Course: CA Intermediate
Paper: AUDIT Marks:100
Time Allowed: 3Hours
Model Answer
Division A- Multiple Choice Questions
Questions (1-20) carry 1 Mark each
Questions 21-25 carry 2 Marks each Total 30 Marks
1) Which of the following is the responsibility of the auditor:
a) Preparation and presentation of the financial statements in accordance with applicable financial
reporting
b) Design, implementation, and maintenance of internal controls
c) Express an opinion on the Financial Statements
d) To obtain limited assurance.
2) CA. Bobby is a recently qualified Chartered Accountant. He is appointed as an auditor of Droopy Ltd. for the
current Financial Year 2017-18. He is quite conservative in nature which is also replicated in his professional
work. CA. Bobby is of the view that he shall record all the matters related to audit, audit procedures to be
performed, audit evidence obtained and conclusions reached. Thus, he maintained a file and recorded each
and every of his findings during the audit. His audit file, besides other thing, 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) Notes reflecting preliminary thinking.
(c) Letters of confirmation.
(d) E-mails concerning significant matters.
3) While auditing the accounts of ThoughtCo Ltd., CA. Bliss, the auditor of the company came across certain
accounts payable balances for which direct confirmation procedure needs to be applied. Thus, for the year
ending 31st March, 2018, he sent positive confirmation requests wherein the trade payables are requested to
respond whether or not they are in agreement with the balance shown. The auditor received all the
confirmation replies from the trade payables on time as correct except from five of them. What other option
the auditor is left with regard to trade payables from which no reply for confirmation requests received?
(a) Perform additional testing which may include agreeing the balance to subsequent cash paid.
(b) Accept the balances as it is assuming other replies against received confirmation requests being
correct.
(c) Accept the balances as it is assuming that the trade payables must have replied in case of any
discrepancies.
(d) None of the above.
4) If the auditor concludes that there is reasonable justification to change the engagement and if the audit work
performed complied with the SAs applicable to the changed engagement, the report issued would be
appropriate for the revised terms of engagement. In order to avoid confusion, the report would not include
reference to:
(a) the original engagement; or any procedures that may have been performed in the original
engagement.
(b) the original engagement ;
(c) any procedures that may have been performed in the original engagement
(d) the original engagement and any procedures that may have been performed in the original
engagement.
5) 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 circum
stances.
(a) (1) only
(b) (1) and (2)
(c) (1), (2) and (3)
(d) (1) or (2) or (3)
6) Standard on Quality Control (SQC) 1 provides that,
(a) unless otherwise specified by law or regulation, audit documentation is the property of the
management.
(b) unless otherwise specified by law or regulation, audit documentation is the property of those charged
with governance.
(c) unless otherwise specified by law or regulation, audit documentation is the property of the
management or those charged with governance.
(d) Standard on Quality Control (SQC) 1 provides that, unless otherwise specified by law or regulation,
audit documentation is the property of the auditor.
7) Audit procedures to obtain audit evidence can include
(a) inspection, observation, confirmation, recalculation, re-performance and analytical procedures
(b) inspection, observation, confirmation, recalculation and re-performance
(c) inspection, observation, confirmation and analytical procedures
(d) inspection, observation, recalculation, re-performance and analytical procedures
8) Audit risk is a function of the
(a) risks of material misstatement and detection risk.
(b) audit risk and detection risk.
(c) control risk and detection risk.
(d) inherent risk and detection risk.
9) The susceptibility of an assertion about a class of transaction, account balance or disclosure to a
misstatement that could be material, either individually or when aggregated with other misstatements, before
consideration of any related controls is-
(a) Control Risk
(b) Inherent Risk
(c) Detection Risk
(d) Audit Risk
10) The assessment of risks is a
(a) matter capable of precise measurement rather than matter of professional judgment
(b) matter of professional judgment, rather than a matter capable of precise measurement.
(c) matter of professional judgement as well as capable of precise measurement sometimes.
(d) None of the above
11) Planning an audit involves establishing the overall audit strategy for the engagement and
(a) developing an audit plan.
(b) developing an audit program
(c) developing detailed strategy
(d) any of the above
12) There are two interlinked perspectives of independence of auditors, one, independence of mind; and two,
(a) objectivity
(b) Professional competence
(c) Integrity
(d) independence in appearance.
