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Chapter 12
Case Scenarios
Case Scenario (MTP May 20)
• M/s TPR & Associates have been appointed as the auditors of Octopus Ltd. for the Financial Year
2019-20.
• During the course of audit, the auditor notices that there is significant change in the number of
debtors of the company. The auditor decided to check the debtors account in detail.
• Further the company has made various provisions like the provisions for taxation, provision for
bad & doubtful debts.
• Also during the current Financial Year, the auditor attended the physical verification of the
inventory being carried out by the management.
• The auditor notices that there is no substantial change in the bifurcation of amount of items
representing the liabilities side of the balance sheet of Octopus Ltd. Still the auditor
understands that he needs to check the liability side in detail.
• Further the company has also recognised various income like interest income and dividend
income which auditor understands need to be checked in detail.
• The auditor is of the understanding that certain matters need to be reported under Companies
Auditors Report Order (CARO).
Based on the above facts, answer the following:-
1. ...... is a possible obligation that arises from the past events and whose existence will be
confirmed only by the occurrence/ non occurrence of one or more uncertain future events not
wholly within the control of the entity:-
(a) Provision
(b) Reserve
(c) Contingent Liability
(d) Liability (2 Marks May 20)
Answer : (c)
2. Which of the following is not correct with respect to the inventory held by Octopus Limited:-
(a) All inventory units held by the company should have been recorded and recognized in the
financial statements.
(b) Any inventory held by a third party on behalf of the company should not be included as part
of the inventory balance.
(c) Inventory should be recognized at cost or net realizable value whichever is lower.
(d) Inventory balance as at the year end does not include any element of next year(2 Marks
May 20)
Answer : (b)
3. If the management of Octopus Ltd. refuses to allow the auditor, to send the confirmation
request to the debtors, the auditor should:-
(a) Withdraw from the engagement.
(b) Not listen at all to any requests of the management.
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(c) Consider the management’s request for refusal and assess its validity and decide the
nature, timing, extent of his audit procedures accordingly.

(a) Agree to management request and proceed with audit of other items of the financial
statements. (2 Marks May 20)
Answer : (c)

4. Which of the following statements is not true so far as the liabilities of a company are
concerned:-
(a) Liabilities are the financial obligations of a company including owner’s funds.
(b) Liabilities include borrowing, trade payable and other current liabilities and provisions.
(c) Verification of liabilities is an important as that of assets.
(d) All of the above. (2 Marks May 20)
Answer : (a)

5. Statement 1: Confirmations as well as undelivered letters should be given/ returned to the

auditor and not to the client
Statement 2: When no reply is received, the auditor should perform alternate procedures
regarding the balances:-
(a) Only statement 1 is correct
(b) Only statement 2 is correct
(c) Both 1 & 2 are correct
(d) Both 1 & 2 are incorrect (2 Marks May 20)
Answer : (c)

Case Scenario (MTP May 20) (Chapter 10 The Company Audit)

ABC Ltd. is a company dealing in products namely chocolate and coffee. ABC Ltd. approached audit
firm XYZ & Associates for the statutory audit of its financial statements for the year ended
31.03.2019. The Gross turnover of the company is Rs.105 crores, out of which turnover from one of
its product namely coffee is of Rs.95 crores during the immediate preceding Financial Year.
During the course of Audit, XYZ & Associates found certain delay in the payment of the Employees
Provident Fund by ABC Ltd. They understand that the same need to be reported under the relevant
provisions of Companies (Auditors Report) Order 2016.
During the FY 2018-2019, Mrs. X wife of CA Mr. X who is partner in XYZ & Associates acquires certain
shares of ABC Ltd. The audit firm is of the opinion that this may call for a disqualification for the firm
for being working as the auditor of the company under the relevant provisions of the Companies Act
2013.
Further, ABC Ltd. also approached the auditors to provide them the Investment Banking service to
which the auditors denied as per the provisions of Companies Act 2013.
During the course of audit, XYZ & Associates has reason to believe that an offence of fraud involving
some amount has been committed in the ABC Ltd. by its General Manager. The auditors understand
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that there is a requirement for reporting of fraud by the auditors under the Companies Act and the
relevant rules.
Based on the above facts, answer the following:-
1. After the appointment of XYZ & Associates, ABC Ltd. should inform the auditor and file a notice
of such appointment with registrar within:-
(a) 60 days
(b) 30 days
(c) 15 days
(d) 20 days(2 Marks May 20)
Answer : (c)

2. If Mrs. X acquires security exceeding the prescribed limit in the ABC Ltd., then XYZ & Associates
shall take corrective actions within… days. What is the prescribed limit:-
(a) 100 days, Market Value Rs 1,00,000
(b) 60 days, Face value Rs 1,00,000
(c) 90 days, Face value Rs 1,00,000
(d) 15 days, Market Value Rs 1,00,000(2 Marks May 20)
Answer : (b)

3. Under which section reporting of fraud by an auditor to the Central Government is required and
what is the amount of fraud:-
(a) Section 143(12), 1 crore & above
(b) Section 139(12), 1 crore & above
(c) Section 143(12), 2 crore & above
(d) None of the above(2 Marks May 20)
Answer : (a)

4. What is the requirement for ABC Ltd as per the relevant provisions regarding maintenance of
cost records:-
(a) Maintenance of cost records is mandatory, in form CRA 1.
(b) Maintenance of cost records is mandatory, in form CRA 2.
(c) Maintenance of cost records is mandatory, in any general format.
(a) No requirement of maintenance of cost records. (2 Marks May 20)
Answer : (a)

5. Under relevant clause of CARO,2020, XYZ & Associates is required to report the extent of arrears
of Employees Provident Fund as at the balance sheet date:-
(a) Exceeding 9 months
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(b) Exceeding 3 months

(c) Exceeding 6 months
(d) Exceeding 12 months(2 Marks May 20)
Answer :(c)

Case Scenario (MTP Oct 20)

Mr. Laxman is appointed as statutory auditor of Best Limited for the Financial Year ended 31st March,
2020.
During the course of audit, it was found that few doubtful transactions had been committed by
finance manager who retired in March, 2020.
The fraud was going on since last 4-5 years and the total amount misappropriated is approximately ₹
75 lacs.
Balance sheet of Best Ltd. reflected a cash balance of ₹ 7 crores. The company has taken a loan of ₹
2 crores from the bank despite of the huge cash balance with the company.
Also, Companies Act bestows some duties on auditors to report matters to Central Government in case
of fraud.
On the basis of above facts answer below questions in relation to Mr. Laxman’s role and duties while
conducting statutory audit of Best Limited.
1. Mr. Laxman shall obtain ________________ that the financial statements are free from fraud
andbmisstatement.
(a) Absolute assurance
(b) Reasonable assurance
(c) Management’s assurance
(d) Chief Financial Officer assurance.(2 Marks Oct ‘20)
Answer : (b)
2. Mr. Laxman suspects that cash payments were inflated. Out of the below which could be
probable reason for such inflated cash payments.
(a) Not accounting for cash sales completely
(b) Making payments against purchase vouchers
(c) Making payments against inflated vouchers
(d) Teeming and Lading .(2 Marks Oct ‘20)
Answer : (c)
3. As per Section 143 (12) of Companies Act, 2013 & Rule 13 of CAAR, 2014; Mr. Laxman shall
(a) report the matter to the audit committee constituted under section 177 or to the Board in
other cases within such time and in such manner as prescribed.
(b) report the matter to the audit committee constituted under section 177 within such time
and in such manner as prescribed.
(c) report the matter to the audit committee constituted under section 177 and also to the
Board within such time and in such manner as prescribed.
(d) report the matter to the Board within such time and in such manner as prescribed.
Answer : (a)

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4. Owing to the _______ limitations of an audit, there is __ risk that some material misstatements
of the financial statements will not be detected, even though the audit is properly planned and
performed in accordance with the SAs.
(a) Inherent, unavoidable
(b) Inherit, complete
(c) Management, unavoidable
(d) Regulatory, control.(2 Marks Oct ‘20)
Answer : (a)
5. As an auditor what conclusion can Mr Laxman draw looking at the huge cash reserve of the
company and corresponding bank loan?
(a) Report this matter to the Central Government u/s 143(12) as there is a possibility of fraud
(b) Obtain sufficient and appropriate audit evidence of existence of fraud
(c) Report the matter under CARO, 2020
(a) There is nothing to report as it’s a normal financial decision.(2 Marks Oct ‘20)
Answer : (b)

Case Scenario (MTP Oct ’20)

Roop & Co. are the auditors of Onda group of Hotels. This is the first time the firm is auditing an
industry in food and beverages and it is day one of the audit. The engagement partner along with his
team wants to make a thorough understanding of the entity and its environment in order to identify
and assess the risks of material misstatements, whether due to fraud or error. The following are
some of the points identified by them on Day 1.
1. The hotel has two banquet halls. The documentation available for verification of banquet hall
revenue is only the invoice raised by the hotel and some mail conversations on customer
enquiry and finalization of price. In audit trail, it is found that finance approval of the
transaction is only after invoice is sent to them for accounting at final settlement. Advance paid
by the clients are not vetted through finance team. The auditor suspects a weakness in this
system.
2. The auditor also finds a control deficiency in the process of procurement of stores. A goods
receipt note is not prepared at the time of receipt of goods. On enquiry with management, the
auditor finds that there exists a system control wherein goods receipt note is automatically
prepared and approved in the system once the quantity and price of goods is entered against
specific vendor. This entry is on real -time basis and system does not allow back dated entries.
3. The auditor enquires of the management as to what is risk assessment process followed by the
entity for prevention and detection of risk of material misstatement due to fraud and error. The
auditor finds there is no documented risk assessment process.
With the help of the above facts, answer the following questions by choosing the correct option.
Questions:
1. What kind of a risk is portrayed in the booking of revenue with respect to Banquet halls?
(a) Inherent risk in the class of transaction
(b) Control risk in the class of transaction
(c) Detection risk in the audit procedures
(d) Audit risk in the opinion on the financial statements.
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( 2 Marks Oct ‘20)

Answer : (b)
2. Which among the following statement is incorrect in the context of Audit Risk?
(a) The more extensive the audit procedures performed, the lower is the detection risk
(b) Greater the risk of material misstatement the auditor believes exist, less is the detection risk
that can be accepted and accordingly more persuasive evidence is required by the auditor.
(c) Audit risk means the risk that the auditor gives an appropriate audit opinion when the
financial statement are materially misstated.
(d) Risk of material misstatement at the assertion level is of two kinds – control risk and
inherent risk. ( 2 Marks Oct ‘20)(Chapter 4.3 Key concepts)
Answer : (c)

3. In the case of procurement of stores, the auditor has tested more than one control for the same
assertion. In that given case, what should be his reliance on the control?
(a) Since compensating controls are identified, if tested and evaluated to be effective , the
auditor can rely on the control.
(b) Even though compensating controls are there, since one control is ineffective, the auditor
should not rely on control for this assertion and should perform extensive procedures.
(c) Documentation in electronic medium cannot be accepted, hence, he cannot rely only on
system control.
(d) Even though compensating controls are there, since one control is ineffective, the auditor
should not rely on control for this assertion as well as associated assertions. ( 2 Marks Oct
‘20)
Answer : (a)

4. In the context of SA 315, which among the following is NOT a risk assessment procedure?
(a) Inquiries of management, of appropriate individuals within internal audit function and of
others within the entity
(b) Analytical Procedures
(c) Observation and Inspection
(d) Audit Planning ( 2 Marks Oct ‘20)
Answer : (d)

5. What should be the course of action of the auditor for the entity not having a documented risk
assessment process?
(a) The auditor should obtain management written representations on how risks are identified
(b) The auditor shall discuss with management on how risks are identified, addressed and
determine whether the absence is appropriate in the circumstances or whether it represents
a significant deficiency in internal control.
(c) The auditor should advise the management to document the same immediately and
accordingly opine on the same in his audit report too.
(d) The auditor shall discuss with management on how risks are identified by system and place
reliance on the same as documentation in this context is immaterial. ( 2 Marks Oct ‘20)
Answer : (b)
Case Scenario (MTP March ’21)
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Ghan Shyam & Associates have been appointed as the statutory auditors of ABC Ltd. for the FY 2019 -
2020. The engagement partner, CA Ghan Shyam established the overall audit strategy and made the
detailed plan with respect to the audit assignment of ABC Ltd. after discussing the same with the
engagement team.
The strategy adopted by Ghan Shyam & Associates consisted of relying on the internal control system
of the company and the audit plan and programme were developed accordingly & executed by the
engagement team. During the course of audit, the engagement partner, CA Ghan Shyam found that
some internal control system of the company were not in place. So, he decided not to rely on the
internal control system of the company and accordingly changed the firm’s overall audit strategy, audit
plan & audit programme.
While conducting audit, the engagement partner also discussed with his team regarding the audit
procedures to be performed to verify the debtors’ balances of ABC Ltd. CA Ghan Shyam also asked for
the addresses of various debtors from the management of ABC Ltd. to send balance confirmation
request to such debtors. The management provided such addresses to the audit team. However, the
management of ABC Ltd. asked the debtors to send the responses to such confirmation request to
General Manager of accounts department who will in turn provide such responses to the audit team.
Also with respect to five random debtors, CA Ghan Shyam decided to confirm the terms of agreement
also along with confirming the balance amount, by seeking responses to confirmation requests from
such debtors.
During the course of audit, the auditor found that the inventory of ABC Ltd. is kept at its factories and
various other locations including warehouses. The audit team is unable to attend the physical
verification activity undertaken by the management at all such locations.
During the course of audit, the audit team found that legal cases have been filed against the company
on account of customer complaint. CA Ghan Shyam discussed with his team regarding the audit
procedures that can be performed by the audit team in this regard. CA Ghan Shyam also briefed his
engagement team regarding the documents to be included in the audit file with respect to the audit
assignment of ABC Ltd.
Based on the above facts, answer the following:-
1. Is CA Ghan Shyam right in changing the overall audit strategy and plan after the audit team has
started working as per the earlier strategy established & plan so developed?
(a) CA Ghan Shyam is not right as once the audit team has started the audit work, it is not correct
to change the audit strategy and plan.
(b) CA Ghan Shyam is not right as once the overall audit strategy has been established the same
cannot be changed. Audit plan however can be revised.
(c) CA Ghan Shyam is right in making changes to the overall audit strategy and the audit plan.
(d) CA Ghan Shyam can change the overall audit strategy and audit plan only after discussing the
same with the management of ABC Ltd. ( 2 Marks March ‘21)
Answer : (c)

2. Which of the following audit procedures should the audit team perform with respect to verification
of debtors balance?
(a) Ghan Shyam & Associates can compare the debtors balance reflected in financial statement
with the total balance of ledgers account in the books of ABC Ltd.
(b) Ghan Shyam & Associates can obtain direct balance confirmation from the debtors as this is
external evidence which is most reliable and relevant.
(c) Ghan Shyam & Associates can obtain management representations with respect to the
debtors balance from the management of ABC Ltd and need not perform other audit
procedure as obtaining written representation from management constitutes sufficient and
appropriate audit evidence.
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(d) Both a & b. ( 2 Marks March ‘21)

Answer : (d)

3. Statement 1: The reliability of information to be used as audit evidence is influenced by its source
and its nature, and the circumstances under which it is obtained.
Statement 2: The audit evidence obtained from sources external to the entity are generally more
reliable than the audit evidence from internal sources.
(a) Only statement 1 is true
(b) Only statement 2 is true
(c) Both the statements are true
(d) None of the statements is true( 2 Marks March ‘21)
Answer : (c)

4. With respect to the inventory of ABC Ltd. kept in warehouse, which audit procedures can the
audit team perform to obtain sufficient and appropriate audit evidence?
(a) Checking of warehouse receipt with the inventory record of ABC Ltd.
(b) Obtaining direct confirmation with respect to quantity & condition of inventory of ABC Ltd.
from the warehouse.
(c) Both a & b
(d) Seeking a management representation regarding inventory valuation and mentioning the
fact regarding inventory being kept at the warehouse in the audit report. ( 2 Marks March
‘21)
Answer : (c)

5. Is management correct in asking the debtors to provide the reply of confirmation request of
auditor to the General Manager of accounts department of the company?
(a) Yes, the management has correctly asked the debtors to respond directly to the GM of
accounts department.
(b) No, management is not correct in asking for a direct response to GM of accounts
department as external confirmation is the response obtained directly by the auditor.
(c) Yes, the management is correct in advising direct response to the GM of accounts
department as this will ensure that only correct confirmation are provided to the auditors.
(d) No, management is not correct as this is the option of the auditor to see if the response to
external confirmation is to be obtained by management or auditor himself. ( 2 Marks
March ‘21)

Answer (b)

Case Scenario (MTP March ’21)

RRM & Associates have been appointed as the statutory auditors of UVW Ltd. for the FY 2019-2020.
The engagement partner is CA Raj and his engagement team consists of 2 article assistants. CA Raj
briefed his audit team regarding the factors affecting the sample selection and the sample size. The
team was also told that the tolerable error should be zero and sample size should be selected
accordingly. CA Raj gave a detailed audit programme to his team. The audit programme with respect
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to the checking of accounts receivable and accounts payable consists of checking the accounts on
sample basis. CA Raj asked the engagement team to divide the accounts receivables and account
payable balances into separate groups and to take sample from each of them.
During the course of audit, the audit team noticed that certain internal control system with respect to
the accounts receivable were not in place at few instances during the FY 2019 -20.
Also while checking the payment transactions on sample basis, the engagement team noticed that on 9
th and 10th of every month, the miscellaneous expense vouchers were not signed by the authorised

personnel. The engagement team discussed the implications of the same on their audit procedures to
be performed in this regard.
Based on the above facts, answer the following:-
1. Which of the following factors should not be considered by CA Raj in deciding the extent of
checking while making the sample plan in case of UVW Ltd.?
(a) The size of UVW Ltd.
(b) The state of the internal control system of UVW Ltd.
(c) The tolerable error range decided in case of UVW Ltd.
(d) The competence of the engagement team. ( 2 Marks March ‘21)
Answer : (d)

2. With respect to the weakness in internal control system of accounts receivable during the FY
2019 -20, the audit team:-
(a) Should consider a larger sample size or 100% examination of accounts receivables.
(b) Should consider a smaller sample size of accounts receivables.
(c) Should not consider applying sampling techniques.
(d) Should give a disclaimer of opinion. ( 2 Marks March ‘21)
Answer : (a)

