CA Inter Audit MTP 1 Jan’25 (New Questions)

Case Scenario 1
While auditing ANJ Industries Private Limited, CA J has decided that it would be appropriate to
examine 100% of the items comprising turnover of ₹ 30 crores as reflected in its financial statements.
In this regard, he has designed tests of details for transactions forming part of company’s turnover.
The sales function is automated in the company’s information system involving repetitive nature of
calculations. Further, in respect of designing of tests of controls pertaining to turnover, he is in a fix.

While verifying turnover of the company, CA J ensures that all the sales are correctly recorded in the
books of accounts based on the invoices and discounts have been properly adjusted. Similarly, in
respect of verification of employee benefit expenses reflected in the financial statements, he ensured
that TDS related adjustments are correctly reconciled and accounted for.

Ankush is an article assistant who has recently joined CA J for practical training.

He is also part of the team assisting seniors. Although he has read about assertions, there remain
several doubts about assertions in his mind. He noted down the following points about assertions as
per his understanding: -
i) Assertions are the representations made by the auditors.
ii) Assertions are generally explicit and not implied.
iii) Verification of the assertions helps the auditor in finding out whether financial statements are
in accordance with applicable financial reporting framework or not.

In normal course of business, the company also holds a part of goods as a consignee. While verifying
assertions relating to inventories, he ensures that inventory held by the company as consignee of goods
on behalf of third parties is excluded from inventories.

Based on the above facts, answer the following: -

1. Considering approach of CA J in respect of tests of details and tests of controls pertaining

to sales, which of the following statement is most appropriate?
a) The approach for both designing tests of details and tests of controls is proper.
b) The approach for designing tests of details is proper. However, it is an unlikely approach for
tests of controls.
c) The approach for designing tests of controls is proper. However, it is an unlikely approach for
tests of details.
d) The approach for designing tests of details as well as tests of controls is not proper.

2. Which assertions are being verified by CA J for correctness of recording of sales on the basis
of invoices (including adjustment of discounts) and TDS adjustments for employee benefit expenses
respectively?
a) Measurement, Measurement.
b) Completeness, Measurement.
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CA Inter Audit MTP 1 Jan’25 (New Questions)
c) Existence, Measurement.
d) Measurement, Completeness.

3. Considering the view of Ankush, which of the following(s) is/are false?

a) 1 and 2.
b) 1,2 and 3.
c) 1 only.
d) 2 only.

4. As regards the matter of holding of certain inventories as consignee of goods, which type of
assertion(s) is/are being verified by the auditor?
a) Cut-off and Valuation.
b) Completeness and Rights & Obligations.
c) Completeness only.
d) Rights & Obligations only.

Solution
Ques. Ans. Description
1 B Examine entire population of items that make up a class of transactions or a/c
balance (or a stratum within population). 100% examination is unlikely in case of
TOCs; however, it’s more common for TODs.
100% examination may be appropriate when,
• Population constitutes a small no. of large value items
• There’s a significant risk & other means don’t provide SAAE or
• Repetitive nature of a calculation or other process performed automatically
by an info. system makes a 100% examination cost effective.
2 A Measurement (Accuracy) as its related to calculation of appropriate amount.
3 A 1. Assertions are the representations made by the management.
2. Assertions can be explicit or implied.
4 B Completeness and Rights & Obligations
[Completeness point discussed here:
[Link]

Case Scenario 2
Revanth, Manohar and Piyush are planning to set up a new business for trading of electronic goods.
They have heard in business circles that many entrepreneurs are setting up their organisations as
Limited Liability Partnerships (LLPs). However, they lack knowledge about such legal structures. So,
they decided to approach CA S for understanding the difference between a partnership firm, an LLP
and a private company.

They also want to gain the knowledge of legal provisions regarding number of partners and the
paperwork involved in forming an LLP. Further, they also have doubts regarding maintenance of books
CA Shubham Keswani [[Link]/@shubhamkeswani]
CA Inter Audit MTP 1 Jan’25 (New Questions)
of accounts and the audit requirement for such organisations. Revanth, being cost conscious,
specifically asks CA S regarding requirement of audit of LLPs. During the discussion, he shares that
they are expecting a turnover of ₹ 5 crores in the first year of their business and funds amounting to
₹ 50 lakhs would be brought by partners as their contribution.

