CASE SCENARIO - 1

Sunlight Ltd. is a company engaged in the manufacture of solar panels. It is one

of the largest solar panel manufacturing companies in India. With over a decade
of experience, the company has implemented projects across the length and
breadth of the country in both commercial and residen al sectors. For the F.Y.
2023-24, Singhania & Co., an LLP of Chartered Accountants was appointed as
the statutory auditors of the company. The audit work for the F.Y. 2023-24 is on
the verge of comple on.
During the audit, one of the audit team members, Mr. Rishab, was asked by the
engagement partner, to verify the ownership asser on of the inventories held
by the company. To verify such asser on, Mr. Rishab asked the concerned
official of the company to make arrangements for the a endance of the audit
team at the physical inventory count being conducted by the company. Mr.
Rishab was of the view that only by a ending the physical inventory count, the
ownership asser on with respect to inventory of the company can be checked.
He discussed his view with another audit team member Ms. Soni who had a
different point of view for such situa on. According to her, the correct course of
ac on in this regard is that Mr. Rishab should verify the purchase requisi on,
purchase order, receiving reports, vendor invoices, inventory records, payment
file etc. as ownership asser on cannot be verified by a ending the physical
inventory count only.
Further, while verifying the creditors and purchases balances, Ms. Soni decided
to check the creditors balance on sample basis with a sample size of 50 creditors
as she was sa sfied with the Internal Control Procedures applied for the same.
She asked the management to provide the list of all the 550 creditors. For
deciding the sample, she took the sampling interval of every 11th creditor
balance and in this way created a sample size of 50 creditors balance for the
purpose of audit.
During the audit, while verifying the share capital balance of the company, Mr.
Rishab and Ms. Soni no ced that there has been no change in the share capital
raised by the company. Ms. Soni was of the view that since there has been no
change in the share capital of the company, the audit team is not required to
obtain any evidence with respect to the share capital balance. However, Mr.
Rishab opined that they should obtain audit evidence even if there is no change
in the company’s capital structure during the year. According to him such
evidence can be a wri en confirma on from the accounts manager.
Before finalising the audit report, the Engagement Partner asked Mr. Rishab to
coordinate with the client for reques ng wri en representa on from the
management of the company with respect to the management responsibili es
and informa on provided by the management. Mr. Rishab did not accept the
representa on given by the management as the same contained a qualifying
language to the effect that representa ons are made to the best of its
knowledge and belief, which according to Mr. Rishab was not reasonable to
accept.
Since the engagement partner was about to finalise and sign the audit report,
Mr. Rishab and Ms. Soni were discussing the various requirements of assembly
of the final audit file and the changes that can be made in the audit
documenta on during the final assembly process. According to Ms. Soni only
changes of administra ve nature can be made, like dele ng superseded
documenta on, sor ng, colla ng and cross-referencing working papers and
changes like recalcula on of deprecia on etc. should not be made during such
final assembly process.
Based on the above facts, answer the following MCQs:
1. While verifying the inventory as asked by the engagement partner, which
specific asser on can be best verified by following the specific audit
procedure considered appropriate by Mr. Rishab?
(a) Rights and Obliga ons.
(b) Existence and condi on.
(c) Valua on.
(d) Presenta on & Disclosure.
2. While selec ng the sample for verifica on of creditors, which method of
sampling has been applied by Ms. Soni?
(a) Stra fied sampling.
(b) Haphazard sampling.
(c) Systema c sampling.
(d) Simple random sampling.
3. What is the best course of ac on to be taken by Mr. Rishab for verifying
the asser on with respect to the inventory of the company, as asked by
the engagement partner?
(a) Mr. Rishab should a end the physical inventory count as the only audit
procedure.
(b) Mr. Rishab should agree with Ms. Soni and follow the course of ac on
as suggested by her.
(c) Mr. Rishab should ask the management to provide a wri en
representa on in this regard as it is a sufficient and appropriate audit
evidence.
(d) Mr. Rishab should perform test count and inspec on while a ending
the physical inventory count to verify the asser on as requested by the
engagement partner.
4. With respect to verifica on of the share capital balance of the company,
which of the following is the most appropriate?
(a) The point of view of Ms. Soni is correct.
 (b) The point of view of Mr. Rishab is correct.
(c) The point of view of Mr. Rishab is partly correct as wri en confirma on
