CA FINLA NEW COURSE

ADVANCED AUDITING AND PROFESSIONAL ETHICS

FULL SYLLABUS TEST-2

Question No. 1 is Compulsory

Attempt any Four Questions out of remaining Five Questions

Total Marks 100

Case Study-1

“PQR Limited” is a listed entity and is having Outstanding SR Equity Shares. “XYZ Limited” is
material unlisted subsidiary of PQR Limited. Accounts of XYZ Ltd. are required to be
consolidated with that of PQR Ltd. as per the requirement of applicable Accounting Standards.
The minutes of the Meetings of XYZ Limited is maintained by the company as per the
requirements of applicable laws and regulation. The management of PQR Ltd. constituted
various committees which are required mandatorily to be constituted under SEBI (LODR)
Regulations, 2015 as amended from time to time. PQR Ltd. Provide the details as to
constitution of committees and the meetings of these committees held during the year as
below:

Name of committee Meetings held

Audit Committee Four meetings and gap between two meetings
is not more than 120 days.
Nomination and Remuneration Committee Only one meeting
Stakeholders Relationship Committee Only one meeting
Risk Management Committee Only one meeting.

The statutory auditor of the PQR Ltd. conducts detailed checking to ensure the composition of
the various committee(s) in the company is in accordance to the provisions of the SEBI (LODR)

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Regulations, 2015 as only the date regarding frequency of conducting meetings is available to
the auditor. The auditor asked for minutes to check the proceedings of all committee meetings
and made noting of it in its audit books.

One of the Senior partner of Auditor of PQR Ltd. is under an impression that they are also
required to conduct a limited review of the audit of XYZ Ltd. to which the management of PQR
Ltd as well as XYZ Ltd. raises objection on the ground that audit of XYZ Ltd. being conducted by
a reputed and renowned Chartered Accountant Firm, hence there is no requirement of review
of audit of XYZ Ltd.

Considering the facts of the case mentioned above, answer the following multiple choice
questions (MCQs):

1. The statutory auditors of ______________________ should comply with prescribed

procedure relating to limited review of the audit of all the entities whose accounts are to be
consolidated with the listed entity.

a) PQR Limited
b) XYZ Limited
c) Both XYZ Limited and PQR Limited
d) Either PQR Limited or XYZ Limited

2. As per the facts of the given case scenario, the auditor of PQR Limited should ensure that
the minutes of meeting of the board of directors of XYZ Limited shall be placed at the
meeting of__________.

a) Board of directors of PQR Limited

b) Committee of Board of XYZ Limited
c) Shareholders of PQR Limited
d) Shareholders of XYZ Limited.

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3. The auditor of PQR Ltd. should ensure that risk management committee shall comprise of
minimum number of independent directors. Minimum number of independent directors for
the purpose of compliance of SEBI (LODR) Regulations are:

a) 1/3rd of total No. of members of Risk management committee.

b) 2/3rd of total No. of member of risk management committee.
c) 3/4rd of total No. of members of risk management committee.
d) All members of risk management committee shall be independent directors.

4. The auditor of PQR Ltd. should ensure that Audit committee shall comprise of minimum
number of independent directors. Minimum number of independent directors for the
purpose of compliance of SEBI (LODR) Regulations are:

a) 1/3rd of total No. of members of Risk management committee.

b) 2/3rd of total No. of member of risk management committee.
c) 3/4rd of total No. of members of risk management committee.
d) All members of risk management committee shall be independent directors.

5. Which of the below mentioned companies are mandatorily required to undertake

secretarial audit for Financial Year 2020-21.

a) PQR Limited
b) XYZ Limited
c) Both XYZ Limited and PQR Limited
d) Either PQR Limited or XYZ Limited

(5 x 1 = 5 marks)

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Case Study-2

Liberty Co. is a manufacturer of shoes. You are an audit manager with Veda & Co. and you are
performing an overall review of the financial statements for the year ended 31 March 2021
prior to the issue of the auditor’s report. Profit before tax for the year was Rs 80 Cr. (2019: Rs
74 Cr.).

