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Scanner is published in India by Shuchita Prakashan (P) Ltd. 25/19, L.I.C. Colony, Tagore Town, Prayagraj -
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Acknowledgement ___________________________________ We humbly praise God, the Almighty
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Dr. Arpita Ghose Gourab Ghose

In this edition
Questions Solutions
May - 2010

May - 2010to to November - 2019 Duly incorporated in chapters

May - 2019 Duly incorporated in chapters

November - 2019 on companion.sauda.com

v

CA Inter Group - II

(New Syllabus)

Paper 6 - Auditing and Assurance

Authors: Editors : Dr. Arpita Ghose

Gourab Ghose
Prof. Arun Kumar

CA Mohit Bahal CS (Dr.) Himanshu Srivastava

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Sources of Questions in this Scanner_______________
CA Inter Gr. II
Paper 6 - Auditing and Assurance
Ch. Chapter Name
No.
1. Nature, Objective and Scope of Audit

2. Audit Strategy, Audit Planning and Audit Programme

3. Audit Documentation and Audit Evidence

4. Risk Assessment and Internal Control

5. Fraud and Responsibilities of the Auditor in this regard

6. Audit in an Automated Environment

7. Audit Sampling
8. Analytical Procedures
9A. Audit of Balance Sheet Items

Sources of Questions from Old Course

CA IPCC Paper- 6, Chapter- 1, 2 & 3 CA IPCC Paper- 6, Chapter- 2 & 3

CA IPCC Paper- 6, Chapter- 1, 2, 3 & 15 CA IPCC Paper- 6, Chapter- 3 & 4 CA IPCC Paper- 6, Chapter- 1

CA Final Paper- 6 Chapter- 6 CA IPCC Paper- 6 Chapter- 3 CA IPCC Paper- 6 Chapter- 2 & 3 CA IPCC Paper- 6, Chapter- 5 to 14

9B. Audit of Statement of P & L Accounts Items CA IPCC Paper- 6, Chapter- 5 to 14 CA IPCC Paper- 6 Chapter- 16 &17 CA IPCC Paper- 6 Chapter- 17
CA Final Paper- 3 Chapter- 12 CA IPCC Paper- 6 Chapter- 19 CA IPCC Paper- 6 Chapter- 20 CA IPCC Paper- 6 Chapter- 21 CA Final Paper- 3 Chapter-
14 CA IPCC Paper- 6, Chapter- 22 10. Company Audit
11. Audit Report
12. Audit of Banks
13. Government Audit and Audit of Local Bodies 14. Audit of NGO
15. Miscellaneous Audit
16. Audit of Co-Operative Societies
17. SA and Guidance Notes

Notes:
1. When Questions/Chapters are taken from different levels of same course (e.g. from Final level in papers of Inter, or from Inter level in papers of Final)
or from different courses (e.g. from CS or CMA in CA) then following are not prepared in the Scanner for such Questions/Chapters:
(a) Examination Trend Analysis
(b) Line Chart Showing Relative Importance of Chapters
(c) Table Showing Importance of Chapter on the Basis of Marks
(d) Bar Chart in Chapters
(e) Repeatedly Asked Questions
2. When new syllabus is introduced in a Course, then full question papers of only new course examinations are added at the end of Scanner.

viii

Preface to Scanner___________________________

A dream does not become reality through magic, it takes sweat, determination and hard work.
It gives us immense pleasure and satisfaction to present the Thirty second edition of Scanner for CA Inter Group - II
(New Syllabus) Paper 6 - Auditing and Assurance.

This book contains questions and solution of more than 20 attempts along with important RTP and Practice
Questions.

The unique feature of this book is 3 way Scanned past year Question and Answers
- Chapter Wise Scanned
- Topic Wise Scanned
- Each Topic Scanned in ascending order of examination/year.

Each question indicates its category i.e. Objective, Short Notes, Distinguish Between, Descriptive and Practical with
marks. Another unique feature of this book is the Time Manager. It will help the students to plan and manage their
time to leading them towards grand success.

It is strictly according to latest Syllabus of CA-Inter as prescribed by ICAI. We sincerely hope that this book will be
able to fulfill the needs of the students and lead them towards success. Suggestions for further improvement are
solicited.

With Best Wishes

Arpita & Gourab
e-mail: ghose.gourab@gmail.com

UNIQUE FEATURES OF THIS EDITION

☐ An Examination Trend Analysis for question paper based contents of last five examinations before the paper.
☐ Questions are arranged according to the subject/topic in ascending order of examinations/years.
☐ Graph for every chapter, showing marks allotment for last twenty examinations amongst Short Notes,
Distinguish Between, Descriptive Questions and Practical Questions.
☐ (Or) for Optional Questions.
☐ "{C}" for Compulsory Questions.
☐ Analytical Classification of every Chapter in Four Categories: (1) Short Notes,
(2) Distinguish Between,
(3) Descriptive Questions and
(4) Practical Questions.
☐ 100% Correct Answers of Practical Questions.
☐ Frequency table showing distribution of marks & compulsory questions to identify important chapters.
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☐ Quick Look Weightage Analysis.
☐ Complete Question and Solution.
☐ Complete Question Paper of May, 2019 and November, 2019.
☐ Complete Test Series.
☐ Pleasant get-up.

x Dedicated To _______________________________________

Late Brajendra Lal Ghose & Late Ardhendu Ghosh

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Contents________________________________
Paper - 6 ______________________Auditing and Assurance

Chapter Name Page No. ☐ Study Material Based Contents 6.1

☐ Syllabus 6.3
☐ Examination Trend Analysis 6.8
☐ Line Chart Showing Relative Importance of Chapters 6.14
☐ Table Showing Importance of Chapter on the Basis of Marks 6.15
☐ Legends for the Graphs 6.16
☐ List of Standards on Auditing 6.17
1. Nature, Objective and Scope of Audit 6.19
2. Audit Strategy, Audit Planning and Audit Programme 6.62
3. Audit Documentation and Audit Evidence 6.97
4. Risk Assessment and Internal Control 6.152
5. Fraud and Responsibilities of the Auditor in this Regard 6.226
6. Audit in an Automated Environment 6.247
7. Audit Sampling 6.267
8. Analytical Procedures 6.283
9A. Audit of Balance Sheet Items 6.296
9B. Audit of Statement of P&L Accounts Items 6.356
10. Company Audit 6.410
11. Audit Report 6.487
12. Audit of Banks 6.517
13. Government Audit and Audit of Local Bodies 6.547
14. Audit of NGO 6.575
15. Miscellaneous Audit 6.583
16. Audit of Co-operative Societies 6.615
17. SA and Guidance Notes 6.627
☹ Question Paper of May, 2019 6.658
☹ Question Paper of November, 2019 6.661
☹ Test Series 6.665

Praise for Scanner___________________________________

Solving or practicing questions at all three level of Chartered Accountancy course is of utmost importance. I solved
scanner of Shuchita Prakashan at the foundation level which contained ample number of questions to have a grip
over the subject. It was so helpful that most of the questions in the main exam were already known to me. Nayan
Goyal, Bhopal

The scanner has been a great help during the final stages of my preparation. The cohesiveness of the scanner and its
solutions really made it considerably easy for me to revise and check my progress.

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questions. I went through the scanner 2-3 times which helped me alot.

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acts as a support and confidence booster. Sushil Kumar, Patna

Scanner is the best and the most important book for the preparation of any professional examination. According to
my view, without the help of Scanner, preparation by any student is incomplete. Scanner and its contents make
every student fully prepared for examinations.

Manisha Singhania, Jaipur xv

Roop Chand Kochar, Jodhpur towards the requirements and
STUDY MATERIALBASED CONTENTS

Paper 6 Auditing and Assurance Syllabus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3

Examination Trend Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8
Line Chart Showing Relative Importance of Chapters . . . . . . . . . 6.14
Table Showing Importance of Chapter on the Basis of Marks 6.15
Legends for the Graphs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.16
List of Standards on Auditing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.17

Study Material Based Contents

C.N. Scanner
1. (Chapter 1)
2. (Chapter 2)

Study Chapters Pg. No. Nature, Objective and Scope of Audit . . . . 6.19

A u d i t S t r a t e g y , A u d i t P l a n n i n g a n d Audit Programme. . . . . . . . . . . . . . . . . . . . . 6.62

3. (Chapter 3)
4. (Chapter 4)
5. (Chapter 5)
Audit Documentation and Audit Evidence . 6.97
Risk Assessment and Internal Control. . . . 6.152

Fraud and Responsibilities of the Auditor in this Regard . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.226

6. (Chapter 6)
7. (Chapter 7)
8. (Chapter 8)
9A. (Chapter 9)
9B. (Chapter 9)
Audit in an Automated Environment . . . . . 6.247
Audit Sampling . . . . . . . . . . . . . . . . . . . . . 6.267
Analytical Procedures . . . . . . . . . . . . . . . . 6.283
Audit of Balance Sheet Items . . . . . . . . . . 6.296
Audit of Statement of P&L Accounts Items 6.356

10. (Chapter 10) Company Audit . . . . . . . . . . . . . . . . . . . . . 6.410

11. (Chapter 11) Audit Report. . . . . . . . . . . . . . . . . . . . . . . . 6.487
12. (Chapter 12) Audit of Banks . . . . . . . . . . . . . . . . . . . . . . 6.517
13. (Chapter 13 Government Audit and Audit of Local Bodies 6.547
Unit 1 & 2)
14. (Chapter 13 Audit of NGO . . . . . . . . . . . . . . . . . . . . . . . 6.575
Unit 3)
15. (Chapter 13 Miscellaneous Audit. . . . . . . . . . . . . . . . . . 6.583
Unit 4 to 12)
16. (Chapter 13) Audit of Co-operative Societies . . . . . . . . 6.615
17. SA and Guidance Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 6.627
☹ Question Paper of May, 2019 . . . . . . . . . . . . . . . . . . . . . . 6.658
☹ Question Paper of November, 2019 . . . . . . . . . . . . . . . . . 6.661
☹ Test Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.665

SYLLABUS
Paper 6 Auditing and Assurance (100 marks) (One Paper - Three Hours)

Objective:
To develop an understanding of the concepts in auditing and of the generally accepted auditing procedures,
techniques and skills and acquire the ability to apply the same in audit and attestation engagements.
Contents
1. Nature, Objective and Scope of Audit

Auditing Concepts: Nature, objective and scope of Audit; Relationship of auditing with other disciplines;
Standard Setting Process: Overview, Standard-setting process, Role of International Auditing and Assurance
Standards Board (IAASB) & Auditing and Assurance Standards Board (AASB); Standards on Auditing, Guidance
Note(s) issued by the ICAI;
Engagement Standards: Qualities of Auditor, Elements of System of Quality Control (SQC 1 Quality Control for
Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related
Services Engagements); Ethical requirements relating to an audit of financial statements; Inherent Limitations of an
audit (SA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with
Standards on Auditing); Preconditions for an audit; Audit Engagement; Agreement on Audit Engagement Terms;
Terms of Engagement in Recurring Audits (SA 210 Agreeing the Terms of Audit Engagements); Leadership
Responsibilities for Quality on Audits; Concept of Auditor’s Independence; Threats to Independence; Acceptance
and Continuance of Client Relationships and Audit Engagements (SA 220 Quality Control for an Audit of Financial
Statements).