should be obtained from the Company Secretary.
(d) The point of view of Ms. Soni is partly correct as no evidence is
required to be obtained if the same audit firm has conducted the audit of
the previous year thereby verifying the closing balance of share capital in
the previous year, which becomes the opening balance of the share
capital for the year under audit.
5. Whether non-acceptance of the wri en representa on by Mr. Rishab is
correct?
(a) The non-acceptance of wri en representa on by Mr. Rishab is not
correct as the management of the company has the sole discre on to
decide as to which language is used or what limita ons are imposed in the
wri en representa on provided to the auditor.
(b) The non-acceptance of wri en representa on by Mr. Rishab is correct
as it is not reasonable for the auditor to accept any qualifying language in
the wri en representa ons given by the management.
(c) The non-acceptance of wri en representa on by Mr. Rishab is correct
as SA 580 requires the auditor to accept the wri en representa on only
if it is in the language as used in the le er of audit engagement.
(d) The non-acceptance of wri en representa on by Mr. Rishab is not
correct as it is reasonable for the auditor to accept such qualifying
language if the auditor is sa sfied that the representa ons are being
made by those with appropriate responsibili es and knowledge of the
ma ers included in the representa ons.
6. Whether the view of Ms. Soni regarding assembly of the final audit file is
correct?
(a) View of Ms. Soni is not correct as changes which are administra ve in
nature, cannot be made in the audit documenta on during the final
assembly process.
(b) View of Ms. Soni is correct.
 (c) View of Ms. Soni is not correct as changes in the form of recalcula on
of deprecia on amount can be made in the audit documenta on during
the final assembly process.
(d) View of Ms. Soni is partly correct as during the final assembly process
changes like dele ng superseded documents cannot be made.
CASE SCENARIO - 2
CA F has been appointed as an auditor of a manufacturing en ty. Pursuant to
appointment, CA F planned to assess the risk of material misstatement. During
this process, CA F observed that en ty has iden fied various controls to mi gate
the risk. The en ty has implemented a control (named TARGET) whose objec ve
is to ensure that produc on systems are processed to meet financial repor ng
objec ves.
On comple on of risk assessment procedure, CA F was wandering as to how he
can verify the existence of related party rela onships and transac ons. So, he
consulted one of his colleagues, CA Z, who suggested following ways to iden fy
the same:
(1) Informa on supplied by the en ty to regulatory authori es.
(2) En ty's income tax returns.
(3) Inventory records maintained by the en ty.
(4) Life insurance policies acquired by the en ty. On-going through the financial
statement provided by the en ty, CA F observed that the en ty has significantly
borrowed the amount during the financial year 2023-24. CA F wanted to ensure
that all borrowing on the balance sheet represent valid claims by banks or other
third par es. Accordingly, he performed the following procedures:
(i) Reviewed subsequent transac ons a er the end of the repor ng period.
(ii) Recomputed the interest on borrowing.
(iii) Reviewed board minutes for approval of new lending agreements.
(iv) Agreed loan balance and loan payables to the loan agreement.
CA F decided to perform analy cal procedures to obtain audit evidence as to
overall reasonableness of purchase quan ty and price. For this, CA F scru nised
raw material consumed as per manufacturing account and compared the same
with previous years with closing stock. The varia ons observed were discussed
with the management of the en ty.
Based on the above facts, answer the following MCQs:
7. Control "TARGET" will be categorised in which of the following?
(a) Data center and network opera ons.
(b) Program Control.
(c) Processing control.
(d) Applica on Control
8. Which of the procedures performed by CA F is suitable for sa sfac on of
concern regarding borrowing?
(a) Procedure (i).
(b) Procedure (ii).
(c) Procedure (iii).
(d) Procedure (iv).
9. Do you agree with all the ways suggested by CA Z to CA F?
(a) No. Sugges on (i) is not correct.
(b) No. Sugges on (ii) is not correct.
(c) No. Sugges on (iii) is not correct.
(d) No. Sugges on (iv) is not correct.
[Link] F performed which of the following analy cal procedures to obtain the
audit evidence with respect to the overall reasonableness of purchase
quan ty and price of raw material?
(a) Consump on Analysis
(b) Stock Composi on Analysis.
(c) Trend Analysis.
(d) Ra o Analysis.
CASE SCENARIO - 3
DS & Co., Chartered Accountants, are statutory auditors of SAR Industries Pvt.
Ltd., a company engaged in manufacturing business since 2018. The company
operates from rented premises, and it does not have building of its own. It had
upgraded its machinery last me in 2020. Except interest in this company,
promoters, directors, key managerial persons and their rela ves do not have
