CA Inter Audit RTP May’25 Exams

Case study
Aditya & Co. LLP are the statutory auditors of Benuka Furniture Ltd., a company engaged in the
manufacture of wide range of office furniture that suits various workspaces ranging from home offices
to corporate environments. The audit team is headed by CA Aditya, being the engagement partner who
is further assisted by 2 articled assistants namely Rohit and Mudit. Before starting the audit work of
the company, CA Aditya briefed the engagement team about the client’s business, the various audit
procedures the team can perform and the Standard on Auditing that the team needs to be complied
with while conducting the audit of this company. While such discussions were going on, Mudit showed
no inclination towards understanding the business and business environment of the company. He was of
the view that as a member of the audit team he needs to obtain an understanding about the audit
procedures to be performed during the course of audit and not about the client’s business.

Rohit was asked by CA Aditya to verify the trade receivables, loan and advances given by the company,
amounting to ₹ 20 crore and ₹ 20 lakhs respectively. Rohit asked the concerned official of the company
to provide him with the ageing of trade receivables. Rohit decided to send confirmation requests to
debtors having balance as on the balance sheet date exceeding ₹ 5 lakhs. He further decided to request
to the third party in the request letters to reply positively whether the balance in their books tallies
with the balance mentioned in the request letters. Also, while verifying the balance of loans and
advances given by the company, Rohit selected the sample for checking without following any
structured approach though he made sure to avoid any conscious biasness or predictability. Thus, he
made sure that all the individual balances constituting the total of loans and advances given by the
company had a chance of selection.

While checking the balances of fixed assets, Mudit asked the concerned employee of the company to
provide him with various documents related to all the fixed assets appearing as on the balance sheet
date. He asked for the title deeds with respect to the building owned by the company and the purchase
bills for assets purchased by the company. While asking for such documents from the client company,
Mudit was of the view that as a member of the audit team he can force the employee of the company
to provide him with the required documents.

Further with respect to the inventory of the company, Mudit performed the audit procedures to verify
that any inventory balance as at the year end does not include any element of next financial year.

Based on the above facts, answer the following MCQs:

1. Whether the view of Mudit regarding obtaining understanding of the client business is correct:
(a) The view of Mudit is correct because as a member of the audit team, he needs an understanding
only about the audit procedures to be performed by him.
(b) The view of Mudit is not correct because while conducting an audit, the understanding of
business and business environment of the client whose audit is to be conducted is very
important.
(c) The view of Mudit is partially correct because such understanding is required only for the
engagement partner and not be the members of the audit team.
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CA Inter Audit RTP May’25 Exams
(d) The view of Mudit is not correct because such information forms a crucial part of the audit
report to be issued at the end of the audit process.

2. What kind of confirmation requests Rohit decided to send the debtors for verification of
balances of trade receivables?
(a) Negative confirmation.
(b) Positive confirmation.
(c) Exception letter.
(d) Written Representation.

3. Which sample selection methods has been opted by Rohit while verifying the loans and advances
given by the company?
(a) Interval Sampling.
(b) Block Sampling.
(c) Haphazard Sampling.
(d) Monetary Unit Sampling.

4. While verifying the inventory of the client company, which assertion is being verified by Mudit?
(a) Cut Off assertion.
(b) Valuation assertion.
(c) Presentation & Disclosure assertion.
(d) Rights & Obligations assertion.

5. With respect to fixed assets, which assertion does Mudit want to check.
(a) Valuation assertion.
(b) Presentation and Disclosure assertion.
(c) Rights and obligations assertion.
(d) Existence assertion.

Q Ans Remarks
1 B The view of Mudit is not correct because while conducting an audit, the understanding of
business and business environment of the client whose audit is to be conducted is very
important.
2 B Positive confirmation.
3 C Haphazard Sampling.
4 A Cut Off assertion.
5 C Rights and obligations assertion.

General MCQs
6. CA Rocky is a recently qualified Chartered Accountant. He is appointed as an auditor of Sky
Ltd. for the current Financial Year 2023-24. CA Rocky is of the view that he shall record all
the matters related to audit i.e., audit procedures to be performed, audit evidence obtained and
CA Shubham Keswani [[Link]/@shubhamkeswani]
CA Inter Audit RTP May’25 Exams
conclusions reached. Thus, he maintained a file and recorded each and every finding during the
audit. His audit file, also includes audit programmes, notes reflecting preliminary thinking, letters
of confirmation, e-mails concerning significant matters, etc.

