CA Inter Audit RTP Sep’24 Exams

MCQ Case Study

Pluto Limited is engaged in the manufacturing and distribu:on of furniture. A=er Covid, as the number of people
working from home has gone up, this customisable range home office furniture has gained lot of importance. They
were able to perform very well over the years and the same has been reflected in their financial statements.

During the year 2023-24, M/s Saha and Associates was reappointed as the auditor. The new engagement team has
CA Saha (partner) and five ar:cle assistants. Given the large volume of transac:ons, the partner instructed the
ar:cle assistants to review the financial statements and auditor's report from the previous year, 2022-23, to gain a
thorough understanding.

While reviewing the summary page, one of the ar:cle Kabir no:ced that few points were under discussion with the
partner before finalising the audit:

The team verified the following points with respect to employee benefit expenses:
• The employee benefit expenses recorded in the books were actually incurred during the relevant period.
• The expenses in respect of all personnel have been accounted for.
• The expenses recognised during the period are pertaining to the current accoun:ng period.

It was also noted that dividend to equity shareholders for the year 2022-23, was declared on 15.04.2023 and was
recognised as liability in the year 2022-23. Another ar:cle Krish no:ced that debtors cons:tute a major component
of the company’s financial statements.

As part of audit procedure, the auditor requested the client to obtain external confirma:ons from the par:es. For
this, a list of all the debtors were obtained and a random sampling was performed by the auditor. The client directly
obtained the selected debtor confirma:ons from the customers on :me.

Krish also observed addi:on in the assets amoun:ng ₹ 50 lakhs during the year supported by sufficient audit
evidence. However, upon scru:ny, it was found that some of the invoices were not in the name of the company.
Further, Cash and cash equivalents were classified as balances with banks, cheques and dra=s on hand, cash on
hand and earmarked balances with banks (e.g. unpaid dividend)

Based on above, answer the following ques:ons: -

1. Which among the following asser:ons are discussed with respect to the employee benefit expenses?
i) Measurement
ii) Occurrence
iii) Cutoff
iv) Completeness

Choose the correct combina:on from below:

a) (i), (ii) and (iv)
b) (ii), (iii) and (iv)
c) (i), (iii) and (iv)
d) (i), (ii) and (iii)

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CA Inter Audit RTP Sep’24 Exams
2. Whether disclosure of dividend under the liability head during the year 2022-23 is appropriate?

a) Yes. It should be recognised in the same year irrespec<ve of the year of declara<on as the amount of dividend
belongs to year 2022-23.
b) No. The amount should be recognised equally between two financial years.
c) No. The amount should not be recognised as a liability. It should be disclosed in the notes to accounts.
d) No. The amount should neither be recognised as liability nor disclosure is required in the financial statements.

3. Krish pointed out that that the method followed to obtain debtor confirma:on in the previous year was not in
accordance with SA 505. Therefore, M/s Saha & Associated should reperform the same in the correct manner.

a) As per SA 505, confirma<on should be directly obtained by the auditor. Further, for all significant account balances
as on the Balance sheet date confirma<ons should necessarily be collected and for the smaller outstanding
balances, random sampling could be performed.
b) It is ok to obtain confirma<on through clients as they are in constant contact with their customers. Also, many
customers may not respond to auditor’s external confirma<on request mail. Random selec<on can be done for
all debtors irrespec<ve of the amount in accordance with SA 505.
c) As per SA 505, confirma<on should be directly obtained by the auditor. Whereas random selec<on can be done
for all debtors irrespec<ve of the amount.
d) Either auditor or client can obtain confirma<on based on <me availability. However, it is necessary to obtain
confirma<on for all significant account balances as on the Balance sheet date and for the remaining random
sampling could be performed in accordance with SA 505.

4. Which asser:on has been affected in the case of fixed assets?

a) Existence
b) Rights and obliga<on
c) Completeness
d) Measurement

5. Cash and cash equivalents were not properly classified by the client. Which of the following is incorrect disclosure
of the same?
a) Balances with banks
b) Cheques and draUs on hand
c) Cash on hand
d) Earmarked balances with banks (e.g.: unpaid dividend)

1 b Occurance, Completeness & cut-off

2 c Dividend declared aUer BS Date should not be recognised as a liability. It should be disclosed in the
notes to accounts.
3 a As per SA 505, confirma<on should be directly obtained by the auditor. Further, for all significant
account balances as on the Balance sheet date confirma<ons should necessarily be collected and for
the smaller outstanding balances, random sampling could be performed.
4 b Since invoice not in Co’s name, asser<on of Rights is affected.
5 d Earmarked balances with banks (e.g.: unpaid dividend) need to be disclosed separately.