Manohar is concerned about the rules regarding the maintenance of accounts in software with an audit
trail feature. He has a vague understanding, gained through social media, that such rules have recently
come into effect. Moreover, he believes that these features are useful only for auditors. To address
his concerns, CA S attempts to explain these matters to him.

After resolving their doubts, they decided to constitute an LLP named Blitz Products LLP with the
professional assistance of CA S, who helped them in completing the necessary paper formalities. After
constituting an LLP, they acquired dealerships of few reputed companies and received a good response
from market due to prominent location of their showroom and are confident of achieving their turnover
expectation within the first year of business.

They plan to get their accounts audited after closure of the financial year 2023-24 from CA S. The
finance and accounts function of business is being headed by Piyush and he plans to contact him
somewhere around August 2024 for getting audit of financial statements conducted, filing income tax
return and making necessary regulatory compliances on behalf of LLP.

Based on the above facts, answer the following: -

5. Which of the following is correct regarding the difference in types of organisational structures
and connected matters?
a) LLP gives the benefit of flexibility of limited liability of a partnership and good governance of
a company. A Minimum of two individuals are required to form an LLP and at least 2 partners
are required to take DIN. The regulatory authority in the case of LLPs is Registrar of firms of
the respective state where the LLP is located.
b) LLP gives the benefit of limited liability of a company and flexibility of partnership. A minimum
of two individuals are required to form an LLP and at least 2 partners are required to take
DPIN. The regulatory authority in the case of LLPs is Registrar of Companies (ROC).
c) LLP gives the benefits of limited liability of a company and flexibility of partnership. A minimum
of two individuals are required to form an LLP and at least 2 partners are required to take DIN.
The regulatory authority in the case of LLPs is Registrar of Companies (ROC).
d) LLP gives the benefits of limited liability of a company and flexibility of partnership. A minimum
of three individuals are required to form an LLP and at least 2 partners are required to take
DPIN. The regulatory authority in the case of LLPs is Registrar of Companies (ROC).

6. Which advice would have been provided by CA S to Revanth regarding audit of financial
statements of LLP considering description provided in case scenario?

CA Shubham Keswani [[Link]/@shubhamkeswani]

CA Inter Audit MTP 1 Jan’25 (New Questions)
a) There is no provision for compulsory audit of LLPs under the LLP Act, 2008 and relevant Rules.
However, partners may choose to get accounts audited due to advantages associated with an
audit.
b) Every LLP is compulsorily required to get its accounts audited under the LLP Act, 2008 and
relevant Rules.
c) There exist provisions under the LLP Act, 2008 and relevant Rules for audit of LLPs based upon
twin criteria of turnover and contribution thresholds. However, the proposed business doesn’t
meet thresholds and would not be required to get its accounts audited.
d) There exist provisions under the LLP Act, 2008 and relevant Rules for audit of LLPs based upon
twin criteria of turnover and contribution thresholds. The proposed business meets thresholds
and would be required to get its accounts audited.

7. Which of the following statement is correct regarding Manohar’s point of view?

a) Audit trails are useful only for auditors. However, maintenance of accounts in software having
feature of audit trail is not compulsory for LLPs.
b) Audit trails are useful for businesses as well as auditors. However, maintenance of accounts in
software having feature of audit trail is not compulsory for LLPs.
c) Audit trails are useful for businesses as well as auditors. Maintenance of accounts in a software
having feature of audit trail is compulsory for LLPs.
d) Audit trails are useful for businesses as well as auditors. Maintenance of accounts in a software
having feature of audit trail is compulsory for LLPs having certain turnover thresholds.

8. Which of the following statement is correct regarding Piyush’s plan?

a) Auditor is required to be appointed at least 30 days prior to March 31st, 2024. Therefore,
Piyush’s plan to approach CA S is not in accordance with the relevant rules and regulations.
b) Auditor is required to be appointed at least 60 days prior to March 31st, 2024. Therefore,
Piyush’s plan to approach CA S is not in accordance with the relevant rules and regulations.
c) Auditor is required to be appointed at any time before March 31st, 2024. Therefore, Piyush’s
plan to approach CA S is not in accordance with the relevant rules and regulations.
d) Piyush’s plan is proper and there are no specific provisions for appointment of auditor of an LLP
in accordance with relevant rules and regulations.