Analytical Procedures

As part of your overall review, you have performed analytical procedures over the draft
financial statements and have noted that the trade receivables collection period is lower than it
was during the interim audit performed in July 2020. You are aware that the credit controller of
Liberty Co. left the company in August 2020 and that the directors have said that, as a result,
the company is experiencing difficulties in debt collection.

Disclosures

During the year, Liberty Co. revalued its head office and as part of your review, you are
considering the detail which is disclosed in the property, plant and equipment note in the draft
financial statements.

Uncorrected misstatements

Your review also includes an assessment of uncorrected misstatements. These have been
recorded by the audit team as follows:

(1) Interest payable omitted in error Rs 20 lacs

(2) Additional allowance for receivables required Rs 1.45 Cr.
(3) Error in sales invoice processing resulting in understatement of sales Rs 1.90 Cr.
(4) Write off in respect of faulty goods Rs 30 lacs

Faulty goods

The adjustment for faulty goods listed as an uncorrected misstatement above relates to an
entire batch of shoes, which was produced on 12 September 2020. The audit work concluded

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that the cost of this inventory exceed its net realisable value by Rs 30 lacs. The directors dispute
the audit team’s figures and believe that the realisable value of the inventory still exceeds its
cost.

1. Which of the following would form part of auditor’s overall review of the financial
statements?

(1) Establishing whether the pre-conditions for an audit are present.

(2) Assessing whether the information and explanations obtained during the audit are
adequately reflected

(3) Performing a detailed review of the audit working papers to ensure the work has been
properly performed

(4) Reviewing the adequacy of the disclosure of accounting policies

a) 1 and 2
b) 3 and 4
c) 1 and 3
d) 2 and 4

2. Which of the following is a valid explanation for the INCONSISTENCY between the results of
the analytical procedures on trade receivables and the director’s statement regarding debt
collection problems?

a) A change in sales mix towards high value products.

b) An increase in the proportion of cash sales since August 2019
c) An increase in the rate of goods and services tax in September 2019.
d) Sales growth of 1% per month over the year.

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3. Which of the following details should be disclosed in respect of the revaluation of the head
office if the audit is to conclude that the disclosures are adequate?

(1) Effective date of the revaluation

(2) Name of the valuer

(3) Involvement of Independent valuer

(4) Revaluation surplus

a) 1,2 and 3 only

b) 1,3 and 4 only
c) 2,3 and 4 only
d) 1,2,3 and 4

4. Which of the uncorrected misstatements numbered (1), (2) and (3) by the audit team MUST
be adjusted for it the auditor is to issue an unmodified audit opinion?

a) Misstatements 2 and 3 only

b) Misstatement 1 and 3 only
c) Misstatement 1,2 and 3
d) Misstatement 2 only

5. All adjustments required by the auditors have been made to the financial statements with
the exception of adjustment (4) relating to the faulty goods. Which of the following correctly
describes the effect of this matter on the auditor’s report?

a) Unmodified opinion with no further disclosure

b) Unmodified opinion with disclosure in a emphasis of matter paragraph
c) Qualified opinion due to material misstatement

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 d) Qualified opinion due to inability to obtain sufficient appropriate audit evidence

(5 x 1 = 5 marks)

MCQs

1. CA X, a recently qualified practicing Chartered Accountant got his first audit assignment of
Futura (P) Ltd. for the financial year 2017-18. He obtained all the relevant appropriate audit
evidence for the items related to statement of profit and loss. However, while auditing the
Balance Sheet items, CA X left out obtaining appropriate audit evidence, say confirmations,
from the outstanding Accounts Receivable amounting Rs 100 lakhs, continued as it is from
the last year, on the affirmation of the management that there is no receipts and further
credits during the year. CA X, therefore, excluded from the audit programme, the audit of
accounts receivable on the understanding that it pertains to the preceding year which was
already audited by predecessor auditor.

a) CA X has no responsibility in relation to opening balances if prior period financial

statements were audited by predecessor auditor and hence the approach of CA X is
correct.
b) CA X is required to obtain sufficient appropriate audit evidence regarding opening
balances and in the present case, he should insist for management representation for
their views. As per code of ethics, CA X is guilty for other misconduct for not exercising
the due diligence.
c) CA X is required to obtain sufficient appropriate audit evidence regarding opening
balances and in the present case, he should insist for management representation for
their views. As code of ethics, Mr. X is guilty for professional misconduct for not
exercising the due diligence.
d) None of the above.