2. Audit Strategy, Audit Planning and Audit Programme Audit Strategy; Audit planning (SA 300 Planning an
Audit of Financial statements); Audit programme; Development of Audit Plan and Programme, Control of quality of
audit work - Delegation and supervision of audit work; Materiality and Audit Plan; Revision of Materiality;
Documenting the Materiality; Performance Materiality (SA 320 Materiality in Planning and Performing an Audit).

3. Audit Documentation and Audit Evidence

Concept of Audit Documentation; Nature and Purpose of Audit Documentation; Form, Content and Extent of Audit
Documentation; Completion Memorandum; Ownership and custody of Audit Documentation (SA 230 Audit
Documentation); Audit procedures for obtaining audit evidence; Sources of evidence; Relevance and Reliability of
audit evidence; Sufficient appropriate audit evidence, Evaluation of Audit Evidence (SA 500 Audit Evidence);
Written Representations as Audit Evidence; Objective of Auditor regarding Written Representation; Management
from whom Written Representations may be requested; Written Representations about Management’s
Responsibilities (SA 580 Written Representations); Obtaining evidence of existence of inventory; Audit procedure
to identify litigation and claims (SA 501 Audit Evidence
- Specific Considerations for Selected Items); External confirmation procedures; Management’s refusal to allow the
auditor to send a confirmation request; Negative Confirmations (SA 505 External Confirmations); Audit evidence
about opening balances; Accounting policies relating to opening balances; Reporting with regard to opening
balances (SA 510 Initial Audit Engagements-Opening Balances); Meaning of Related Party; Nature of Related Party
Relationships and Transactions; Understanding the Entity’s Related Party Relationships and Transactions (SA 550
Related Parties); Meaning of Subsequent Events; Auditor’s obligations in different situations of subsequent events
(SA 560 Subsequent Events); Responsibilities of the Auditor with regard to Going Concern Assumption; Objectives
of the Auditor regarding Going Concern; Events or Conditions that may cast doubt about Going Concern
Assumption; Audit Procedures when events or conditions are identified (SA 570 Going Concern).

4. Risk Assessment and Internal Control: Audit Risk, Identifying and Assessing the Risk of Material
Misstatement, Risk Assessment procedures; Understanding the entity and its environment; Internal control,
Documenting the Risks; Evaluation of internal control system; Testing of Internal control; Internal Control and IT
Environment (SA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the
Entity and Its Environment); Materiality and audit risk (SA 320 Materiality in Planning and Performing an Audit);
Internal audit, Basics of Standards on Internal Audit (SIAs) issued by the ICAI; Basics of Internal Financial Control
and reporting requirements; Distinction between Internal Financial Control and Internal Control over Financial
Reporting.

5. Fraud and Responsibilities of the Auditor in this Regard: Responsibility for the Prevention and Detection of
Fraud; Fraud Risk Factors; Risks of Material Misstatement Due to Fraud; Communication of Fraud (SA 240 The
Auditor’s responsibilities Relating to Fraud in an Audit of Financial Statements); Provisions of the Companies Act
2013 relating to fraud and rules thereunder including reporting requirements under CARO.

6. Audit in an Automated Environment: Key features, Impact of IT related Risks, Impact on Controls, Internal
Financial Controls as per Regulatory requirements, Types of Controls, Audit approach, Understanding and
documenting Automated environment, Testing methods, data analytics for audit, assessing and reporting audit
findings.

7. Audit Sampling: Meaning of Audit Sampling; Designing an audit sample; Types of sampling; Sample Size and
selection of items for testing; Sample selection method (SA 530 Audit Sampling).

8. Analytical Procedures: Meaning, nature, purpose and timing of analytical procedures; Substantive analytical
procedures, Designing and performing analytical procedures prior to Audit; investigating the results of analytical
procedures (SA 520 Analytical Procedures).

9. Audit of Items of Financial Statements: Audit of sale of Products and Services; Audit of Interest Income,
Rental Income, Dividend Income, Net gain/loss on sale of Investments etc.
Audit of Purchases, Employee benefits expenses, Depreciation, Interest expense, Expenditure on Power & Fuel,
Rent, Repair to building, Repair to Machinery, Insurance, Taxes, Travelling Expenses, Miscellaneous Expenses etc.
Audit of Share Capital, Reserve and Surplus, Long Term Borrowings, Trade Payables, Provisions, Short Term
Borrowings and Other Current Liabilities. Audit of Land, Buildings, Plant and Equipment, Furniture and Fixtures,
Vehicles, Office Equipments, Goodwill, Brand/Trademarks, Computer Software etc. Audit of Loan and Advances,
Trade Receivable, Inventories, Cash and Cash Equivalent, Other Current Assets. Audit of Contingent Liabilities.
(The list of items is illustrative only)

10. The Company Audit: Eligibility, Qualifications and Disqualifications of Auditors; Appointment of auditors;
Removal of auditors; Remuneration of Auditors; Powers and duties of auditors; Branch audit; Joint audit; Reporting
requirements under the Companies Act, 2013 including CARO; Other Important Provisions under the Companies
Act, 2013 relating to Audit and Auditors and Rules made thereunder.

11. Audit Report: Forming an opinion on the Financial Statements; Auditor’s Report- basic elements (SA 700
Forming an Opinion and Reporting on Financial Statements); Types of Modified Opinion; Circumstances When a
Modification to the Auditor’s Opinion is Required, Qualified, Adverse, Disclaimer of Opinion (SA 705
Modification to the Opinion in the Independent Auditor’s Report); Qualification, Disclaimer, Adverse opinion, SA
706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report; Nature of
Comparative Information; Corresponding Figure; Comparative Financial Statements (SA 710 Comparative
Information – Corresponding Figures and Comparative Financial Statements).

12. Audit of Banks: Understanding of accounting system in Banks, Audit Approach, Audit of Revenue items,
Special Consideration in Bank Audit with emphasis on Advances and NPAs.

13. Audit of Different Types of Entities: Appointment of Auditor, Audit Procedure and Audit Report in respect of
different Category of Entities: Government; Local bodies and Not-for-profit organizations; Partnership Firms, Audit
of different type of undertakings, i.e., Educational institutions, Hotels, Clubs, Hospitals Basics of Limited Liability
Partnerships (LLPs) audit and Co-operative Societies Audit.

Note:
(i) The specific inclusions/exclusions, in any topic covered in the syllabus, will be effected every year by way of
Study Guidelines.

(ii) The provisions of the Companies Act, 1956 which are still in force would form part of the syllabus till the time
their corresponding or new provisions of the Companies Act, 2013 are enforced.

(iii) If new legislations/ Standards on Auditing/Guidance Notes/Statements are enacted in place of the existing
legislations, the syllabus would include the corresponding provisions of such new legislations with effect from a
date notified by the Institute. The changes in this regard would also form part of Study Guidelines.

Examination Trend Analysis

Paper 6 Auditing and Assurance Question Paper Based Contents of Last Five Examinations
Years Q. No. CompulChapter Marks Category Page sory No. No. Name

2017 1. (a) {C} 11 Audit Report 5 Descriptive 503

Nov. 2. (c) 10 Company Audit 2 Objective 461
(e) 10 " " " 2 " 459
4. (b) 10 " " " 6 Descriptive 413
7. (a) 13 Government Audit and Audit of
Local Bodies 4 Short Notes 558
(c) 10 Company Audit 4 " 455
2018 1. (a) {C} 4 Risk Assessment and Internal May Control 2 (b) {C} 10 Company Audit 2 (c) {C} 3 Audit Documentation and Audit Evidence 2 (d) {C}
4 Risk Assessment and Internal Control 2 (e) {C} 8 Analytical Procedures 2 (f) {C} 10 Company Audit 2 (g) {C} 10 " " " 2 (h) {C} 11 Audit Report 2 (i)
{C} 7 Audit Sampling 2 (j) {C} 10 Company Audit 2 2. (a)(i) 9A Audit of Balance Sheet Items 1 (ii) 9A " " " 1 (iii) 9A " " " 1 (iv) 9A " " " 1 (v) 9A " " " 1
(b) 9B Audit of Statement of P&L Accounts Items 5 (c) 17 SA and Guidance Notes 5 (d) 6 A u d i t i n a n A u t o m a t e d Environment 5 3. (a) 3 Audit
Documentation and Audit Evidence 5 (b) 9B Audit of Statement of P&L Accounts Items 5 (c) 9B " " " " " " 10 4. (a) 2 Audit Strategy, Audit Planning and
Audit Programme 5 (b) 10 Company Audit 4 (c) 4 Risk Assessment and Internal Control 6 (d) 8 Analytical Procedures 5 5. (a) 11 Audit Report 5 (b) 10
Company Audit 5 (c) 4 Risk Assessment and Internal Control 5 Objective 207
" 416

" 107

" 170
" 284
" 425
" 420
" 495
Objective 270
" 459
Descriptive 298
" 297
" 298
" 299
Descriptive 306