9. Considering Piyush’s plan to contact CA S in August 2024 for making necessary regulatory
compliances could lead to___________
a) Default by LLP in filing its annual return.
b) Default by LLP in filing its Statement of account and solvency.
c) Default by LLP in filing its annual return as well as statement of account and solvency.
d) No default by LLP in making necessary compliances.

CA Shubham Keswani [[Link]/@shubhamkeswani]

CA Inter Audit MTP 1 Jan’25 (New Questions)
Ques. Ans. Description
5 B LLP gives the benefit of limited liability of a company and flexibility of
partnership. A minimum of two individuals are required to form an LLP and at least
2 partners are required to take DPIN. The regulatory authority in the case of LLPs
is Registrar of Companies (ROC).
6 D There exist provisions under the LLP Act, 2008 and relevant Rules for audit of
LLPs based upon twin criteria of turnover and contribution thresholds. The
proposed business meets thresholds and would be required to get its accounts
audited.
7 B Audit trails are useful for businesses as well as auditors. However, maintenance
of accounts in software having feature of audit trail is not compulsory for LLPs.
8 C Since its first auditor, auditor is required to be appointed at any time before
March 31st, 2024.
9 A Default by LLP in filing its annual return as it has to be filed within 60 days from
closer of financial year.

Case Scenario 3
Vama & Associates were appointed as auditors for Royal Constructions Ltd. for the financial year 2023-
2024. During the audit, the auditors observed a significant amount of work-in-progress inventory.
Instead of attending the physical inventory count, they relied on alternative procedures. These
included reviewing production reports, reconciling them with recorded inventory levels, and analysing
variance trends to assess the accuracy of the work-in-progress balance.

The auditor also noticed that the company has obsolete Inventory of ₹1,75,000, which had an estimated
realisable value of ₹ 50,000, and the company has valued it at cost in its financial statements.

During the review of Property Plan and Equipment (PPE), the audit team noted that the company
included ₹ 1,05,000 for employee benefits related to the acquisition of PPE and ₹ 1,25,000 for testing
the functionality of the equipment, offset by ₹ 35,000 received from the sale of samples produced
during testing.

Vama & Associates derive a significant portion of their income from Royal Constructions Ltd.,
amounting to ₹ 10,00,000, which represents 65% of their total annual revenue. Despite finding financial
discrepancies of ₹ 3,00,000 in the company’s accounts, the partners decided to overlook these issues
to maintain their lucrative relationship with the client.

Based on the above facts, answer the following: -

10. Royal Constructions Ltd. should value the obsolete inventory at:
a) ₹ 50,000.
b) ₹ 1,25,000 .
c) ₹ 1,75,000.
CA Shubham Keswani [[Link]/@shubhamkeswani]
CA Inter Audit MTP 1 Jan’25 (New Questions)
d) It should be written off completely.

11. What amount should be included in the cost of PPE in the financial statements of Royal
Constructions Ltd.?
a) ₹ 1,95,000.
b) ₹ 2,30,000.
c) ₹ 2,65,000.
d) ₹ 1,05,000.

12. What potential threat to the independence of Vama & Associates arises from receiving fees of ₹
10,00,000 from Royal Constructions Ltd.?
a) Self-interest threat.
b) Self-review threat.
c) Intimidation threat.
d) Familiarity threat.

Ques. Ans. Description

10 A Obsolete inventory is valued at realisable value as it’s lower than cost.
11 A (Acqusition cost 1,05,000 + Testing 1,25,000 – Sales during testing 35,000 =
1,95,000)
12 A Undue dependence on fees is self interest threat.

Question 13
M/s RJ & Associates, Chartered Accountants, has been auditing the books of GP Resorts Private
Limited for the past two years. GP Resorts Private Limited has experienced a significant increase in
visitors due to a successful marketing campaign. This increase in number of visitors has prompted the
Resort to introduce new services, such as event hosting, which contribute to higher revenue. Whether
M/s RJ & Associates should issue a revised audit engagement letter to the GP Resorts Private Limited?

a) No, since M/s RJ & Associates has been auditing the GP Resorts Private Limited for the past
two years, new audit engagement letter is not required.
b) Yes, the auditor is required to issue a new audit engagement letter for each period.
c) Yes, a new engagement letter is required due to significant changes in the nature and size in
the business of the GP Resorts Private Limited.
d) No, M/s RJ & Associates is not required to provide a new engagement letter, as GP Resorts
Private Limited will send new engagement letter to M/s RJ & Associates.