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2. M/s Airlift Ltd. carrying on the business of passenger transportation by air is running into
continuous financial losses as well as reduction in sales due to stiff competition and frequent
break down of its own aircrafts. The Financial Statements for the year ended on 31.03.2018
are to be now finalized. The Management is quite uncertain as to its ability to continue in
near future and has informed the Auditors that having seized of this matter, it had
constituted a committee to study this aspect and to give suggestions for recovery, if any,
from this bad situation. Till the study is completed, according to the management, the issue
involves uncertainty as to its ability to continue its business and it informs the Auditor that
the fact of uncertainty clamping on the “Going Concern” would suitably be disclosed in notes
to account. Reporting requirement, in the Independent Auditor’s Report in respect of this
matter will be:

a) To include a separate section under the heading “Key Audit Matters” in the Auditor’s
report as per the requirements of SA 701.
b) To include a separate section under the heading “Material uncertainty Relating to Going
concern” in the Auditor’s report as per the requirements of SA 705.
c) To include a separate section under the heading “Key Audit Matters” in the Auditor’s
report as per the requirements of SA 570.
d) To include a separate section under the heading “Material uncertainty Relating to Going
concern” in the Auditor’s report as per the requirements of SA 570.

3. Your firm has been appointed statutory auditor by a Nationalised Bank for the year 2018-
19. While verification you observed that one of the loan account was regularized on 28th
March 2019, for which the interest and instalment amount was overdue from the quarter
ending 30th September 2018. The account was regularized after the repayment of overdue
interest and instalment amounts was done on 26th March 2019. Only the last day of the
financial year was reckoned as the date of account becoming NPA by the bank.

As a statutory auditor will you agree with the Bank’s policy?

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 a) As the interest charged in the account was overdue for more than 90 days from the end
of quarter, it should be classified as NPA and should be considered as sub-standard
asset for the balance sheet as on 31st March, 2019.
b) As the overdue interest and instalment amount was paid before the balance sheet date
there is no reason to classify the account as NPA.
c) The auditor should not agree with the Bank’s policy to regularize the account before
balance sheet date as overdue interest indicates more than normal risk attached to the
business.
d) Bank can regularize the account before balance sheet date but should ensure that the
amount has been paid through genuine resources and not by sanction of additional
facilities, and the account remains in order subsequently.

4. A Ltd. is engaged in the business of providing management consultancy services and have
been in operation for the last 15 years. The company’s financial reporting process is very
good and its statutory auditors always issued clean report on the audit of the financial
statements of the company. The auditors were required to be rotated due to mandatory
audit rotation requirement of the companies Act, 2013.

MN & Associates, a firm of Chartered Accountants, was appointed as the new auditor of the
company for a team of 5 years and have to start their first audit for the financial year ended
31st March 2019.

The auditors had a detailed and clear discussion with the management that they will perform
their audit procedures in respect of opening balances along with the audit procedures for the
financial year ended 31st March 2019. Management agreed with that and audit was
completed as per the plan.

The auditors did not have any significant observations and hence they communicated to the
management that their report will be clean. Management was quite happy with this and also
requested the auditors to share draft report before issuing the final report.

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In the draft audit report, all the particulars were fine except ‘other matters paragraph’
wherein the auditors gave a reference that the financial statements for the comparative year
ended 31st March 2018 was audited by another auditor. Management asked the audit team
to remove this paragraph as the auditors had performed all the audit procedures on opening
balances also. But the auditors did not agree with the management.

Please advise the auditor or the management whoever is incorrect with the right guidance.

a) The contention of the management is valid. After performing all the audit procedures,
an auditor should not pass on the responsibility to another auditor by including such
references in his audit report.
b) Any auditor has two options, either to perform audit procedures on opening balances or
given such reference of another auditor in his report. Auditor cannot mix up the things
like this auditor has done. It is completely unprofessional.
c) In the given situation even if the auditor wants to give such reference, the management
and the auditor should have taken approval from the previous auditor at the time of
appointment of new auditor. In this case, it cannot be done.
d) The report of the auditor is absolutely correct and is in line with the auditing standards.
An auditor is required to include such reference in his report as per the requirements of
the auditing standard.