13) Which statement is correct regarding written representations
(a) Although written representations provide necessary audit evidence, they do not provide sufficient
appropriate audit evidence on their own about any of the matters with which they deal.
(b) Written representations provide sufficient appropriate audit evidence on their own about any of the
matters with which they deal.
(c) Written representations neither provide necessary audit evidence nor they provide sufficient
appropriate audit evidence.
(d) Written representations are not related to audit evidence.
14) Which of the following Assertion is not related to assertion about presentation and disclosure:
(a) Occurrence and rights and obligations
(b) Completeness
(c) Classification and understandability
(d) Valuation and allocation
15) When deviations from controls upon which the auditor intends to rely are detected,
(a) the auditor shall not make any inquiries to understand these matters and their potential
consequences
(b) the auditor shall make specific inquiries to understand these matters and their potential
consequences
(c) the auditor shall make general inquiries to understand these matters and their potential
consequences
(d) the auditor shall make both general as well as specific inquiries to understand these matters and their
potential consequences
16) Components of risk of material misstatement at the assertion level are :
(a) Inherent risk and detection risk
(b) inherent risk and control risk
(c) control risk and detection risk
(d) inherent risk, control risk and detection risk
17) Judging the significance of a matter requires of the facts and circumstances.
(a) objective analysis
(b) subjective analysis
(c) Both subjective and objective analysis
(d) qualitative analysis
18) When an auditor deals with shares or securities of the audited company is an example of :
(a) Self-review threats
(b) Self-interest threats
(c) Advocacy threats
(d) Intimidation threats
19) Which of the following is not an assertion about presentation and disclosure?
(a) Occurrence and rights and obligations
(b) Completeness
(c) Classification and understandability
(d) Existence
20) The matter of difficulty, time, or cost involved is :
(a) not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative.
(b) in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative.
(c) not in itself a valid basis for the auditor to omit an audit procedure for which alternative exists.
(d) not in itself a valid basis for the auditor to omit an audit procedure.
21) Which of the following is correct in case of Banks :
(a) The policy of income recognition should be subjective.
(b) The policy of income recognition should be objective and based on record of recovery rather than on
any subjective considerations.
(c) The policy of income recognition should be objective.
(d) The policy of income recognition may be objective or subjective.
22) Which of the following is correct :
a) The auditor shall establish an audit plan that sets the scope, timing, and direction of the audit, and that
guides the development of the overall audit strategy.
b) The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the
audit, and there is no need to guide the development of the audit plan.
c) The auditor shall establish an overall audit strategy that sets the scope, timing, and direction of the
audit, and that guides the development of the audit plan.
d) The auditor shall establish an audit plan that sets the scope, timing, and direction of the audit, and that
there is no need to guide the development of the overall audit strategy.
23) Where no reply is received during the performance of direct confirmation procedures as part of audit of
accounts receivable balances, the auditor should perform:
a) No additional testing
b)Additional testing including subsequent collections testing and agreeing the detail of the respective balance
to the customer’s remittance advice.
c) Additional testing including preparing a detailed analysis of the balance, ensuring it consists of identifiable
transactions and confirming that these revenue transactions actually occurred.
d)Both (b) and (c)
24) One of your junior audit team members is confused with the term ‘material misstatement’. You explain him
that a material misstatement is untrue information in a financial statement that could affect the financial
decisions of one who relies on the statement. Which of the following would constitute material misstatement?
1)An error of Rs. 5,000 in relation to assets of Rs.20 lakhs.
2)A payroll fraud of Rs.100 in a company where profit before tax is Rs. 11,000.
3)Non-disclosure of a material uncertainty.