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CA Inter Audit RTP Sep’24 Exams
General MCQs
6. CA Chatur provides accoun:ng and book keeping services to Shiv Ganga Limited. He is also offered an audit of
the accounts to the Shiv Ganga Limited. Which threat to independence may be involved in accep:ng such an
engagement.

a) Self-interest threats
b) Self-review threats
c) Familiarity threats
d) Advocacy threats

7. CA Sargun is conduc:ng statutory audit of branch of KBC Bank. During the course of audit, it is no:ced that one
borrower has availed a housing loan and a car loan from the branch. Housing loan EMIs are overdue for 120 days as
on date of Balance sheet. Car loan EMIs are overdue for 60 days as on date of Balance sheet. Which of the following
statements is appropriate?

a. Housing Loan should be classified as “Non-Performing Asset” in accordance with RBI norms on asset classifica<on.
However, Car loan should be classified as Standard asset.
b. Car Loan should be classified as “Non-Performing Asset” in accordance with RBI norms on asset classifica<on.
However, Housing Loan should be classified as Standard asset.
c. Both Housing loan as well as car loan should be classified as “NonPerforming Assets” in accordance with RBI
norms on asset classifica<on.
d. Both Housing as well as car loans should be classified as Standard assets. 8. Sagar Finance Corpora<on Limited is
a government company.

8. The audit of the company is conducted by statutory auditors appointed by Comptroller and Auditor General of
India (C&AG). Who is empowered to conduct “supplementary audit” of Sagar Finance Corpora:on Ltd.?

a. Central Government
b. C&AG
c. Another independent auditor appointed by C&AG
d. Another independent auditor appointed by Ministry of Corporate Affairs

Descrip:ve Ques:ons

Ch-1 Intro + Ethics

1. Kri<, a CA student, has joined ar<cles in a reputed audit firm. She considers audit engagement to be an “assurance
engagement”. Her understanding is that audit engagement is the only kind of assurance engagement in which
prac<<oner gives a wrieen assurance report in appropriate form. However, her friend Somaya, does not agree with
her. She is of the view that assurance engagements are not restricted to audit alone. Besides, Somaya also thinks that
assurance engagements can also relate to maeers other than historical financial informa<on. Whose view appears to
be correct? State with reasons.

Audit engagement is an assurance engagement. However, assurance engagements are not restricted to audi<ng alone.
There are other assurance engagements too like review engagements, engagements providing assurance involving
prospec<ve financial informa<on, engagements providing assurance on internal controls in an en<ty.

Assurance engagements provide assurance to users. The difference is of degree.

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CA Inter Audit RTP Sep’24 Exams

• Whereas an audit provides reasonable assurance which is a high level of assurance, review provides lower level
of assurance as compared to audit.
• There are also assurance engagements which relate to maeers other than historical financial informa<on like
providing assurance on maeers involving prospec<ve financial informa<on and providing assurance on internal
controls in an en<ty.

Prospec<ve Financial Info.

In assurance reports involving prospec<ve financial informa<on, the prac<<oner obtains sufficient appropriate
evidence to the effect that
ü management’s assump<ons on which the prospec<ve financial informa<on is based are not unreasonable,
ü the prospec<ve financial informa<on is properly prepared on the basis of the assump<ons, and
ü it is properly presented, and all material assump<ons are adequately disclosed.

In the given case, Kri< is of the view that audit engagement is the only kind of assurance engagement in which
prac<<oner gives a wrieen assurance report in appropriate form whereas is of the view that assurance engagements
are not restricted to audit alone. Thus, view of Somaya is correct.

2. CA N, engagement partner of LPS & Associates, is planning for audit of a large company. As part of preliminary
engagement ac<vi<es being performed in this regard, he wants to ensure that compliance with independence
requirements is adhered. How shall he form a conclusion that audit firm complies with independence requirements?