3. Statement 1: While conducting an audit, it is obligatory for the auditor to apply sampling.
Statement 2: There may be sometimes where test checking or sampling may not be suitable.
(a) Only statement 1 is true
(b) Only statement 2 is true
(c) Both the statements are true
(d) None of the statements is true( 2 Marks March ‘21)
Answer : (b)

4. With respect to selecting sample for accounts receivable and accounts payable which method of
selecting of sample is advised by CA Raj to the engagement team?
(a) Stratified Sampling method
(b) Monetary Unit Sampling method
(c) Haphazard Sampling method
(d) Interval Sampling( 2 Marks March ‘21)
Answer : (a)

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5. With respect to the deviation identified by the auditor occurring on 9 th and 10th of every month,
what course of action should the audit firm adopt?
(a) RRM & Associates should ignore such deviation as it exists only on a very few instances
during the entire year under audit.
(b) RRM & Associates should extend its audit procedures to such deviated transactions.
(c) RRM & Associates shall investigate the nature and causes of such deviations as such
deviations may be intentional and may indicate the possibility of fraud.
(d) Both b & c ( 2 Marks March ‘21)
Answer : (d)

Case Scenario (MTP April ’21)

• Mars Ltd is a public company having a turnover exceeding Rs 50 crores in the last 3 financial
years including the current financial year which is FY 2019-20
• The company comes under the class of companies specified under item (A) Regulated Sectors.
• M/s XYZ & Associates have been appointed as the auditors of Mars Ltd for FY 2019-20.
• Mars Ltd has a branch office in Dubai for which a separate auditor has been appointed.
• M/s XYZ & Associates understand that they need to communicate with the another auditor
appointed for the branch office in Dubai.
• Further Mars Ltd has taken a loan from a nationalized bank in 2015 amounting to Rs 1 crore
payable in 8 equal instalments of Rs. 12.50 lakhs each starting from 31 st March 2016 onwards.
It has repaid its 4 instalments, however the company has defaulted in the current financial year.
Mars Ltd has sought re- scheduling of loan from the bank.
• The auditors, XYZ & Associates understand that they have certain reporting requirements under
Companies (Auditor’s Report) Order, 2016.
• Further, the auditors also attended the physical verification of inventory conducted by the
management at the year end.
Based on the above facts, answer the following:-
1. With respect to the forms specified by companies (Cost Records & Audit) Rule 2014, which of the
following is incorrect combination:-
(a) Form CRA 1- Maintenance of cost records by the Company.
(b) Form CRA 2- Intimation of appointment of another cost auditor to Central Government.
(c) Form CRA 3- Submission of Cost Audit Report to the Board of Directors of the company.
(d) Form CRA 4- Submission of Cost Audit Report by the company to the Registrar. ( 2 Marks
April ‘21)
Answer : (d)

2. Within how many days of the receipt of the copy of Cost Audit Report. Mars Ltd is required to
forward the report to the Central Government:-
(a) 30 days
(b) 60 days
(c) 15 days
(d) 90days( 2 Marks April ‘21)

Answer : (a)
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3. Whether reporting about maintenance of cost records required by Companies (Auditors Report)
Order, 2016. If yes, then under which clause and which is the relevant section under the Companies
Act 2013: -
(a) Yes, Clause vi, Section 148(1)
(b) No, - , Section 148(1)
(c) Yes, clause v, Section 143(1)
(d) No, - , section 143(1) ( 2 Marks April ‘21)

Answer : (a)

4. With respect to the branch office of Mars Ltd In Dubai, what is the duty of M/s XYZ & Associates:-
(a) M/s XYZ & Associates might discuss with the branch auditor the audit procedures applied by
the branch auditor.
(b) M/s XYZ & Associates may also visit the branch auditor.
(c) M/s XYZ & Associates cannot advise the other auditor of accounting, auditing/ reporting
requirement as the other auditor is well versed with such provisions.
(d) Both a & b( 2 Marks April ‘21)
Answer : (d)

5. Which of the following is incorrect:-

(a) SA 200- Overall objectives of Independent Auditor
(b) SA 230- Audit Documentation
(c) SA 299- Joint Audit of Financial Statements
(d) SA 600- Subsequent Events ( 2 Marks April ‘21)
Answer : (d)

Case Scenario (MTP April ’21 & Sep ‘22)

Sun Private Limited is a newly formed private limited company engaged in the manufacturing of solar
panels. Company has appointed M&S Associates, a Partnership Firm of Mr Meticulous and Mr
Sincere as their First Auditors. M&S Associates accepted the assignment and Mr Meticulous being
the engagement Partner, started their Audit.
During the course of Audit, Mr Meticulous asked the Management for name of the companies
operating in similar business so that they can compare the Company’s Figures. During this procedure,
Mr Meticulous found that the Gross Margin of the Company is lower than the Industry Standard /
Fellow Companies. He prepared an Interim Report dealing with this matter and asked the
Management about the reasons for this deviation. Management asked him to give all the working
along with the Working Papers as they believed it is the Company’s Property. Mr Meticulous advised
them that he can provide working but cannot give them the working papers as they are the property
of the Firm.
Management agreed to that and asked Mr Meticulous to go into detail and tell them the reasons for
lower Gross Margin to which he agreed. During the detailed audit, Mr Meticulous came to know
about the fact that the company dispatched its solar panels to its Distributors on Delivery Challans
and once the goods were accepted, Sales bills were raised. Checking each Challan against Sales
Invoices, Mr Meticulous found that there were many challans for which no Invoices were raised and
thus Sales was grossly understated and there was no mechanism where unbilled Challans were
recorded or tracked. Company employed a person to reconcile all the challans and prepared a list
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where Bills are yet to be sent to the Customers. In addition, Company was also asked to seek
confirmation of balances from all its customers. The Management assured Mr Meticulous that
Inventories are physically verified and hence there will be no impact on them.
Multiple Choice Questions:
1. Mr. Meticulous asked about other Companies, he was intending to perform which audit p
rocedure?
(a) Analytical Procedures
(b) Substantive Procedures
(c) Random Sampling
(d) Statistical Sampling ( 2 Marks)
Answer : (a)

2. What was the initial procedure carried on by Mr Meticulous?

(a) Trend Analysis
(b) Ratio Analysis
(c) Statistical Modelling
(d) Random Sampling( 2 Marks )
Answer : (b)

3. Who has the right to retain the working papers of the Company in current case?
(a) Audit Committee
(b) Board of Directors
(c) Auditor
(d) Chairman of the Audit Committee( 2 Marks )
Answer : (c)
4. When Mr. Meticulous decided to go in detail checking of Sales, which Audit Procedure he
applied to obtain the evidence?
(a) Test of Transactions
(b) Test of Balances
(c) Both (a) and (b)
(d) Analytical Procedures( 2 Marks )
Answer : (c)

5. The impact of the exercise carried on by the Company for unbilled challans will have an impact
on
(a) Gross Receipts and Debtors
(b) Gross Receipts and Inventory
(c) Debtors
(d) Inventory ( 2 Marks )
Answer (a)

Case Scenario (MTP Oct ’21)

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A Partnership Firm of Chartered Accountants by the name of HS and Associates was appointed to audit
books of accounts of WT Limited for financial year 2019-20. HS and Associates consisted of two
partners CA H and CA S.
While conducting audit of WT Limited for financial year 2019-20, CA H, one of the partners of HS and
Associates used different audit procedures in order to obtain audit evidence.
The different audit procedures used by CA H were as follows:
(1) As WT Limited was engaged in manufacturing business of wooden doors, CA H and his team
members carefully watched the whole process of counting of finished wooden doors by
employees of WT Limited. The counting of finished wooden doors was necessary for the purpose
of verification of stock of finished wooden doors.
(2) In WT Limited the stock of finished wooden doors was valued manually by multiplying number
of finished wooden doors with value per finished wooden door. A team member of CA H again
did the calculation in order to verify the accuracy regarding valuation of stock of wooden
finished doors.
(3) CA H with the help of his team members obtained information from people (who were
experienced in manufacturing business of wooden doors) about the purchase price of raw
materials required in manufacturing business of wooden doors and also obtained some non-
financial information.
(4) CA H and his team members while conducting the audit of WT Limited for financial year 2019-
20 in detail checked and evaluated the books of accounts and relevant documents of W
Limited.
(5) CA H asked for written confirmations regarding account balances from Debtors and Creditors of
WT Limited.
Keeping the basic concepts about various audit procedures in mind, answer the following multiple -
choice questions:
1. CA H and his team members carefully watched the whole process of counting of finished wooden
doors by employees of WT Limited. This is an example of which audit procedure:
(a) External Confirmation.
(b) Observation.
(c) Inquiry.
(d) Inspection. (2 Marks Oct ‘21)
Answer : (b)

2. In order to verify the accuracy regarding valuation of stock of wooden finished doors, a team
member of CA H again did the calculation. This is an example of which audit procedure:
(a) Analytical Procedures.
(b) Inquiry.
(c) Inspection.
(d) Recalculation. (2 Marks Oct ‘21)
Answer : (d)

3. CA H with the help of his team members obtained information (both financial and non-financial
information) from experienced people in manufacturing business of wooden doors. These
experienced people provided the required information. This whole method of obtaining
information is an example of which audit procedure:
(a) Inspection
(b) Reperformance.
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(c) Inquiry.
(d) Investigation. (2 Marks Oct ‘21)
Answer : (c)

4. CA H and his team members in detail checked and evaluated the books of accounts and relevant
documents of WT Limited. This is an example of which audit procedure:
(a) Inspection.
(b) Reperformance.
(c) Recalculation.
(d) Investigation(2 Marks Oct ‘21)
Answer : (a)

5. Asking for written confirmations regarding account balances from Debtors and Creditors of WT
Limited by CA H is an example of which audit procedure:
(a) Inquiry
(b) Inspection
(c) Investigation.
(d) External Confirmation. (2 Marks Oct ‘21)
Answer : (d)

Case Scenario (MTP Oct ’21)

RM & Associates have been appointed as Auditors of Techblocks Consulting Ltd. for the year 2020-
21. CA R and CA M were the Engagement partners.
Para 1
The Firm has freshly appointed 2 Article Clerks who had no practical knowledge in the area of Auditing.
They had to work to tight hard-headed factual issues and were baffling to understand the various terms
and their objectives in the field of Auditing.
Para 2
To make sure that the Article Clerk do not misplace or mis-handle the Working Papers, CA M also
described the relevance of Audit File and clarified that working papers are the property of Auditor.
Such Audit file should be preserved for a period of seven years.
Para 3
CA R while scrutinizing Books of Accounts suspected some fictitious sales as a result of which he
anticipated inflated Debtors. Management was reluctant to give the details. As CA R could not gather
more evidence from the Management, he sought to obtain details from the third party.
Para 4
On further perusal of Opening Balances, it is essential to perceive that Accounting Policies have been
consistently applied in the current period’s financial statements and whether any changes have been
properly accounted for and disclosed. CA M assigned this duty to his article clerk. The Article clerk
explained to CA M about how he had observed that Accounting policies were not consistently applied
in relation to opening balances in accordance with the financial reporting framework or a change is not
properly accounted or not adequately disclosed.
Para 5
Subsequently, the Auditors gathered from the Management that there was a fire in the Factory
premises after the Balance Sheet date, as a result of which the company suffered loss of Inventories.
It did not provide any conditions on the Balance Sheet date. SA 560 deals with such type of
transactions.
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1. The Auditor explained his Audit team the purpose of Audit Documentation. Which of the following
is incorrect with respect to the purpose of Audit Documentation?
(a) It enables the conduct of quality control reviews and inspections in accordance with SQC-
1.
(b) It helps in preparation of Financial Statements.
(c) It retains a record of matters of continuing significance to future audits.
(d) It enables the conduct of external inspections in accordance with applicable legal,
regulatory or other requirements. (2 Marks Oct 21)
Answer : (b)

2. An auditor strictly ensured that the audit team should document / assemble all the working papers
in Audit file. The completion of assembling the Audit File is an administrative process and should
be done in :
(a) It should be within 30 days from the date of Audit Report.
(b) It should be within 60 days from the completion of Audit.
(c) It should not be more than 60 days from the date of Audit Report.
(d) It should be before 90 days from the completion of Audit. (2 Marks Oct 21)
Answer : (c)

3. With reference to para 3 of Case scenario, this is a case of obtaining External Confirmation by the
Auditor. Which of the following is inappropriate with regard to External Confirmation?
(a) External Confirmations are restricted to Account balances only.
(b) It is also used in a case to obtain Audit evidence about the absence of certain conditions say,
Side Agreement.
(c) It can be also effective in obtaining Audit evidence about verification of Inventories held by
third parties at bonded warehouses for processing or on consignment.
(d) External Confirmation is also functional in case of Investments held for safekeeping by third
parties, or purchased from stockbrokers but not delivered at the Balance Sheet date. (2
Marks Oct 21) )
Answer : (a)

4. With reference to para 4, in such a situation CA M shall express a :

(a) A Disclaimer Opinion
(b) A qualified opinion
(c) A qualified opinion or an adverse opinion in accordance with SA 705
(d) An unmodified opinion(2 Marks Oct 21)
Answer : (c)

5. In respect to subject matter mentioned in Para 5, what procedures should Auditor perform to
identify such events?
Statement 1: Obtain an understanding of any procedures management has established as well as
Inquiry with Management and those charged with governance procedures for identification of such
subsequent events.
Statement 2: Inspection of Minutes of the meetings of the entity’s owners, management and those
charged with governance that have been held after the date of the financial statements and
inquiring about the matters discussed at any such meetings for which minutes are not yet available.
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Statement 3: The Auditor should not read the entity’s latest subsequent interim financial
statements, if
any.
(a) Only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both Statements 1 and 2 are correct
(d) Only Statement 3 is correct (2 Marks Oct 21)
Answer : (c)

Case Scenario (MTP Nov ’21)

Mars Ltd. is a public limited Company incorporated during the previous financial year 2019-20. R S
Shah & Associates have been appointed as the Auditors of the Company.
Para 1
Its Authorized Capital was Rs. 75 Lacs. Subsequently it increased its Share Capital. They issued
Shares at a premium of Rs.25/- per share. The Company has transferred the amount received as
premium to the Securities Premium Account.
Para 2
CA R recommended his Engagement Team to prepare an Audit Strategy as well as Audit plan for
efficient conduct of audit. He advised to the team that they should include a series of verification
procedures to be applied to Financial Statements of the Company for accomplishing the Audit
objectives. CA R illustrated to his team the relationship between Audit strategy as well as Audit
plan.
Para 3
Encompassed by a huge clientele, one of the Auditee firm was a LLP. It was in the name of Mangaldeep
Geotech LLP. They conducted the business in a very efficient way but had allotted only the Audit and
the Income Tax work to CA R S Shah & Associates. The Partners of the LLP were capable enough but
however inadvertently bypassed the ROC Compliances. They had no knowledge about the
Compliances and its related penalties. Thus they approached CA R S Shah and Associates for their
guidance. They were completely clueless as to filing of Annual Return with ROC.
Para 4
R S Shah and Associates have been appointed as Auditors of a large Enterprise namely Search Results
Ltd. Considering the overhaul required in the Organization’s Risk Management, Directors of the listed
companies braced the subject of Internal Financial Control with much seriousness and rigor. The dawn
of the Financial Year lays down the daunting task of establishing and implementing Internal Financial
Control in an Enterprise.
Para 5
The Auditors are performing their Audit work in the Company Search Results Ltd by using CAAT’s.
The Company is completely automated and all the processes, operations are carried out using the
Computer systems. Testing is performed in an automated environment to increase the efficiency
and allow for more robust tools to be built. There are four types of testing methods in an Automated
environment. They are Inquiry, Observation, Inspection and Re-performance.