5. BC Ltd., having principal place of business in Delhi, is engaged in the generation,

transmission, distribution and supply of electricity throughout the India. The management of
the company came to know that the provisions related to maintenance of cost records and
cost audit are applicable to the company. The company, therefore, appointed a cost auditor
for the financial year 2020-21.

The cost auditor reported certain disqualifications in Form CRA-3 of the cost audit report to
which the management of the company disagreed.

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The management of ABC Ltd. instructed its tax auditor not to reveal any of the
disqualifications related to the cost audit while filing particulars to be furnished in Form No.
3CD contending that the disqualifications are not relevant and there is no correlation
between tax audit and cost audit as well.

As a tax audit, how would you deal with the matter?

a) Contention of management is not acceptable as auditor is required to provide the

details of disqualifications on any matter/item/value/quantity as may be reported/
identified by cost auditor under clause 37 of Form 3CD.
b) Contention of management is not acceptable as auditor is required to provide the
details of disqualifications on any matter/ item/ value/ quantity as may be reported/
identified by cost auditor under clause 38 of Form 3CD.
c) Contention of management is acceptable as auditor is not required to provide the
details of disqualifications on any matter/ item/ value/ quantity as may be reported/
identified by cost auditor under clause 37 of Form 3CD.
d) Contention of management is acceptable as auditor is not required to provide the
details of disqualifications on any matter/ item/ value/ quantity as may be reported/
identified by cost auditor under clause 38 of Form 3CD.

6. AJ & Co LLP is a firm of chartered accountants. The Firm has 10 partners. The firm has a
good portfolio of clients for statutory audits but the same clients has some other firms as
their tax auditors. In the current year (FY 2019-20), many existing clients for whom AJ & Co
LLP happens to be the statutory auditor have requested the firm to carry out their tax audits
as well. The firm is expecting the number of tax audits to increase significantly this year. One
of the partners of the firm has also raised a point that firm can accepts tax audits upto a
maximum limit. However, other partners are of the strong view that limits on audits is
applicable in case of statutory audits and not for tax audits. This needs to be decided as soon
as possible so that the appointment formalities can also be completed.

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You are requested to advise the firm in this matter.

a) There is no limit on number of tax audits in case of LLP.

b) All the partners of the firm can collectively sign 450 tax audits reports.
c) All the partners of the firm can collectively sign 600 tax audit reports.
d) All the partners of the firm can collectively sign 450 tax audit reports. However, one
partner can individually sign maximum 60 tax reports.

7. Kinfin Private Limited had taken overdrafts from three banks (Bank A, Bank B and Bank C)
with a limit of Rs 40 lacs each against the security of fixed deposit it had with those banks and
an unsecured overdraft from a financial institution (Financial Institution X) of 36 lacs. As on
30th October 2021, the management used the overdraft fully of the A & C bank to the tune of
40 lacs each. However, the overdraft of second bank (Bank B) was not used until 31st
December, 2021. On 31st December, 2021, Management took overdraft of B bank and very
next day management paid the overdraft of C bank as the rate of interest charged by Bank C
on overdraft facility was 15% whereas, the rate of interest charged by Bank B was 12%. As on
31st March 2022 only overdraft of Bank A and Bank B were used fully, overdrafts of Bank C
and Financial Institution X were unused. The paid-up capital and reserves of the company as
at that date was 85 lacs and its revenue for the financial year ended on 31st March 2022 was
Rs 8.95 crores. The management of the company is of the opinion that CARO, 2020 is not
applicable to it because turnover and paid-up capital were within the limits prescribed. With
respect to the loans, management was of the view that the total outstanding as on 31 March
2022 is less than the prescribed limit. The company further contended that loan limit is to be
reckoned per bank or financial institution and not cumulatively. Comment.

a) The CARO, 2020 is applicable to the company as the turnover of the company exceeds
the prescribed limit.
b) The CARO, 2020 is not applicable to the company as the turnover of the company does
not exceeds the prescribed limit.