" 403 " 638

" 252
" 126
" 388 " 370
" 68 " 447

" 162
" 287
" 505
Practical 426

" 183
(d) 5 Fraud and Responsibilities of
the Auditor in this Regard 5 " 239
6. (a) 10 Company Audit 5 " 417
(b) 16 Audit of Co-operative Societies 5 " 618
(c) 12 Audit of Banks 5 Descriptive 524
(d) 13 Government Audit and Audit of
Local Bodies 5 " 563
(e) 6 A u d i t i n a n A u t o m a t e d
Environment 5 " 248
2018 1. (a) {C} 17 SA and Guidance Notes 2 Nov. (b) {C} 2 Audit Strategy, Audit Planning and Audit Programme 2 (c) {C} 17 SA and Guidance Notes 2
(d) {C} 17 " " " " 2 (e) {C} 12 Audit of Banks 2 (f) {C} 17 SA and Guidance Notes 2 (g) {C} 10 Company Audit 2 (h) {C} 11 Audit Report 2 (i) {C} 6 A
u d i t i n a n A u t o m a t e d Environment 2 (j) {C} 11 Audit Report 2 2. (a) 7 Audit Sampling 5 (b) 2 Audit Strategy, Audit Planning and Audit
Programme 5 (c) 17 SA and Guidance Notes 5 (d) 6 A u d i t i n a n A u t o m a t e d Environment 5 3. (b) 9B Audit of Statement of P&L Accounts Items 5
(c) 9A Audit of Balance Sheet Items 10 4. (a) 2 Audit Strategy, Audit Planning and Audit Programme 5 (b) 10 Company Audit 4 (d) 4 Risk Assessment
and Internal Control 5 5. (a) 11 Audit Report 5 (b) 10 Company Audit 5 (c) 9A Audit of Balance Sheet Items 5 (d) 5 Fraud and Responsibilities of the
Auditor in this Regard 5 6. (a) 10 Company Audit 5 (b) 16 Audit of Co-operative Societies 5 (c) 4 Risk Assessment and Internal Control 5 (d) 13
Government Audit and Audit of Local Bodies 5 (e) 12 Audit of Banks 5 Objective 635

" 69
" 646
" 644
" 530
Objective 635
" 426
" 496

" 255
" 496
Descriptive 271

" 64 " 635

" 258
Descriptive 399 " 299
Descriptive 65 " 448

Practical 210
Descriptive 489
" 461
" 325

" 237
" 416
" 624

" 181
" 559 Practical 531

2019 1. (a) 11 Audit Report 2

May (b) 5 Fraud and Responsibilities of the Auditor in this Regard 2
(c) 13 Government Audit and Audit of Local Bodies 2
(d) 10 Company Audit 2
(e) 12 Audit of Banks 2
(f) 15 Miscellaneous Audit 2
(g) 3 Audit Documentation and Audit Evidence 2
(h) 10 Company Audit 2
2. (a) 7 Audit Sampling 4
(b) 2 Audit Strategy, Audit Planning and Audit Programme 3
(c) 1 Nature, Objective and Scope of Audit 3
(d) 2 Audit Strategy, Audit Planning and Audit Programme 4
3. (a) 4 Risk Assessment and Internal Control 4
(b) 4 " " " " " 3
(c) 1 Nature, Objective and Scope of Audit 3
(d) 3 Audit Documentation and Audit Evidence 3
4. (a) 9A Audit of Balance Sheet Items 4
(b) 9B Audit of Statement of P&L Accounts Items 4
(c) 9B " " " 3
(d) 9A Audit of Balance Sheet Items 3
5. (a) 10 Company Audit 4
(b) 10 Company Audit 4
(c) 10 " " " 3
(d) 10 " " " 3
6. (a) 12 Audit of Banks 4
(b) 15 Miscellaneous Audit 4
(Or) (b) 12 Audit of Banks 4
(c) 16 Audit of Co-operative Societies 3
(d) 13 Government Audit and Audit of Local Bodies 3
Objective 496

" 231

" 553
" 456
" 519
Objective 589

" 125
" 462
Descriptive 272

" 75
" 38
" 66
Practical 160 Descriptive 198
" 34
" 107 Practical 341

Descriptive 377
" 385
" 306
Practical 435
Descriptive 438
" 439
" 448
Descriptive 518
" 610
" 523
Practical 625

Descriptive 553 2019 1. (a) {C} 4 Risk Assessment and Internal Nov. Control 2

(b) {C} 2 Audit Strategy, Audit Planning and Audit Programme 2

(c) {C} 17 SA and Guidance Notes 2
(d) {C} 10 Company Audit 2
(e) {C} 10 " " " 2
(f) {C} 7 Audit Sampling 2
(g) {C} 8 Analytical Procedures 2
(h) {C} 4 Risk Assessment and Internal Control 2
2. (a) 1 Nature, Objective and Scope of Audit 4
(b) 2 Audit Strategy, Audit Planning and Audit Programme 4
(c) 17 SA and Guidance Notes 3
(d) 6 A u d i t i n a n A u t o m a t e d Environment 3
3. (a) 3 Audit Documentation and Audit Evidence 4
(b) 9A Audit of Balance Sheet Items 4
(c) 9A " " " 3
(d) 3 Audit Documentation and Audit Evidence 3
4. (a) 2 Audit Strategy, Audit Planning and Audit Programme 4
(b) 10 Company Audit 4
(c) 4 Risk Assessment and Internal Control 3
(d) 8 Analytical Procedures 3
5. (a) 11 Audit Report 4
(b) 10 Company Audit 4
(c) 1 Nature, Objective and Scope of Audit 3
(d) 4 Risk Assessment and Internal Control 3
6. (a) 12 Audit of Banks 4
(b) 15 Miscellaneous Audit 4
(Or) (b) 15 " " " 4
(c) 12 Audit of Banks 3
(d) 15 Miscellaneous Audit 3
Objective 211

" 75
" 647
" 449
" 426
" 271
" 288

" 160
Descriptive 35
" 66 " 637
" 249

" 124
" 307
" 309

" 125
" 75 " 457

Practical 211
" 288
Descriptive 508
" 449

" 35

Descriptive 170
" 531
" 590
" 602
" 519
" 589

Line Chart
Table Showing Importance of Chapter on the Basis of Marks
19
Chap. Years 15 15 16 16 17 17 18 18 19 No. Chapter Name May Nov. May Nov. May Nov. May Nov. May Nov. Total Ave. 1. Nature, Objective and Scope 7 5 6 7 25 2.5
of...
2. A u d i t S t r a t e g y , A u d i t 2 12 5 5 12 7 10 53 5.3 Planning...
3. Audit Documentation and 14 12 12 12 6 7 5 7 75 7.5 Audit..
4. R i s k A s s e s s m e n t a n d 16 9 17 16 11 15 10 8 10 112 11.2 Internal...
5. Fraud and Responsibilities 9 4 2 5 5 2 27 2.7 of...

6. Audit in an Automated... 10 7 3 20 2.0

7. Audit Sampling 4 7 2 5 4 2 24 2.4
8. Analytical Procedures 2 7 5 14 1.4
9A. Audit of Balance Sheet Items 4 14 10 14 6 5 15 7 7 82 8.2
9B. Audit of Statement of P&L... 12 22 8 26 9 20 5 7 109 10.9
10. Company Audit 10 28 4 18 15 14 22 16 18 12 157 15.7
11. Audit Report 2 2 2 5 7 9 2 4 33 3.3
12. Audit of Banks 5 7 10 7 29 2.9

13. Government Audit and Audit 6 6 5 4 5 5 5 36 3.6

of...

14. Audit of NGO 2 2 0.2

15. Miscellaneous Audit 6 6 10 6 11 39 3.9

16. A u d i t o f C o - o p e r a t i v e 5 5 3 13 1.3
Societies
17. SA and Guidance Notes 5 5 9 10 5 5 13 5 57 5.7 Legends for the Graphs

List of Standards on Auditing

S. SA No. Name No.

1 SA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance with SAs 2 SA
210 Agreeing the Terms of Audit Engagements
3 SA 220 Quality Control for an Audit of Financial Statements 4 SA 230 Audit Documentation
5 SA 240 The Auditor’s responsibilities relating to Fraud in an Audit of Financial Statements
6 SA 250 Consideration of Laws and Regulations in an Audit of Financial Statements
7 SA 299 Responsibility of Joint Auditors
8 SA 300 Planning an Audit of Financial Statements

9 SA 315 Identifying and Assessing the Risks of Material Misstatement through understanding the Entity and its
Environment

10 SA 320 Materiality in Planning and Performing an Audit

11 SA 500 Audit Evidence
12 SA 501 Audit Evidence - Specific Considerations for Selected Items

13 SA 510 Initial Audit Engagements - Opening Balances

14 SA 520 Analytical Procedures
15 SA 530 Audit Sampling

16 SA 550 Related Parties 17 SA 560 Subsequent Events

18 SA 570 Going Concern 19 SA 580 Written Representations
20 SA 610 Using the work of an Internal Auditor 21 SA 700 Forming an Opinion and Reporting on Financial
Statements
22 SA 705 Modification to the Opinion in the Independent Auditor’s Report
23 SA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report. 24 SA
710 Comparative Information - Corresponding Figures and Comparative Financial Statements
CHAPTER

Nature, Objective and 1 Scope of Audit

This Chapter Covers: Study’s Chapter: 1

Chapter Comprises: Meaning and Definition of Auditing ☹Objectives of Audit ☹Scope of Audit ☹Types of Audit
☹Inherent Limitations of Audit ☹Relationship of Auditing with other disciplines ☹Standard Setting Process
☹Elements of a System of Quality Control ☹Preconditions for an Audit ☹Agreement of Audit Engagement Terms
☹Recurring Audit.

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis

Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book.
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8
4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK Repeatedly Asked Questions
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
8.2, 10.1 3.1, 5.1, 8.2, 8.6, 11.1, 12.3, 12.6
1 Meaning and Definition of Auditing
Q.1.1 2010 - May [1] (ii) Objective

State with reasons (in short) whether the following statement is True or False:
The auditor compares entries in the books of accounts with vouchers and if two agrees, his work is done. (2 marks)

Answer:
False :
The totaling of entries in the books with vouchers shows fairness of financials statements. But auditor has to
determine reliability of annual statement of accounts alongwith the truth and fairness.

Space to write important points for revision

2 Objective of Audit
Q.2.1 2015 - May [2] (viii) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
The basic objective of audit does not change with reference to nature, size or form of an entity. (2 marks)

Answer:
Correct:
The meaning and nature of audit does not change with the nature or size of entity, audit is examination of true and
fair view of statement of any entity irrespective of its size and legal structure as defined in definition of audit.

Space to write important points for revision

3 Scope of Audit
Q.3.1 2009 - May [3] Descriptive

In auditing, the auditor checks the specific assertions of the items appearing in the financial statements and opines
about the overall assertions they signify. Explain specific assertions and overall assertions in this context. (10 marks)

Answer:
Auditor checks specific assertions that the items of financial statements misleaded and also gives his opinion in the
form of overall assertion in respect of financial statements taken as a whole.

The specific assertions are:

1. Existence

2. Rights and Obligations

3. Occurrence

4. Completeness
5. Valuation
6. Measurement
7. Presentation and Disclosure

An asset or liability exists at a given date. An asset is a right of an entity and a liability is an obligation of the entity
at a given date.

A transaction or event took place which pertains to the entity.

There are no unrecorded assets, liabilities or transactions.