The engagement partner, CA N shall form a conclusion on compliance with independence requirements that apply to
the audit engagement.

In doing so, CA N shall: -

i) Obtain relevant informa<on from the firm to iden<fy and evaluate circumstances and rela<onships that create
threats to independence
ii) Evaluate informa<on on iden<fied breaches, if any, of the firm’s independence policies and procedures to
determine whether they create a threat to independence for the audit engagement and
iii) Take appropriate ac<on to
ü eliminate such threats or
ü reduce them to an acceptable level by applying safeguards, or,
ü if considered appropriate, to withdraw from the audit engagement, where withdrawal is permieed by law or
regula<on.

The engagement partner shall promptly report to the firm any inability to resolve the maeer for appropriate ac<on.

3. ABC & Associates, an audit firm, has been approached by a prospec<ve company client that has been in business
for about 10 years to conduct an audit of its financial statements. Before accep<ng the audit engagement, the firm
wants to access the integrity of prospec<ve client. With regard to the assessment of integrity, which maeers should
be considered by the audit firm?

With regard to the integrity of a client, maeers that ABC & Associates should considers include, for example:
• The iden<ty and business reputa<on of the client’s principal owners, key management, related par<es and those
charged with its governance.
• The nature of the client’s opera<ons, including its business prac<ces.

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CA Inter Audit RTP Sep’24 Exams
• Informa<on concerning the ahtude of the client’s principal owners, key management and those charged with its
governance towards such maeers as aggressive interpreta<on of accoun<ng standards and the internal control
environment.
• Whether the client is aggressively concerned with maintaining the firm’s fees as low as possible.
• Indica<ons of an inappropriate limita<on in the scope of work.
• Indica<ons that the client might be involved in money laundering or other criminal ac<vi<es.

Ch-3 Audit Documenta<on

An important factor in determining the form, content and extent of audit documenta<on of significant maeers is the
extent of professional judgment exercised in performing the work and evalua<ng the results. Explain sta<ng clearly
the examples of significant maeers.

As per SA 230,”Audit documenta<on” judging the significance of a maeer requires an objec<ve analysis of the facts
and circumstances.

Examples of significant maeers include:

• Maeers that give rise to significant risks.
• Results of audit procedures indica<ng
a) that the financial statements could be materially misstated, or
b) a need to revise the auditor’s previous assessment of the risks of material misstatement and the auditor’s
responses to those risks.
• Circumstances that cause the auditor significant difficulty in applying necessary audit procedures.
• Findings that could result in a modifica<on to the audit opinion or the inclusion of an Emphasis of Maeer
Paragraph in the auditor’s report.

An important factor in determining the form, content and extent of audit documenta<on of significant maeers is the
extent of professional judgement exercised in performing the work and evalua<ng the results.

Documenta<on of the professional judgements made, where significant, explains the auditor’s conclusions and
reinforces the quality of the judgement.

Such maeers are of par<cular interest to those responsible for reviewing audit documenta<on, including those
carrying out subsequent audits, when reviewing maeers of con<nuing significance (for example, when performing a
retrospec<ve review of accoun<ng es<mates).

Ch-7 Automated Environment

Companies are increasingly using data analy<cs for managing their opera<ons. Auditors can also obtain good results
by using data analy<cs. What are the tools and techniques used by auditors in applying the principles of Data Analy<cs
and in which areas data analy<cs can be used by auditors?

The tools and techniques that auditors use in applying principles of data analy<cs are known as Computer Assisted
Audi<ng Techniques (CAATs).

Data analy<cs can be used in tes<ng of electronic records and data residing in IT systems using spreadsheets and
specialised audit tools viz., IDEA and ACL to perform the following: -
• Check completeness of data and popula<on that is used in either test of controls or substan<ve audit tests.
• Selec<on of audit samples – random sampling, systema<c sampling.
• Re-computa<on of balances – reconstruc<on of trial balance from transac<on data.
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CA Inter Audit RTP Sep’24 Exams
• Reperformance of mathema<cal calcula<ons – deprecia<on, bank interest calcula<on.
• Analysis of journal entries Fraud inves<ga<on.
• Evalua<ng impact of control deficiencies.