State which of the following need not be included in the audit documentation?
(a) Audit programmes.
(b) E-mails concerning significant matters.
(c) Letters of confirmation.
(d) Notes reflecting preliminary thinking.

7. CA Ramesh has been the auditor of XYZ Ltd. for the past 10 years. Over these years, he
has built a personal relationship with Mr. Rajan, CEO of the company. During the audit, CA
Ramesh discovers several discrepancies, but he feels uncomfortable reporting these issues due to
his personal relationship with Mr. Rajan. He has also accepted gifts from the company on several
occasions. As a result, CA Ramesh is concerned about the impact of his long-standing relationship
with Mr. Rajan on the audit report.

Which threat to independence exists in the given case?

(a) Self-interest threat.
(b) Familiarity threat.
(c) Self-review threat.
(d) Advocacy threat.

8. CA Paras is auditing a firm’s financial statements and performs detailed procedures to verify
assertions. The firm is engaged in export of goods to Europe. The sales invoices raised in Euros
are converted into Indian rupees as per applicable norms. He checks classification of expenses,
ensures trade payables are genuine, compares current and past wages, examines title deeds for
land, and check the accuracy of calculation of the conversion of foreign currency into Indian
rupees for export invoices.

Which audit procedure he performed to verify whether conversion of foreign currency into Indian
rupees is proper or not?
(a) Inspection.
(b) Recalculation.
(c) Observation.
(d) Reperformance.

Solution: 6. (d) 7. (b) 8. (b)

CA Shubham Keswani [[Link]/@shubhamkeswani]

CA Inter Audit RTP May’25 Exams
Q1 (Ch-1)
XYZ Ltd., a manufacturing company based in India, operates multiple plants across the country and
deals in complex machinery, which requires specialized maintenance and valuation expertise. XYZ Ltd.
appointed CA Dhruv as Statutory auditor. During the audit, he observed that the management
consistently applied the same method for valuation of inventory over the past few years, but this year,
without proper disclosure, they switched to a different valuation method, which resulted in higher
reported profits. Does such a matter fall within scope of audit?

Solution
The purpose of an audit is to enhance the degree of confidence of intended users in the financial
statements. The scope of audit of financial statements includes coverage of all aspects of entity,
reliability and sufficiency of financial information and proper disclosure of financial information.

Facts
In the given situation, CA. Dhruv observed that the management consistently applied the same method
for valuation of inventory over the past few years, but this year, without proper disclosure, they
switched to a different valuation method, which resulted in higher profits.

Conclusion
Since proper disclosure of financial information is covered under the scope of audit, thus, the auditor
should decide whether relevant information is properly disclosed in the financial statements. He should
also keep in mind applicable statutory requirements in this regard.

The management responsible for preparation and presentation of financial statements makes many
judgments in this process of preparing and presenting financial statements.
For example, choosing appropriate accounting policies in relation to various accounting issues like
choosing method of charging depreciation on fixed assets or choosing appropriate method for valuation
of inventories.

The auditor evaluates selection and consistent application of accounting policies by management;
whether such a selection is proper and whether chosen policy has been applied consistently on a period-
to-period basis.

Thus, it can be concluded that proper disclosure of financial information is well within scope of
audit.

Q1 (SA 210)
CA Puneet is appointed as an auditor of Kamla Limited for the F.Y. 2023-24. The management of Kamla
Limited has requested the auditor to change the terms of original engagement as the company has
diversified its business and a few new products have been introduced by the company. Whether CA
Puneet can agree to the request made by the management? Under which circumstances can the client
make a request to the auditor for a change in the terms of engagement?
CA Shubham Keswani [[Link]/@shubhamkeswani]
CA Inter Audit RTP May’25 Exams

Solution
The auditor may decide not to send a new audit engagement letter or other written agreement each
period. However, a significant change in nature or size of the entity’s business is one of the factors
which may make it appropriate to revise the terms of the audit engagement.

Facts
In the given situation, Kamla Limited has diversified its business, and few new products have also been
introduced by the company which is indicative of significant change in nature or size of the entity’s
business.

Conclusion
In view of the above, CA. Puneet can agree to the request made by the management to change the
terms of the audit engagement. Therefore, the request of Management to change the terms of
audit engagement is appropriate.

A request from the client for the auditor to change the engagement may result from:
1. a change in circumstances affecting the need for the service.
2. a misunderstanding as to the nature of an audit or related service originally requested.
3. a restriction on the scope of the engagement, whether imposed by management or caused by
circumstances.