An assets or liability is recorded at an appropriate carrying value.

A transaction is recorded in the proper amount and revenue or expense is allocated to proper period. An item is
disclosed, classified and described in accordance with the acceptable accounting policies and, when applicable, legal
requirements.

The overall assertion opined by the auditor about the financial statements are:

(i) The profit and loss account gives a true and fair view of the results profit or loss for the period ended on the last
date of the accounting period.

(ii) The balance sheet gives a true and fair view of the financial status or financial position of the entity as on the last
date of the accounting period.

Space to write important points for revision

4 Types of Audit
Q.4.1 2011 - Nov [6] (b) Descriptive

Discuss the types of audits required under law. (5 marks) Answer:

Legally audit is not compulsory for all the types of business organisation or institution. Thus it may be divided in
two broad categories:
1. Statutory/Mandatory Audit
2. Voluntary/Independent Audit
1. Statutory Audit: It is an audit which is conducted under the control of

law as under:

Enterprise Companies
Co☐operative Societies Banking Co's

Insurance Co's
Electricity Co's
Public Charitable Trust

Governing Statute

Companies Act, 2013

Multi state Co☐operative Societies Act Banking Regulation Act, 1949, Banking Laws (Amendment) Act, 2017
Insurance Act and Companies Act
The Electricity Act, 2003
Indian Trust Act and also state enactments

2. Voluntary Audit : It is a purely optional audit and at the discretion of the governing body. Examples of
enterprises of voluntary natures are individuals, private trust, partnership firm etc.

Space to write important points for revision

5 Advantages of Audit of Financial Statements
Q.5.1 RTP Descriptive

The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may be easy to
understand. Apart from this obvious utility, there are other advantages of audit. Some or all of these are of
considerable value even to those enterprises and organisations where audit is not compulsory. Explain.
Answer:
The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may be easy to
understand. Apart from this obvious

utility, there are other advantages of audit. Some or all of these are of considerable value even to those enterprises
and organisations where audit is not compulsory, these advantages are given below:
(a) It safeguards the financial interest of persons who are not associated

with the management of the entity, whether they are partners or shareholders, bankers, FI’s, public at large etc.

(b) It acts as a moral check on the employees from committing defalcations or embezzlement.
(c) Audited statements of account are helpful in settling liability for taxes, negotiating loans and for determining the
purchase consideration for a business.
(d) These are also useful for settling trade disputes for higher wages or bonus as well as claims in respect of damage
suffered by property, by fire or some other calamity.
(e) An audit can also help in the detection of wastages and losses to show the different ways by which these might
be checked, especially those that occur due to the absence or inadequacy of internal checks or internal control
measures.
(f) Audit ascertains whether the necessary books of account and allied records have been properly kept and helps the
client in making good deficiencies or inadequacies in this respect.
(g) As an appraisal function, audit reviews the existence and operations of various controls in the organisations and
reports weaknesses, inadequacies, etc., in them.
(h) Audited accounts are of great help in the settlement of accounts at the time of admission or death of partner.
(i) Government may require audited and certified statement before it gives assistance or issues a license for a
particular trade.
Space to write important points for revision

6 Inherent Limitations of Audit

Q.6.1 2008 - Nov [1] (xi) Objective

State with reasons (in short) whether the following statement is True or False:
“Auditor is not an Insurer”. (2 marks)

Answer:
True :
SA☐ 200 i.e. “Overall objectives of the independent Auditor and the Conduct of an audit in accordance with
standards of Auditing,” states that auditor’s opinion is not an assurance as to the future viability of the enterprise
or the efficiency or effectiveness with which the management has conducted the affairs of the enterprise. The auditor
does not insures the interest of users of accounts but only states his opinion after taking all reasonable care and
skill, that the statements show a true and fair picture. The ultimate responsibility is of the management. The audit of
financial statements does not relieve management of its responsibilities.

According to Companies Act 2013:

The financial statements shall give a true and fair view of the state of affairs of the company or companies as at the
end of the financial year [Sec. 129(1) of 2013 Act].
The auditor’s report shall state that:
to the best of his information and knowledge, the said accounts, financial statements give a true and fair view of the
state of the company’s affairs as at the end of its financial year and the profit or loss and cash flow for the year and
such other matters as may be prescribed [Sec. 143(2) of the 2013 Act]. The aforesaid definition is very authoritative.
It makes clear that the basic objective of auditing, i.e., expression of opinion on financial statements does not change
with reference to nature, size or form of an entity. The definition given above is restrictive since it covers financial
information aspect only. However, the scope of auditing is not restricted to financial information only, but, today it
extends to variety of non-financial areas as well. That is how various expressions like marketing audit, personnel
audit, efficiency audit, production audit, etc. came into existence. But here we should study only financial audit
unless and until otherwise specified.

Space to write important points for revision

Q.6.2 2011 - May [3] (a) Descriptive Discuss limitations of audit. (8 marks)

Answer:
Inherent limitations of Audit:
As per SA-200, Overall Objectives of the Independent Auditor and the conduct of Audit in accordance with
standards of auditing, the purpose of an audit is to enhance the degree of confidence of intended users in the
financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial
statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. In
the case of most general purpose frameworks, that opinion is on whether the financial statements are presented
fairly, in all material respects, or give a true and fair view in accordance with the framework. An audit conducted in
accordance with SAs and relevant ethical requirements enables the auditor to form that opinion.
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance
that the financial statements are free from material misstatement due to fraud or error. This is because there are
inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions
and bases the auditor’s opinion being persuasive rather than conclusive.

The inherent limitations of an audit arise from:

1. The Nature of Financial

Reporting

2. Non Co
operation by Management

The preparation of financial statements involves judgment by management in applying the requirements of the
entity’s applicable financial reporting framework to the facts and circumstances of the entity. In addition, many
financial statement items involve subjective decisions or assessments or a degree of uncertainty, and there may be a
range of acceptable interpretations or judgments that may be made. Consequently, some financial statement items
are subject to an inherent level of variability which cannot be eliminated by the application of additional auditing
procedures.

There is the possibility that management or others may not provide, intentionally or unintentionally, the complete
information that is relevant to the preparation and presentation of the financial statements or that has been requested
by the auditor. Accordingly, the auditor cannot be certain of the completeness of information, even though the
auditor has performed audit procedures to obtain assurance that all relevant information has been obtained.

3. Fraud may
involve
sophisticated and carefully organised
schemes
designed to conceal it

4. Timeliness of Financial
Reporting and the Balance between
Benefit and Cost

5. Risk of failure of Internal

Control

Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an intentional
misstatement that involves, for example, collusion to falsify documentation which may cause the auditor to believe
that audit evidence is valid when it is not. The auditor is neither trained as nor expected to be an expert in the
authentication of documents.

The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure
for which there is no alternative or to be satisfied with audit evidence that is less than persuasive. Appropriate
planning assists in making sufficient time and resources available for the conduct of the audit, Notwithstanding this,
the relevance of information, and thereby its value, tends to diminish over time, and there is a balance to be struck
between the reliability of information and its cost. There is an expectation by users of financial statements that the
auditor will form an opinion on the financial statements within a reasonable period of time and at a reasonable cost,
recognising that it is impracticable to address all information that may exist or to pursue every matter exhaustively
on the assumption that information is in error or fraudulent until proved otherwise.

Any system of internal check/control may become ineffective due to collusion among employees for doing fraud
and fraud committed by top management itself.
6. Management’s Risk of auditor not detecting a material misstatement

Fraud resulting from management’s fraud is greater than that of an employee’s fraud because those charged with
governance and management are often in a position that assumes their integrity and enables them to override the
internal control procedures. For example- if a director of a company orders verbally the assistant not to record the
sales made to particular party and to show the goods, sold as inventory, he is overriding the internally established
procedure (internal control).

Space to write important points for revision

7 Relationship of Auditing with other Disciplines
Q.7.1 2013 - Nov [1] {C} (b) Descriptive

Discuss the following:

The discipline of behavioural science is closely linked with the subject of auditing. (5 marks)

Answer:
Auditing is very much a discipline which involves review of various assertions both financial as well as non
financial as regards his truthfulness. So audit can be performed in a better way only if the person also possesses a
good knowledge about other disciplines.
The discipline of behavioural science is closely linked with subject of auditing. While carrying out audit activity an
auditor is required to obtain information and explanations from the client’s staff and he has also to interact with the
client’s staff in analysing the financial figures. So, the knowledge of human behaviour is very essential for an
auditor. Thus knowledge of dealing with human being is indeed very essential for an auditor in order to discharge
his duties.

Space to write important points for revision

Q.7.2 2014 - Nov [1] {C} (c) Descriptive

Discuss the following:

Indicate the factors which make it appropriate for an auditor to send a new Engagement Letter for a recurring audit.
(5 marks)

Answer:
Factors what make it appropriate for an auditor to send a new Engagement Letter for a recurring audit
☐ Any indication that entity misunderstands the objective and scope of the

audit.
☐ Any revised or special terms of the audit engagement.
☐ A recent change of senior management.
☐ A significant change in ownership.
☐ A significant change in nature or size of the Entity’s business. ☐ A change in legal or regulatory requirements.
☐ A change in the financial reporting framework adopted in the preparation

of the financial statements.

☐ A change in other reporting requirements.
Space to write important points for revision
8 Elements of a System of Quality Control
Q.8.1 2007 - Nov [8] (b) Short Notes Write short note on the Quality control for audit work at firm level. (5 marks)
Answer:
Under SA – 220, Quality Control for an audit of Financial Statement, an audit firm should implement quality
control policies and procedures designed to ensure that all audits are conducted in accordance with Standard of
Audit.

Following are the objectives of the quality control policies and procedure to be adopted by an audit firm:
1 . Professional requirements
2 . Skills and competence
3 . Assignment
4 . Delegation
5 . Consultation

6 . Acceptance and r e t e n t i o n o f clients

7 . Monitoring The continued effectiveness of procedures are to be monitored.

8 . Communication of quality control policies

Personnel in the firm are to adhere to the principles of independence, integrity, objectivity, confidentiality and
professional behaviour.

The firm is to be staffed by the personnel who have attained and maintained the technical standards and professional
competence required to enable them to fulfill their responsibility with due care.

Audit work is to be assigned to personnel who have the required degree of technical, training, and proficiency
required in the circumstances.

There should be sufficient direction, supervision and review of the work at all levels to provide reasonable assurance
that the work performed keeps appropriate standards of quality.

Consultation with person of appropriate expertise, within or outside the firm is to be made whenever required.