Ch-8 SA 500/501/505/510
Quality Products Limited is engaged in manufacturing of bicycles. As part of manufacturing ac<vi<es, it sends raw
material to some business en<<es and procures finished components from them. As on 31st March 2024 inventories
lying with such business en<<es are material. Being statutory auditor of Quality Products Limited, how you will obtain
sufficient appropriate audit evidence regarding existence and condi<on of inventories lying with such business
en<<es?

In accordance with requirements of SA 501,”Audit Evidence- Specific Considera<ons for Selected Items”, when
inventory under the custody and control of a third party is material to the financial statements, the auditor shall obtain
sufficient appropriate audit evidence regarding the existence and condi<on of that inventory by performing one or
both of the following:
a. Request confirma<on from the third party as to the quan<<es and condi<on of inventory held on behalf of the
en<ty.
b. Perform inspec<on or other audit procedures appropriate in the circumstances.

Other audit procedure may include –

• Aeending, or arranging for another auditor to aeend, the third party’s physical coun<ng of inventory, if
prac<cable.
• Obtaining another auditor’s report, or a service auditor’s report, on the adequacy of the third party’s internal
control for ensuring that inventory is properly counted and adequately safeguarded.
• Inspec<ng documenta<on regarding inventory held by third par<es
• Reques<ng confirma<on from other par<es when inventory has been pledged as collateral.

Ch-9
1. CA Manoj is the statutory auditor of a company. He has completed the audit and issued the audit report dated June
30, 2024. Before signing the audit report, wrieen representa<ons dated June 29, 2024, were obtained from the
management of the company. Discuss the significance of the date of wrieen representa<ons. Also state whether the
wrieen representa<ons obtained on June 29, 2024 is appropriate or not.

As per SA 580,”Wrieen Representa<ons” the date of the wrieen representa<ons shall be as near as prac<cable to, but
not aUer, the date of the auditor’s report on the financial statements.
• Since wrieen representa<ons are necessary audit evidence, the auditor’s opinion cannot be expressed, and the
auditor’s report cannot be dated before the date of the wrieen representa<ons.
• Furthermore, because the auditor must consider events occurring up to the date of the auditor’s report that might
require adjustment to or disclosure in the financial statements, the wrieen representa<ons are dated as near as
prac<cable to, but not aUer, the date of the auditor’s report on the financial statements.

In the given situa<on, CA Manoj obtained wrieen representa<ons dated June 29, 2024, from the management of the
company before signing the audit report on June 30, 2024. From the above is can be concluded that wrieen
representa<ons have been obtained appropriately.

2. While conduc<ng audit of BYN Limited, CA Y no<ces that company has lost one of its key markets along with
important customers. Addi<onally, several highly successful compe<tors have emerged, impac<ng business of the
company. Despite the existence of material uncertainty, CA Y finds the use of going concern basis of accoun<ng
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CA Inter Audit RTP Sep’24 Exams
appropriate for prepara<on of financial statements. The company has also disclosed material uncertainty in notes to
accounts adequately. How should he deal with the maeer in auditor’s report?

As per SA 570,”Going concern”, If adequate disclosure about the material uncertainty is made in the financial
statements, the auditor shall express an unmodified opinion and the auditor’s report shall include a separate sec<on
under the heading “Material Uncertainty Related to Going Concern” to: -
a. Draw aeen<on to the note in the financial statements that discloses such maeers.
b. State that these events or condi<ons indicate that a material uncertainty exists that may cast significant doubt on
the en<ty’s ability to con<nue as a going concern and that the auditor’s opinion is not modified in respect of the
maeer.

Ch-13 CARO 2020

Discuss the repor<ng requirements as per CARO, 2020, regarding:
(i) Statutory Dues and
(ii) Transac<ons with Related Par<es

Repor<ng under CARO,2020 regarding statutory Dues [Para 3(vii)]

(a) whether the company is regular in deposi<ng undisputed statutory dues including Goods and Services Tax,
provident fund, employees' state insurance, income tax, sales-tax, service tax, duty of customs, duty of excise, value
added tax, cess and any other statutory dues to the appropriate authori<es and if not, the extent of the arrears of
outstanding statutory dues as on the last day of the financial year concerned for a period of more than six months
from the date they became payable, shall be indicated;

(b) where statutory dues referred to in sub-clause (a) have not been deposited on account of any dispute, then the
amounts involved and the forum where dispute is pending shall be men<oned (a mere representa<on to the
concerned Department shall not be treated as a dispute);

(ii) Repor<ng under CARO,2020 regarding transac<ons with related par<es [Para 3(xiii)]
Whether all transac<ons with the related par<es are in compliance with sec<ons 177 and 188 of Companies Act where
applicable and the details have been disclosed in the financial statements, etc., as required by the applicable
accoun<ng standards.