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 c) The CARO, 2020 is not applicable to the company as the company does not exceeds the
prescribed limit.
d) The CARO, 2020 is applicable to the company as the borrowing of the company exceeds
the prescribed limit.

8. ABC Ltd., an Indian company, has three group companies - one subsidiary in India and the
other two in Germany and France. The statutory auditors have evaluated that all the group
companies are significant for the purpose of audit of consolidated financial statements.
During the year ended on 31 March 2021, the audited financial statements of French
company are not available as its audit is in progress and would not get completed before the
release date of Consolidated financial statements of parent company. For the purpose of
consolidation, ABC Ltd. has provided the audited financial statements of other components.
Please advise what can be the possible situation in respect of financial statements of French
company for the purpose of consolidation for the purpose of audit of CFS.

a) Since the audit of French company is in progress, its financial statements subject to
audit can be considered by auditor of parent company and audited signed financials can
be given to auditors even after release of audited CFS as this is matter of documentation
only.
b) The management should give management accounts to the auditors of CFS and auditor
can mention the same point in other matters paragraph in his audit report which is an
acceptable approach.
c) Auditor should get the financial statements of French company excluded from CFS.
d) If the auditor does not receive audited financial statements of French company, he
should modify his audit report.

9. No NBFC is allowed to commence or carry on the business of a NBFC without obtaining a

certificate of registration from RBI. The registration is required where the financing activity is

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a principal business of the company. Financial activity will be considered as principal business
if:

a) The company's financial assets constitute more than 50% of the total assets.
b) Income from financial assets constitute more than 50% of the gross income.
c) The company's financial assets constitute more than 50% of the total assets and income
from financial assets constitute more than 50% of the gross income.
d) The company's financial assets constitute more than 50% of the total assets or income
from financial assets constitute more than 50% of the gross income.

10. KDK Bank Ltd., received an application from a pharmaceutical company for takeover of
their outstanding term loans secured on its assets, availed from and outstanding with a
nationalized bank. KDK Bank Ltd., requires you to make a due diligence audit in the areas of
assets of pharmaceutical company especially with reference to valuation aspect of assets. In
order to ensure that the assets are not stated at overvalued amounts, the auditor shall have
to specifically examine____:

a) Uncollectable receivables.
b) Obsolete, slow and non-moving inventories and valued above net realizable value, if
any.
c) Obsolete and unused plant and machinery and their spares.
d) All of the above

(10 x 2 = 20 marks)

Q-1

(a) GHK Associates, Chartered Accountants, conducting the audit of PBS Ltd., a listed company
for the year ended 31.03.2020 is concerned with the presentation and disclosure of segment
information included in Company's Annual Report. GHK Associates want to ensure that

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methods adopted by management for determining segment information have resulted in
disclosure in accordance with the applicable financial reporting framework. Guide GHK
Associates with 'Examples of Matters' that may be relevant when obtaining an understanding of
the methods used by the management with reference to the relevant Standards on Auditing.

(5 marks)

(b) MN & Associates, Chartered Accountants have been appointed as statutory Auditors of
Cotton Ltd. for the F.Y 2020-2021. The Company is into the business of yarn manufacturing. For
this purpose, cotton ginning is also done within the factory premises. Raw cotton is purchased
from local market and processed in-house. The Company received a notice from the State
Government to deposit market development fee for the last 5 years to the tune of
Rs 10.00 crores. The Company and all other organizations in the same business have not
deposited the market development fee, taking shelter of an old circular issued by the
Government. The trade association met with the government officials to resolve the matter and
agreed to deposit the same prospectively. However, the matter relating to payment of
development fee for the last 5 years is pending before the Government as at the end of the
financial year. The Company, however, disclosed the same in notes to accounts, as contingent
liability, without quantifying the effect and proper explanation. If the liability is provided in the
books of accounts, entire reserves will be wiped off. Auditor seeks your guidance as to how this
disclosure affects them while forming an opinion on financial statements.