An evaluation of prospective clients and a review on an ongoing basis of existing clients is to be conducted. In
making a decision to accept or retain a client, the firm’s independence and ability to serve the client properly are to
be considered.

adequacy and quality control operational policies and

The firm’s general quality control policies and procedures should be communicated in such a manner that provides
reasonable assurance that they are understood and implemented.

Q.8.2 2008 - May [5] (b) Descriptive What is the importance of having the accounts audited by an independent
auditor? (5 marks) OR 2015 - May [1] {C} (a), RTP Descriptive

Advantages of Independent Audit. (5 marks) Answer:

Independent Audit
1. Meaning

2. Nature
3. Visibility

Independence implies that the judgement of a person is not subordinate to the wishes or directions of another person
who might have engaged him or to his own self-interest.
Independence is a condition of mind and personal character and should not be confused with the superficial and
visible standards of independence, which are imposed by law.
Independence of the auditor should not only exist, but should also appear to so exist to all reasonable persons. The
relationship maintained by the auditor shall be such that no reasonable man can doubt his objectivity and integrity.
There is a collective aspect of independence that is important to the accounting professional as a whole.
The advantages of an Independent Audit are : 1. Protection of interest
2. Moral check

It safeguards the financial interest of persons who are not associated with the management of the organization
whether they are partners or shareholders.
It acts as a moral check on the employees from committing defalcations.

3. Tax liability
4. Credit
negotiation
5. Trade dispute settlement 6. Control over inefficiency
Audited statements of account are helpful in settling liability for taxes.

Financiers and bankers use audited financial statements in evaluating the credit worthiness of individuals in
negotiating loans.

Audited statements are useful in settling the trade disputes for higher wages, or bonus, etc.
It helps in detection of wastages and losses and also helps in recommending ways to correct it.
8. Arbitration 9. Appraisal
10. Assistance to government

7. Funds-in-trust It is an agency, which ensures that persons acting for others have properly accounted for the
amounts collected by them.

It is helpful in settling disputes by arbitration.

Audit reviews the existence and operations of various controls in the organization and reports in adequacies,
weaknesses, etc in them. Management can take suitable action based on the reports.

Government may require audited and certified statements before it gives assistance or issues a license for a
particular trade.

Space to write important points for revision

Q.8.3 2019 - May [3] (c) Descriptive

“Independence of mind and independence in appearance are interlinked perspectives of Independence of auditors.”
Explain. (3 marks) Answer:
Independence of Mind and independence in apperance are interlinked perspective of Independence of auditors.
Independence implies that the judgement of a person is not subordinate to the wishes or directions of another person
who might have engaged him or to his own self-interest.
Independence is a condition of mind and personal character and should not be confused with the superficial and
visible standards of independence, which are imposed by law.
The Code of Ethics for Professional Accountants issued by International Federation of Accountants (IFAC)
defines the term Independence as follows.
Independence is :
☐ Independence of Mind:

The state of mind that permits the provision of an opinion without being affected by influences allowing an
individual to act with integrity and exercise objectivity and professional skepticism ; and.

☐ Independence in Appearance :
The avoidance of facts and circumstances that are so significant that a third party would reasonably conclude an
auditor’s integrity, objectivity or professional skepticism had been compromised.
Space to write important points for revision

Q.8.4 2019 - Nov [2] (a) Descriptive

The auditor shall plan and perform an audit with professional skepticism recognizing that circumstances may exist
that cause the financial statement to be materially misstated. Discuss any four example of professional skepticism. (4
marks)

Q.8.5 2019 - Nov [5] (c) Descriptive

Briefly explain the policies and procedures of assembling the final audit file on a timely basis after the date of
auditor’s report under
SQC-1. (3 marks)

Q.8.6 RTP Short Notes Write short note on Independence of an Auditor.

Answer:
Independence implies that the judgement of a person is not subordinate to the wishes or directions of another person
who might have engaged him or to his own self-interest.
Independence is a condition of mind and personal character and should not be confused with the superficial and
visible standards of independence, which are imposed by law.
Independence of the auditor should not only exist, but should also appear to so exist to all reasonable persons. The
relationship maintained by the auditor shall be such that no reasonable man can doubt his objectivity and integrity.
There is a collective aspect of independence that is important to the accounting professional as a whole.

Space to write important points for revision

9 Agreement of Audit Engagement Terms
Q.9.1 2009 - Nov [4] (b) Descriptive Describe a set of instructions, which an auditor has to give to his client before
the start of actual audit. (4 marks)

Answer:
Set of instructions, which an auditor has to give to his client before the audit, known as letter of engagement.

Letter of Engagement:

Meaning A letter of engagement refers to a letter written by the auditor to his client in order to avoid any
misunderstanding between them.

Purpose of the SA ☐ 210, Agreeing the terms o f Audit Engagements

Contents of Audit Engagement Letters

Normally the objective and scope of an audit and auditor’s duty and obligations are laid down in the applicable
statute like Companies Act, 2013; RBI regulation for bank; or regulations and pronouncements of the Institute of
Chartered Accountants of India (ICAI). In such a case to explain the terms of audit engagement by a letter by the
auditor to the client is only informative.
The purpose mentioned in SA - 210 is to establish standard on:
1. Agreeing with the terms of engagement with the

client, and
2. How the auditor should respond if the client
requests for changes in terms of engagement.

This letter should be sent before starting the audit. It should mention the following:
1. Objective of the audit of financial statements. 2. Responsibility of management regarding the

following:
(i) Financial statements are proposed on going concern basis.

(ii) Selection of accounting policies.

(iii) Consistently following the accounting policies. (iv) Maintenance of adequate accounting records. (v) Written
representation by the management. (vi) Arrangement concerning the involvement of
internal auditors and the other staff of the client.

3. The scope of the audit including reference to applicable laws and regulations and pronouncements of ICAI.

4. Test nature of audit, frauds & errors may remain undetected.

5. Unrestricted access to records.
6.

F o l l o w i n g 1. instruc tions are given by the auditor 2. to the client before 3. the start of audit

4.

5.
6.
7.
8.

9. The fact that audit process may be subjected to a peer review under the Chartered Accountants Act, 1949.
The accounts should be totaled up and trial balance and final accounts be kept ready. Vouchers should be serially
arranged.
Schedule of trade receivables and trade payables should be prepared.
Schedule of outstanding expenses, prepaid expenses and accrued income to be kept ready. A list of bad and doubtful
debts should be prepared. Schedule of investments should be prepared. Certified list of goods returned to be
prepared. Statement of permanent capital expenditure to be prepared.
Schedule of deferred revenue expenditures to be prepared.

10. Names and addresses of managers and other officers should be kept ready.
Space to write important points for revision
Q.9.2 2019 - May [2] (c) Descriptive

CA Raj, an engagement partner wants to take decision, regarding acceptance and continuance of an audit
engagement. Which informations, he should obtain before accepting an engagement? (3 marks)

Answer:
SQC 1 requires the firm to obtain information before accepting an engagement. Information such as the following
assists the engagement partner in determing whether the decisions regarding the acceptance and continuance of audit
engagements are appropriate :
1. The integrity of the principal owners, key management and those

charged with governance of the entity:

2. Whether the engagement team is competent to perform the audit engagement and has the necessary capabilities,
including time and resources:

3. Whether the firm and the engagement team can comply with relevant ethical requirements: and.
4. Significant matters that have arisen during the current or previous audit engagement, and their implications for
continuing the relationship. Space to write important points for revision

10 Recurring Audits
Q.10.1 2011 - Nov [1] {C} (a) Descriptive

“It is not mandatory to send a new engagement letter in recurring audit, but sometimes it becomes mandatory to
send new letter.” Explain those situations where new engagement letter is to be sent. (5 marks)

OR 2014 - Nov [1] {C} (c) Descriptive

Discuss the following:

Indicate the factors which make it appropriate for an auditor to send a new Engagement Letter for a recurring audit.
(5 marks)
Answer:
As per SA - 210 i.e. “Agreeing the terms of Audit Engagement, In case of recurring audit, the auditor should
consider:
1. Whether circumstances require the terms of engagement to be revised,

and
2. Whether there is a need to remind the check of the existing terms of
engagement.
In following circumstances the auditor may think it appropriate to send a new engagement letter to client:
1. Any indication that the client misunderstood the objective and scope of
audit
2. Any revised and special terms of the engagement
3. Any recent change in board of directors, and senior managements. 4. New legal requirements, or pronouncements
of the Institute of Chartered
Accountants of India (ICAI)
5. Significant change in client’s business.
Change in terms of engagement :
1. If a change is related to information that is incorrect or otherwise
unsatisfactory the auditor should not agree to changed terms of
engagement.
2. If the auditor is unable to agree to change the engagement then he
should withdraw from it.
Space to write important points for revision

Q.10.2 2015 - Nov [1] {C} Descriptive

Discuss the following:

(c) ‘P’ an auditor decides not to send a new audit engagement letter to G Ltd. every year. Whether he is right in his
approach? State the circumstances where sending new engagement letter, would be appropriate. (5 marks)

Answer:
As per SA-210, Agreeing the terms of Audit Engagements, the auditor shall assess whether circumstances require
the terms of audit engagement to be revised and whether there is a need to remind the entity of the existing terms.
• It is not necessary to issue audit engagement letter each year for

repetitive audit. Here ‘P’ an auditor decides not to send a new engagement letter to G Ltd. every year. So, the
approach of the auditor is correct and appropriate.

• The following are the circumstances where issue of the fresh engagement letter becomes mandatory:
(i) When it appears that the client has misunderstood the objective and

scope of audit. In such case issue of engagement letter becomes necessary.

(ii) Where there has been change in management, board or ownership, so that it is felt that it is pertinent to remind
them of the engagement terms again.

(iii) Where any revision by way of addition, deletion or modifications had been contemplated in the engagement
letter originally issued.
(iv) Where significant changes had occurred in nature, volume of the business transactions of the client which
warrant the scope and terms of engagement to be altered to be in tune with them.
(v) Where there has been necessity to modify audit approach to be in line with the pronouncements of ICAI, the
Companies Act and the like.
Space to write important points for revision

Q.10.3 2010 - Nov [7] (c) Practical

R & M Company, a firm of Chartered Accountants, was appointed as statutory auditors of XYZ Company Ltd. Draft
an engagement letter accepting the appointment as auditors. (8 marks)

Answer:
Engagement Letter for accepting the appointment as an Auditor : As per the SA 210, “Agreeing the Terms of
Audit Engagements”.
Draft of Engagement Letter :
To the Board of Directors of ABC Limited
You have requested that we audit the financial statements of ABC Company Limited, which comprise the Balance
Sheet as at March 31, 2011, and the Statement of Profit & Loss, and Cash Flow Statement for the year then ended,
and a summary of significant accounting policies and other explanatory information.