1. Sec. 52 of the Companies Act states that Security Premium Account can be applied by the
Company for one of the purpose mentioned below. Which of the following is an INCORRECT
option?
(a) To write off preliminary expenses of the Company
(b) To pay dividend to equity shareholders
(c) To provide premium on redemption of Preference share capital
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(d) To purchase its own shares or other securities under Sec 68(Buyback)
( 2 Marks Nov ‘21)
Answer : (b)

2. In reference to para 2, which of the following Statement is inappropriate?

(a) Once the overall audit strategy is established, an audit plan can be developed to address
the various matters identified in the overall audit strategy.
(b) The establishment of overall audit strategy as well as detailed audit plan is a discrete and
sequential process.
(c) Audit Strategy and Audit plan are inter-related as changes in one may result in
consequential changes to the other.
(d) The Audit plan is more detailed than the Audit Strategy that includes the nature, timing and
extent of audit procedures to be performed by engagement team members. ( 2 Marks Nov
‘21)
Answer : (b)

3. In reference to para 3, which form from the following should be filed by the Partners to avoid
penalty consequences?
(a) Form 11 within 90 day of end of closer of financial year and Form 8 within a period of 60
days from the end of six months of the financial year.
(b) Form 11 within 60 days of end of closer of financial year and Form 8 within a period of 30
days from the end of six months of the financial year.
(c) Form 11 within 30 days of end of closer of financial year and Form 8 within a period of 60
days from the end of three months of the financial year.
(d) Form 11 within 60 day of end of closer of financial year and Form 8 within a period of 90
days from the end of three months of the financial year. ( 2 Marks Nov ‘21)
Answer : (b)

4. With reference to para 4, which of the following point ensures implementation of policies and
procedures with regard to Internal Financial Control by the Companies?
(a) Reliability of Financial Reporting
(b) Effectiveness and efficiency of operations
(c) Compliance with applicable laws and regulations
(d) All of the above. ( 2 Marks Nov ‘21)
Answer : (d)

5. Which of the following statement is inappropriate with regard to testing methods as mentioned
in Para 5 above?
(a) Inquiry in combination with Inspection gives the most effective and efficient audit
evidence.
(b) Re-performance is the most effective as an audit test and gives the best audit evidence.
(c) Inquiry should always be used in combination with any other testing method.
(d) which audit test to use and in what combination does not require professional judgment. (
2 Marks Nov ‘21)
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Answer : (d)

Case Scenario (MTP Nov 21)

A Partnership Firm of Chartered Accountants by the name of S K and Associates were appointed as the
Auditors of the Company named Big Box Ltd.
Para 1
Big Box Ltd is a Public Listed Company. The CA Firm comprised of 2 partners namely CA S and CA K.
Subsequently, a close relative of CA K, acquired security having face value Rs.495000/- of Big Box
Ltd. As per the provisions of Section 141 of the Companies Act 2013, an Auditor will be disqualified
from appointment, if the Auditor himself or his relative acquires the security exceeding the
prescribed limit in the Company.
Para 2
Further, the Auditors, S K and Associates also had to bank on the policies and procedures adopted by
the Company for ensuring the efficient conduct of its business. They have to state about the adequacy
of Internal Financial Controls in the Company. The Company had a turnover of Rs. 60 Crores as per the
latest Audited Balance Sheet and its Borrowings during the year were Rs. 20 Crores from Banks.
Para 3
The CFO of the Company, Mrs. Darshana felt dubious in the Accounts department of the Company.
She entreated the Auditors to perform a thorough investigation of the Accounts department. Mrs.
Darshana was also anticipating a fraud in this situation. Both the Auditor as well as the CFO of the
Company analyzed the various risk factors. The Auditors observed that the Head Accountant of the
Department has inflated the Sales amount to finish his targets. There was collusion between the Head
Accountant & Employees of the Company. Employees were presented incentives on accomplishing
their targets. This resulted in a fraud by the Head Accountant of amount aggregating to Rs.75 Lacs.
Para 4
Mr. X, an acquaintance of CA S, wanted to form an LLP with his distant relatives. He wanted to possess
in- depth knowledge about LLP. CA S explained him that LLP is a separate legal structure and is liable
to full extent of its assets but the partners are liable to the extent of their agreed contribution in LLP.
Mr. X additionally wanted to know the criteria for the accounts of LLP to be audited. CA S enlightened
him that the accounts of every LLP shall be audited in accordance with Rule 24 of LLP, Rules 2009.
Para 5
Big Box Ltd. is expanding its business. Consequently it requires many Computers. Purchasing
computers may involve paying a huge upfront cost. Cash flow may get disrupted. Hence the
Company came up with an idea of getting the Computers on lease. It will allow the businesses to
have access to the latest technology without harming their cash flow.
The Auditors explained to the Directors that leasing Computers shall come under the purview of
Operating Lease.
1. With reference to para 1, S K and Associates can take corrective actions within days. The
relative may hold security or interest in the company of face value not exceeding ____________
(a) 45 days, Face Value Rs.100000/-
(b) 60 days, Market Value Rs.500000/-
(c) 30 days, Face Value Rs. 500000/-
(d) 60 days, Face Value Rs.100000/- ( 2 Marks Nov ‘21)
Answer : (d)

2. The Auditors of S K and Associates were doubtful concerning the applicability of Internal
Financial Controls in the Company Big Box Ltd. With reference to details provided in Para 2
above, please guide
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them in this regard.

(a) It will be applicable as Turnover exceeds the threshold limit of Rs.50 Crores.
(b) It is not applicable as the Borrowings are less than 25 Crores during the financial year.
(c) It will be applicable as the Company is a Public Listed Company.
(d) Reporting on Internal Financial Control is not under the scope of Auditors reporting. Hence,
Not Applicable. ( 2 Marks Nov ‘21)
Answer : (c)

3. With reference to para 3, wherein a fraud was observed by the Auditor, what should be the
course of action of the Auditor?
(a) The Auditor should report the fraud details to Central Government.
(b) The Auditor shall report the fraud to the audit Committee or to the Board within the
prescribed time.
(c) The Auditor shall disclose it in the Audit Report and report the fraud details to RBI too.
(d) Both a & c above. ( 2 Marks Nov ‘21)
Answer : (b)

4. With regard to information provided in Para 4, which of the following is a CORRECT option?
(a) Any LLP whose turnover does not exceed, in any financial year, Rs.40 Lacs or whose
contribution does not exceed Rs.25 Lacs is not required to gets its accounts audited.
(b) Any LLP whose turnover does not exceed, in any financial year, Rs.50 Lacs or whose
contribution does not exceed Rs.20 Lacs is not required to gets its accounts audited.
(c) Any LLP whose turnover exceeds Rs.25 Lacs in any financial year or whose contribution
exceeds Rs.10 Lacs in any financial year is required to gets its accounts audited.
(d) Any LLP whose turnover does not exceed, in any financial year, Rs.40 Lacs and whose
contribution does not exceed Rs.25 Lacs is not required to gets its accounts audited.
( 2 Marks Nov ‘21)
Answer : (a)

5. In reference to para 5, which among the following is an INCORRECT trait about the Operating
Lease?
(a) The Lessee does not have the option to buy the asset during the lease period.
(b) The Lessee cannot claim Depreciation on the leased asset.
(c) The Lessee generally bears the Insurance, Maintenance and Taxes.
(d) The Lease term generally extends to less than 75% of the projected useful life of the leased
asset.
( 2 Marks Nov ‘21)
Answer : (c)

Case Scenario (MTP March 22)

Honest Limited is a listed Company engaged in the construction business. The Company
constructs residential buildings after purchasing vacant land and then sells ready flats to
customers. The Company has not been earning good profits and so no dividend was declared in
the last financial year for which the statutory audit is to be conducted.
XYZ & Company
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has seven partners and is a reputed firm with the partners having expert knowledge in various
areas.
While conducting the audit, the engagement partner, CA Z suspects some fraudulent activities
undertaken by the officers and employees of the Company. CA Z is aware that for the purpose
of SAs, the auditor is concerned with fraud that causes a material miss tatement in the financial
statements. He understands that misstatements in the financial statements can arise from either
fraud or error.
On detailed verification by the audit team, it was observed that accounts were manipulated with
a view to presenting a false state of affairs. The fraud was committed to avoid incidence of
income-tax and withhold declaration of dividend. There was also an incidence of cash receipts
being suppressed which came to the notice of the audit team.
CA Z had enough reasons to believe that the offence of fraud, involved individually an amount
of Rs.1 crore, and had been committed against the company by its officers or employees. The
audit team discussed the reporting requirements of the fraud committed.
One of the audit team members puts forward his recommendations on reporting which includes
disclosure in the Board’s Report. He states that sub-section (12) of section 143 of the Companies
Act, 2013 prescribes that the companies, whose auditors have report ed frauds under this sub-
section (12) to the audit committee or the Board, but not reported to the Central Government,
shall disclose the details about such frauds in the Board’s report in such manner as may be
prescribed.
CA Z discusses the reporting under Companies (Auditor’s Report) Order, 2020 [CARO, 2020]
wherein the auditor is required to report under clause (xi) of paragraph 3 of Companies (Auditor’
s Report) Order,2020, about fraud by the company or any fraud on the Company.
Based on the above information, answer the following questions: (2 Marks)
1. Misstatements in the financial statements can arise from either fraud or error. The
distinguishing factor
between fraud and error is:
(a) Fraud causes a material misstatement in the financial statements.
(b) Fraud is an intentional act.
(c) Fraud is easier to detect than error.
(d) Fraud can be committed by only the management, those charged with governance, and
the employees.
Answer 1 (b)
2. Which of the following is not a technique of suppressing cash receipts?
(a) Writing down asset values in entirety, selling them subsequently and misappropriating
the proceeds.
(b) Adjusting unauthorized or fictitious rebates, allowances, discounts,etc. to customer’
accounts and
misappropriating amount paid by them.
(c) Manipulating totals of wage rolls either by including therein names of dummy workers or
by inflating
them in any other manner.
(d) Writing off as debts in respect of such balances against which cash has already been
received but has been misappropriated.
Answer 2 (c)

3. To whom should XYZ & Company report the fraud committed in Honest Limited?
(a) Report the matter only to the Audit Committee constituted under section 177 since the
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amount of fraud has not exceeded 1 crore.

(b) Report the matter to the Board or the Audit Committee, as the case may be, immediately
but not later than 2 days of his knowledge of the fraud, seeking their reply or observations
within 45 days and on receipt of such reply or observations, the auditor sha ll forward his
report and the reply or observations of the Board or the Audit Committee along with his
comments (on such reply or observations of the Board or the Audit Committee) to the
Central Government within 15 days from the date of receipt of such reply or observations.
(c) Report the matter only to the Board since the amount of fraud is not less than 1 crore.
(d) Report the matter either to the audit committee constituted under section 177 or the
Central Government since the amount of fraud is neither less nor more than 1 crore.
Answer 3 (b)

4. Sub-rule (4) of Rule 13 of the Companies (Audit and Auditors) Rules,2014 states that the
auditor is required to disclose in the Board’s Report details of each of the fraud reported to
the Audit Committee or the Board under sub-rule (3) during the year. Which of the following
details is not required to be disclosed in the Board’s Report?
(a) Nature of Fraud with description.
(b) Parties involved, if remedial action taken.
(c) Approximate Amount involved
(d) Remedial actions taken.
Answer 4 (b)

5. For reporting under clause (xi) of paragraph 3 of Companies (Auditor’s Report) Order,2020,
which of the following points the auditor may consider?
(a) Fraud by the company or on the company by its officers, employees or third parties to
be reported.
(b) Only suspected frauds shall be included here and not the noticed frauds.
(c) Principles of materiality outlined in Standards on Auditing.
(d) The auditor’s withdrawal from the engagement and the reasons for the withdrawal.
Answer 5 (c)

Case Scenario (MTP March 22)(RTP Nov ’22)

SAM & Company, a Chartered Accountant firm, is in the process of finalizing the audit of Health
is Wealth Limited which is a Company listed on the Bombay Stock Exchange. Since the past
decade, Health is Wealth Limited has made its presence felt in over 10 countries, including India,
making it a leader in the global fitness industry. It runs a chain of fitness centres that offers
energetic group workouts and multiple workout formats to choose from. It also offers the best
equipment, knowledgeable staff and personal advice in a welcoming environment.
SAM & Company being a very reputed firm, was appointed for the statutory audit of Health is
Wealth Limited. The Engagement Partner CA A and her team of 8 members have conducted the
audit in an efficient and effective manner. The senior manager in the team, CA K is of the opinion
that they have obtained sufficient appropriate audit evidence, which concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the financial
statements. One of the article clerks, Mr N, is a fresher and this audit is his first experience as
an auditor in a limited company. He is a sharp boy and has grasped all the concepts and
techniques very well. However, the term “pervasive” confused him so CA K patiently explained
to Mr N the pervasive effects on the financial statements as per the auditor’s judgement. Mr. N
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understood the term well and thanked CA K for clearing all his doubts.
CA A disagreed with CA K that they have obtained sufficient appropriate audit evidence, which
concludes that misstatements, individually or in the aggregate, are material, but not pervasive,
to the financial statements. So, the entire team held various meetings and discussions, and
finally reached to a conclusion. They concluded that they have obtained reasonable assurance
that the financial statements as a whole are free from material misstatement, whether due to
fraud or error. That conclusion took into account:
(a) Whether sufficient appropriate audit evidence had been obtained;
(b) Whether uncorrected misstatements were material, individually or in aggregate;
(c) The evaluations.
The Auditor’s Report was prepared in writing and it was decided that an unmodified opinion
would be expressed. The first section of the auditor’s report included the auditor’s opinion, and
had the heading “Opinion”. Following the Opinion section, was a section with the heading “Basis
for Opinion”. When expressing an unmodified opinion on financial statements, the auditor’s
opinion used the following phrase,
“In our opinion, the accompanying financial statements give a true and fair view of […] in
accordance with [the applicable financial reporting framework].”
During the audit, the audit team had observed that there was uncertainty in Health is Wealth
Limited relating to the future outcome of a regulatory action. So, a paragraph was included in
the auditor’s report that referred to this matter which was appropri ately disclosed in the
financial statements and that, in the auditor’s judgment, was of such importance that it was
fundamental to users’ understanding of the financial statements.
CA A also determined whether the financial statements included the comparative information
required by the applicable financial reporting framework and whether such information was
appropriately classified. One team member, Mr R was curious to know whether th e auditor’s
opinion referred to the corresponding figures or not, whenever the corresponding figures are
presented. CA A explained the circumstances to Mr R in which, when the corresponding figures
are presented, auditor’s opinion referred to the corresponding figures.
Based on the above information, answer the following questions: (2 Marks)
1. CA K explained to Mr. N the pervasive effects on the financial statements in the auditor’s
judgement.
Pervasive effects on the financial statements are those that, in the auditor’s judgement:
(i) Are not confined to specific elements, accounts or items of the financial statements;
(ii) If so confined, represent or could represent a substantial proportion of the financial
statements; or
(iii) In relation to disclosures, are fundamental to users’ understanding of the financial
statements. Which of the following is correct?
(a) (i), (iii)
(b) (ii),(iii)
(c) (i), (ii)
(d) (i), (ii) and (iii)
Answer 1 (d)

2. When expressing an unmodified opinion on financial statements, SAM & Company used the
following phrase:
“In our opinion, the accompanying financial statements give a true and fair view of […] in
accordance with [the applicable financial reporting framework].”
Which is the other phrase which is regarded as being equivalent to the above phrase and could
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also be used by SAM & Company?

(a) In our opinion, the accompanying financial statements give a true and correct view of […]
in accordance with [the applicable financial reporting framework];
(b) In our opinion, the accompanying financial statements present correctly, in all material
respects,
[…] in accordance with [the applicable financial reporting framework];
(c) In our opinion, the accompanying financial statements present fairly, in all material
respects,
[…] in accordance with [the applicable financial reporting framework];
(d) In our opinion, the accompanying financial statements give a correct and fair view of […]
in accordance with [the applicable financial reporting framework].
Answer 2 (c)

3. Which of the following statements is not included in the section with the heading “Basis for
Opinion” in the Auditor’s Report?
(a) Audit was conducted in accordance with the Accounting Standards.
(b) Auditor is independent of the entity in accordance with the relevant ethical requirements
relating to the audit and has fulfilled the auditor’s other ethical responsibilities in
accordance with these requirements.
(c) Description of the auditor’s responsibilities under the SAs.
(d) States whether the auditor believes that the audit evidence the auditor has obtained, is
sufficient and appropriate to provide a basis for the auditor’s opinion.
Answer 3 (a)

4. A paragraph was included in the Auditor’s Report of Health is Wealth Limited that referred to
a matter which was appropriately disclosed in the financial statements that, in the auditor’s
judgment, was of such importance that it was fundamental to users’ understanding of the
financial statements. What is this section of the Auditor’s Report called?
(a) Other Matters.
(b) Emphasis of Matters.
(c) Key Audit Matters.
(d) Auditor’s Responsibilities for the Audit of the Financial Statements.
Answer 4 (b)

5. CA A explained the circumstances to Mr. R in which, when the corresponding figures are
presented, auditor’s opinion referred to the corresponding figures. Which of these
circumstances did he mention to Mr. R?
(a) If the auditor obtains audit evidence that a material misstatement exists in the prior
period financial statements on which a modified opinion has been previously issued.
(b) If the auditor’s report on the prior period, as previously issued, included a qualified
opinion, a disclaimer of opinion, or an adverse opinion and the matter which gave rise to
the modification is resolved.
(c) Prior Period Financial Statements are audited by another auditor.
(d) Prior Period Financial Statements not audited.
Answer 5 (d)
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Case Scenario (MTP April 22)

AA & Associates, an audit firm based in New Delhi, was appointed as the Statutory Auditor of
Success Ltd ., a listed Company having branches all over India. Success Limited is engaged in the
business of manufacturing furniture items from timber which is im ported from South Africa. The
audit firm has six partners and partner CA A is the engagement partner for Success Ltd.
The audit team consisting of CA A and five more members prepared an audit strategy and audit
plan before commencing the audit. CA A was aware of the fact that the understanding of the
internal control of the organization would assist the team in various ways. So, it was decided
that the team would first obtain an understanding of the internal control relevant to the audit
before commencing the audit.
CA A explained to the team that there is a direct relationship between an entity’s objectives and
the controls it implements to provide reasonable assurance about their achievement. The
entity’s objectives, and therefore controls, relate to financial report ing, operations and
compliance; however, not all of these objectives and controls are relevant to the auditor’s risk
assessment. CA A educated the team about the factors relevant to the auditor’s judgment about
whether a control, individually or in combination with others, is relevant to the audit. The team
then applied its professional judgment to decide whether a control, individually or in
combination with others, is relevant to the audit.
One of the team members, CA P scheduled a meeting with the Director of Success Ltd., Mr. D, to
understand the risk assessment process of the entity. The entity’s risk assessment process
formed the basis for the risk to be managed. CA P, on the basis of his judgment, found the process
to be appropriate, and it helped him in in identifying the risks.
Once the risks were identified, CA P had to determine whether any of the risk identified is, in his
judgment, a significant risk. CA P considered all the factors which he should have considered to
exercise his judgement as to which risks are significant risks. He was aware that significant risks
often relate to certain type of transactions and matters.
In the meanwhile, CA A met the CFO of the Company, Mr. C to obtain an understanding of the
major activities that the entity uses to monitor internal control over financial reporting. Mr. C
explained to CA A the various monitoring activities undertaken by th e management to monitor
the internal control performance of the company.
Based on the above information, answer the following questions:
1. CA A was aware of the fact that the understanding of the internal control of the organization
would assist the team in various ways. Which of the following is not achieved by an
understanding of the internal control system? (2 Marks for each question)
(a) Identifying breakdown due to human error.
(b) identifying types of potential misstatements.
(c) designing the nature, timing, and extent of further audit procedures.
(d) identifying factors that affect the risks of material misstatement.
Answer 1 (a)

2. Which of the following factors is not relevant to the auditor’s judgment about whether a
control,
individually or in combination with others, is relevant to the audit?
(a) The diversity and complexity of the entity’s operations.
(b) Applicable legal and regulatory requirements.
(c) The
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characteristics.
(d) Nature, timing, and extent of further audit procedures.
Answer 2 (d)

3. CA P obtained an understanding of the risk assessment process of the entity. Which of the
following is a risk assessment process to be followed by an entity?
(i) Identifying business risks relevant to financial reporting objectives.
(ii) Estimating the significance of the risks.
(iii) Assessing the likelihood of their occurrence.
(iv) Deciding about actions to address those risks.
(a) (i), (ii), (iii),
(b) (i), (ii)
(c) (i), (ii), (iii), (iv)
(d) (ii), (iii)
Answer 3 (c)