Q3 (Audit documentation)
CA Piku has prepared audit documentation of an entity describing nature, timing and extent of audit
procedures performed during the course of audit. In documenting nature, time and extent of audit
procedures performed, which matters shall be recorded? He is also of the view that such
documentation alone as described above meets requirements of Standards on Auditing. Comment upon
validity of his views.

Solution
In documenting the nature, timing and extent of audit procedures performed, the auditor shall record:
(a) The identifying characteristics of the specific items or matters tested.
(b) Who performed the audit work and the date such work was completed; and
(c) Who reviewed the audit work performed and the date and extent of such review.

The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor,
having no previous connection with the audit, to understand:
(a) The nature, timing and extent of the audit procedures performed.
(b) The results of the audit procedures performed, and the audit evidence obtained; and
(c) Significant matters arising during the audit and the conclusions reached thereon and
significant professional judgements made in reaching those conclusions.

CA Shubham Keswani [[Link]/@shubhamkeswani]

CA Inter Audit RTP May’25 Exams
Thus, all above matters shall be recorded to meet requirements of SA 230. Documenting nature, time
and extent of audit procedures performed alone does not meet the requirements of SA 230.
Therefore, CA Piku’s views are not valid.

Q4 (Govt Audit)
A government department has been allocated a budget for infrastructure development.
During the audit, the auditor observes the following:
(i) Some payments were processed without proper approval from the competent authority.
(ii) A large-scale project was implemented, but no assessment has been made regarding the expected
benefits were achieved or not.
(iii) Funds were utilised from an account for which no budgetary provision was made.
(iv) Certain expenditures were made without following the prescribed financial regulations.
(v) There were instances of unnecessary spending that did not align with financial propriety.

Identify the different types of audits applicable to each of these observations.

Solution
The audit of government expenditure is one of the major components of government audit. The basic
standards set for audit of expenditure are to ensure that there is provision of funds authorised by
competent authority fixing the limits within which expenditure can be incurred.

(i) When payments are processed without proper approval from the competent authority, an Audit of
Sanctions is required. This ensures that there is sanction, either special or general, accorded by
competent authority authorising the expenditure.

(ii) In cases where a large-scale project has been implemented without any assessment of whether the
expected benefits were achieved, a Performance Audit is necessary. This type of audit ensures that
the various programmes, schemes and projects where large financial expenditure has been incurred
are being run economically and are yielding results expected of them.

(iii) When funds were utilised from an account for which no budgetary provision was made, an Audit
Against Provision of Funds is conducted. This ensures that there is a provision of funds out of which
expenditure can be incurred and the same has been authorised by competent authority.

(iv) If expenditures are made without adhering to the prescribed financial regulations, an Audit
Against Rules and Orders is applicable. This audit ensures that the expenditure incurred conforms to
the relevant provisions of the statutory enactment and in accordance with the Financial Rules and
Regulations framed by the competent authority.

CA Shubham Keswani [[Link]/@shubhamkeswani]

CA Inter Audit RTP May’25 Exams
(v) Instances of unnecessary spending that do not align with financial propriety fall under the scope
of a Propriety Audit. It ensures that the expenditure is incurred with due regard to broad and general
principles of financial propriety.

Q5 (Bank Audit)
CBC Bank Ltd. has multiple loan accounts classified as Non-Performing Assets (NPAs). During the
financial year, some borrowers made partial payments towards their outstanding dues. However, there
was no explicit agreement between the bank and the borrowers regarding the appropriation of these
recoveries i.e., whether they should be adjusted against principal or interest. The bank’s finance team
decided to recognise the recovered amount as interest income in its financial statements. However,
during the statutory audit, the auditors raised concerns about the treatment of these recoveries.
Discuss the appropriate accounting treatment of partial recoveries in NPAs. Also, explain the principles
that banks should follow in recognising interest income from NPAs.

Solution
In the absence of a clear agreement between the bank and the borrower for the purpose of
appropriation of recoveries in NPAs (i.e., towards principal or interest due), banks are required to
adopt an accounting policy and exercise the right of appropriation of recoveries in a uniform and
consistent manner.

The appropriate policy to be followed is to recognise income as per AS 9, “Revenue Recognition”, when
certainty attaches to realisation and accordingly amount reversed/derecognised or not recognised
in the past should be accounted.

Interest partly/fully realised in NPAs can be taken to income.

However, it should be ensured that the credits towards interest in the relevant accounts are not out
of fresh/additional credit facilities sanctioned to the borrowers concerned.

CA Shubham Keswani [[Link]/@shubhamkeswani]