4) Financial statements have been prepared on a going concern basis when the company is in the process of
being liquidated.
a) 1 and 2
b) 3 and 4
c) 2 and 3
d) 1 and 4
25) While auditing TEN Ltd., CA. Porky divided the whole population of trade receivables balances to be tested in
a few separate groups called ‘strata’ and started taking a sample from each of them. He treated each stratum
as if it was a separate population. He divided the trade receivables balances of TEN Ltd. for the Financial Year
2017-18 into groups on the basis of personal judgment as follows:
S. No. Particulars
1 Balances in excess of Rs. 10,00,000;
2 Balances in the range of Rs. 7,75,001 to Rs. 10,00,000;
3 Balances in the range of Rs. 5,50,001 to Rs. 7,75,000;
4 Balances in the range of Rs. 2,25,001 to Rs. 5,50,000;
5 Balances Rs. 2,25,000 and below
From the abovementioned groups, CA. Porky picked up different percentage of items for examination from
each of the groups, for example, from the top group i.e. balances in excess of Rs.10,00,000, he selected all the
items to be examined; from the second group, he opted for 25 % of the items to be examined; from the lowest
group, he selected 2% of the items for examination; and so on from rest of the groups. Which one of the
following methods of sample selection is he following?
(a) Systematic sampling.
(b) Stratified sampling.
(c) Section sampling.
(d) Selection sampling.
Answer
1) c
2) b
3) a
4) a
5) d
6) d
7) a
8) a
9) b
10) b
11) a
12) d
13) a
14) d
15) b
16) b
17) a
18) c
19) d
20) a
21) b
22) c
23) b
24) b
25) b
Division B- Descriptive Questions
Question No. 1 is compulsory.
Attempt any four questions from the Rest
Marks 70
Q1) Examine with reasons (in short) whether the following statements are correct or incorrect : (Attempt
any 7 out of 8)
(i) The objective of audit is to obtain absolute assurance and to report on the financial statements.
(ii) As per SA 230 on “Audit Documentations”, the working papers are not the property of the auditor.
(iii) Control risk is the susceptibility of an account balance or class of transactions to misstatement that
could be material either individually or, when aggregated with misstatements in other balances or classes,
assuming that there were no related internal controls.
(iv) The Audit Engagement documentations should ordinarily be retained by the auditor for minimum of
six years from the date of the auditor's report or the date of the group auditor's report, whichever is later.
(v) Collateral security refers to the security offered by the borrower for bank finance or the one against
which credit has been extended by the bank.
(vi) “Sweat Equity Shares” means equity shares issued by the company to employees or directors at a
premium or for consideration other than cash for providing know-how or making available right in the nature of
intellectual property rights or value additions, by whatever name called.
(vii) PPE are depreciated when the asset is actually put to active use.
(viii) According to ‘propriety audit’, the auditors try to bring out cases of improper, avoidable, or
infructuous expenditure even though the expenditure has been incurred in conformity with the existing rules
and regulations. (7 x 2 Marks)
Answer
(i) Incorrect: As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting an audit of financial
statements, the overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement; and
(b) To report on the financial statements, and communicate as required by the SAs, in accordance with
the auditor’s findings.
(ii) Incorrect: As per SA 230 on “Audit Documentations” the working papers are the property of the
auditor and the auditor has right to retain them. He may at his discretion can make available working papers to
his client. The auditor should retain them long enough to meet the needs of his practice and legal or
professional requirement.
(iii) Incorrect: Inherent risk is the susceptibility of an account balance or class of transactions to
misstatement that could be material either individually or, when aggregated with misstatements in other
balances or classes, assuming that there were no related internal controls.
(iv) Incorrect: SQC 1 requires firms to establish policies and procedures for the retention of engagement
documentation. The retention period for audit engagements ordinarily is no shorter than seven years from the
date of the auditor’s report, or, if later, the date of the group auditor’s report.
(v) Incorrect: Primary security refers to the security offered by the borrower for bank finance or the one
against which credit has been extended by the bank. This security is the principal security for an advance.
Collateral security is in addition to the Primary security.
(vi) Incorrect: “Sweat Equity Shares” means equity shares issued by the company to employees or
directors at a discount or for consideration other than cash for providing know-how or making available right in
the nature of intellectual property rights or value additions, by whatever name called.
(vii) Incorrect: Depreciation is a fall in value of asset due to obsolescence, usage and effluxion of time,
Therefore, depreciation is charged when the asset is ready for use. Active use of asset is not a mandatory
criteria for charge of depreciation.
(viii) Correct- According to ‘propriety audit’, the auditors try to bring out cases of improper, avoidable, or
infructuous expenditure even though the expenditure has been incurred in conformity with the existing rules
and regulations i.e. the expenditure is incurred with due regard to broad and general principles of financial
propriety.