4. CA P considered all the factors which he should have considered to exercise his judgment as
to which risks are significant risks. Which of the following is a factor which he would have
considered to determine the same?
(a) Whether the risk is a risk of error.
(b) The complexity of transactions.
(c) Whether the risk involves significant transactions with non-related parties.
(a) The degree of objectivity in the measurement of financial information related to the
risk, especially those measurements involving a wide range of measurement
uncertainty.
Answer 4 (b)

5. Which among the following is incorrect with reference to last para of the case study regarding
the auditor to obtain an understanding of the major activities that the entity uses to monitor
internal control over financial reporting :
(a) It involves assessing the efficiency of controls on a timely basis and taking necessary
remedial actions.
(b) Management accomplishes it through ongoing activities, separate evaluations etc.
(c) Management’s monitoring activities may include using information from communications
from external parties.
(d) In small entities, management’s monitoring of control is often accomplished by
management’s or the owner-manager’s close involvement in operations.
Answer 5 (a)

Case Scenario (MTP April 22) (RTP May ’21)

Suresh Rana & Associates have been appointed as the statutory auditors of HAIL Ltd. by the
Comptroller & Auditor General for the FY 2021-22. HAIL Ltd. is a Government company engaged
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in the manufacture of metro train coaches. During the course of audit, CA Suresh extended his
scope of audit to cover efficiency, effectiveness and economy audit. CA Suresh Rana also asked
his audit team to conduct expenditure audit as part of the audit engagement of HAIL Ltd.
During the course of audit, CA Suresh also found that the company has constructed its new
stockyard for parking its metro coaches and maintenance of its metro coaches. However, the
stockyard was not being used by the company for the designated purpose and the company
continued using the rented stockyard. Suresh considered such expenditure as infructuous and
avoidable expenditure.
The engagement partner also discussed with his team regarding the areas to be covered while
conducting the audit of receipts. The reporting responsibilities of the engagement team were
also discussed by the engagement partner with his team. (2 Marks For each question)
Based on the above facts, answer the following:-
1 Statement 1: Government audit provides public accounting of operational, management
programme and policy aspects of public administration as well as accountability of officials
administering them.
Statement 2: Government audit is equipped and intended to function as an investigating
agency, to pursue every irregularity or misdemeanour to its logical end.
(a) Only statement 1 is correct
(b) Only statement 2 is correct
(c) Both 1 & 2 are correct
(d) Both 1 & 2 are incorrect
Answer 1 (a)

2. is conducted to ensure that the various programmes, schemes, and projects where large
financial expenditure have been incurred are run economically and are yielding results
expected of them:-
(a) Propriety audit
(b) Audit against Rules and orders
(c) Performance Audit
(d) Audit against Provision of funds
Answer 2 (c)
3. While conducting audit against provision of funds, the statutory auditors, M/s Suresh Rana &
Associates must check:-
(a) That each item of expenditure is covered by a sanction either general or special of a
competent authority.
(b) That the expenditure incurred has been on the purpose for which the grant and
appropriation has been provided and the amount of expenditure does not exceed the
appropriation made.
(c) That the expenditure conforms to the relevant provision of the constitution.
(d) That the expenditure is in accordance with the financial rules, regulations and orders
issued by the competent authority.

Answer 3 (b)
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4. Which part of expenditure audit covers the scrutiny of the expenditure incurred on the
construction of stockyard by the company which is considered as infructuous and avoidable
by CA Suresh Rana?
(a) Propriety Audit
(b) Audit against provision of funds
(c) Audit of sanctions
(d) Performance Audit
Answer 4 (a)

5. While conducting the audit of receipts of HAIL Ltd., which of the following area is to be
covered as part of Audit of Receipts?
1. Whether all revenues or other debts due to government have been correctly assessed,
realised and credited to government account by the designated authorities of HAIL Ltd.
2. Whether adequate checks are imposed to ensure the prompt detection and investigation
of irregularities, double refunds, fraudulent or forged refund vouchers or other loss of
revenue through fraud or willful omission or negligence to levy or collect taxes or to issue
refunds.
3. Whether the expenditure incurred has been on the purpose for which the grant and
appropriation had been provided and that the amount of such expenditure does not
exceed the appropriation made.
4. Whether the various schemes/projects are executed and their operations conducted
economically and whether they are yielding the results expected of them.
(a) Only statement 1 is correct
(b) Statements 1 & 2 are correct
(c) Statements 1,2,3,4 are correct
(d) Statements 1,2,3 are correct
Answer 5 (b)

Case scenario (MTP Sep’22) (10 Marks)

GSR & Company have been appointed as the statutory auditors of Raj Textiles Ltd. for the FY 2021-
22. The engagement partner, CA Rahul Dhawan established the overall audit strategy and made the
detailed plan with respect to the audit assignment of Raj Textiles Ltd. after discussing the same with
the engagement team.
The strategy adopted by GSR & Company consisted of relying on the internal control system of the
company and the audit plan and program were developed accordingly and the audit team started to
work in accordance with the developed audit plan and program. During the course of audit, the
engagement partner, CA Rahul Dhawan found that some internal controls implemented by the
company were not operating effectively. So, he decided not to rely on the internal control system of
the company & accordingly changed the overall audit strategy, audit plan & audit program.
While conducting the audit, the engagement partner also discussed with his team regarding the audit
procedures to be performed to verify the debtors’ balances of the company. CA Rahul Dhawan asked
for the addresses of various debtors from the management of Raj Textiles Ltd. for the purpose of
sending balance confirmation request to such debtors. The management provided such addresses to
the audit team. However, the management of Raj Textiles Ltd. asked the debtors to send the
responses of such confirmation requests to General Manager of accounts department of the
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company, who will in turn provide such responses to the audit team.
Further, the audit team found that a legal case has been filed against the company on account of
customer complaint. CA Rahul Dhawan discussed with his team regarding the audit procedures that
can be performed by the audit team to verify the implications of such litigation on the financial
statements of the company.
One of the audit team members, Mr. Girish had the following understanding with respect to the
audit file to be maintained by the audit team with respect to the audit assignment:
Point no. 1: The completion of assembly of final audit file after the date of the auditor’s report is an
administrative process involving the performance of new audit procedures or drawing of new
conclusions.
Point no. 2: After the assembly of the final audit file has been completed, the auditor shall not delete
or discard audit documentation of any nature before the end of its retention period.
CA Rahul Dhawan briefed his engagement team regarding the documents to be included in the audit
file with respect to the audit assignment of Raj Textiles Ltd. and also discussed with his team in detail
regarding the various aspects of audit file.

1.1 Is CA Rahul Dhawan right in changing the overall audit strategy and plan after the audit team has
started working as per the earlier strategy established & plan so developed?
(a) CA Rahul Dhawan is not right as once the audit team has started the audit work, it is not
correct to change the audit strategy and plan.
(b) CA Rahul Dhawan is not right as once the overall audit strategy has been established the same
cannot be changed. Audit plan however can be revised.
(c) CA Rahul Dhawan is right in making changes to the overall audit strategy and the audit plan.
(d) CA Rahul Dhawan can change the overall audit strategy and audit plan only after taking due
permission from the management of Raj Textiles Ltd.(Sep’22)
Answer 1.1( c) CA Rahul Dhawan is right in making changes to the overall audit strategy and the
audit plan.

1.2 Which of the following audit procedures should the audit team perform with respect to verification
of debtors’ balances?
(a) GSR & Company can compare the debtors’ balance reflected in financial statements with
invoices,
debit notes, credit notes, monthly accounts statement sent to the customers.
(b) GSR & Company can obtain direct balance confirmation from the debtors as this is external
evidence which is most reliable and relevant.
(c) GSR & Company can obtain management representations with respect to the debtors’
balances from the management of ABC Ltd and need not perform other audit procedure as
obtaining written representation from management constitutes sufficient and appropriate
audit evidence.
(d) Both a & b.( Sep’22)
Answer 1.2:(a) Both a & b.

1.3 Is management correct in asking the debtors to provide the reply of confirmation request directly
to the General Manager of accounts department of the company?
(a) Yes, the management has correctly asked the debtors to respond directly to the GM of
accounts department.
(b) No, management is not correct in asking for a direct response to GM of accounts department
as external confirmation is the response obtained directly by the auditor.
(c) Yes, the management is correct in advising direct response to the GM of accounts department
as this will ensure that only correct confirmation is provided to the auditors.
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(d)
No, management is not correct as this is the option of the auditor to see if the response to
external confirmation is to be obtained by management or auditor himself. (Sep’22)
Answer 1.3(b) No, management is not correct in asking for a direct response to GM of accounts
department as external confirmation is the response obtained directly by the auditor.

1.4 For confirming/verifying the litigation going against the company which of the following audit
procedures is not correct?
(a) GSR & Company can enquire the management including in house legal counsel.
(b) GSR & Company should review the minutes of meetings of those charged with governance.
(c) GSR & Company can review the legal expense account.
(a) GSR & Company need not perform audit procedures with respect to litigation claims of the
company except for obtaining written representation from the management in this regard.
(Sep’22)
Answer 1.4:(d) GSR & Company need not perform audit procedures with respect to litigation claims
of the company except for obtaining written representation from the management inthis regard.

1.5 Is the understanding of Mr. Girish regarding the assembly of audit fi le with respect to an audit
assignment, mentioned as point no. 1 & point no. 2 in the case scenario, correct?
(a) Only understanding as per point no. 1 is correct.
(b) Only understanding as per point no. 2 is correct.
(c) Understanding as per point no. 1 & point no. 2 both are correct.
(a) Understanding as per point no. 1 & point no. 2, both are incorrect. (Sep’22)
Answer 1.5:(b) Only understanding as per point no. 2 is correct.

Case scenario (MTP Oct’22) (10 Marks)

Meeta, Neeta, Rita and Babita are friends and all of them have joined office of an auditing firm for
undergoing articled training. It is still early days in the office. However, all of them are curious about
different issues of auditing. They have also studied auditing subject. They were going through one audit
file of a large manufacturing company as part of their training. In the file are included some audit
working papers and other related documents.
(A) Some papers contained in file reflect following: -
(i) Are budgets for capital expenditure approved by the Board?
(ii) Are approved budgets communicated in writing to accounts department and to department
originating the request?
(iii) Is the authority to incur capital expenditure restricted to specified officials?
(iv) Are receipts of capital items subject to controls as in case of purchases of raw material,
stores?
(v) Is there proper check to see that amounts expended do not exceed the amount authorised?
Further, “Yes”, “No” and “Not applicable” along with remarks/notes have been provided by the
employees of company against items stated at serial no.[i] to [v].
(B) Also included in audit working papers is a detailed note on process of employee recruitment
followed by company along with practices on related matters such as orientation, training,
evaluation, compensation and promotion of employees. In particular, it seemed that auditors had
shown keen interest in standards followed by the company in recruiting most qualified
individuals.
(C) The audit file also includes documentation on how customs duty paid by company on imported
raw material was verified. The engagement team had examined the payment of custom duty with
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reference to bill of entry available in client records. It was verified that customs duty was in
accordance with applicable duty rate on goods. In cases where duty was paid by clearing and
forwarding agent, bill of entry with reference to bill of forwarder was verified.
(D) The audit file includes a document, signed by CEO of company addressed to auditors, extract of
which is as under: -
We have provided you with: -
(i) Access to all information of which we are aware that is relevant to the preparation of the
financial statements such as records, documentation and other matters;
(ii) Additional information that you have requested from us for the purpose of the audit;
(iii) Unrestricted access to persons within the entity from whom you determined it necessary to
obtain audit evidence.
(iv) All transactions have been recorded in the accounting records and are reflected in the
financial statements.
(E) The audit file included following draft to be included in audit report: -
“Revenue is one of the main profit drivers and is, therefore, susceptible to misstatement. Cut -off
is the main relevant assertion insofar as revenue recognition is concerned, since an inappropriate
cut -off can result in material misstatement of results for the year.
Our audit procedures with regard to revenue recognition included testing controls, automated
and manual- around deliveries, inventory reconciliations and substantive testing for cut -offs and
analytical review procedures.”
The issues pertaining to above for audit period under consideration were communicated with
responsible persons in management.
1.1 Regarding description of expenditure on capital items reflected in Para A, which of the following
views is Most appropriate?
(a) Meeta is of view that such a document is in nature of a checklist for evaluating internal control
over capital items.
(b) Neeta is of view that such a document is in nature of audit programme for verification of capital
items.
(c) Babita considers that such a document is in nature of an internal control questionnaire for
evaluating internal control over capital items.
(d) Rita considers it to be specific audit plan in relation to capital items.(Oct’22)
Answer 1.1:
(c)Babita considers that such a document is in nature of an internal control questionnaire for
evaluating internal control over capital items.

1.2 On reading description in Para B, what were the auditors trying to do by studying employee
recruitment and related HR matters?
(a) Auditors were trying to gain an understanding of how the company is monitoring controls.
(b) Auditors were gaining knowledge to understand how employee pay rolls are prepared and
whether there could be any misstatements in pay rolls due to non- inclusion of promotion
increments
(c) Auditors were trying to understand control environment of the company.
(d) Auditors were trying to assess the control activities relevant to audit to assess risk of material
misstatement. (Oct’22)
Answer 1.2:
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(c)Auditors were trying to understand control environment of the company.

1.3 On the basis of description provided in Para C, identify audit procedure(s) performed by auditors.

(a) Test of Controls

(b) Vouching
(c) Analytical Procedures
(d) Verification(Oct’22)
Answer 1.3:
(b) Vouching

1.4 What would the most appropriate nomenclature to extract of document described in Para D?

(a) Engagement letter

(b) Written Representation
(c) External confirmation
(d) Offer letter to auditor(Oct’22)
Answer 1.4:
(b) Written Representation

1.5 Given draft in Para E, which of the following views is Most appropriate in accordance with
relevant Standards on Auditing?
(a) Meeta is of the view that draft in Para E needs emphasis in audit report. Therefore, its
inclusion under heading “Emphasis of Matter” is proper.
(b) Neeta is of the view that draft in Para E is a residuary matter. Therefore, its inclusion under
heading “Other Matters” is proper.
(c) Rita is of the view that draft in Para E provides the basis on which opinion is to be given.
Therefore, its inclusion under heading “Basis for Opinion” is proper.
(d) Babita is of the view that draft in Para E relates to significant matter identified during
course of audit and it contains how the same was addressed. Therefore, its inclusion under
heading “Key Audit Matters” is proper.(Oct’22)
Answer 1.5:
(d) Babita is of the view that draft in Box E relates to significant matter identified during course
of audit and it contains how the same was addressed. Therefore, its inclusion under heading
“Key Audit Matters” is proper.

Case Scenario (MTP Oct’22)(10 marks)

Rohan is part of an engagement team conducting statutory audit of branch of a nationalized bank. The
financial statements to be audited include Balance sheet and Profit & Loss account of the branch drawn
up in accordance with Form A and Form B respectively of the Third Schedule to the Banking Regulation
Act, 1949. Besides, various advances and other returns are also to be verified as part of audit.
Rohan was part of all audit work pertaining to verification of deposits, advances, income and
expenditure of the branch.
While verifying different items of profit and loss account, it was noticed that income included income
on account of interest earned and other income.
The team also verified system of branch prior to sanction of advances like verifying creditworthiness of
borrower etc. It was also verified whether there exists system for bringing to the notice of higher
authorities, accounts which exceed the sanctioned limits or drawing power. Besides, the team also
verified whether there exists a system for review of operations in accounts once a year and more
frequently in case of large advances.
During the course of audit, it was noticed that one advance, consisting of a term loan, having
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outstanding balance of ₹ 20 crore as on balance sheet date has been guaranteed by Uttar Pradesh
government. The interest of term loan has remained overdue for more than 90 days. The branch has
classified advance as non-performing asset and made applicable provision and reversed unrealized
income. Rohan is perplexed as to whether classification, provisioning and reversal of unrealized income
made by branch is proper.
The auditee branch is a CBS branch and uses FINACLE software. The core banking system (CBS) is the set
of basic software components that manage the services provided by a bank to its customers through its
branches. The bank's customers can execute their transactions from any branch, ATM, Service Outlets,
Internet, Phone at their disposal. It helps banks to reduce risk that can result from manual data entry
and out of date information. It also helps banks to improve service delivery quality and time to its
customer. The software is accessed from different branches of bank via communication lines like
telephones, satellite , internet, etc.
The engagement team has kept record of audit documentation in accordance with SA 230.
Chapter 12: Audit of Banks

2.1 Which of the following does not constitute “Other income” in the profit and loss account of branch
of a bank?
(a) Discount on Bills purchased
(b) Commission on Bills sent for collection
(c) Loan processing fees
(d) Credit card fees(Oct’22)
Answer 2.1:
(a)Discount on Bills purchased

2.2 Identify what the engagement team is trying to do in respect to advances of the branch.
(a) The engagement team is carrying out analytical procedures in respect of advances.
(b) The engagement team is carrying out substantive procedures in respect of advances.
(c) The engagement team is evaluating internal control over advances.
(d) The engagement team is trying to select samples for verification of advances.(Oct’22)
Answer 2.2:
The engagement team is evaluating internal control over advances

2.3 Considering state government guaranteed advance of ₹20 crore and its NPA classification made
by branch, which of the following statements is most appropriate?
(a) The branch has correctly classified account as NPA and has rightly made provisioning and
reversal of unrealized income in this regard. Uttar Pradesh government guarantee has no effect
on provisioning and income recognition.
(b) The branch has correctly classified account as NPA and has rightly made provisioning. However,
unrealized income should not have been reversed due to Uttar Pradesh government guarantee.
(c) The branch should have classified account as Standard asset due to Uttar Pradesh government
guarantee without having recourse to provisioning and reversal of unrealized income.
(d) The branch should have classified account as Standard asset due to Uttar Pradesh government
guarantee. No provisioning is required. However, for purposes of income recognition, it should
be treated as NPA and unrealized income should be reversed.(Oct’22)
Answer 2.3:
(a)The branch has correctly classified account as NPA and has rightly made provisioning and
reversal of unrealized income in this regard. Uttar Pradesh government guarantee has no effect on
provisioning and income recognition.