Ans (c)

CA Shubham Keswani [[Link]/@shubhamkeswani]

CA Inter Audit MTP 1 Jan’25 (New Questions)
Question 14
TAD & Associates, a sole proprietor firm of Agamya, is offered appointment as auditor of a company
engaged in manufacturing of automobile components for the first time. She is checking the facts about
the integrity of promoters of the company and key managerial persons. Matters such as the
competence of staff to perform the engagement are also considered by her. The appointment is
subsequently accepted by her. What is CA Agamya trying to do by checking such facts?
a) CA Agamya is establishing an audit strategy.
b) CA Agamya is conducting preliminary engagement activities.
c) CA Agamya is designing audit plan.
d) CA Agamya is checking her compliance of ethical requirements.

Ans (b)

Question 15
A practicing Chartered Accountant has been engaged by a company to perform certain procedures
relating to its trade payables. Such agreed upon procedures includes verification of purchases from
related parties, sending confirmation letters and reporting factual discrepancies to the management
of the company. Which of the following statement is correct in this context?

a) The practicing CA shall perform work in accordance with Standards on Related Services and
Standards on Auditing.
b) The practicing CA shall perform work in accordance with Standards on Related Services and
SQC 1.
c) The practicing CA shall perform work in accordance with Standards on Auditing only.
d) The practicing CA shall perform work in accordance with Standards on Assurance Engagements
and SQC 1.

Ans (b)

CA Shubham Keswani [[Link]/@shubhamkeswani]

CA Inter Audit MTP 1 Jan’25 (New Questions)
Descriptive Questions

Question 1 (Types of engagements)

Rajul Ltd. engaged an external practitioner CA Rajul to provide assurance on its prospective financial
information for the upcoming year, which includes projections for a new product line. The company
projected a 15% increase in revenue, estimating total sales of ₹ 75 crore, driven by the expected
launch of this new product. Mention the applicable Engagement and Quality Control Standard and the
level of assurance that will be provided in the given situation. Also explain how Prospective Financial
Information is different from Historical Financial Information. (MTP I Jan’25)

Solution
In the given situation, Standards on Assurance Engagements will be applicable and such type of
assurance engagement provides only a “moderate” level of assurance.

In assurance reports involving prospective financial information, the practitioner obtains sufficient
appropriate evidence to the effect that
• management’s assumptions on which the prospective financial information is based are not
unreasonable,
• the prospective financial information is properly prepared on the basis of the assumptions and
• it is properly presented and all material assumptions are adequately disclosed.

“Historical financial information” and “Prospective financial information.” The former relates to
information expressed in financial terms of an entity about economic events, conditions or
circumstances occurring in past periods. The latter relates to financial information based on
assumptions about occurrence of future events and possible actions by an entity.

Therefore, historical financial information is rooted in past events which have already occurred
whereas prospective financial information is related to future events.

Question 2 (SA 210)

CA Paras has accepted audit of financial statements of an entity. According to the Standards on
Auditing, the auditor is required to send an audit engagement letter to the entity. What are the key
areas that should be included in the audit engagement letter? Under what circumstances is the auditor
not required to record the terms of engagement in such a written agreement? [MTP Jan’25]

Solution:
Audit Engagement letter includes: -
1. The objective and scope of the audit of the financial statements
2. The responsibilities of the auditor
3. The responsibilities of management
4. Identification of the applicable financial reporting framework for the preparation of the financial
statements and
CA Shubham Keswani [[Link]/@shubhamkeswani]
CA Inter Audit MTP 1 Jan’25 (New Questions)
5. Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected form
and content.

If law or regulation prescribes in sufficient detail the terms of the audit engagement, the auditor
need not record them in a written agreement, except for the fact that such law or regulation applies,
and that management acknowledges and understands its responsibilities.