(5 marks)

(c) You have been appointed as Concurrent auditor of one of the branches of Coin Bank Ltd.
This branch is dealing mainly in foreign exchange. State the suggested audit procedures to be
covered by you to check the foreign exchange transactions of this branch while doing
Concurrent audit. (4 marks)

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Q-2

(a) M/s IT Limited has prepared the financial statements for the year 2021-22 and mentioned in
the significant accounting policies that depreciation on tangible fixed assets is provided on the
straight-line method over the useful lives of the assets as estimated by the management. The
company has ignored the useful lives of assets mentioned in schedule II of the Companies Act,
2013. As statutory auditor of the company how would you deal with this?

(5 marks)

(b) Cineplex, a movie theatre complex, is the foremost theatre Located in Delhi. Along with the
sale of tickets over the counter and online booking, the major proportion of income is from the
cafe, shops, pubs etc. located in the complex. It's other income includes advertisements
exhibited within/outside the premises such as hoardings, banners, slides, short films etc. The
facility for parking of vehicles is also provided in the basement of the premises.

Cineplex appointed your firm as the auditor of the entity. Being the head of the audit team, you
are therefore required to draw an audit programme initially in respect of its revenue and
expenditure considering the above-mentioned facts along with other relevant points relating to
a complex.

(5 marks)

(c) Mr. X, who passed his CA examination of ICAI on 18th July, 2021 had started his practice
from 15th August, 2021. On 16th August, 2021 one candidate approached him for article ship.
Mr. X decided to give her 1% profits of his CA firm in addition to monthly stipend. She agreed to
take both 1% of profits and prescribed stipend. The ICAI had sent a letter to Mr. X objecting the
payment of 1% profits.

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Mr. X replied stating that sharing 1% profits is over and above the stipend to help the articled
clerk to overcome her financial crisis.

Is Mr. X liable for Professional misconduct?

(4 marks)

Q-3

(a) During the financial year ended on 31.03.2022, LM Private Limited had borrowed from a
Nationalized Bank, a term loan of Rs 120 lakhs consisting of Rs 100 lakhs for purchase of a
machinery for the new plant and Rs 20 lakhs for erection expenses. As on the date of 31st
March, 2022, the total of capital and free reserves of the Company was Rs 50 lakhs and
turnover for the year 2021-22 was Rs 750 lakhs. The Bank paid Rs 100 lakhs to the vendor of the
Company for the supply of machinery on 31.12.2021. The machinery had reached the yard of
the Company. On 28.02.2022, the Company had drawn the balance of loan viz. Rs 20 lakhs to
the credit of its current account maintained with the Bank and utilized the full amount for
renovating its administrative office building. The machinery had been kept as capital stock
under construction. Comment as to reporting issues, if any, that the Auditor should be
concerned with for the financial year ended on 31.03.2022, in this respect.

(6 marks)

(b) Tee & Co., a firm of chartered accountants had been appointed by C & AG to conduct
statutory audit of M/s Rare Airlines Limited, a Public-Sector Company. They would like to check
certain mandatory propriety points sector company. They would like to check certain
mandatory propriety points as required u/s 143(1) of the Companies Act, 2013. List the areas of
check to meet these requirements. (4 marks)

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(c) New life Hospital is a multi-specialty hospital which has been facing a lot of pilferage and
troubles regarding their inventory maintenance and control. On investigation into the matter it
was found that the person in charge of inventory inflow and outflow from the store house is
also responsible for purchases and maintaining inventory records. According to you, which
basic system control has been violated? Also list down the other general conditions pertaining
to such system which needs to be maintained and checked by the management.

(4 marks)

Q-4

(a) Can a practicing Chartered Accountant be held guilty of professional misconduct under the
following circumstance: P, a Chartered Accountant had accepted appointment as an auditor of
QRS Company limited without ascertaining from the company whether the requirements of
Secs. 139 and 140 of the Companies Act, 2013 had been complied with. However, he realised
this defect only at acceptance.

(4 marks)

(b) H Co. Ltd., is a holding company with two subsidiaries R Co. Ltd. and S Co. Ltd., The H Co. Ltd
adopts straight line method of depreciation for its assets whereas S Co. Ltd., follows written
down value or diminishing value method. Though R Co. Ltd., follows straight line method of
depreciation, it does not give effect to component accounting of depreciation in respect of high
value assets, while consolidating the financials of the R Co. Ltd., and S Co. Ltd., with those of H
Co. Ltd., determine the possible issue that you have to ensure for compliance in the light of
above facts.