Q2) Answer the following:
a) Mention any five attributes to be considered by an auditor while verifying for a depreciation and amortisation
expenses. Marks 3
Answer
Depreciation and Amortisation Expenses: Auditor needs to consider the following attributes while verifying for
depreciation and amortisation expenses:
• Obtain the understanding of entity’s accounting policy related to depreciation and amortisation.
• Ensure that the Company’s policy for charging depreciation and amortisation is as per the relevant
provisions of Companies Act and applicable accounting standards.
• Whether the depreciation has been calculated after making adjustment of residual value from the cost
of the assets.
• Whether depreciation and amortisation charges are valid.
• Whether depreciation and amortisation charges are accurately calculated and recorded.
• Whether all depreciation and amortisation charges are recorded in the appropriate period.
• Ensure the parts (components) of each item of property, plant and equipment that are to be
depreciated separately has been properly identified.
• Whether the most appropriate depreciation method for each separately depreciable component has
been used.
b)M/s Amitabh & Associates are the statutory auditors of Ringston Ltd. which is a company engaged in the
business of manufacture of pen drives. The auditor has started drafting the audit report for the FY 2021-22. CA
Amitabh, the engagement partner is of the view that the financial statements of Ringston Ltd. represent a true
and fair view. Give the draft of the opinion paragraph of the audit report. Marks 3
Answer
We have audited the financial statements of Ringston Limited which comprise the Balance Sheet as at
31.03.2022 and the statement of Profit and Loss Account and the notes to the financial statements, including a
summary of significant accounting policies and other explanatory information.
In our opinion and to the best of our information and according to the explanations given to us, the aforesaid
financial statements give the information required by the Act in the manner so required and give a true and fair
view in conformity with the accounting principles generally accepted in India, of the state of affairs of the
company as at 31.03.2022 and the Profit & Loss for the year ending on that date.
c) CA R Gurumurthy is about to complete audit of a company. Before completion, he asks management to
provide him a written representation confirming that management has fulfilled its responsibilities regarding
preparation of financial statements. He also wants management to confirm in writing about providing of all
the necessary information and completeness of transactions to him. The management feels that auditor is
seeking irrelevant documents near the completion of audit. Why view of management is not proper? What
possible implications it may lead to? Marks 4
Answer
The view of management is not proper. Audit evidence obtained during the audit that management has
fulfilled its responsibilities regarding preparation of financial statements and about information provided and
completeness of transactions is not sufficient without obtaining confirmation from management that it
believes that it has fulfilled those responsibilities. This is because the auditor is not able to judge solely on
other audit evidence whether management has prepared and presented the financial statements and
provided information to the auditor on the basis of the agreed acknowledgement and understanding of its
responsibilities.
In case of refusal of management to provide such a confirmation, it may lead to disclaimer of opinion by the
auditor.
d)A Chartered accountant receives about 40% of his total audit fees from a single client. Discuss how it could
affect independence of Chartered accountant as auditor of this client. What are such types of threats referred
to as? Marks 4
Answer
Undue dependence on fees of a client constitutes a threat as there is fear of losing the client. Such threats are
referred to as self-interest threats.
Q3) Answer the following:
a) You have been appointed as an auditor of an NGO, briefly state the points on which you would concentrate
while planning the audit of such an organisation? Marks 5
Answer
While planning the audit of an NGO, the auditor may concentrate on the following:
(i) Knowledge of the NGO's work, its mission and vision, areas of operations and environment in which it
operate.
(ii) Updating knowledge of relevant statutes especially with regard to recent amendments, circulars, judicial
decisions related to the statutes.
(iii) Reviewing the legal form of the Organisation and its Memorandum of Association, Articles of
Association, Rules and Regulations.
(iv) Reviewing the NGO's Organisation chart, then Financial and Administrative Manuals, Project and
Programme Guidelines, Funding Agencies Requirements and formats, budgetary policies if any.
(v) Examination of minutes of the Board/Managing Committee/Governing Body/Management and
Committees thereof to ascertain the impact of any decisions on the financial records.
(vi) Study the accounting system, procedures, internal controls and internal checks existing for the NGO and
verify their applicability.
(vii) Setting of materiality levels for audit purposes.
(viii) The nature and timing of reports or other communications.