Question 3 (Audit Strategy)

Lotus Ltd., a rapidly growing manufacturing company, appointed Ridhi & Co., as statutory auditor. The
engagement team of Ridhi & Co. identified key areas requiring scrutiny, such as revenue recognition,
inventory valuation, and related party transactions. Based on his professional judgment, CA Ravi, the
engagement partner, directed the engagement team to focus on these critical areas, emphasising the
need for detailed testing to ensure accuracy and compliance. Give some examples of the factors need
to be considered by CA Ravi for establishing the audit strategy. (MTP 1 Jan’25)

Solution
The auditor needs to direct efforts of engagement team towards matters that in his professional
judgment are significant. Preliminary identification of material classes of transactions, account
balances and disclosures helps auditor in establishing overall audit strategy. More energies need to be
devoted to significant matters to obtain desired outcomes.

Few examples are listed as under: -

• Volume of transactions which may determine whether it is more efficient for the auditor to rely
on internal control
• Significant industry developments such as changes in industry regulations and new reporting
requirements.
• Significant changes in the financial reporting framework, such as changes in accounting standards.
• Other significant relevant developments, such as changes in the legal environment affecting the
entity.

Question 4 (Audit Program)

Audit programme is a list of examination and verification steps to be applied and set out in such a
way that the inter-relationship of one step to another is clearly shown and designed, keeping in view
the assertions apparent in the statements of account produced for audit or based on an appraisal of
the accounting records of the client. For example, while auditing a company’s inventory, the program
may include steps to verify physical stock counts, ownership rights, and valuation. What are the
advantages of an audit programme? (MTP Jan’25)

Solution
The advantages of an audit programme are:
• It provides the assistant carrying out the audit with total and clear set of instructions of the
work generally to be done.
CA Shubham Keswani [[Link]/@shubhamkeswani]
CA Inter Audit MTP 1 Jan’25 (New Questions)
• It is essential, particularly for major audits, to provide a total perspective of the work to be
performed.
• Selection of assistants for the jobs on the basis of capability becomes easier when the work is
rationally planned, defined and segregated.
• Without a written and pre-determined programme, work is necessarily to be carried out on the
basis of some ‘mental’ plan. In such a situation there is always a risk of ignoring or overlooking
certain books and records. Under a properly framed programme, such risk is significantly less and
the audit can proceed systematically.
• The assistants, by putting their signature on programme, accept the responsibility for the work
carried out by them individually and, if necessary, the work done may be traced back to the
assistant.
• The principal can control the progress of the various audits in hand by examination of audit
programmes initiated by the assistants deputed to the jobs for completed work.
• It serves as a guide for audits to be carried out in the succeeding year.
• A properly drawn up audit programme serves as evidence in the event of any charge of negligence
being brought against the auditor. It may be of considerable value in establishing that he exercised
reasonable skill and care that was expected of professional auditor.

Question 5 (RAIC: Relevance of Controls)

KR & Associates, an auditor of FDP Ltd., observed that the company has implemented various internal
controls addressing financial reporting, operational efficiency, and compliances during their
preliminary evaluation. CA Karan suggests that all controls should be assessed to mitigate the risk of
material misstatement in the financial statements, while CA Rajat is of the view that only those
controls deemed relevant to the audit should be assessed based on professional judgment.

Comment, whether the auditor should assess all the internal controls or limit the assessment to only
those considered relevant by the auditor during the audit. Also, discuss the factors influencing the
auditor's judgment on the relevance of controls. (MTP Jan’25)

Solution
There is a direct relationship between an entity’s objectives and the control it implements to provide
reasonable assurance about their achievement. FDP Ltd. has implemented internal controls addressing
financial reporting, operational efficiency, and compliance. However, not all of these objectives and
controls are relevant to the auditor’s risk assessment.

Factors relevant to the auditor’s judgment about whether a control, individually or in combination with
others, is relevant to the audit may include such matters as the following:
• Materiality.
• The significance of the related risk.
• The size of the entity.
• The nature of the entity’s business, including its organisation and ownership characteristics.
• The diversity and complexity of the entity’s operations.
CA Shubham Keswani [[Link]/@shubhamkeswani]
CA Inter Audit MTP 1 Jan’25 (New Questions)
• Applicable legal and regulatory requirements.
• The circumstances and the applicable component of internal control.
• The nature and complexity of the systems that are part of the entity’s internal control, including
the use of service organisations.
• Whether, and how, a specific control, individually or in combination with others, prevents, or
detects and corrects, material misstatement.