Prakshal Shah 2.4 The branch

| 8779794646 is operating in CBS environment. In view of above, which of the following statements is
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most appropriate?
(a) Due to CBS environment, substantive procedures alone are effective to reduce audit risk to an
acceptably low level.
(b) In CBS environment, in most situations, the auditors’ ability to reduce audit risk to an acceptably
low level would be affected by the internal control systems established by the management.
(c) The extensive use of IT systems in CBS environment substantially reduces need to assess
inherent and control risks.
(d) Low level of branch staff sensitisation to the control expectations of management requires
fewer audit procedures.(Oct’22)
Answer 2.4:
(b)In CBS environment, in most situations, the auditors’ ability to reduce audit risk to an acceptably
low level would be affected by the internal control systems established by the management.

2.5 With regards to audit documentation, consider the following: -

(P) NOC from previous auditor
(Q) Management certified trial balance of branch for year under consideration
(R) KYC verification details
(S) Latest RBI master directions/circulars
Which of the following statements is correct as regards to audit documentation?
(a) Only documents stated at Q and R form part of audit documentation.
(b) Only documents stated at Q, R and S form part of audit documentation.
(c) Only documents stated at Q and S form part of audit documentation.
(d) All documents stated at P, Q, R and S form part of audit documentation.(Oct’22)
Answer 2.5:
(d) All documents stated at P, Q, R and S form part of audit documentation.

Case scenario (MTP March ‘23) (10 Marks)

M/s SPR & Associates are appointed as auditors of XYZ Ltd. for the Financial Year 2021-22.
• The team consisted of Mr. S, Mr. P, Mr. R all Chartered Accountants and three article assistants.
• Mr. S, the engagement partner, briefed the audit staff about various items of financial
statement to be checked in detail in case of XYZ Ltd and about various aspects to be covered in
the audit of the company.
• Mr. S told the audit staff about audit documentation, audit evidence, audit file, completion
memorandum and many other things along with relevant Standards of Auditing applicable.
• Mr. S also told the staff about the risk of material misstatement that the financial statements
are prone to and how it affects the sufficiency and appropriateness of audit evidence.
• The audit staff was also apprised about the various audit procedures to be adopted while
conducting the audit of XYZ Ltd.
• Further discussions were done about various types of risks related to financial statement and
the audit work, the related audit procedures, and the risk assessment procedures.
• The engagement team is also very particular about the application of various Standards on
Auditing applicable in case of XYZ Ltd.
Based on the above facts, answer the following:-
1. ____is the summary of significant matters identified during audit and way they are addressed :
(a) Audit
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(b) Audit Programme

(c) Completion memorandum
(d) Checklists
Answer (c)

2. The susceptibility of an assertion to a misstatement that could be material before consideration

of any related control is………………:
(a) Control Risk
(b) Inherent Risk
(c) Audit Risk
(d) Significant Risk
Answer (b)

3. Statement 1: Audit procedures consist of Risk Assessments Procedures and other procedures.
Statement 2: Substantive procedures consist of test of details and analytical procedures.
(a) Only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both 1 & 2 are correct
(d) Both 1 & 2 are incorrect
Answer (c)
4. refers to the audit procedures performed to obtain an understanding of the entity and its
environment, including the entity’s internal control, to identify and assess the risks of material
misstatement, whether due to fraud or error at the financial statement and assertion levels: -
(a) Analytical Procedures
(b) Risk Assessment Procedures
(c) Audit Procedures
(d) Substantive Analytical Procedures
Answer (b)
5. Statement 1:- Substantive Procedures alone can provide sufficient and appropriate audit evidence
at the assertion level.
Statement 2:-Test of Control is audit procedure designed to evaluate the operating effectiveness of
controls in prevention, detection and correcting material misstatement at the assertion level.
(a) Only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both 1 & 2 are correct
(d) Both 1 & 2 are incorrect
Answer (b)

Case scenario (MTP March ‘23) (10 Marks)

M/s ABC & Associates have been appointed as auditors of Venus Ltd. for the Financial Year 2020-21.
• During the course of audit, the auditors notice that certain legal expenses been charged to
revenue during the financial year by Venus Ltd.
• These legal expenses are related to litigations going against the company regarding its Corporate
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Social Responsibility expenses incurred near its factory area.

• Further, M/s ABC & Associates noticed that there is a major change in the debtors and creditors
account of Venus Ltd. during the financial year under audit. The auditors have decided to send
balance confirmation requests to the debtors and creditors of Venus Ltd. Also, the auditors
decide to take management representation letters wherever required.
• The auditors have noticed certain related party transactions reflected in the financial
statements of Venus Ltd. during the financial year under audit. The transaction is between
Venus Ltd. and a Company owned by wife of one of the directors of Venus Ltd.
• The auditors have become aware of certain subsequent events occurring in case of Venus Ltd.
These are related to the outcomes of the litigations going against Venus Ltd.
• The auditors are also concerned whether the litigations going against Venus Ltd. and their
outcomes have any impact on the going concern of the company.
Based on the above facts, answer the following:-
(1) Statement 1: Although Written Representations provide necessary audit evidence, they do not
provide sufficient and appropriate audit evidence on their own about the matters with which
they deal.
Statement 2: Written Representations do not include financial statements, the assertions within,
or supporting books and records.
(a) Only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both Statement 1 & 2 are correct
(d) None of Statement 1 & 2 is correct
Answer (c)
(2) The auditor can perform the following procedures to identify litigation and claims of Venus
Ltd.:-
(i) Inquiry of management including in house legal counsel.
(ii) Reviewing legal expenses account.
(iii) Reviewing of minutes of meetings of those charged to governance and correspondence
between entity and external legal counsel.
(a) (i) & (i) are correct
(b) (i), (ii) & (iii) are correct
(c) (ii) & (iii) are correct
(d) only (i) is correct
Answer (b)
(3) Negative confirmation requests require the third party to respond in the following cases : -
(a) If there is agreement
(b) If there is disagreement
(c) In both cases of agreement as well as disagreement
(d) None of the above.
Answer (b)
(4) Statement 1:- A failure of the confirming party to respond, or fully respond to a positive
confirmation request or a confirmation request returned undelivered is a case of Non Response.
Statement 2:- A response that indicates difference between information requested to be
confirmed and contained in entity’s records and information provided by the confirming part is a
case of Exception.
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(a) Only Statement 1 is correct

(b) Only Statement 2 is correct
(c) Both Statement 1 & 2 are correct
(d) None of Statement 1 & 2 is correct
Answer (c)
(5) Which of the following is correct so far as the related party transactions are concerned:-
(i) Many related party transactions are in the normal course of business.
(ii) Related party transactions may not be conducted under normal market term and
conditions.
(iii) In some circumstances, related party transactions may give rise to higher risks of material
misstatement.
(a) only (i) is correct
(b) (i) & (iii) are correct
(c) (i), (ii) & (iii) are correct
(d) (i) and (ii) are correct

Answer (c)

Case scenario (MTP April ‘23) (10 Marks)

Aastha Ltd. has published its audited financial statements for the year ended 31 st March, 2023. A
shareholder of Aastha Ltd. raised a point to the promoter of the company questioning the
authenticity of the financial statements. The Management of the Company conveyed the
shareholder that the same have been audited by a Chartered Accountant as per the provisions of
Companies Act,2013.
The same shareholder then noticed that in the last year’s financial statements, there was a disclosure
regarding a legal dispute with its competitor. But in the current year’s financial statements, there is
neither such disclosure nor there is any update on the resolution of the dispute. However, the
management did not give any convincing answer regarding lack of disclosure in current year’s
financial statements.
The Management also revealed in the meeting that there were few fictitious vendors to whom
payments worth ₹ 50 lakhs were made by an employee who has been suspended from the office with
immediate effect and a case to that effect has been filed in the court of law. The same has also been
appropriately disclosed in the financial statements. The Company transferred ₹ 75 lakhs from current
year’s profit to asset replacement reserve for making another building for the operations of the
company.
Based on the above facts, answer the following:
1. The financial statements audit is a report by the auditor:
a. attesting to the truth and fairness of presentation of the financial statements and
related disclosures.
b. attesting to the truth and fairness of presentation of the financial statements.
c. attesting to the truth, transparency and fairness of presentation of the financial
statements and related disclosures.
[Link] to the truth, completeness and fairness of presentation of the financial
statements and related disclosures.
Answer (a)
2. Non-disclosure of the legal dispute with the competitor of Aastha [Link]:
a. Misappropriation of assets
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b. Recording fictitious Journal Entries

c. Manipulation of accounts
d. Misrepresentation in or intentional omission from financial statements.
Answer (d)
3. Payment to fictitious vendors by the employee of Aastha Ltd. Is:
a. Misappropriation of assets
b. Intentional misapplication of accounting principles
c. Manipulation of accounts
d. Misrepresentation in or intentional omission

Answer (a)
4. The appropriation of ₹ 75 lakhs from the revenue profit to asset replacement reserve is:
a. Revenue Reserve
b. Capital Reserve
c. Capital Redemption Reserve
d. Capital Revenue Reserve
Answer (b)

Case scenario (MTP April ‘23) (10 Marks)

As per SA 210 “Agreeing the Terms of Audit Engagements”, preconditions for an audit may be defined
as the use by management of an acceptable financial reporting framework in the preparation of the
financial statements and the agreement of management and, where appropriate, those charged with
governance to the premise on which an audit is conducted.
Mridul & Co, a firm of Chartered Accountants agreed on the Terms of Audit Engagements of a Private
Limited Company, Jayshree Private Limited. Jayshree Private Limited has conveyed to Mridul & Co
that they want the firm to undertake the statutory audit as well as to examine the life of its plant
and machinery at Indore which is in existence for 10 years. While finalizing the scope of the audit,
the auditors agreed to cover all the units of the company based at Delhi and Indore. Mridul & Co has
asked Jayshree Private Ltd to make all the relevant disclosures in the financial statements. The
auditors were vigilant to inquire about any audit evidence that contradicts the other audit evidence.
The auditors decided to cover following aspects under audit:
(i) An examination of the system of accounting and internal control
(ii) Reviewing the system and procedures.
(iii) Checking of the arithmetical accuracy of the books of account.
(iv) Verification of the authenticity and validity of transactions.
(v) Classification between capital and revenue expenditure.
(vi) Comparison of the balance sheet and profit and loss account or other statements with the
underlying record.
(vii) Verification of the title, existence and value of the assets.
(viii) Verification of the liabilities stated in the balance sheet.
(ix) Checking the results shown by the profit and loss and to see whether the results shown are true
and fair.
(x) 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.
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(xi) Where audit is of a corporate body, confirming that the statutory requirements have been
complied with.
While testing the accounts receivables of Jayshree Private Limited, the auditor decided to divide the
accounts receivables by age of receivables in the following manner:
• Below 15 days
• 15 days -30 days
• 31-60 days
• 61-90 days
• 91 days and beyond
Based on the above facts, answer the following:
1. According to you, what is the scope of the audit which Mridul & Co should cover in the audit of
financial statements of Jayshree Private Limited?
I. to examine the life of its plant and machinery at Indore which is in existence for 10 years.
II. to cover all the units of the company based at Delhi and Indore.
III to check whether the relevant disclosures are properly made in the financial statements.
a. I,II,III
b. I,II
c. II,III
d. I,III
Answer (c)
2. What is the name of the method used by the auditor for segregation of accounts receivable?
a. Value weighted selection
b. Stratification
c. Systematic method of Sampling
d. Tests of Control
Answer (b)
3. The aspects covered by auditor should be:
a. i,ii,iii,x,vi,vii
b. i,ii,iv,v,vi,vii.
c. i,ii,iii,iv,v,vi,vii,viii,ix,x,xi.
d. ii,iii,viii,x,xi
Answer (c)
4. The auditor’s vigilance to question the audit evidence that contradicts the other audit evidence
is called as:
a. Professional Skepticism
b. Vigilant Skepticism
c. Professional Judgement
d. Judgement and Skepticism
Answer (a)
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5. With respect to the preconditions for an audit, which one of the following is correct:
I. The use by Management of an acceptable financial reporting framework in the preparation
of financial statements.
II. Management’s responsibility for the internal control
III. Giving auditor access to all information and access to the Entity’s premises.
a. I, II
b. I, II, III
c. II, III
d. I, III
Answer (b)

Case Scenario (MTP Sep ’23)

Following is the extract of information taken from financial statements of AAF Private Limited for the
financial
year 2022-23: - (All Figs in tables are in ₹ 000s)
Particulars 31/03/23 31/03/22
Paid up share capital 75000 75000
Long term borrowings 24500 30000
Short term borrowings 55000 50000
Other current liabilities 350 550
Property, Plant and Equipment 48500 56000
Depreciation 7500 9500
Profit/(Loss) after tax (5000) (6000)
Assume that there are no taxation adjustments.
The schedule of short-term borrowings reflects as under: -
Particulars 31/03/23 31/03/22
Loans repayable on demand from MMT Bank (secured)
(Cash credit limit against hypothecation of stocks guaranteed by all 55000 50000
directors)
It has been further noticed during the course of audit that quarterly statements filed by company with
its bank for availing cash credit facilities of ₹5.50 crores during the year vis-à-vis books of accounts
reflect following details: -
Period ending Value of stocks as per Value of stocks per
quarterly Books of accounts
statements
30.6.22 80000 70000
30.9.22 70000 65000
31.12.22 85000 70000
31.3.23 80000 80000
It has also been noticed that long term borrowings consist of a term loan from MMT Bank. Term loan
outstanding has reduced in comparison to last year. However, during the year 2022-23, company has
not paid one instalment of ₹ 5 lakhs on time which is overdue for 65 days as on balance sheet date.
The credit
facilities have been classified as Standard assets by the Bank in accordance with prudential guidelines
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Other current liabilities as on 31/3/23 include TDS payable of ₹ 1.00 lac (out of which ₹ 0.60 lac for
month of Feb 23 was due for deposit on 7.3.23). The balance Rs 0.40 lac pertains to month of March
2023.
You are part of engagement team conducting audit of AAF Private Limited. As part of assigned work,
you are also responsible for providing information/input to your senior for reporting under CARO,
2020 for financial year 2022-23.
Based on above, answer the following questions:
1. Considering description about short-term borrowings in the case study, which of following statements
is in accordance with CARO, 2020?
(a) The statutory auditor is required to provide details of differences in quarterly statements
filed with bankers with its books of accounts.
(b) The statutory auditor is required to provide details of differences only in respect of those
quarterly statements where there is discrepancy of more than 10% as compared to its books
of accounts.
(c) The statutory auditor is not required to provide details of differences as reporting
requirement is triggered only when working capital limits have been sanctioned in excess of
₹ 10 crore during any point of time of the year.
(d) The statutory auditor is not required to provide details of differences, as at end of year, books
of accounts are in agreement with quarterly statement filed.
Answer (a)

2. The company has not paid one instalment of ₹ 5 lakhs on time which is overdue for more than 65 days
as on balance sheet date. Identify likely correct statement in this regard in relation to reporting under
CARO, 2020: -
(a) The account has not become NPA as on 31.3.23. Hence, there is no reporting requirement.
(b) The reporting requirement is necessary only when company is declared a willful defaulter by
Bank. In the given situation, there is no reporting requirement.
(c) Amount of default along with period of default is required to be reported.
(d) The reporting requirement is necessary only when company has diverted amount of term
loan for some other purpose. In the given situation, there is no reporting requirement.
Answer (c)

3. As regards TDS payable of ₹ 1.00 lakh included in other current liabilities, what input would be
provided by you to your senior for reporting under CARO, 2020?
(a) TDS payable of ₹ 1.00 lac in financial statements shall not be reported as it does not meet
necessary reporting requirements.
(b) It is in nature of undisputed statutory dues. Hence, outstanding amount of ₹ 1.00 lac not
deposited is to be reported.
(c) It is in nature of undisputed statutory dues. However, only outstanding amount of ₹ 0.60 lac
not deposited is to be reported.
Answer (a)

4. TDS payable of ₹ 1.00 lac does not fall under meaning of “undisputed statutory dues”. Hence there is
no question of reporting. Which of following is not a reporting duty of statutory auditor regarding
Property, Plant and Equipment reflected in company’s financial statements under CARO, 2020?
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(a) whether the company is maintaining proper records showing full particulars, including
quantitative details and situation of Property, Plant and Equipment
(b) whether Property, Plant and Equipment have been physically verified by the management at
reasonable intervals; whether any material discrepancies were noticed on such verification
and if so, whether the same have been properly dealt with in the books of account
(c) whether Property, Plant and Equipment have been physically verified by the auditor during
the year; whether any material discrepancies were noticed on such verification and if so,
whether the same have been properly dealt with in the books of account
(d) whether tittle deeds of all immovable properties (other than properties where company is
lessee and lease agreements are duly executed in favour of the lessee) disclosed in the
financial statements are held in the name of the company
Answer (c)

5. The company has reflected losses in its financial statements for year 2022-23 and 2021-22. Which of
following statements is likely to be correct in this regard while reporting under CARO, 2020 for year
2022-23?
(a) Losses reflected in statement of profit and loss for year 2022-23 and 2021-22 are required to
be reported under CARO, 2020.
(b) Loss reflected in statement of profit and loss for year 2022-23 is alone required to be
reported under CARO, 2020.
(c) There is no requirement to report losses reflected in statement of profit and loss under CARO,
2020.
(d) The company’s losses reflected in statement of profit and loss in financial year 2022-23 and
2021-22 are less than prescribed percentage threshold limit of paid- up capital. Hence, these
are not required to be reported. (5 x 2 = 10 Marks)
Answer (c)

Case Scenario (MTP Sep ’23)

Sookrit, a CA student, has decided to participate in “Mega Conference of CA Students” being organized
by Student Skills Enrichment Board, (Board of Studies-Operations), ICAI to be held in a city in South
India. He has decided to try his luck for presenting a paper in one of the technical sessions of the
conference on the topic of “Nature, Objective and Scope of Audit”. He has to first submit for approval
a soft copy of the paper to the competent authority.
While preparing a draft for the presentation, he has included some paragraphs on the topic. Para A
requires filling of certain gaps to explain nature of auditing to prospective audience at the conference.
Para B and C have certain misleading and false statements which need corrections. Para D needs
certain elaborations.
Para A
An audit of financial statements provides ________ assurance to the users of financial statements.
It is a___________ level of assurance but it is not__________ assurance. The auditor has to see effect
of misstatement(s) _______. Misstatements in financial statements can arise due to frauds or or
both.