(ix) The involvement of experts and their reports.
(x) Review the previous year's Audit Report.
b)It is the duty of Comptroller and Auditor General of India to audit and report on all expenditure from the
Consolidated Fund of India and of each State and of each Union Territory having a Legislative Assembly and to
ascertain whether the moneys shown in the accounts as having been disbursed were legally available for and
applicable to the service or purpose to which they have been applied or charged and whether the expenditure
conforms to the authority which governs it. Discuss, in above context, what is understood by “Consolidated
Fund of India”? What is its importance? Marks 4
Answer
Consolidated Fund of India consists of all the revenue received from direct and indirect taxes, all the loans
taken by the Govt. of India and all the amount of repayment of loans received by the Govt. of India. Its
importance lies in the fact that all government expenditure is incurred from this fund. No moneys out of the
Consolidated Fund of India shall be appropriated except in accordance with law and for the purposes and in
the manner provided in the Constitution.
c) Write a short note on Reversal of Income with respect to banking. Marks 5
Answer
If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, the entire
interest accrued and credited to income account in the past periods, should be reversed or provided for if the
same is not realised. This will apply to Government guaranteed accounts also.
In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the
current period and should be reversed or provided for with respect to past periods, if uncollected.
Further, in case of banks which have wrongly recognised income in the past should reverse the interest if it
was recognised as income during the current year or make a provision for an equivalent amount if it was
recognized as income in the previous year(s).
Furthermore, the auditor should enquire if there are any large debits in the Interest Income account that have
not been explained. It should be enquired is there are any communications from borrowers pointing out
differences in Interest charge, and whether action as justified has been taken in this regard.
Q4) Answer the following:
a) How will you vouch/verify the following:
- Goods sent on consignment. Marks 4
Answer
(a) Goods Sent Out on Sale or Return Basis:
(i) Check whether a separate memoranda record of goods sent out on sale or return basis is maintained.
The party accounts are debited only after the goods have been sold and the sales account is credited.
(ii) See that price of such goods is unloaded from the sales account and the trade receivable’s record. Refer
to the memoranda record to confirm that on the receipt of acceptance from each party, his account has been
debited and the sales account correspondingly credited.
(iii) Ensure that the goods in respect of which the period of approval has expired at the close of the year
either have been received back subsequently or customers’ accounts have been debited.
(iv) Confirm that the inventory of goods sent out on approval, the period of approval in respect of which
had not expired till the close of the year lying with the party, has been included in the closing inventory.
b) CA Chandni Khanna is going to complete audit of a company within next few days. She has performed
necessary audit procedures like inquiry of management personnel, reading minutes of meetings held after date
of financial statements, going through books of accounts after date of financial statements to make sure that
all subsequent events before signing audit report have been considered by her. Still, she wants to be certain
that no such events have been left out. What she should do in such a situation? Also, discuss the rationale of
doing so. Marks 5
Answer
She has already performed necessary audit procedures like inquiry of management personnel, reading
minutes of meetings after date of financial statements and going through books after date of financial
statements.
Now, she should request management and, where appropriate, those charged with governance, to provide a
written representation in accordance with SA 580, “Written Representations” that all events occurring
subsequent to the date of the financial statements and for which the applicable financial reporting framework
requires adjustment or disclosure have been adjusted or disclosed.
The rationale of obtaining written representations is that even after performing abovesaid procedures, she
may not come to know all subsequent events. Therefore, it is necessary from an auditor’s point of view to
obtain acknowledgment from management in the form of Written representations that all such events for
which the applicable financial reporting framework requires adjustment or disclosure have been adjusted or
disclosed.
c) As part of the risk assessment, the auditor shall determine whether any of the risks identified are, in the
auditor’s judgment, a significant risk.
In exercising judgment as to which risks are significant risks, state the factors which shall be considered by the
auditor.
Explain the above in context of SA-315. Marks 5
Answer
Identification of Significant Risks: SA 315 “Identifying and Assessing the Risk of Material Misstatement through
understanding the Entity and its Environment” de fines ‘significant risk’ as an identified and assessed risk of
material misstatement that, in the auditor’s judgment, requires special audit consideration.
As part of the risk assessment, the auditor shall determine whether any of the risks identified are, in the
auditor’s judgment, a significant risk. In exercising this judgment, the auditor shall exclude the effects of
identified controls related to the risk.