Facts of Case
In the given case, CA Karan suggests that all controls should be assessed to mitigate the risk of
material misstatement in the financial statements, while CA Rajat is of the view that only those
controls deemed relevant to the audit should be assessed based on professional judgment.

Conclusion:
Based on the factors mentioned above, it can be concluded that the auditors should assess only those
controls deemed relevant to mitigate the risk of material misstatement in FDP Ltd.'s financial
statements.

Question 6 (SA 315: Analytical Procedures as RAP)

CA Srishti, while auditing KSM Private Limited for the first time, utilised software to analyse financial
data, comparing amounts recorded in the financial statements for the current audit year with the
preceding two years. Her objective was to evaluate the risk of material misstatement. Identify the
type of audit procedure performed by CA Srishti in the given case, discuss its relevance, and explain
whether an auditor’s opinion can solely rely on such procedures. (Jan’25)

Solution
In the given case, CA Srishti is performing analytical procedures as risk assessment procedures.

Analytical procedures performed as risk assessment procedures may identify aspects of the entity of
which the auditor was unaware and may assist in assessing the risks of material misstatement in order
to provide a basis for designing and implementing responses to the assessed risks.
• Analytical procedures performed as risk assessment procedures may include both financial and
non-financial information.
• Analytical procedures may help identify the existence of unusual transactions or events, and
amounts, ratios, and trends that might indicate matters that have audit implications.
• Unusual or unexpected relationships that are identified may assist the auditor in identifying risks
of material misstatement, especially risks of material misstatement due to fraud.

Risk assessment procedures are a basis for the identification and assessment of risks of material
misstatement at the financial statement and assertion levels.
Risk assessment procedures by themselves, however, do not provide sufficient appropriate audit
evidence on which to base the audit opinion. Thus, it can be concluded that auditor’s opinion cannot be
solely based upon such procedures.
CA Shubham Keswani [[Link]/@shubhamkeswani]
CA Inter Audit MTP 1 Jan’25 (New Questions)
Question 7 (Audit Procedures: Why TOCs?)
SA 330 states that auditor shall design and perform tests of controls to obtain sufficient appropriate
audit evidence as to operating effectiveness of relevant controls. Briefly discuss when such tests are
to be designed and performed in accordance with SA 330?

If an auditor intends to place greater reliance on effectiveness of a control, state its likely effect on
audit evidence to be obtained as a result of such tests of controls. Why a higher level of assurance
may be sought by an auditor about the operating effectiveness of controls? [MTP 1 Jan’25]

Solution
Test of controls may be defined as an audit procedure designed to evaluate the operating
effectiveness of controls in preventing, or detecting and correcting, material misstatements at the
assertion level.

The auditor shall design and perform tests of controls to obtain sufficient appropriate audit evidence
as to the operating effectiveness of relevant controls when:
a. The auditor’s assessment of risks of material misstatement at the assertion level includes an
expectation that the controls are operating effectively (i.e., the auditor intends to rely on the
operating effectiveness of controls in determining the nature, timing and extent of substantive
procedures); or
b. Substantive procedures alone cannot provide sufficient appropriate audit evidence at the
assertion level.

In designing and performing tests of controls, the auditor shall obtain more persuasive audit evidence,
the greater the reliance the auditor places on the effectiveness of a control.

A higher level of assurance may be sought about the operating effectiveness of controls when:
the approach adopted consists primarily of tests of controls, in particular where it is not possible or
practicable to obtain sufficient appropriate audit evidence only from substantive procedures.

Question 8 (SA 530: Nature & Case of deviations and misstatements)

CA Shubham, the auditor of Sigma Limited, is performing tests of controls and tests of details using
audit sampling. During these procedures, he observed deviations in compliance with management's
prescribed procedures for sales transactions of small values of a product at one location during tests
of controls. Additionally, misstatements were identified in the sample related to these small-value
sales transactions during tests of details. How should he proceed to analyse the nature and cause of
the deviations and misstatements observed in the sample results? (MTP 1 Jan’25)

Solution
In the given case, while performing tests of details on a sample in respect of sales, misstatements
have been found by CA Shubham in selected sample pertaining to the sales transactions of small values.