We are pleased to confirm our acceptance and our understanding of this audit engagement by means of this letter.
Our audit will be conducted with the objective of our expressing an opinion on the financial statements.

We will conduct our audit in accordance with Standards on Auditing (SAs), issued by the Institute of Chartered
Accountants of India (ICAI). Those Standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free from material
misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of
the risks of material misstatement of the financial statements, whether due to fraud or error. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.

Because of the inherent limitations of an audit, together with the inherent limitations of internal control, there is an
unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned
and performed in accordance with SAS.

In making our risk assessments, we consider internal control relevant to the entity’s preparation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. However, we will communicate to you in
writing concerning any significant deficiencies in internal control relevant to the audit of the financial statements
that we have identified during the audit.

Our audit will be conducted on the basis of acknowledgment provided by management or appropriate governance
body.
1. For the preparation of financial statements that give a true and fair view

in accordance with the Financial Reporting Standards. This includes:

☐ the responsibility for the preparation of financial statements on a going concern basis.
☐ the responsibility for selection and consistent application of appropriate accounting policies, including
implementation of applicable accounting standards along with proper explanation relating to any material departures
from those accounting standards.
☐ the responsibility for making judgements and estimates that are reasonable and prudent so as to give a true and
fair view of the state of affairs of the entity at the end of the financial year and of the profit or loss of the entity for
that period.
2. For such internal control as management determines, it is necessary to
enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error; and
3. To provide us with :
(i) Access, at all times, to all information, including the books, accounts, vouchers and other records and
documentation, of the Company, whether kept at the head office of the company or elsewhere, of which
management is aware that is relevant to the preparation of the financial statements such as records, documentation
and other matters;
(ii) Additional information that we may request from management for the purpose of the audit; and
(iii) Unrestricted access to persons within the entity from whom we determine it necessary to obtain audit evidence.
This includes our entitlement to require from the officers of the Company such information and explanations as we
may think necessary for the performance of our duties as auditor.
As part of our audit process, we will request from management and, where appropriate, those charged with
governance, written confirmation concerning representations made to us in connection with the audit.
We also wish to invite your attention to the fact that our audit process is subject to 'peer review' under the Chartered
Accountants Act, 1949 to be conducted by an Independent reviewer. The reviewer may inspect, examine or take
abstract of our working papers during the course of the peer review. We look forward to full cooperation from your
staff during our audit.
The form and content of our report may need to be amended in the light of our audit findings.
Please sign and return the attached copy of this letter to indicate your acknowledgment of, and agreement with, the
arrangements for our audit of the financial statements including our respective responsibilities.

Date :
Place :
Acknowledged on behalf of ABC Ltd. by ……………………..
(Signature)
Name and Designation
Date

Space to write important points for revision

XYZ & Co. Chartered Accountants Firm’s Registration No. …………………………

(Signature) (Name of the Member)

(Partner or Proprietor)
11 Acceptance of Change in Engagements
Q.11.1 2009 - Nov [8] (a), RTP Descriptive

X, a Chartered Accountant was engaged by PQR & Co. Ltd. for auditing their accounts. He sent his letter of
engagement to the Board of Directors, which was accepted by the Company. In the course of audit of the company,
the auditor was unable to obtain appropriate sufficient audit evidence regarding receivables. The client requested for
a change in the terms of engagement.
Offer your comments in this regard. (5 marks)

Answer:
A letter of engagement refers to a letter written by the auditor to his client in order to avoid any misunderstanding
between them as to the scope and objective of an audit.

Change in terms of engagement.

In the following circumstances the auditor may think it appropriate to send a new engagement letter to client.
1. Any indication that the client misunderstood the objective and scope of

audit.
2. Any revised and special terms of engagement.
3. Any recent change in board of directors and senior management.
4. New legal requirements or pronouncement of ICAI.
5. Significant change in clients business
It should be kept in mind that
1. When the terms of engagement change both the auditor and the client should agree an new terms.
2. The auditor should not agree to change in terms where there is no reasonable justification for doing so.
Thus, as per the case in question, the auditor should not agree to change the terms of engagement as the auditor was
unable to obtain sufficient evidence regarding receivable.
Space to write important points for revision

12 Miscellaneous
Error of Principle
Q.12.1 2008 - May [1] (i) Objective
State with reasons (in short) whether the following: statement is True or False:
Procedural error arises as a result of transactions having been recorded in a fundamentally incorrect manner. (2
marks)

Answer:
False :
When transactions are recorded in fundamentally incorrect manner it is known as Error of Principle. For e.g. a
distinction not being made between capital and revenue income or expenditure.
Procedural errors arise due to adoption of wrong accounting procedures.

Space to write important points for revision

Principle of Confidentiality
Q.12.2 2009 - May [1] (i) Objective

State with reasons (in short) whether the following statement is True or False:
The principle of confidentiality precludes auditor to disclose the information about the client to third party at all
circumstances without any exception.

(2 marks) Answer:
False:
The principle of confidentiality is one of the basic principles of auditing. Auditor is generally not expected to
disclose the information of his client to others. He can disclose the information to others only when (a) permitted by
his client, or (b) as per any statutory obligation dictated by any law.

Space to write important points for revision

Fundamental Accounting Assumption

Q.12.3 2014 - May [2] (ii), RTP Objective

State with reasons (in short) whether the following statement is correct or incorrect.
Specific disclosure is required of the fundamental accounting assumptions followed in the financial statements. (2
marks)

Answer:
Incorrect:
As per AS - 1 Disclosure of Accounting Policies, if the company or firm does not follow the fundamental
accounting assumptions viz., going concern, accrual, consistency then disclosures in the financial statements are
required. If they follow the fundamental accounting assumptions then disclosures are not required.

Space to write important points for revision

Error of Commission
Q.12.4 2014 - May [2] (v) Objective

State with reasons (in short) whether the following statements are correct or incorrect.
‘Errors of commission’ is where a transaction has been omitted either wholly or partially. (2 marks)

Answer:
Incorrect:
When wrong amount is entered either in the subsidiary books or in ledger accounts or when totals are wrongly made
or when a wrong account is involved or when amount is posted on the wrong side, it is a case of error of
commission.

Space to write important points for revision

Self Revealing Errors

Q.12.5 2014 - Nov [7] (b) Short Notes
Write short note on the Self-revealing errors and four illustrations thereof. (4 marks)

Answer:
Self revealing errors: These are such errors the existence of which becomes apparent in the process of compilation
of accounts. A few illustrations of such errors are given hereunder, showing how they become apparent.

1. Omission to post a part of a journal entry to the ledger.

2. Wrong totaling of the Purchase Register.

3. A failure to record in the cash book amounts paid into or withdrawn from the bank.

4. A mistake in recording amount received from X in the account of Y.

Trial balance does not tally.

Control Account (e.g., the Sundry Creditors Account) balances and the aggregate of the balances in the personal
ledger will disagree.

Bank reconciliation statement will show up error.

Statements of account of parties will reveal mistake.

From the above, it is clear that certain apparent errors balance almost automatically by double entry accounting
procedure and by following established practices that lie within the accounting system but not being generally
considered to be a part of it, like bank reconciliation or sending monthly statements of account for confirmation.

Space to write important points for revision

Auditing Vs. Investigation

Q.12.6 2012 - Nov [4] (b), RTP Distinguish Between Distinguish between Auditing and Investigation. (8 marks)

Answer:
Both involve a systematic and critical examination of the available evidence, yet these are quite distinct from each
other which is as follows:

S. Basis of No. Difference

1. Meaning

2. Scope
3. Object
4. Coverage
5. Purpose

Auditing relates to the independent examination of financial information of any entity, when such an examination is
conducted with a view to express an opinion.

Audit covers all factual assertions in the financial statements to ascertain their truth and fairness.

The object of an audit is to critically examine the financial statements and report on the truth & fairness of
assertions. Auditing is a routine exercise for generally an accounting year.
To enhance the degree of confidence of users in the statements.
intended financial Investigation relates to systematic, critical and special examination of the records of the business
for a specific purpose.

Scope is limited as regards the period or area to be covered.

Investigation aims at ascertaining certain facts such as fraud, tax liability, value of shares etc.
Investigation may spread over a period longer than one year.
To establish a fact or assessing a particular situation.
6. Appointment Auditing

Auditor may be appointed b y t h e o w n e r s o r shareholders.

Investigation

Investigator may be appointed by the owners or management or even third parties.

7. Procedure
8. Approach
9. Evidence
10. Extent of checking
11. Report

The audit is conducted in accordance G e n e r a l l y Auditing Procedure.

Auditor is skeptical and not suspicious.

with the A c c e p t e d
A u d i t e v i d e n c e i s persuasive.
Test checking or sample checking is allowed.
Auditor reports to owners e.g. shareholders. the

Investigator starts his work with suspicion & collects evidence to either confirm or dispel that suspicion.

Investigator relies on conclusive.

In investigation particularly to detect frauds, test checking may not be advisable. It may be necessary to check
100%.
Investigator reports to the person on whose behalf he has undertaken the investigation.

Space to write important points for revision

Investigation involves an e x t e n d e d a u d i t i n g procedure.

MULTIPLE CHOICE QUESTION

1 Meaning and Definition of Auditing

1. Audit is ___________ examination of financial information. (a) Dependent

(b) Independent
(c) Inter dependent
(d) Intra dependent

2. The Objective of an audit is to ___________.

(a) Find errors
(b) Give report on any fraud
(c) Express an opinion on the financial statement
(d) Any of them

3. Audit is an independent examination of ___________ information of any entity.

(a) Statutory
(b) Financial
(c) Financial as well as non financial
(d) All of them

4. Audit is an independent examination of financial information of any entity.

(a) that entity must be profit oriented
(b) that may profit oriented or not
(c) irrespective of its size or legal form
(d) (b) and (c)

5. Audit ensure that the entries in the books are

(a) adequately supported by sufficient documents
(b) adequately supported by sufficient evidence
(c) adequately supported by vouchers
(d) adequately supported by sufficient and appropriate evidence.

6. The word “Auditing” has been derived from Latin word

(a) Auditro
(b) Audiere
(c) Auditstro
(d) Audiherence

7. ‘Auditing’ word has been derived from Latin word “Audiere” which means (a) to check
(b) to verify
(c) to hear
(d) to comply.