Para B
Audit of financial statements should be organized adequately to cover all aspects of the entity
relevant to the financial statements being audited. The auditor makes a judgment of reliability and
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sufficiency of financial
information by making a study and assessment of accounting systems and internal controls. He also
carries out appropriate tests and procedures. Due to professional training and knowledge acquired
by auditor, he can authenticate genuineness of documents. However, he is not expected to perform
duties which fall outside his domain of competence. Auditor is not an official investigator.
Para C
The process of audit suffers from certain inbuilt limitations. Inherent limitations of audit may arise
due to nature of financial reporting, nature of audit procedures and need to strike a balance between
reliability of information and cost of obtaining it. The information being relied upon by the auditor
cannot lose its reliability due to historical nature of financial information presented in financial
statements. However, future events may affect an entity adversely.
Para D
The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs
may be easy to understand. Its basic nature lies in providing assurance i.e., confidence to users of
financial statements. Apart from this obvious utility, there are other advantages of an audit. Some
or all of those are of considerable value even to those enterprises and organizations where audit is
not compulsory.
Try to help him by answering the following questions: -
1. Identify appropriate words to be used in blanks to make the sentences meaningful and relevant in
context of theme of the topic.
(a) absolute, high, complete, individually, uncertainties
(b) reasonable, high, complete, in totality, errors
(c) reasonable, moderate, low, in totality, errors
(d) moderate, low, complete, individually, judgments
Answer (b)

2. After reading Para B, which of following statements is false as regards scope of an audit of financial
statements is concerned?
(a) Audit of financial statements should be organized adequately to cover all aspects of the
entity relevant to the financial statements being audited.
(b) The auditor makes a judgment of reliability and sufficiency of financial information by
making a study and assessment of accounting systems and internal controls.
(c) Due to professional training and knowledge acquired by auditor, he can authenticate
genuineness of documents.
(d) Auditor is not an official investigator.
Answer (c)

3. After reading Para C, which statement needs to be corrected in draft regarding inherent limitations of
audit?
(a) Inherent limitations of audit may arise due to nature of financial reporting, nature of audit
procedures and need to strike a balance between reliability of information and cost of
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(b) The information being relied upon by the auditor cannot lose its reliability due to historical
nature of financial information presented in financial statements.
(c) Future events may affect an entity adversely.
(d) The process of audit suffers from certain inbuilt limitations.
Answer (b)

4. Para D states that an audit provides advantages of considerable value to enterprises. Which of
following is not one of advantages of an audit of financial statements of a listed company?
(a) It acts as a moral check on employees.
(b) It acts as an appraisal function.
(c) Its chief advantage lies in safeguarding financial interest of management.
(d) It is useful for settling trade disputes for higher wages or bonus.
Answer (c)

5. Para D states that audit can be of considerable value even to those enterprises where it is not
compulsory. In context of companies in India, which of following statements is correct in relation to
Companies Act, 2013?
(a) OPC and small companies are exempted from audit.
(b) OPC, small companies and section 8 companies are exempted from audit.
(c) For all companies in India, except Section 8 companies, audit is legally obligatory.
(d) For all companies in India, audit is legally obligatory. (5 x 2 = 10 Marks)
Answer (d)

Case Scenario (MTP Oct ’23)

CA Sanjoy is conducting audit of PETA Education Solutions Private Limited for the first time. The
company
is engaged in providing solutions to students appearing for competitive exams under engineering
and medical streams. Company’s business is operated from physical centres spread in many states
of the country. However, of late, number of aspirants availing company’s services are shrinking due
to emergence of new competitors and inability of company to switch to new technologies available
in market to render its services.
The company had taken bank loans in past years for expansion of its physical centres. However, due
to reduction in strength of aspirants opting for services provided by the company, management is
always looking for means to meet its financial commitments on time. During the course of audit, CA
Sanjoy wants to be sure about revenue and profit assertions reflected in financial statements of the
company. Therefore, he is planning to test company’s system for booking revenue in its books of
accounts.
He notices that during the year under consideration, many experienced teaching faculties have left
due to late payment of their contractual payments by the company. These have been replaced by
inexperienced faculties having lower contractual costs but leading to poor satisfaction outcomes
among aspirants. Besides, employee turnover of regular administrative staff also remains high. The
company has not organized any training programmes either for its faculties or administrative staff
for considerable period of time.
He has, in his wisdom, decided to increase the area of substantive checking in the company. He does
not want to suffer from probable adverse publicity or loss of his professional goodwill.
Based on above case scenario, answer the following MCQs: -
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1. After studying description of the company and its nature of operations, which of following statements is
most appropriate?
(a) Inherent risk for revenue and profit assertions is likely to be lower.
(b) Inherent risk for revenue and profit assertions is likely to be higher.
(c) Inherent risk for revenue and profit assertions cannot be assessed from given situation.
(d) There does not exist inherent risk for revenue and profit assertions in described situation.
Answer (b)

2. The case scenario describes a situation of leaving of experienced faculties, high employee turnover and
absence of training programmes for staff of the company. Such indicators are an example of
____________?
(a) Unsatisfactory risk assessment process used by the company
(b) Unsatisfactory control environment of the company
(c) Unsatisfactory performance reviews carried out by the company
(d) Unsatisfactory system of segregation of duties in the company
Answer (b)

3. The auditor is planning to test company’s system for booking revenue in its books of accounts. Identify
the correct statement in this regard: -
(a) He is likely to place greater reliance on controls relating to booking of revenue.
(b) He is likely to place lower reliance on controls relating to booking of revenue.
(c) Reliance placed by him on controls relating to booking of revenue would be unaffected due
to reduction in contractual costs by company.
(d) Reliance placed by him on controls relating to booking of revenue would be unaffected due
to shrinking number of aspirants.
Answer (b)

4. The auditor has increased area of “substantive checking” in the company. It is due to the reason
that________________
(a) he wants to lower detection risk
(b) he wants to lower control risk
(c) he wants to raise sample risk
(d) he wants to lower inherent risk
Answer (a)

5. 1.5 The auditor does not want to suffer from probable adverse publicity or loss of professional goodwill.
Such a situation is indicative of ?
(a) audit risk
(b) auditor’s business risk
(c) auditor’s detection risk
(d) non-sampling risk (5 x 2 = 10 Marks)
Answer (b)

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Case Scenario (MTP Oct ’23)(RTP May ’22)

You are a partner in ABC & Company, a firm of Chartered Accountants based in New Delhi. ABC &
Company have been appointed as the statutory auditors of Onetime Limited, a public company which
manufactures and sells wall and table clocks and has many branches all over India. Onetime Limited
has been exporting the clocks since past two years. However, the domestic sales have contributed
towards major source of rev enue for the Company.
One of the team members, CA B noticed that one of the suppliers of Onetime Limited, Mr AM had
sent some raw material to the Company for storage in their warehouse in March 2023. Due to
renovation going on at his warehouse, his stock could be damaged and so he had requested Onetime
Limited to keep the same in their warehouse. Onetime Limited contended that since the raw material
was anyway billed to the Company the next month, so the same had been included in the valuation
of stock, since physically the stock was present in the warehouse of Onetime Limited as on 31.03.2023.
While verifying the debtors, team member C noticed that there were a few trade receivables
pertaining to export sales mainly to England. Mr. C verified the same with respect to the invoices
issued and other supporting documents. The amount booked as on 31.03.2023 was based on the
exchange rate as on the date of the invoice.
Mr. T, another team member verified the PPE of the Company. Onetime Limited had purchased few
cars for its directors during the year of audit. The same were appearing in the PPE schedule of the
Company. Mr T verified the same with respect to the invoices as well as physically verified the assets
in the Company’s premises. Since the cars were for the official use of the Directors, they were
purchased in the name of the Directors of the Company. Mr. T verified the amount with the Invoice
and checked the registration and insurance documents. Besides, all items appearing in the PPE
schedule were verified and he was satisfied that all PPE items that should have been recorded have,
in fact, been recorded.
One of the articled clerks was assigned the work of verification of “Provisions” appearing in the
Balance sheet. He wanted to understand from you the circumstances in which a provision is
recognised in the books of accounts. You explained him the situations in which an entity recognises
Provisions in its books.
Onetime Limited has invested in the shares of other companies. One of the Companies has declared
dividend on its shares. Onetime Limited has not recognised the same in the profit & loss account.
Team Member R has asked you to look into the matter since she is unable to understand the reasons
for the same.
1. Is the raw material lying in the warehouse of Onetime Limited accounted for correctly in its books of
account?
(a) No, since the same belongs to Mr. AM and should appear in his books.
(b) Yes, since the same is in possession of Onetime Limited and was billed to it the following
month.
(c) It should be shown in the books of both Onetime Limited and Mr. AM.
(d) It should not appear in the books of Onetime Limited or Mr. AM and the raw material
should be disclosed as a note in the final accounts of both the entities.
Answer (a)

2. Which exchange rate is considered for accounting of foreign debtors at the year end?
(a) Exchange Rate on the date of the invoice.
(b) Exchange Rate on the last day of the financial year.
(c) Exchange Rate on the date of shipment of the products to the customer.
(d) Exchange Rate on the date of delivery of the products to the customer.
Answer (b)
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3. Which of the following management assertions is not satisfied with respect to Cars included in the PPE
items by the company:
(a) Existence
(b) Valuation
(c) Completeness
(d) Rights and Obligations
Answer (d)

4. Which of the following condition is not required to be met for recognizing a provision?
(a) When a possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future events
not wholly within the control of the entity.
(b) When an entity has a present obligation (legal or constructive) as a result of a past event.
(c) A reliable estimate can be made of the amount of the obligation.
(d) When it is probable that an outflow of resources embodying economic benefits will be
required to
settle the obligation.
Answer (a)

5. Which of the following conditions is not necessary for recognizing dividends in the statement of profit
and loss of Onetime Ltd.:
(a) the entity’s right to receive payment of the dividend is established.
(b) it is probable that the economic benefits associated with the dividend will flow to the entity.
(c) the amount of the dividend can be measured reliably.
(d) payment of income tax on dividends received (5 x 2 = 10 Marks)
Answer (d)

Case Scenario (RTP May ‘20)

M/s NSG & Associates have been appointed as auditors of Viaan Ltd. for the financial year 2019-20.
The processes, operations, accounting and decisions are carried out by using computers in Viaan Ltd.
The auditors understand that there are several aspects that they should consider to determine the
level of automation and complexity in the business environment of Viaan Ltd. While planning the
audit work, the engagement partners discussed with the audit staff about the various types of
controls in the automated environment.
The different types of audit tests that can be used in audit of an automated business environment
were also discussed within the engagement team. The responsibility regarding the Internal Financial
Controls was also discussed in detail. Further the tools and techniques that can be used to deal with
the enormous data and information of Viaan Ltd. were briefed to the audit staff by the engagement
partners.
Question 1
Based on the above facts, answer the following: -
__________ are the manual controls that make use of some form of data or information or report
produced from the IT systems and applications.
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(a) Application Controls

(b) IT dependent Controls

(c) Automated Controls
(d) General IT Controls
Answer 1: (b)

Question 2
Statement 1: Application controls include both manual and automated controls that operate at a
business process level.
Statement 2: General IT Controls apply to mainframe, mainframe as well as end user environment.
(a) Only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both Statements 1 & 2 are correct
(d) Both Statements 1 & 2 are incorrect
Answer 2: (c)

Question 3
………are also known as pervasive or indirect controls: -
(a) General IT Controls
(b) Application Controls
(c) IT dependent Controls
(d) None of the above
Answer 3: (a)

Question 4
Which of the following are not the types of audit tests that can be used in the audit in an automated
environment?
(a) Observation
(b) Inspection
(c) Re performance
(d) None of the above
Answer 4:(d)

Question 5
…………is the combination of processes, tools and techniques that are used to tap vast amounts of
electronic data to obtain meaningful information: -
(a) Computer Assisted Audit Techniques
(b) Automated Controls
(c) Data Analytics
(d) None of the above
Answer 5: (c)

Case Scenario (RTP May 20)

M/s JK & Associates have been appointed as auditors of Venus Ltd. for the financial year 2019-20. The
team consist of Mr. J & Mr. K both Chartered Accountants as also the engagement partners and the
audit staff consisting of 2 article assistants. While starting the audit work of Venus Ltd, the engagement
Prakshal Shah partners briefed the audit staff about the audit work, areas to be covered and the various auditing
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concepts and their application in the audit of Venus Ltd along with applicable Standard on Auditing.
Various topics like audit planning, overall audit strategy, audit programmer were discussed in detail.
The team was told about the purpose and implication of various statements and guidance notes issued
by the Institute of Chartered Accountants of India (ICAI) from time to time. Mr. K also briefed the team
about the concept of materiality to be applied while planning and performing audit. The team was
also explained in detail about the area where benchmark materiality can be applied in case of Venus
Ltd.
Question 6
Based on the above facts, answer the following: -
............................ sets the scope, timing & direction of the audit and guides the development of the
more detailed plan.
(a) Audit Programmed
(b) Overall Audit Strategy
(c) Completion Memorandum
(d) Audit Plan
Answer 6: (b)

Question 7
Statement 1: The establishment of the overall audit strategy and the detailed audit plan are not
necessarily discrete or sequential process but are closely inter -related.
Statement 2: The auditor shall establish an overall audit strategy that guides the development of audit
plan.
(a) Only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both Statements 1 & 2 are correct
(d) Both Statements 1 & 2 are incorrect
Answer 7: (c)

Question 8
………. means the amount set by the auditor at less than materiality for the financial statements as a
whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatement exceeds materiality for the financial statements as a whole: -
(a) Benchmark Materiality
(b) Materiality in Planning
(c) Performance Materiality
(d) Materiality.
Answer8: (c)

Question 9

Which of the following is not an example of benchmark that can be used in determining the materiality
in the case of financial statements: -
(a) Total Revenue
(b) Profit before tax
(c) Net Asset Value
(d) None of the above
Answer 9: (d)

Question
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(I) Guidance notes issued by ICAI provide guidance to members on matters which may arise in the
course of their professional work.
(ii) Statements are issued by ICAI with a view to secure compliance by members on some matters.
(iii) Guidance notes are recommendatory in nature.
(iv) Statements are mandatory in nature.
(a) All the above statements are correct.
(b) Statements 1 & 2 are correct
(c) Statements 1, 2 & 3 are correct
(d) Statements 1,2 & 4 are core
Answer 10:(a)

Case Scenario (RTP Nov’20) (Chapter 3.3 SA 501- Audit Evidence-Specific Considerations for Selected
Items.)
M/s JJ & associates having office in Chennai are statutory auditors under Companies Act, 2013 of a
company viz. Sweet Aroma Private Limited engaged in business of obtaining and manufacturing rice
from paddy catering to both domestic as well as international market mainly in Gulf nations. The
company has a huge plant capacity for rice extraction in one of the states in Northern India.
Needless to state that inventories are in huge quantity in such type of business consisting of raw
material, work in progress and finished goods. The auditors want to obtain sufficient appropriate
audit evidence regarding inventories.
In above context, answer the following questions: -
Question 1
Which of the following is most likely correct in relation to obtaining of sufficient appropriate audit
evidence regarding existence and condition of inventory?
(a) It is mandatory for the auditor to attend physical inventory counting on the date of financial
statements in all circumstances.
(b) Physical inventory counting may be attended by auditor on the date of financial statement or at a
date other than date of financial statements in his discretion mandatorily in all circumstances

(c) The attendance of auditors at physical inventory counting is impracticable due to time and costs
involved because of auditor’s office location vis-à-vis company’s plant location. Hence, attendance
at physical inventory counting may be skipped and alternative audit procedures may be performed
to obtain sufficient appropriate evidence. .