interest or ownership in any other en ty. Also, the company does not enter into
any business dealings with promoters, directors, key managerial persons and
their rela ves. The directors and key managerial persons get only reasonable
remunera on from the company. Though the company has an internal control
system in place, it has not appointed an internal auditor. It is also not
mandatorily required to make such an appointment under the provisions of the
Companies Act, 2013.
DS & Co. have accepted an audit of the above company for the year 2023-24 for
the first me. Promoters and directors of the company are known to
engagement partner only socially for quite some me. However, it is for the first
me that any type of professional work related to this company has been
accepted by them.
While formula ng audit plan for the company, CA D (engagement partner) has
planned certain risk assessment procedures and further audit procedures
consis ng of tests of controls and substan ve procedures in rela on to different
areas.
The following is extract of financial informa on of the company: - (figures in
rupees crores)
The PPE items consist of machinery only. While planning procedures in respect
of Property, Plant and Equipment, auditor has included audit procedures like
inspec ng and reviewing company’s plan for performing physical verifica on of
PPE, assessing deprecia on method used, verifying cost of PPE items acquired
during the year with purchase bills and recalcula on of deprecia on charged in
statement of profit and loss.
Further, while performing risk assessment procedures to iden fy risk of material
misstatements in financial statements, engagement partner has come to no ce
that there is considerable varia on in gross profit ra o as compared to last year.
During performance of substan ve procedures, he has also studied data of
purchases and sales of the company during the year under audit and has also
compared such data with preceding year and earlier years also.
Based on the above facts, answer the following MCQs:
[Link] in view the descrip on provided in the case scenario, which of
the following statements is likely to be most appropriate?
(a) Engagement partner is known socially to promoters and directors of
the company. The situa on mandatorily involves advocacy threat cas ng
a doubt on auditor’s independence. Irrespec ve of this, detec on risk in
engagement is low.
(b) Engagement partner is known socially to promoters and directors of
the company. The situa on mandatorily involves familiarity threat cas ng
a doubt on auditor’s independence. Irrespec ve of this, detec on risk in
engagement is high.
(c) The situa on reflected in the case scenario may not cons tute threat
to independence of auditor mandatorily. Irrespec ve of this, detec on
risk in engagement is low.
(d) The situa on reflected in the case scenario may not cons tute threat
to independence of auditor mandatorily. Irrespec ve of this, detec on
risk in engagement is high.
[Link] D has included in the audit plan certain procedures in respect of PPE
items. Which of the following audit procedure included in audit plan is
likely to be least relevant?
 (a) Inspec ng and reviewing company’s plan for physical verifica on of
PPE.
(b) Assessing deprecia on method used.
(c) Verifying cost of PPE items acquired during the year with purchase bills.
(d) Recalcula on of deprecia on charged in statement of profit and loss.
[Link] of the following statements is likely to be most suitable to explain
the fact rela ng to varia on in gross profit ra o as compared to last year?
(a) Gross profit ra o has decreased in year 2023-24 as compared to year
2022-23. It may be due to the fact that sales prices may have been
reduced by the company to procure more orders.
(b) Gross profit ra o has increased in year 2023-24 as compared to year
2022-23. It may be due to the reason that the cost of materials purchased
by company could have decreased.
(c) Gross profit ra o has decreased in year 2023-24 as compared to year
2022-23. It may be due to the fact that office staff salary engaged in
administra ve func ons and office maintenance expenditure could have
increased.
(d) Gross profit ra o has decreased in year 2023-24 as compared to year
2022-23. It may be due to the reason that the company has not made an
allowance for obsolescence in respect of inventories during the year.

[Link] D has also studied purchases and sales data of the company during the
year and has also compared such data with the preceding year and earlier
years also. It is an example of __________.

(a) Ra o analysis forming part of substan ve analy cal procedures.

(b) Trend analysis forming part of substan ve analy cal procedures.

(c) Reasonable test forming part of substan ve analy cal procedures.

(d) Structural modelling forming part of substan ve analy cal procedures.

[Link] the whole case scenario, iden fy which of the following
combina on of Standards is not proper for their likely relevance in
performing and comple ng the above engagement?
(a) SQC 1, SA 220, SA 501, SA 505.
(b) SA 550, SA 510, SA 220, SA 610.
(c) SA 700, SA 510, SA 220, SA 500.
(d) SQC 1, SA 700.