2 Objective of Audit

8. Overall Objectives of the Independent Auditor describe under. (a) SA - 200

(b) SA - 205
(c) SA - 500
(d) SA - 700
9. Objective of the auditor
(a) To obtain reasonable assurance
(b) To report on the financial statements and communicate as required by the SAs.
(c) To ensure the financial statement as a whole are free from material misstatement
(d) All of them.

3 Scope of Audit

10. Audit should be organised to cover adequately ___________ of the enterprise relevant to the financial statements
being audited. (a) some aspects
(b) only financial aspects
(c) non financial aspects
(d) all aspects.

11. Auditor assesses the reliability and sufficiency of the information contained in the accounting records and other
source data by: (a) making a study and evaluation of accounting systems and internal

control
(b) carrying out other tests, enquiries, and verification as appropriate in
a particular circumstances
(c) (a) or (b)
(d) (a) and (b).
12. Aspects to be covered in Audit
(a) An examination of system of accounting and internal control
(b) Verification of the authenticity and validity of transaction including all assets and liabilities
(c) Checking the result shown by the financial statement and report it to the appropriate body
(d) All of them.
13. Audit of a corporate body, auditor should confirming the compliances of
(a) Management’s requirements
(b) Non Statutory requirements
(c) Statutory requirements
(d) None of them.
4 Types of Audit

14. Audit is ___________ for all types of business organisation or institution. (a) Legally obligatory
(b) Not legally obligatory
(c) Voluntary
(d) None of them

15. Organisations which require audit under law.

(a) Companies governed by the Companies Act.
(b) Banking Companies
(c) Statutory bodies required by their regulators or by Specific Act (d) All of them

16. Exception of voluntary category of audit

(a) Proprietary enties
(b) HUF enties
(c) Companies form under companies law
(d) Partnership firms.

17. An audit that is taken up between two annual audits is called (a) Statutory Audit
(b) Voluntary Audit
(c) Interim Audit
(d) Internal Audit

18. When the auditor’s staff is engaged continuously in checking the accounts of the client throughout the financial
period/whole year is called (a) Statutory Audit
(b) Interim Audit
(c) Concurrent Audit
(d) Continuous Audit

19. A comprehensive, continuous and systematic examination of all transactions by a person other than those
involved in operation is called. (a) Statutory Audit
(b) Interim Audit
(c) Concurrent Audit
(d) Continuous Audit

20. Concurrent Audit ensure

(a) Accuracy
(b) authenticity and due compliance
(c) procedures and guidelines
(d) all of them.

21. ___________ is a management process tool towards the establishment of sound internal functions and effective
control systems. (a) Statutory Audit
(b) Internal Audit
(c) Interim Audit
(d) Concurrent Audit

22. Audit which commences after the books has been closed at the end of the accounting period and thereafter is
carried on continuously until completed.
(a) Continuous Audit
(b) Internal Audit
(c) Final or Annual Audit
(d) Concurrent Audit

5 Advantages of Audit of Financial Statements

23. Advantages of audit excludes

(a) It safeguards the financial interest of person who are associated (b) It safeguards the financial interest of person
who are not associated (c) It acts as a moral check on the employees.
(d) It helps in the detection of wastages and losses.

24. Audit of financial statement is beneficial:

(a) For settlement of accounts at the time of admission or death of partners

(b) Help in detection of wastages and losses
(c) Help in settlement of liabilities for taxes
(d) All of them.

6 Inherent Limitations of Audit

25. The auditor is not expected to, and cannot, reduse audit risk to zero because there are some inherent limitation of
an audit. This statement is stated under.
(a) SA 200
(b) SA 300
(c) SA 500
(d) SA 700

26. Some practical and legal limitations on the auditor’s ability to obtain audit evidence includes:
(a) An Audit is not an official investigation into alleged wrong doing (b) Fraud may involve shophisticated and
carefully organised scheme (c) Possibility that management or other may not provide, intentionally

or unintentionally, the complete information relevant for preparation and presentation of financial statement
(d) Any of them.
7 Relationship of Auditing with other Disciplines

27. Auditing involves review of various assertion ___________, with a view to prove the veracity of such assertions
and expression of opinion by auditor on the same.
(a) financial terms
(b) non financial terms
(c) both financial and non financial term
(d) None of them

28. International Federation ___________.

(a) 1970
(b) 1977
(c) 1987
(d) 1997

29. International Federation of Accountants was set up with a view to (a) establish uniform accounting rules and
regulation
(b) establish uniform accounting standards
(c) bringing same accounting methods and procedure for all countries (d) bringing harmony in the profession of
accountancy on an

international scale.
30. ICAI is a member of
(a) IFAC
(b) IAASB
(c) IMF
(d) SEBI

Standard Setting Process

of Accountants (IFAC) was set up in 31. ___________ apply in the audit of historical financial information. (a)
Standards on Auditing (SAs)
(b) Standards on Review Engagements (SREs)
(c) Standards on Assurance Engagements (SAEs)
(d) Standards on Related Services

32. ___________ apply in the review of historical financial information (a) Standards on Auditing (SAs)
(b) Standards on Review Engagements (SREs)
(c) Standards on Assurance Engagements (SAEs)
(d) Standards on Related Services

33. ___________ apply to engagements to apply agreed upon procedures to information and other related services
engagements such as compilation engagements.
(a) Standards on Auditing (SAs)
(b) Standards on Review Engagements (SREs)
(c) Standards on Assurance Engagements (SAEs)
(d) Standards on Related Services

34. ___________ apply in assurance engagements, dealing with subject matters other than historical financial
information
(a) Standards on Auditing (SAs)
(b) Standards on Review Engagements (SREs)
(c) Standards on Assurance Engagements (SAEs)
(d) Standards on Related Services

35. Guidance Notes are ___________ in nature.

(a) Mandatory
(b) Recommendatory
(c) Statutory

9 Qualities of an auditor

36. “An auditor must be honest that is, he must not certify what he does not believe to be true and must take
reasonable care and skill before he believes that what he certifies is true”. Stated by
(a) Justice kindley in Federal General Bank Case
(b) Justice Lindley in London Federal Bank Case
(c) Justice Lindley in London and General Bank Case
(d) None of them.

10 Elements of a system of quality control

37. Quality Control System of a firm should includes policies and procedures of
(a) Ethical requirements
(b) Engagement performance
(c) Leadership responsibilities for quality
(d) All of them.

38. “As per SA - Engaged partner shall take responsibility for the overall quality on each audit engagement to which
that partner is assigned”. (a) SA 200
(b) SA 220
(c) SA 300
(d) SA 320

39. Which of the fundamental principles of professional ethics relevant to the auditor when conducting an audit.
(a) Integrity and objectivity
(b) Confidentiality and professional behaviour
(c) Professional competence and due care
40. ___________ refers to an attitude that includes a questioning mind. While conducting the audit.
(a) Professional misconduct
(b) Professional behaviour
(c) Professional Skepticism
(d) Professional ethics

11 Preconditions for an Audit

41. “Agreeing the Terms of Audit Engagements”, preconditions for an audit may be defined as the use by
management is defined under (a) SA 200
(b) SA 210
(c) SA 220
(d) SA 300

12 Agreement of Audit Engagement Terms

42. Audit engagement letter is sent by ___________ to his ___________. (a) Client, auditor
(b) Shareholder, auditor
(c) Auditor, Client
(d) Auditor, government

43. ICAI has issued SA 210 “Agreeing the Terms of Audit engagement” in the interest of
(a) both the auditor and the client
(b) both the auditor and government
(c) only auditor
(d) only client

44. Letter of engagement is issued so that

(a) Possibility of understanding increases to a great extent (b) Possibility of understanding reduces to a great extent
(c) Possibility of mis-understanding is reduced to great extent (d) None of them.

45. The appointment of the auditor in partnership firm is normally government by

(a) Partners
(b) Management of the firm
(c) Partnership Deed
(d) Governing Council.

46. According to SA 210 “Agreeing the Terms of Audit Engagement” the auditor shall agree the terms of audit
engagement with ___________ as appropriate.
(a) Management or those charge with governance (TCWG) (b) Management or shareholders
(c) Management or auditor
(d) Auditor or those charge with governance.

47. The agreed terms of the audit engagement shall include: (a) The objective and scope of he audit of the financial
statement (b) The responsibilities of auditor and management
(c) Identification of the applicable financial reporting framework for the

preparation of the financial statements.

(d) All of above.
13 Recurring Audits

48. In case of recurring audit of a firm by the same auditor

(a) requires fresh letter of engagement
(b) requires revised letter of engagement
(c) does not requires any letter of engagement
(d) does not requires any letter of engagement until and unless there is
any type of change
49. Factor(s) that may make it appropriate to revise the terms of the audit engagement are :
(a) Any indication that the entity misunderstands the objective and

scope of the audit

(b) A resent change of senior management or change in ownership (c) A change in legal or regulatory requirement
(d) Any of them.

14 Limitation on scope prior to Audit engagement acceptance

50. If management or TCWG impose limitation on the scope such that auditor believes limitation would result in
auditor disclaiming an opinion (a) the auditor shall accept such a limited engagement
(b) the auditor shall not accept such a limited engagement (c) the audit quit his assignment
(d) any of them.

Answer

1. (b) 2. (c) 3. (b) 4. (d) 5. (d) 6. (b) 7. (c) 8. (a) 9. (d) 10. (d) 11. (d) 12. (d) 13. (c) 14. (b) 15. (d) 16. (c) 17. (c) 18.
(d) 19. (c) 20. (d) 21. (d) 22. (c) 23. (a) 24. (d) 25. (a) 26. (d) 27. (c) 28. (b) 29. (d) 30. (a) 31. (a) 32. (b) 33. (d) 34.
(c) 35. (b) 36. (c) 37. (d) 38. (b) 39. (d) 40. (c) 41. (b) 42. (c) 43. (a) 44. (c) 45. (c) 46. (a) 47. (d) 48. (d) 49. (d) 50.
(b)

CHAPTER

Audit Strategy, Audit Planning 2 and Audit Programme

This Chapter Covers: Study’s Chapter: 2

Chapter Comprises: Audit Planning ☹Audit Strategy ☹Relationship Between Overall Audit Strategy and Audit
Plan ☹Development of Audit Plan ☹Audit Planning a Continuous Process ☹Direction, Supervision and Review
☹Audit Programme ☹Audit Planning and Materiality.

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis

Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book.
6.62
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK . . . . . . . Weightage Analysis Repeatedly Asked Questions
Common Answered Questions
Must Try Question
1.1, 4.2, 5.1,7.2, 8.5, 8.10
1
Q.1.1 2011 - May [1] {C} (d), RTP

Comment on the following in relation to SAs: “Auditor shall establish an overall strategy that sets the scope, timing
and directions of the audit, and that guides the development of the audit plan.”