In exercising judgment as to which risks are significant risks, the auditor shall consider at least the following-
(i) Whether the risk is a risk of fraud;
(ii) Whether the risk is related to recent significant economic, accounting or other developments like
changes in regulatory environment etc. and therefore requires specific attention;
(iii) The complexity of transactions;
(iv) Whether the risk involves significant transactions with related parties;
(v) The degree of subjectivity in the measurement of financial information related to the risk, especially
those measurements involving a wide range of measurement uncertainty; and
(vi) Whether the risk involves significant transactions that are outside the normal course of business for the
entity or that otherwise appear to be unusual.
Q5) Answer the following:
a) The auditor of XYZ Ltd, engaged in FMCG (Fast Moving Consumable Goods) obtains an understanding of the
control environment. As part of obtaining this understanding, the auditor evaluates whether:
(i) Management has created and maintained a culture of honesty and ethical behavior; and
(ii) The strengths in the control environment elements collectively provide an appropriate foundation for
the other components of internal control.
Advise what is included in control environment. Also explain the elements of control environment. Marks 8
Answer
Control Environment – Component of Internal Control: The auditor shall obtain an understanding of the
control environment. As part of obtaining this understanding, the auditor shall evaluate whether:
(i) Management has created and maintained a culture of honesty and ethical behavior; and
(ii) The strengths in the control environment elements collectively provide an appropriate foundation for
the other components of internal control.
What is included in Control Environment? The control environment includes:
(i) the governance and management functions and
(ii) the attitudes, awareness, and actions of those charged with governance and management.
(iii) The control environment sets the tone of an organization, influencing the control consciousness of its
people.
Elements of the Control Environment: Elements of the control environment that may be relevant when
obtaining an understanding of the control environment include the following:
(a) Communication and enforcement of integrity and ethical values – These are essential elements that
influence the effectiveness of the design, administration and monitoring of controls.
(b) Commitment to competence – Matters such as management’s consideration of the competence levels
for particular jobs and how those levels translate into requisite skills and knowledge.
(c) Participation by those charged with governance – Attributes of those charged with governance such as:
• Their independence from management.
• Their experience and stature.
• The extent of their involvement and the information they receive, and the scrutiny of activities.
• The appropriateness of their actions, including the degree to which difficult questions are raised and
pursued with management, and their interaction with internal and external auditors.
(d) Management’s philosophy and operating style – Characteristics such as management’s:
• Approach to taking and managing business risks.
• Attitudes and actions toward financial reporting.
• Attitudes toward information processing and accounting functions and personnel.
(e) Organisational structure – The framework within which an entity’s activities for achieving its objectives
are planned, executed, controlled, and reviewed.
(f) Assignment of authority and responsibility - Matters such as how authority and responsibility for
operating activities are assigned and how re porting relationships and authorisation hierarchies are
established.
(g) Human resource policies and practices – Policies and practices that relate to, for example, recruitment,
orientation, training, evaluation, counselling, promotion, compensation, and remedial actions.
b) Multi-State Co-operative Societies Act, 2002 states that a person who is a Chartered Accountant within the
meaning of the Chartered Accountants Act, 1949 can only be appointed as auditor of Multi-State co-operative
society. Explain stating also the persons who are not eligible for appointment as auditors of a Multi-State co-
operative society. Marks 6
Answer
Qualification of Auditors - Section 72 of the Multi-State Co-operative Societies Act, 2002 states that a person
who is a Chartered Accountant within the meaning of the Chartered Accountants Act, 1949 can only be
appointed as auditor of Multi-State co-operative society.
However, the following persons are not eligible for appointment as auditors of a Multi-State co- operative
society-
(a) A body corporate.
(b) An officer or employee of the Multi-State co-operative society.
(c) A person who is a member or who is in the employment, of an officer or employee of the Multi - State
co-operative society.
(d) A person who is indebted to the Multi-State co-operative society or who has given any guarantee or
provided any security in connection with the indebtedness of any third person to the Multi-State co-operative
society for an amount exceeding one thousand rupees.
If an auditor becomes subject, after his appointment, to any, of the disqualifications specified above, he shall
be deemed to have vacated his office as such.