(d) The auditor shall attend at physical inventory counting unless impracticable. However, issue of
time and costs involved because of auditor’s office location vis-à- vis company’s plant location is
not a valid basis for skipping physical inventory counting. (Nov’20)
Answer 1: (d)

Question 2
Below are given certain cluster of matters which are relevant in planning attendance of auditor at
physical inventory counting. Which of the following clusters consists of a likely inappropriate
combination?
(a) Nature of inventory, timing of physical inventory counting and stages of completion of work in
progress
(b) Nature of inventory, timing of physical inventory counting and valuation method of inventory
(c) Nature of inventory, timing of physical inventory counting, considerations regarding maintenance
of a perpetual inventory system
(d) Risks of material misstatements related to inventory, nature of internal control pertaining to
inventory, considerations regarding maintenance of a perpetual inventory system. (Nov’20)
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Answer 2: (b)
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Question 3
Which of the following is the most likely logical sequence of steps in relation to attendance at physical
inventory counting by auditor?
(a) Observance of performance of management’s count procedures, inspection of inventory,
performing test counts and evaluation of management’s procedures for recording and controlling
results of physical inventory counting
(b) Observance of performance of management’s count procedures, performing test counts,
inspection of inventory and evaluation of management’s procedures for recording and controlling
results of physical inventory counting
(c) Performing test counts, inspection of inventory, Observance of performance of management’s
count procedures and evaluation of management’s procedures for recording and controlling results
of physical inventory counting
(d) Evaluation of management’s procedures for recording and controlling results of physical inventory
counting, Observance of performance of management’s count procedures, inspection of inventory
and performing test counts. (Nov’20)
Answer 3:(d)

Question 4

During attendance at physical inventory counting, the auditor inspects inventory. Following
outcomes stated as I, II & III are given below of this inspection procedure: -
Outcome I Existence of inventory
Outcome II Ownership of inventory
Outcome III Condition of inventory
Which of following statements is most likely true?
(a) Outcomes I, II and III are all necessarily established after inspection.
(b) Only Outcomes I and III are established after inspection and Outcome II is never
established.
(c) Outcomes I and III are established after inspection. However, outcome II may not be
necessarily established.
(d) Outcome II and III are established after inspection. However, outcome I may not be
necessarily established. (Nov’20)
Answer4: (c)

Question 5
It was observed by auditors that, out of total rice physically counted on 31 set March, 2020 about 67
quintals of rice belonged to M/s PQR, a proprietary concern which had sent paddy to this company’s
plant for extraction of rice. What would be treatment of this item in financial statements of company?
(a) The value of 67 quintals rice would be reflected in company’s financial statements as per method
of valuation adopted by the company.
(b) The value of 67 quintals rice would be reflected in company’s financial statements as per method
of valuation adopted by the proprietary concern.
(c) The value of 67 quintals rice would not be reflected in company’s financial statements.
(d) The value of 67 quintals rice would be reflected in proprietary concern’s financial statements as
per method of valuation adopted by the company. (Nov’20)
Answer 5: (c)

Case Scenario (RTP Nov’20)

1. Mr. T of UV Private Limited have been shown as Rent Expenses of business of UV Private
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2. Repair and Maintenance Expenses for the months of February 2019 and March 2019 were
still outstanding and were not shown in Balance Sheet of UV Private Limited.
3. Repair and Maintenance Expenses for the financial year 1 April, 2018 to 31 March, 2019 were
very high as compared to financial year 1 April, 2017 to 31 March, 2018. The auditor Mr. H
asked the appropriate authority about the reasons for such huge differences in amounts of
two financial years.
4. While verifying the insurance expenses, the insurance policies were not shown to auditor
Mr. H.
The above mentioned five points were some of the issues which Mr. H was unable to
understand.
Answer the following questions:
Question 6
As per the point number (1) mentioned in the above case, the Power and Fuel Expenses paid for the
months of April 2019 and May 2019 must be shown under asset side of balance sheet of UV Private
Limited as on 31 March, 2019 as:
(a) Outstanding Power and Fuel Expenses
(b) Prepaid Power and Fuel Expenses
(c) Power and Fuel Expenses
(d) Power and Fuel Expenses Payable (Nov’20)
Answer 6:(b)

Question 7
As per point number (2) mentioned above in the case, the Personal Rent Expenses of the son of one of
the director Mr. T were added to Rent Expenses of business of UV Private Limited. The amount of
personal rent expenses of the son of the director Mr. T must be:
(a) Subtracted from Rent Expenses of business of UV Private Limited
(b) Remain Added to Rent Expenses of business of UV Private Limited
(c) Again Added to Rent Expenses of business of UV Private Limited
(d) Subtracted twice from Rent Expenses of business of UV Private Limited (Nov’20)
Answer 7 (a)

Question 8
As per point number (3) mentioned above in the case, the Repair and Maintenance Expenses
outstanding for the months of February 2019 and March 2019 must be shown under liability side of
balance sheet of UV Private Limited as on 31 March, 2019 as:
(a) Prepaid Repair and Maintenance Expenses
(b) Repair and Maintenance Expenses
(c) Repair and Maintenance Expenses paid in advance
(d) Repair and Maintenance Expenses Payable(Nov’20)
Answer 8 (d)

Question 9
As per point number (4) mentioned in the case above, the auditor Mr. H asked the appropriate
authority for reasons of huge differences in the amount of two financial years of repair and
maintenance expenses. By appropriate authority Mr. H was referring to:
(a) All employees of UV Private Limited
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(b) Management of UV Private Limited

(c) Members of UV Private Limited
(d) Any one director of UV Private Limited. (Nov’20)
Answer 9: (b)

Question 10
As per point number (5) mentioned in the case above, in verifying insurance expenses the insurance
policies would provide auditor Mr. H as:
(a) Invalid Supporting
(b) No Supporting
(c) Lack of proper Supporting
(d) Valid Supporting. (Nov’20)
Answer 10: (d)

Case Scenario ( RTP May ’21)

RS & Associates have been appointed as the statutory auditors of MNO Ltd. for the Financial Year
2019-20. CA Ramesh is the engagement partner for the assignment. The management of MNO Ltd.
has duly given a written representation letter to CA Ramesh regarding acknowledgement of its
responsibility for the implementation and operation of accounting system and the internal control
system of the company. The management has assured the audit firm that such accounting and
internal control systems are designed and implemented to prevent and detect any misstatement
on account of fraud or error.
During the course of audit, the auditor found that the wages cost has increased substantially as
compared to the last year. On detailed checking CA Ramesh found that many new workers have
been added to the workers list which appear to be dummy workers to CA Ramesh.
Further the auditor found that there was a fraud amounting to Rs. 2 crores committed during the
year under audit by an officer of the company. Such fraud has already been reported by the Cost
Accountant of the company, Mr. Sudesh, to the Central Government. The statutory auditors are
considering their reporting responsibilities in this regard.
The audit team also realized that there is inadequate Internal Control System with respect to
the following:
• The system of authorization and approval of transactions specially in the process of
making purchases.
• The system of record keeping with respect to the assets. Based on the above facts,
answer the following:

Question 6
1. As the management of MNO Ltd. has given a written representation regarding its responsibility
for prevention and detection of misstatement on account of fraud and error, M/s RS &
Associates:-
(a) Should rely on such management representation and conduct its audit procedures without
wasting much time and resources towards detection of fraud and error.
(b) Should not consider such management representation as a substitute for obtaining sufficient
and appropriate audit evidence and design its audit procedures accordingly.
(c) Should not rely on such management representation and should obtain written
representation from those charged with governance.
(d) Should concentrate on audit of accounting system and accounting policies so used by the
company as the prevention and detection of fraud and error is the responsibility of the
management(May ’21)
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Answer 6: (b)

Question 7

The inclusion of dummy workmen in the workmen list by the management of MNO Ltd. as noticed by
CA Ramesh amounts to:-
(a) Suppressing cash receipts
(b) Casting wrong total in cash book
(c) Inflating cash payment
(d) Misappropriation of good (May ’21)
Answer 7: (c)

Question 8
With respect to the fraud which has already been reported by The Cost accountant of the company,
Mr. Sudesh, what is the responsibility of M/s RS & Associates in this regard?
(a) Since the reporting has been done to the Central Government by the cost accountant of the
company, the statutory auditor has no responsibility for such fraud and its reporting.
(b) The cost accountant has detected and reported the fraud to the Central Government. The
statutory auditor should not interfere in the work of the Cost Accountant.
(c) CA Ramesh should review the steps taken by the management with respect to the reported
fraud and if he is not satisfied with such steps, he should request the management to perform
additional procedures to enable him to satisfy himself that the matter has been appropriately
addressed.
(d) CA Ramesh should obtain written representation from the management that once the matter is
appropriately addressed, he will be duly informed by the management. (May ’21)
Answer 8: (c)

Question 9
………….refers to events or conditions that indicate an incentive or pressure to commit fraud or provide
an opportunity to commit fraud:-
(a) Fraud Risk Factors
(b) Misappropriation of assets
(c) Incentives/ Pressures
(d) Fraud(May ’21)
Answer 9: (a)

Question 10
Statement 1: The risk of auditor not detecting a material misstatement resulting from employee fraud
is greater than for management fraud.
Statement 2: The risk of not detecting a material misstatement resulting from fraud is higher than the
risk of not detecting one resulting from error.
(a) Only statement 1 is correct
(b) Only statement 2 is correct
(c) Both 1 & 2 are correct
(d) Both 1 & 2 are incorrect(May ’21)
Answer 10: (b)

Case Scenario ( RTP Nov ’21)

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Ms. Rhea was among the promoters who set up a public company by the name "Aksham Ltd". The
company appointed CA Rajendra as the auditor of Aksham Ltd. CA Rajendra is the brother of one of
the directors of Aksham Ltd. After setting up of company, the company had a dispute with one
customer of the company in year 2019-20 who took the company to court. There are probable
chances that company will have to shelve out `50 lakhs as compensation but the case will likely to
be finalised in year 2021-22.
CA Rajender considers the fact that Askham Ltd has a present obligation and it is probable that an
outflow of resources embodying economic benefits will be required to settle the obligation and
that a reliable estimate i.e. ` 50 Lakhs can be made of the amount of the obligation.
Aksham Ltd. declared dividend of ` 10 per equity share on 10th April,2021. The financial statements
were approved on 30th June,2021. Askham Ltd took loan of ` 65 lakhs from Saksham Bank for a
period of 10 years; the loan amount was guaranteed by Mr. Pramod, one of the directors of
Aksham Ltd. The loan was completely secured against the fixed assets of the company. Aksham Ltd
drew designs of one of the products of the company and this product constituted 90 % sales of the
company. The designs of the product were such that the sale of the company will increase every
year for the next 5 years. Aksham Ltd booked the designs of the company at a value of ` 1 crore in
the books of account of the company as intangibles at its cost.
Based on the above information, answer the following questions:
Question 1
State whether appointment of CA Rajendra is correct in law.
(a) Yes, it is correct in law as per Companies Act, 2013
(b) It is incorrect in law as per Companies Act, 2013 as the relative of director is not allowed
to be appointed as an auditor of the company.
(c) It is correct in law as per Companies Act, 2013 because brother is not covered under the
definition of relative.
(d) It is correct as appointment of auditor is not governed by any law in India. (Nov ’21)
Answer 1: (b)

Question 2
Advise the company regarding the course of action Aksham Ltd will have to follow for the court case
for financial statements prepared for year ending 31st March, 2021
(a) create provision
(b) create revenue reserve
(c) create capital reserve
(d) to be disclosed as contingent liability.(Nov ’21)

Answer 2: (a)

Question 3
What is the action which Aksham Ltd is supposed to take with regard to treatment of dividend
declared while preparing and finalizing financial statements for year ending 31st March,2021?
(a) recognise dividends as a liability
(b) disclose the amount of dividend
(c) both a and b
(d) none of the above.(Nov ’21)
Answer 3 : (b)

Question 4
State the disclosures Aksham Ltd is required to make with respect to the long-term borrowings
taken from Saksham Bank.
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I. Secured loan from Saksham Bank.

II. The fixed assets are secured against the loan
III. The loan of ` 65 lakhs is guaranteed by director.
IV. Repayment terms of the loan
(a) I, II, III and IV
(b) I, II
(c) I, II, III
(d) II, III (Nov ’21)
Answer 4: (a)

Question 5
State which of the following statement is true with respect to recording an intangible in the books of
the company.
(a) Intangible is correctly booked by the company.
(b) Intangible is wrongly booked by the company as an intangible cannot be booked as per the
accounting standard of India.
(c) Intangible is wrongly booked by the company as an intangible cannot be booked as per the
auditing standards of India.
(d) Intangible is wrongly booked by the company as an intangible cannot be booked as per the
Companies Act, 2013. (Nov ’21)
Answer 5: (a)

Case Scenario (RTP Nov ’21)

Best Tea House is a Co-operative society formed as per the provisions of the Co-operative
Societies Act, 1912. It runs a chain of restaurants serving mainly tea and snacks in Delhi. RAS &
Associates, a Chartered Accountant firm, has been appointed to conduct the statutory audit of
the society. None of the partners of the firm, CA R, CA A and CA S have ever conducted a Co-
operative Society audit before and so familiarise themselves with the provisions of the particular
Act governing the society before starting the audit.
During the audit, Best Tea House informs the auditors that they have been in operation for the last
five years, and no audit was required earlier since their turnover had not exceeded the prescribed
limit.
While examining the books of account of Best Tea House, RAS & Associates notice that as stated
under section 43(h) of the Central Act, certain rules were framed prescribing the books and
accounts to be kept by Best Tea House.
The auditors also understand that according to section 5 of the Central Act, in the case of a
society where the liability of a member of the society is limited, no member of a society other
than a registered society can hold such portion of the share capital of the society as would exceed
a maximum of a certain percentage of the total number of shares or of the value of shareholding
to a specified amount. RAS & Associates were concerned with this provision so as to watch any
breach relating to holding of shares.
While examining the loans of Best Tea House, the auditors notice that the society has given a loan
to a relative named Mr. P, of a member of the society, Mr. T, of an amount not exceeding ` 1000.
RAS & Associates examined the overdue debts and checked its classification which they are
required to report.
During the audit, RAS & Associates notice few transactions for personal profiteering by members
of the management committee, which are ultimately detrimental to the interest of the society.
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RAS & Associates report this matter to the required authority to take necessary action.
After the conclusion of the audit, in addition to the audit certificate in the prescribed form and
various schedules, RAS & Associates also answered two sets of questionnaires called audit memos.
The auditors also submitted the audit report in a narrative form addressed to the Chairman of the
society which was divided into two parts styled as part I and part II.
Based on the above information, answer the following questions:
Question 6
According to section 5 of the Central Act, what is maximum percentage of the total number of
shares and what is the maximum value of shareholding that RAS & Associates were concerned
with, so as to watch any breach relating to holding of shares?
(a) Twenty-five percent of the total number of shares or of the value of shareholding upto ` 5,000
(b) Twenty percent of the total number of shares or of the value of shareholding upto ` 5,000
(c) Twenty-five percent of the total number of shares or of the value of shareholding upto ` 1,000
(d) Twenty percent of the total number of shares or of the value of shareholding upto 1,000.
(Nov ’21)
Answer 6: (d)

Question 7
As per Section 29 of the Central Act, Best Tea House cannot give a loan to any person other than:
(a) A member and with the special sanction of the Registrar, relatives of the member not
exceeding an amount of ` 1000.
(b) A member and with the special sanction of the Registrar, another registered society.
(c) A member and with the special sanction of the Registrar, relatives of the member.
(d) A member and with the special sanction of the Registrar, another registered society not
exceeding an amount of ` 1000.(Nov ’21)
Answer 7: (b)

Question 8
Overdue debts for a period from _____________to_______ and more than were classified and
reported by RAS & Associates.
(a) 3 months to 6 months and more than 6 months.
(b) 6 months to 3 years and more than 3 years.
(c) 6 months to 5 years and more than 5 years.
(d) 3 months to 5 years and more than 5 years.(Nov ’21)
Answer 8 (c)

Question 9
To whom does RAS & Associates report the few transactions noticed during audit?
(a) Registrar of Co-operative Societies
(b) Secretary of Best Tea House.
(c) State Government
(d) Management Committee of Best Tea House(Nov ’21)
Answer 9: (a)

Question 10
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Mistakes having an impact on the profitability of society were pointed out by RAS & Associates as it had
a consequential effect on the financial position of society. In which of the following submissions was this
information included?
(a) Part I of the audit report
(b) Part II of the audit report
(c) Schedules to the audit report
(d) Audit memos(Nov ’21)
Answer 10 : (b)

Case Scenario (RTP May ’22)

SaveLives Limited is a listed Company which deals in the manufacture of Sanitizers, floor cleaners,
dish and fabric cleaners etc. In spite of spread of covid 19 in the country, the company’s sales have
been very high in the last financial year due to essential products it deals in. The Company is highly
automated and is driven by IT systems and applications that are used in the preparation of the
financial statements of the Company. The Company uses an integrated enterprise resource
planning system since last five years.
KRAN & Associates has been appointed to conduct the statutory audit of the Company. The firm
consists of eight partners, and CA N has been appointed as engagement partner for the audit of
SaveLives Limited.
CA N briefed the team about the audit and also how IT would be relevant to the audit of SaveLives
Limited. The team obtained an understanding of the entity and its automated environment which
involved an understanding of how the IT department was organised, IT activities, IT dependence and
the relevant risks and controls.
One of the team members wanted to understand the importance of different types of controls in an
automated environment viz., General IT Controls, Application Controls and IT - Dependent Controls.
Same was discussed in detail along with the relationship between different controls.
The Companies Act, 2013 has placed a greater emphasis on the effective implementation and
reporting on the internal controls for a company. So, CA N decided to himself evaluate and validate
the design and operating effectiveness of Internal Financial Controls over Financial Reporting (IFC-FR)
of the company as at the Balance Sheet date. Internal Financial Controls (IFC) refers to the policies
and procedures put in place by SaveLives Limited for ensuring adequacy and also the operating
effectiveness of such controls.
The audit team decided to use the tools and techniques that auditors use in applying the principles
of data analytics which are known as CAATs. Data analytics could also be used in testing of electronic
records and data residing in IT systems using spreadsheets and specialised audit tools viz., IDEA and
ACL to perform various functions.
1. Under which situation is IT not relevant to an audit?
(a) Increased complexity of transactions
(b) Hi-tech nature of business
(c) Volume of transactions is low
(d) Company Policy (Compliance).
Answer 1.1 (c)

2. Which of the following is a risk that arises from the use of IT systems?
(a) Direct data changes (backend changes).
(b) Limited/Monitored access.
(c) Adequate segregation of duties.
(d) Authorized access to data.
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Answer 1.2 (a)

3. The relationship between two controls is such that are needed to support the functioning of
_______________, and both are needed to ensure complete and accurate information processing
through IT systems.
(a) IT Dependent Controls, General Controls
(b) Application Controls, General Controls.
(c) General Controls, IT Dependent Controls.
(d) General IT Controls, Application Controls.
Answer 1.3 (d)

4. The term Internal Financial Controls (IFC) refers to the policies and procedures put in place by
companies for ensuring which of the following:
(a) reliability of financial transactions.
(b) effectiveness and efficiency of operations.
(c) safeguarding of human resources.
(d) prevention and detection of errors.