CA Shubham Keswani [[Link]/@shubhamkeswani]

CA Inter Audit MTP 1 Jan’25 (New Questions)
This indicates observance of deviations and misstatements while performing tests of controls and
tests of details respectively in selected samples.

As per SA 530, “Audit Sampling”, in analysing the deviations and misstatements identified, the auditor
may observe that many have a common feature, for example, type of transaction, location, product line
or period of time.

In such circumstances, the auditor may decide to identify all items in the population that possess the
common feature, and extend audit procedures to those items.

In addition, such deviations or misstatements may be intentional, and may indicate the possibility of
fraud. Therefore, the auditor shall investigate the nature and causes of any deviations or
misstatements identified, and evaluate their possible effect on the purpose of the audit procedure
and on other areas of the audit.

In the extremely rare circumstances when the auditor considers a misstatement or deviation
discovered in a sample to be an anomaly, the auditor shall obtain a high degree of certainty that such
misstatement or deviation is not representative of the population.

The auditor shall obtain this degree of certainty by performing additional audit procedures to obtain
sufficient appropriate audit evidence that the misstatement or deviation does not affect the
remainder of the population.

Question 9 (SA 570: Audit procedures)

During course of audit of a company, CA. Varun Aggarwal notices that company is facing significant
skilled labour shortages resulting in hampering of operations of company. The company’s manufacturing
is dependent upon skilled labour coming from villages in certain districts of Eastern UP. However, due
to job opportunities available near villages now, many are not interested in going out from their native
villages. Such a situation has led to company not being able to keep its commitments, losing out on
orders and fall in its revenues. Fixed costs of the company remain at a high level. As a result, company
is facing a liquidity crunch and is not able to pay its creditors on time. The bankers of company are
also not willing to help the company to tide over liquidity crisis. The auditor is having doubts over going
concern status of the company.

How should management of the company try to address auditor’s concerns? What audit procedures
may be performed by auditor in such a situation? (+MTP Jan’25)

Solution
Significant shortage of skilled labour, inability to pay creditors on time and overall liquidity crisis faced
by the company are examples of events or conditions that, individually or collectively, may cast
significant doubt on the entity’s ability to continue as a going concern.

CA Shubham Keswani [[Link]/@shubhamkeswani]

CA Inter Audit MTP 1 Jan’25 (New Questions)
In such a situation, management should try to address auditor’s concerns by preparing its future plan
of action including preparation of cash flow forecast showing inflow and outflow of cash. Such a cash
flow forecast should address auditor’s concerns regarding liquidity crisis being faced by the company.

The auditor should perform audit procedures to evaluate the reliability of the underlying data to
prepare the forecast and determining whether there is adequate support for the assumptions
underlying the forecast. The auditor should also consider whether any additional facts or information
have become available since the date on which management made its assessment.

Question 9 (SA 580: Doubt on reliability of WR)

During the audit of a company, CA Jack obtained written representations from management regarding
all known instances of non-compliance with laws and regulations that should be considered in the
preparation of the financial statements. However, during the audit, he observed that the information
provided in this regard was incomplete, and the audit evidence indicating such non-compliance
contradicted the written representations, casting doubt on their reliability. How should CA Jack
proceed in this situation? (MTP I Jan’25)

Solution
In the given situation, company’s management has not provided complete information regarding
instances of non-compliance with laws & regulations. If the auditor has concerns about the competence,
integrity, ethical values or diligence of management, or about its commitment to or enforcement of
these, the auditor shall determine the effect that such concerns may have on the reliability of
representations and audit evidence in general.

The above situation highlights that auditor has obtained audit evidence relating to non-compliance with
laws which is inconsistent with written representations in this respect casting a doubt about reliability
of written representations.

As per SA 580, “Written Representation”, if written representations are inconsistent with other audit
evidence, the auditor shall perform audit procedures to attempt to resolve the matter.

If the matter remains unresolved, the auditor shall reconsider the assessment of the competence,
integrity, ethical values or diligence of management, or of its commitment to or enforcement of these,
and shall determine the effect that this may have on the reliability of representations and audit
evidence in general.

If the auditor concludes that the written representations are not reliable, the auditor shall take
appropriate actions, including determining the possible effect on the opinion in the auditor’s report in
accordance with SA 705, “Modifications to the Opinion in the Independent Auditor’s Report” having
regard to the requirement of disclaimer of opinion.