Ch-14 Bank Audit

Compute the Drawing Power for Cash Credit A/c of Kirpa Limited for the month of March 2024 with following
informa<on: (Amount in ₹)
Stock 60,000
Debtors 55,000
(Including Debtor of ` 15,000 for an invoice dated 20.10.2023)
Sundry creditors 10,000
Sanc<oned Limit 48,000
Margin on stock is 30% and on debtors is 40%.
Note: Debtors older than 3 months are ineligible for calcula<on of DP

Par<culars of current assets Amount (₹) DP Amt

(A) Stocks 60,000
Less: Sundry creditors (10,000)
Paid stocks 50,000

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CA Inter Audit RTP Sep’24 Exams
Less: Margin 30% (15,000) 35,000
(B) Debtors 55,000
Less: Ineligible debtors (15,000)
Eligible debtors 40,000
Less: Margin 40% (16,000) 24,000
Total Drawing Power 59,000

The sanc<oned limit given in the ques<on is ` 48,000 whereas drawing power as per the above working is ` 59,000. So,
drawing power would be restricted to sanc<oned limit i.e., ` 48,000/-.
Ch-15 Coop Society
Sec<on 77 of Mul<-State Coopera<ve Socie<es Act, 2002 states that the Central Government may at any <me by order
direct that a special audit of the Mul<-State Co-Opera<ve Society’s accounts for such period or periods as may be
specified in the order, shall be conducted. Further, it may by the same or a different order appoint either a Chartered
Accountant or the Mul<-State Co-Opera<ve Society’s auditor himself to conduct special audit. Under which
circumstances such power can be exercised by the Central Government?

The Central government has power to order special audit of Mul<-State Coopera<ve Society’s Accounts where it is of
the opinion: -
a. that the affairs of any mul<-state co-opera<ve society are not being managed in accordance with self-help and
mutual deed and co-opera<ve principles or prudent commercial prac<ces or with sound business principles or
b. that any mul<-state co-opera<ve society is being managed in a manner likely to cause serious injury or damage
to the interests of the trade industry or business to which it pertains or
c. that the financial posi<on of any mul<-state co-opera<ve society is such as to endanger its solvency.

Ch-18 Audit of Items of FS

The financial statements of XYZ Limited show long-term borrowings from the banks, financial ins<tu<ons, leasing, and
hire purchase companies. Addi<onally, the company has issued debentures to its 1000 members to raise funds in
accordance with the provisions of the Companies Act, 2013. The money raised by issuing debentures is also reflected
in long-term borrowings. As the statutory auditor of XYZ Limited, CA X wants to verify that all borrowings on the
balance sheet represent valid claims by banks or other third par<es. Suggest a few audit procedures in this regard.

The audit procedures required to be undertaken by CA X while audi<ng borrowings is as follows:

• Review board minutes for approval of new lending agreements. During review, ensure that new loan agreements
or bond issuances were authorized. Ensure that significant debt commitments are approved by the board of
directors.
• Check the details of loans recorded (interest rate, nature and repayment terms) to the loan agreement. Verify
that borrowing limits, if any, imposed by the agreements are not exceeded.
• Roll out and obtain independent balance confirma<ons (SA 505) in respect of all the borrowings from the lender
(banks/ financial ins<tu<ons etc.).
• Verify the details of leases and hire purchase creditors recorded to underlying contracts/agreements.
• In case of Debentures, examine trust deed for terms and dates of redemp<on, borrowing restric<ons and
compliance with covenants.
• When debt is re<red, ensure that a discharge is received on assets securing the debt.
• Obtain Wrieen Representa<on that all the liabili<es which have been recorded represent a valid claim by the
lenders

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