Q6) Answer the following:
a) The auditor shall update and change the overall audit strategy and the audit plan as necessary during the
course of the audit. Explain Marks 3
Answer
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the
course of the audit. As a result of unexpected events, changes in conditions, or the audit evidence obtained
from the results of audit procedures, the auditor may need to modify the overall audit strategy and audit
plan and thereby the resulting planned nature, timing and extent of further audit procedures, based on the
revised consideration of assessed risks. This may be the case when information comes to the auditor’s
attention that differs significantly from the information available when the auditor planned the audit
procedures. For example, audit evidence obtained through the performance of substantive procedures may
contradict the audit evidence obtained through tests of controls.
b)Mr. A approaches a bank for financial assistance for his upcoming project. The Bank Branch Manager, after
verifying the proposal, is agreeable to financing Mr. A, but asks for the security to be offered to the bank.
Discuss the nature of securities required to be offered to the bank. Marks 4
Answer
Nature of Security:
I. Primary security refers to the security offered by the borrower for bank finance or the one against
which credit has been extended by the bank. This security is the principal security for an advance.
II. Collateral security is an additional security. Security can be in any form i.e. tangible or intangible asset,
movable or immovable asset.
Examples of most common types of securities accepted by banks are the following.
• Personal Security of Guarantor
• Goods / Stocks / Debtors / Trade Receivables
• Gold Ornaments and Bullion
• Immovable Property
• Plantations (For Agricultural Advances)
• Third Party Guarantees
• Banker’s General Lien
• Life Insurance Policies
• Stock Exchange Securities and Other Instruments
c) GST & Co., a firm of Chartered Accountants has been appointed to audit the accounts of XYZ Ltd. The partner
wanted to cover principal aspects while conducting its audit of financial statements. Advise those principal
aspects. Marks 4
Answer
The principal aspects to be covered in an audit concerning final statements of account are the following:
(i) An examination of the system of accounting and internal control to ascertain whether it is appropriate
for the business and helps in properly recording all transactions.
(ii) Reviewing the system and procedures to find out whether they are adequate and comprehensive and
incidentally whether material inadequacies and weaknesses exist to allow frauds and errors going unnoticed.
(iii) Checking of the arithmetical accuracy of the books of account by the verification of postings, balances,
etc.
(iv) Verification of the authenticity and validity of transaction entered into by making an examination of the
entries in the books of accounts with the relevant supporting documents.
(v) Ascertaining that a proper distinction has been made between items of capital and of revenue nature
and that the amounts of various items of income and expenditure adjusted in the accounts corresponding to
the accounting period.
(vi) Comparison of the balance sheet and profit and loss account or other statements with the underlying
record in order to see that they are in accordance therewith.
(vii) Verification of the title, existence and value of the assets appearing in the balance sheet.
(viii) Verification of the liabilities stated in the balance sheet.
(ix) Checking the result shown by the profit and loss and to see whether the results shown are true and fair.
(x) Where audit is of a corporate body, confirming that the statutory requirements have been complied
with.
(xi) Reporting to the appropriate person/body whether the statements of account examined do reveal a
true and fair view of the state of affairs and of the profit and loss of the organisation.
d)Expenses which are essentially of a revenue nature if incurred for creating an asset or adding to its value for
achieving higher productivity are regarded as expenses of a capital nature. Describe any five such expenses.
Marks 3
Answer
Expenses which are essentially of a Revenue Nature, if incurred for creating an asset or adding to its value for
achieving higher productivity, are regarded as expenditure of a capital nature. Examples of capital expenditure
are-
(i) Material and wages- capital expenditure when expended on the construction of a building or erection of
machinery.
(ii) Legal expenses- capital expenditure when incurred in connection with the purchase of land or building.
(iii) Freight- capital expenditure when incurred in respect of purchase of plant and machinery.
(iv) Repair- Major repairs of a fixed asset that increases its productivity .
(v) Wages- Wages paid on installation costs incurred in Plant & machinery.
(vi) Interest- Interest paid for the qualification period as per AS-16 i.e. before the asset is constructed.
Whenever, therefore, a part of the expenditure, ostensibly of a revenue nature, is capitalised it is the duty
of the auditor not only to examine the precise particulars of the expenditure but also the considerations on
which it has been capitalised.