Answer 1.4 (b)

5. Data analytics can be used in testing of electronic records and data residing in IT systems using
spreadsheets and specialized audit tools viz., IDEA and ACL to perform which of the following:
(a) Evaluating impact of control deficiencies.
(b) Compliance with applicable laws and regulations.
(c) Authorized changes to system or programs.
(d) Providing latest information.
Answer 1.5 (a)

Case Scenario (RTP Nov’22)

Bharat Bank, a nationalised bank, has branches all over India and has been the most popular public
sector bank in India for the past few years. The bank is governed by the Banking Regulations Act,
1949 and the Central Statutory Auditors of the bank, ABC & Associates, were appointed according to
the provisions of the relevant enactments. The engagement partner CA C commenced the audit with
his team of seven members so that the audit is completed on time and all the documents are
submitted before the due date. The audit at all the branches also started simultaneously and ABC &
Associates was in constant touch with all the branch auditors to ensure timely completion of the
audit.
As per the audit strategy and plan, CA Q along with Ms. R and Mr. P were assigned the audit of the
advances of Bharat Bank. Advances constituted the largest item on the assets side of the balance
sheet of the bank. Since audit of advances is one of the most important areas covered by auditors in
a bank audit, it was assigned to CA Q since he was aware of the various functional areas of the
bank/branches, its processes, procedures, systems and prevailing internal controls with regard to
advances.
CA Q started with verifying whether the advances were classified as per RBI Prudential Norms.
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There were five categories of advances which were available to CA Q for verification. They were:
Standard Regular, Sub Standard, Doubtful, Loss and Special Mention Accounts. An ageing analysis
was available for doubtful advances and Special Mention Accounts which was examined in detail by
CA Q.
Ms. R, on being instructed by CA Q, verified the securities offered by the borrowers for the bank
finance. For a particular customer named Aquabrass Pvt Ltd., the security was in the form of
delivery of goods by Aquabrass to Bharat Bank with the intention of creating a charge thereon as
security for the advance. The legal ownership of the goods remained with Aquabrass. In case of
another customer named Prism Works, there was a transfer of a life insurance policy in favour of
the bank as security. The bank had absolute right over the [Link]. R examined all the relevant
documents for the above two cases in detail. She continued with her examination of other securities
based on the sample selected by her.
While checking the classification of NPA, Mr. P came across a customer named Trustworthy whose
term loan instalment was overdue for 90 days at the year-end, but it was 100% secured against the
office building. The same was classified as a Substandard asset. There was another customer named
Super40, who had a cash credit account and a term loan with the bank. Super40 had been paying
the instalments on the term loan as well as the interest on the cash credit account regularly and
there was no overdue amount. Mr. P verified the drawing power of Super40 and found it to be less
than the sanctioned limit throughout the year. The outstanding balance of Super40 during the
whole year exceeded the drawing power but was less than the sanctioned limit. Both the advances
to Super40 were classified as Standard Advances since the recoveries were regular and outstanding
balance in the cash credit was less than the sanctioned limit. On examination of large advances, CA
Q noticed that a customer named Stylish N Smart Private Limited had one funded loan (term loan)
and one non funded loan (bank guarantee) sanctioned from the bank. CA Q checked in detail
whether commission earned by the bank on the bank guarantee was provided for on accrual basis.
CA Q along with Ms. R and Mr. P verified the advances in detail and also recommended a few
changes in the classification/provisions based on the examination of the sample selected by them.
Based on the above information, answer the following questions:
1. What are the sub categories of the special mention accounts?
(a) SMA 0 (accounts showing stress signals), SMA 1 (Overdue between 31-60 days) and SMA 2
(Overdue between 61-90 days)
(b) SMA 0 (accounts showing stress signals), SMA 1 (Overdue between 0-45 days) and SMA 2
(Overdue between 46-90 days)
(c) SMA 0 (accounts not yet due for payment), SMA 1 (Overdue between 31 -60 days) and SMA 2
(Overdue between 61-90 days)
(d) SMA 0 (accounts not yet due for payment), SMA 1 (Overdue between 0-45 days) and SMA 2
(Overdue between 46-90 days)(Nov’22)
Answer (a)

2. Creation of security of Aquabrass Private Ltd. and Prism Works was in the form of:
(a) Mortgage and Hypothecation.
(b) Lien and Set-off.
(c) Hypothecation and Pledge.
(d) Pledge and Assignment.(Nov’22)
Answer (d)

3. In your opinion is Trustworthy a standard asset or a substandard asset?

(a) Though it is due for 90 days, it is 100% secured so it is a standard asset.
(b) Since it is due for 90 days, it is a substandard asset irrespective of the security.
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(c) Since it is not due for more than 90 days, it is a standard asset irrespective of the security.
(d) Since it is not due for more than 90 days and it is 100 % secured, it is a standard asset. .(Nov’22)
Answer (c)

4. Is Super40 correctly classified as a standard asset?

(a) Yes, since the recoveries in both term loan and cash credit were regular and outstanding balance
in the cash credit was less than the sanctioned limit.
(b) No, since the outstanding balance of the cash credit facility exceeded the drawing power for more
than 90 days, so both the advances, that is, the term loan and cash credit facility will be classified
as NPA.
(c) No, since the outstanding balance of the cash credit facility exceeded the drawing power for more
than 90 days, the cash credit facility will be classified as NPA and term loan as standard.
(d) Yes, since the recoveries in both term loan and cash credit were regular, there is no relevance of
sanctioning power/drawing power. .(Nov’22)
Answer (b)

5. Which among the following is a non- funded loan?

(a) Demand Loans
(b) Bills Discounted and Purchased
(c) Letter of Credit
(d) Participation on Risk Sharing basis.(Nov’22)
Answer (c)

Case Scenario (RTP May ’23)

Kaur & Associates, a sole proprietor firm of Simran Kaur, is offered appointment as auditor of a
company engaged in manufacturing of automobile components for the first time. She is fact
checking about the integrity of promoters of the company and key managerial persons. Matters
such as competence of staff to perform the engagement are also considered by her. The
appointment is subsequently accepted by her.
She is also taking into account number and location of branches of the company, requirements of
Schedule III of Companies Act, 2013 and expected time by which audit has to be completed keeping
in view statutory requirements. Initially, she has thought it proper to inquire key employees of the
company in procurement and marketing departments and planned for the same. She has also
planned to visit three plants of the company. The purpose of planned inquiry and visit is to identify
and assess risk of material misstatements.
A detailed set of instructions has been prepared by her office and it has been handed over to
assistants in engagement team. These set of instructions include details of extent of checking and
nature of audit procedures to be performed regarding purchases, sales, items of income, items of
expenditure etc. During the course of execution of above set of instructions, it has been brought to
her notice that company is also producing substantial quantities of scrap generated during
manufacturing process. However, no instructions have been given to engagement team in this
regard.
Based on above, answer the following questions:
1. Auditor is fact checking about promoters and key managerial persons. She is also considering
competence of staff to perform engagement. What is she trying to do?
(a) She is establishing audit strategy.
(b) She is conducting preliminary engagement activities.
(c) She is designing audit plan.
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(d) She is checking her compliance of ethical requirements.

Answer: (b)

2. Consideration of number and location of branches, requirements of financial reporting framework and
expected time of completion are relevant factors primarily for which of the following -
(a) Developing audit plan
(b) Establishing overall audit strategy
(c) Designing audit programme
(d) Designing risk assessment procedures
Answer: (b)

3. Taking into account description of planned inquiry and visit, which of the following statements is TRUE?
(a) Planned inquiry and visit fall in area of audit strategy.
(b) Planned inquiry and visit are planned risk assessment procedures and fall in field of audit
plan.
(c) The said description is not related to audit planning.
(d) Planned inquiry and visit fall in scope of audit programme.

Answer: (b)

4. What is detailed set of instructions given to assistants in engagement team known as?
(a) Audit guidelines
(b) Audit plan
(c) Audit Programme
(d) Audit Procedures
Answer: (c)

5. The issue of generation of scrap has been overlooked in detailed set of instructions given to
engagement team. What should be proper course of action by CA Simran Kaur?
(a) She should ignore this information as audit has already begun.
(b) She should modify earlier set of instructions.
(c) She should leave the matter to wisdom of engagement team.
(d) She should put the ball in court of management as she was not provided with complete
information earlier.
Answer: (b)

Case Scenario (RTP May ’23)

CA Rajan Pillai is heading the engagement team conducting audit of a company. While audit is in
progress, consider following issues regarding audit documentation: -

Audit programmed was prepared assigning responsibilities for different types of works to be
performed by team members. The engagement team consists of 4 members Mohit (CA final
student), Rohit (CA final student), Shobhit (Paid CA) and CA Rajan Pillai (partner of audit firm).
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(A) The team has determined materiality for financial statements as a whole.
(B) The team has assessed risks of material misstatements to be low.
(C) CA Shobhit is responsible for attending inventory count process and putting down its
documentation part.
(D) During the course of audit, many related party transactions have come to notice.

On the basis of above, answer the following questions: -

1. Work relating to verification of revenue was assigned to Mohit in audit programme. However, it is being
performed by Rohit actually. Verification of trade receivables was planned to be carried out by Rohit in
audit programme. However, it being performed by CA Rajan Pillai due to last minute practical issues.
Which of the following statements is most appropriate in this regard relating to audit documentation?
(a) Audit programme contains names of persons and work to be performed. It is immaterial
whether work assigned to one person is performed by another person.
(b) Audit programme was already prepared. Only persons assigned specific responsibilities can perform
those duties.
(c) It is necessary that audit programme be suitably updated or notes are given in working papers
to this effect so that planned duties are in accordance with actual work performance.
(d) Changes in audit programme or notes clarifying the matter are required only when a person
not forming part of engagement team is deputed to perform a duty. Otherwise, this issue of
inter-shuffling of team members is frivolous.
Answer: (c)
2. As regards materiality, which of the following statements is most appropriate in context of audit
documentation?(Chapter SA 320- Materiality in Planning and Performing an Audit)
(a) Materiality has already been determined. There is no need to put it into working papers.
(b) Materiality depends upon professional judgment of auditor. Whatever amount has been
determined can be documented in working papers.
(c) Materiality arrived on basis of professional judgment along with factors considered in the
determination has to be documented.
(d) Materiality has been arrived upon professional judgment. It also depends upon professional
judgment of auditor whether he wants to document it or not. (
Answer: (c)

3. As regards team’s assessment that risk of material misstatements is low, which of the following
statements is odd one relating to documentation of risk? (Chapter A 315- Identifying and Assessing the
Risks of Material Misstatement Through Understanding the Entity and Its Environment)

(a) Discussion amongst engagement team members and detail of significant decisions reached
has to be documented.
(b) Details of risk assessment procedures have to be documented.
(c) Details about how understanding of each component of internal control was obtained has to
be documented.
(d) Precise calculation of risk of material misstatements has to be documented.
Answer: (d)

4. CA Shobhit is responsible for attending physical inventory count of the company. Which of the following
is usually not true in this regard relating to audit documentation? (Chapter SA 501- Audit Evidence-
Specific Considerations for Selected Items)
(a) Dates on which physical inventory count process was attended by him should be documented.
It may also include photographs of that date showing his attendance of inventory counting
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process at a particular location.

(b) Detail of test counting undertaken should form part of audit documentation.
(c) Detail of obsolete goods found should form part of audit documentation.
(d) Reports showing that stocks conform to quality control standards in accordance with law are
essential part of audit documentation.
Answer: (d)

5. As regards related party transactions, which of the following should not be part of audit documentation?
(Chapter SA 550- Related Parties)
(a) Management representation letter in this regard
(b) Related party transaction policy of the company
(c) Documentation to show that such transactions are at arm’s length basis
(d) Documentation to show that such transactions are at close length basis.
Answer: (d)

Case Scenario (RTP Nov’23) (Chapter SA 300- Planning an Audit of Financial Statements)

Kartik, a CA student undergoing his articled training, is part of an engagement team conducting
statutory audit of MSE Auto Private Limited, a company engaged in manufacturing of automobile
spare parts. The company has its manufacturing facilities located in Pimpri- Chinchwad industrial
belt near Pune. It is a profit-making company and one of the most sought after by banks in the area
due to its good track record. The following is extract of financial information taken from its pre-
audit financial statements for year 2022-23. Figures have been rounded off in ` 000’s.
Particulars Year 2022-23 Year 2021-22
Share capital 2500.00 2500.00
Long term borrowings 0.00 15000.00
Short term borrowings 55000.00 15000.00
Inventories 35000.00 27000.00
Trade receivables 60000.00 25000.00
Revenue from Operations 300000.00 100000.00
Profit before tax 60000.00 18000.00

While going through schedule of long term borrowings and books of accounts, he finds that
reduction of long term borrowings of the company is on account of full payment of a term loan in
month of April 2022 taken from a bank in past. However, he finds that charge in respect of above
term loan in favour of bank is still subsisting on MCA portal beyond statutory period due to non -
registration of charge satisfaction.
He had read about assertions pertaining to balance sheet and income statement. However, he was
not sure about nomenclatures assigned to assertions pertaining to balance sheet and income
statement.
The team had also attended physical inventory count of the company as at year end in accordance
with SA 501.
Besides, company’s trade receivables have increased from ` 25000 in year 2021-22 to ` 60000 in year
2022-23 (both figs in ‘000s). His understanding is that increase in company’s trade receivables as
compared to last year signifies longer time taken by company’s customers to make their payments.
Considering substantial rise in revenue from operations of the company in the year under audit,
team wants to ensure that revenues of company are not overstated.

Based on above, answer the following questions: -

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1. Keeping in view description regarding full payment of term loan in April 22 taken from a bank in past
and non-registration of satisfaction of charge, which of following statements is correct?
(a) The above fact may be disclosed by the company’s management in its financial statements at its
discretion along with reasons as such disclosure would bring transparency.
(b) The above fact along with reasons is required to be disclosed by the company in its financial
statements in accordance with requirements of Standards on Auditing.
(c) The above fact along with reasons is required to be disclosed by the company in its financial
statements in accordance with requirements of Schedule III of Companies Act, 2013.
(d) The above fact is not required to be disclosed as term loan has already been repaid in full and
there are no outstanding long term borrowings.
Answer 1.1 (c)

2. The company’s short-term borrowings have increased during the year 2022-23 as compared to last year.
One of following assertions is not relevant to verification of short- term borrowings. Which odd one
you would suggest to Kartik in this regard?
(a) Existence
(b) Occurrence
(c) Completeness
(d) Valuation
Answer 1.2 (b)

3. As regards team’s attendance at physical inventory count process of company’s inventories in

accordance with SA 501 is concerned, which of following is not a relevant audit procedure?
(a) Inspection of inventories
(b) Checking appropriateness of method employed for valuation of inventories
(c) Evaluating management’s instructions for recording results of physical inventory count
(d) Performing test counts
Answer 1.3 (b)

4. The company’s trade receivables have increased during year 2022-23 as compared to last year. Which
of following statements is most appropriate regrading understanding of Kartik on this issue?
(a) The view of Kartik is correct and it has led to increased audit risk pertaining to valuation of trade
receivables. Therefore, team needs to go through trade receivables ageing schedule to confirm it.

(b) The view of Kartik is incorrect.

(c) The view of Kartik is correct and it has led to increased audit risk pertaining to valuation of trade
receivables. Therefore, team needs to perform direct confirmation procedures to confirm it.
(d) The view of Kartik is correct and it has led to increased audit risk pertaining to valuation of trade
receivables. Therefore, team needs to perform cut-off procedures to confirm it.
Answer 1.4 (b)

5. The team wants to ensure that revenues of company are not overstated. Which of following is not likely
to be a relevant audit procedure in this regard?
(a) Obtaining confirmations from customers
(b) Reviewing GST returns and their reconciliation with revenue stated in statement of profit & loss
(c) Reviewing credit notes issued by company post year end
(d) Reviewing debit notes issued by company post year end
Answer 1.5 (d)
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Case Scenario (Nov ’23)

CA X has accepted offer of conducting statutory audit of financial statements of DOS Solutions
Private Limited. Keeping in mind requirements of Standards on Auditing including those relating to
SA 300, he plans audit so that it is conducted in an effective manner. He knows that because of
inherent limitations of an audit, there is audit risk in audit of financial statements even though audit
is properly planned and performed in accordance with Standards on Auditing.
Considering nature of operations of the company, he has decided to use audit sampling in
performing audit procedures. The various areas of his testing include testing controls over revenues,
expenditures, assets and liabilities of the company. Besides, he has decided to perform tests of
details in respect of all these areas of financial statements.
While verifying tests of controls over purchase orders placed by the company based
on selected audit samples, he has erroneously concluded that Standard operating procedures (SOP)
for placing purchase orders are not being followed strictly and controls are less effective than they
actually are.
Further, while testing controls over wage payments, he has tested 20 sample wage sheets of
different sections of company and finds that one wage sheet has not been signed by authorized
officer of the company. The rate of deviation was earlier set by him at 3%.
During the course of designing procedures for selecting samples for verification of trade receivables,
he has decided to divide trade receivable balances into groups viz. balances in excess of ` 10 lakh,
balances in range of ` 7,50,001 to ` 10,00,000, balances in range of
` 5,00,001 to ` 7,50,000, balances in range of ` 2,50,001 to ` 5,00,000 and balances of
` 2,50,000 and below. He has planned to pick up different percentage of items from each of above
groups. Random sample is chosen from each group using random number tables.

Some of the trade payables of the company were outstanding since long. He has decided to merely
verify arithmetical accuracy of ageing schedule and its reconciliation with books of accounts.
Therefore, nature of audit procedures, nature of financial reporting itself and need for audit to be
conducted within a reasonable period of time and at a reasonable period of cost all lead to inherent
limitations of audit.
1. The auditor has erroneously concluded that Standard operating procedures (SOP) for placing purchase
order are not being followed strictly and controls are less effective than they actually are. Which of
the following statements is likely to be true in this regard?
(a) It is a sampling risk and might lead to auditor expressing inappropriate audit opinion.
(b) It is a sampling risk and affects audit effectiveness.
(c) It is a sampling risk and affects audit efficiency.
(d) It is a control risk and affects audit effectiveness.
Answer 1 (c)

2. The auditor has tested 20 sample wage sheets in different sections of the company and finds that one
wage sheet has not been signed by authorized officer of the company. It represents ?
(a) Tolerable misstatement
(b) Misstatement
(c) Tolerable rate of deviation
(d) Actual rate of deviation
Answer 2 (d)

3. Which method of selecting samples for verification of trade receivables has been planned by auditor?
(a) Simple random sampling
(b) Systematic sampling
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(c) Block sampling

(d) Stratified sampling
Answer 3 (d)

4. The auditor has decided to merely verify arithmetical accuracy and reconciliation of ageing schedule
relating to trade payables. The use of above audit procedure can lead to _______?
(a) Sampling risk
(b) Non-sampling risk
(c) Inherent risk
(d) Control risk
Answer 4 (b)

5. Keeping in view inherent limitations of audit of financial statements, which of following statements
is likely to be most appropriate?
(a) Due to inherent limitations of audit, auditor obtains conclusive audit evidence.
(b) Due to inherent limitations of audit, auditor can be satisfied with less than persuasive
evidence.
(c) Due to inherent limitations of audit, subsequent discovery of material misstatement in
financial statements after audit, which was conducted in accordance with SAs, does not
indicate a failure of audit.
(d) Due to inherent limitations of audit, auditor can skip a difficult, time-consuming and
costly procedure.
Answer 5 (c)

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