CA Shubham Keswani [[Link]/@shubhamkeswani]

CA Inter Audit MTP 1 Jan’25 (New Questions)
Question 10 (Types of modified opinion)
“When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified Opinion,”
“Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate, for the Opinion section.” Briefly explain
when the auditor should express: (i) Qualified Opinion. (ii) Adverse Opinion and (iii) Disclaimer of
Opinion. (MTP I Jan’25)

Solution
“When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified Opinion,”
“Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate, for the Opinion section.” The auditor
should consider the following while expressing the opinion in accordance with SA 705, “Modifications
to the Opinion in the Independent Auditor’s Report”.

(i) Qualified Opinion

• The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements,
are material, but not pervasive or
• The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion,
but the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive.

(ii) Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having obtained
sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate,
are both material and pervasive to the financial statements.

(iii) Disclaimer of Opinion: The auditor shall disclaim an opinion when he is unable to obtain sufficient
appropriate audit evidence on which to base the opinion, and he concludes that the possible effects on
the financial statements of undetected misstatements, if any, could be both material and pervasive.

Question 11 (CARO 2020: Fraud Reporting)

During the audit of a limited company as a statutory auditor you discovered that a fraud amounting to
₹ 5 lakh has been committed by the company. What are the reporting requirements regarding fraud
under the Companies Auditor's Report Order, 2020? [MTP I Jan’25]

Solution
Reporting requirements of a fraud under the CARO 2020: The auditor is required to report the fraud
under clause (xi) of Paragraph 3 of CARO 2020:
a. whether any fraud by the company or any fraud on the company has been noticed or reported
during the year, if yes, the nature and the amount involved is to be indicated;
b. whether any report under sub-section (12) of section 143 of the Companies Act has been filed by
the auditors in Form ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules,
2014 with the Central Government;
c. whether the auditor has considered whistle-blower complaints, if any, received during the year by
the company;
CA Shubham Keswani [[Link]/@shubhamkeswani]
CA Inter Audit MTP 1 Jan’25 (New Questions)
Question 12 (Bank Audit: Deemed NPA)
Mahavir and Associates is appointed as the statutory auditor of KBC Bank for the financial year 2023-
2024. During the audit, Ms. Chandana, an article trainee, noticed that Sidharth Industries had an
outstanding loan of ₹ 50,00,000 as on March 31, 2024. On March 29, 2024, the company made a
payment of ₹ 10,00,000, reducing the outstanding loan balance to ₹ 40,00,000. However, on April 4,
2024, Sidharth Industries initiated a reversal transaction of ₹ 8,00,000, increasing the outstanding
loan balance back to ₹ 48,00,000. The payment and subsequent reversal occurred within a short period,
with the final outstanding balance remaining ₹ 48,00,000 after the reversal.

Considering this scenario, what should be the response of Mahavir and Associates to this matter,
particularly regarding the classification of the borrower's account and the potential risk of it slipping
into the NPA category? [MTP I Jan’25]

Solution
Accounts regularized near the Balance Sheet Date: The asset classification of borrower accounts
where a solitary or a few credits are recorded before the balance sheet date should be handled with
care and without scope for subjectivity.

Where the account indicates inherent weakness on the basis of the data available, the account should
be deemed as NPA.

The auditor should check for sample transactions immediately before the closing of the financial year
and immediately after the closing of the financial year to get a knowledge of the objective behind the
transactions if they have any relation to each other in the borrower accounts or if any/some
transactions are being reversed during the first few days after closing which might show an
arrangement to prevent the Borrower account(s) from slipping into the NPA category.

Facts of Case
In the given case of Sidharth Industries, a payment of ₹10,00,000 was made on March 29, 2024
reducing the outstanding loan balance to ₹40,00,000. and subsequently reversed by ₹8,00,000 on April
4, 2024.

Conclusion
Thus, Mahavir and Associates should carefully assess the classification of Sidharth Industries’
Account, and determine if the payment and reversal transactions indicate an attempt to prevent the
account from slipping into the NPA category. If yes, the account should be classified as an NPA in
compliance with regulatory guidelines.

CA Shubham Keswani [[Link]/@shubhamkeswani]