(5 marks)

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(c) ABC Ltd., engaged in the manufacturing of goods carriage, appointed you as the tax auditor
for the financial year 2021-22. How would you deal with the following matters in your tax audit:

(i) Payments of 6 invoices of Rs 5,000 each made in cash to Mr. X, engaged in leasing of
goods carriages on 4th July, 2021.
(ii) Payments of 2 invoices of Rs 18,000 each made in cash to Mr. Y, engaged in leasing of
goods carriages on 5th July, 2021 and 6th July, 2021 respectively.
(iii) Payment of Rs 40,000 made in cash to Mr. Z, engaged in leasing of goods carriages on 7th
July, 2021 against an invoice for expenses booked in 2020-21.

(5 marks)

Q-5

(a) ABC & Co., Chartered Accountants are the Auditors of Just Care General Insurance Company
Limited. As on March 31, 2022 the Management made a provision for claims outstanding.
Enumerate the steps to be taken by the Auditor while verifying the “Claims Provisions”.

(5 marks)

(b) What will be the liability of Mr. X, an auditor in the following situation: Mr. X has appeared
before the Income Tax Authorities as an authorized representative of his Auditee and
submitted to the Income Tax Authorities a false declaration.

(5 marks)

(c) CA Vipin has been appointed as Statutory Auditor by IG Insurance Co. Ltd. for 3 of its
branches for the EY, 2021-22. Insurance Company is using a software called "Applied Epic"

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wherein all transactions (policy issuance, premium receipts, expense of insurance company,
incomes, assets and liabilities) are recorded and financial statements generated at the end of
the financial year. CA Vipin not technically equipped and well versed with technology, decided
to follow traditional manual auditing approach and started the audit. He is of the view that
understanding and using the auditee's automated environment is optional and not required. Do
you agree with the approach and views of CA Vipin?

(4 marks)

Q-6

(a) Mr. 'P' have been appointed as operational auditor of M/s. Books & Magazine Ltd. and
observed a totalling error in invoice of Rs 1.000, He has not taken care of the same saying that
this is out of scope of his work. Comment.

(5 marks)

(b) Ram and Associates, a firm of Chartered Accountants, are the auditors of NBFC (Investment
and Credit Company). Some of the team members of the audit team who audited this NBFC
have left the firm and the new team members are in discussion with the previous team
members who are still continuing with the firm regarding the verification procedures to be
performed. In this context, please explain what verification procedures should be performed in
relation to audit of NBFC – Investment and Credit Company (NBFC – ICC).

(5 marks)

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(c) Comment on the following in the light of certificate of compliance of conditions of Corporate
Governance to be issued for a listed company where the Board consists of 10 directors
including a non-executive director as its chairman and further:

(i) There were 5 audit committee meetings held during the year as follows: 01/04/2021,
01/06/2021, 01/09/2021, 03/01/2022, 25/03/2022.
(ii) There are 4 independent directors. One of them resigned on 25/05/2021. A new
independent director was appointed on 01/09/2021.
(iii) The chairman of Audit Committee did not attend the Annual General meeting held on
14/09/2021.
(iv) The internal audit reports were obtained by Audit Committee on quarterly basis. Quarter 1
internal audit report commented on certain serious irregularities as regards electronic
online auction of scrap. The agenda of Audit Committee did not deliberate or take note of
the issue.
(v) There is no women director.

(4 marks)

OR

(c) The Cashier of a company committed a fraud and absconded with the proceeds thereof. This
happened during the course of the accounting year. The Chief Accountant of the company also
did not know about fraud.

In the course of the audit, at the end of the year, the auditor failed to discover the fraud. After
the audit was completed, however, the fraud was discovered by the Chief Accountant.
Investigation made at that time indicate that the auditor did not exercise proper skill and care
and performed his work in a desultory and haphazard manner. With this background, the
Directors of the company intend to file disciplinary proceedings against the auditor. Discuss the
position of the auditor with regard to the disciplinary proceedings.

(4 marks)

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