(5 marks)
Audit Planning

Descriptive Answer:
Establishment of overall strategy for development of audit plan: 1. According to SA 300, “ Planning an Audit
of Financial Statements”

the auditor shall establish an overall audit strategy that sets the scope, timing and directions of the audit, and that
guides the development of the audit plan.

2. In establishing the overall audit strategy, the auditor shall: 1. Identify the characteristics of the engagement that
define its scope; 2. Ascertain the reporting objectives of the engagement to plan the

timing of the audit and the nature of the communications required; 3. Consider the factors that, in the auditor’s
professional judgment, are
significant in directing the engagement team’s efforts; 4. Consider the results of preliminary engagement activities
and, where
applicable, whether knowledge gained on other engagements
performed by the engagement partner for the entity is relevant; and 5. Ascertain the nature, timing and extent of
resources necessary to
perform the engagement.
Space to write important points for revision

Q.1.2 2018 - Nov [2] (b) Descriptive Discuss the following:

“An adequate planning benefits the audit of financial statements.” Discuss.

(5 marks) Answer:
Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan.
An adequate planning benefits the audit of financial statements in several ways, including the following : 1. Helping
the auditor to devote appropriate attention to important areas of

the audit.
2. Helping the auditor identify and resolve potential problems on a timely
basis.
3. Helping the auditor properly organize and manage the audit engagement
so that it is performed in an effective and efficient manner. 4. Assisting in the selection of engagement team
members with appropriate
levels of capabilities and competence to respond to anticipated risks,
and the proper assignment of work to them.
5. Facilitating the direction and supervision of engagement team members
and the review of their work.
6. Assisting, where applicable, in coordination of work done by auditors of
components and experts.
Space to write important points for revision

Q.1.3 2018 - Nov [4] (a) Descriptive “Planning is not a discrete phase of an audit, but rather a continual and
iterative process.” Discuss. (5 marks)

Answer:
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after
(or in connection with) the completion of the previous audit and continues until the completion of the current audit
engagement. Planning, however, includes consideration of the timing of certain activities and audit procedures that
need to be completed prior to the performance of further audit procedures. For example, planning includes the need
to consider, prior to the auditor’s identification and assessment of the risks of material misstatement, such matters
as: 1. The analytical procedures to be applied as risk assessment procedure. 2. Obtaining a general understanding of
the legal and regulatory framework

applicable to the entity and how the entity is complying with that framework.
3. The determination of materiality.
4. The involvement of experts.
5. The performance of other risk assessment procedures.
Space to write important points for revision

2 Audit Strategy
Q.2.1 2019 - May [2] (d) Descriptive

Describe how the process of establishing the overall audit strategy assists the auditor in marshalling his human
resources. (4 marks) Answer:
The process of establishing the overall audit strategy assists the auditor to determine, in marshalling his
human resources in the following way:
1. The resources to deploy for specific audit area, such as the use of

appropriately experienced team members for high risk areas or the involvement of experts on complex matters;

2. The amount of resources to allocate to specific audit areas, such as the number of team members assigned to
observe the inventory count at material locations, the extent of review of other auditors’ work in the case of group
audits, or the audit budget in hours to allocate to high risk areas;

3. When these resources are to be deployed, such as whether at an interim audit stage or at key cut-off dates: and
4. How such resources are managed. directed and supervised such as when team briefing and debriefing meetings
are expected to be held, how engagement partner and manager reviews are expected to take place and whether to
complete engagement quality control reviews. Space to write important points for revision

Q.2.2 2019 - Nov [2] (b) Descriptive

In establishing overall audit strategy, the auditor shall ascertain the reporting objectives of the engagement to plan
the timing of the audit and the nature of the communications required. Elucidate those cases by which auditor can
ascertain the reporting objectives of the engagement.

(4 marks)
3 Development of Audit Plan
Q.3.1 2009 - May [8] (c) Short Notes
Write short note on the Knowledge of Client's business (5 marks) Answer:
Knowledge of Client’s Business
Broad matters to b e c o n s i d e r e d

while obtaining k n o w l e d g e o f Client’s Business SA 315, Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and its Environment lays down the broad matters to be
considered while obtaining knowledge of business for a new audit assignment.
These are:
1. Relevant industry, regulatory, economic and other

external factors including the applicable financial reporting framework.

2. The nature of the entity, including:

(i) Its operations
(ii) Its ownership and governance structures (iii) The types of investments that the entity is

making and plans to make, including investments in special-purpose entities; and

(iv) The way that the entity is structured and how it is financed; to enable the auditor to understand the classes of
transactions, account balances and disclosures to be expected in the financial statements.

3. The entity’s selection and application of accounting policies.

4. The entity’s objectives and strategies and those related business risks that may result in risks of material
misstatement.
5. The measurement and review of the entity’s financial performance.

Source of The auditor can obtain information about client’s Information business from the following sources:
1. The client’s annual Reports to shareholders. 2. Minutes of meetings of shareholders, board of directors and
important committees. 3. Internal financial management report for current and previous periods, including budgets,
if any. 4. The previous year’s audit working papers, and other relevant files.
5. Firm personnel responsible for non audit services to the client who may be able to provide information on matters
that may affect the audit. 6. Discussions with the client.
7. The client’s policy and procedures manual. 8. Relevant publications of the Institute of Chartered Accountants of
India and other professional bodies, industry publication, trade Journals, magazines, newspapers or text books. 9.
Consideration of the state of the economy and its effects on the client’s business.
10 Visits to the client’s premises and plant facilities by the management.
Space to write important points for revision

Q.3.2 2018 - May [4] (a) Descriptive M & Co. was appointed as auditor of IGI Ltd. As an auditor what are the
factors that would be considered in the development of overall audit plan?

(5 marks) Answer:
Factors to be considered in the development of overall audit plan: ☐ The terms of his engagement and statutory
responsibilities. ☐ Nature and timing of reports.
☐ Applicable legal or statutory requirements.
☐ Accounting policies adopted by the client.
☐ Effect of new accounting or auditing pronouncements on the audit. ☐ Identification of significant audit areas.
☐ Setting of materiality levels for audit purposes.
☐ The degree of reliance on accounting system and internal control. ☐ Possible rotation of emphasis on specific
audit areas. ☐ The nature and extent of audit evidence to be obtained. ☐ The work of internal auditors and the
extent of their involvement. ☐ The involvement of other auditors.
☐ The involvement of experts.
☐ The allocation of work between joint auditors.
☐ Establishing and coordinating staffing requirements.

Space to write important points for revision

4
Changes to Planning Decisions During the Course of Audit

Q.4.1 2018 - Nov [1] {C} (b) Objective Examine with reason (in short) whether the following statement is correct
or incorrect:
A well designed and drafted audit plan and audit strategy which takes care of all the uncertainties and conditions,
need not be changed during the course of audit. (2 marks)

Answer:
Incorrect :
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of
the audit. As a result of unexpected events, changes in conditions, or the audit evidence obtained from the results of
audit procedures, the auditor may need to modify the overall audit strategy and audit plan and thereby the resulting
planned nature, timing and extent of further audit procedures, based on the revised consideration of assessed risks.

Q.4.2 RTP Descriptive

The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of
the audit. Explain Answer:
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course
of the audit. As a result of unexpected events, changes in conditions, or the audit evidence obtained from the results
of audit procedures, the auditor may need to modify the overall audit strategy and audit plan and thereby the
resulting planned nature, timing and extent of further audit procedures, based on the revised consideration of
assessed risks. This may be the case when information comes to the auditor’s attention that differs significantly from
the information available when the auditor planned the audit procedures. For example, audit evidence obtained
through the performance of substantive procedures may contradict the audit evidence obtained through tests of
controls.

Space to write important points for revision

5 Documentation of Audit Plan
Q.5.1 RTP Descriptive

The auditor shall document the overall audit strategy, the audit plan and any significant changes made during the
audit engagement to the overall audit strategy or the audit plan, and the reasons for such changes. Explain

Answer:
The auditor shall document:
(a) the overall audit strategy;
(b) the audit plan; and
(c) any significant changes made during the audit engagement to the overall

audit strategy or the audit plan, and the reasons for such changes. The documentation of the overall audit strategy is
a record of the key decisions considered necessary to properly plan the audit and to communicate significant matters
to the engagement team.
For example, the auditor may summarize the overall audit strategy in the form of a memorandum that contains key
decisions regarding the overall scope, timing and conduct of the audit.
The documentation of the audit plan is a record of the planned nature, timing and extent of risk assessment
procedures and further audit procedures at the assertion level in response to the assessed risks. It also serves as a
record of the proper planning of the audit procedures that can be reviewed and approved prior to their performance.
The auditor may use standard audit programs and/or audit completion checklists, tailored as needed to reflect the
particular engagement circumstances.
A record of the significant changes to the overall audit strategy and the audit plan, and resulting changes to the
planned nature, timing and extent of audit procedures, explains why the significant changes were made, and the
overall strategy and audit plan finally adopted for the audit. It also reflects the appropriate response to the significant
changes occurring during the audit. For instance
The following things should form part of auditor’s documentation:
• A summary of discussions with the entity’s key decision makers
• Documentation of audit committee pre-approval of services, where
required
• Audit documentation access letters
• Other communications or agreements with management or those

charged with governance regarding the scope, or changes in scope, of our services
• auditor’s report on the entity’s financial statements.
• Other reports as specified in the engagement agreement (e.g., debt covenant compliance letter)

6 Audit Programme
Q.6.1 2012 - May [7] (c) Short Notes Write short note on Disadvantages of the use of an audit programme. (4
marks)

Answer:
Disadvantages of Audit Programme
1. Mechanical

Task
2. Rigidity
3. Security
4. Lack of Initiative
5. Efficiency
Auditor's work becomes mechanical and he may lose interest and initiative.

Audit programme may become rigid and inflexible. Staff members may limit themselves to the pre-determined
programme.

It creates false sense of security among staff that everything is taken care of by the audit programme. They may fail
to apply their mind in certain circumstances.

Audit programme restricts the independent judgement and initiative of the staff. Talented and efficient audit staff
may become frustrated.

Inefficient staff may defend deficiencies in their work on the ground that audit programme contained no such
instruction.

Space to write important points for revision

Q.6.2 2013 - Nov [1] {C} (a) Descriptive

Discuss the following:

Despite of several disadvantages, audit programme is required to start an audit. (5 marks)

Answer:
Despite several disadvantages, audit programme is required to start an audit due to the following reasons:

1. Set of
instructions
2. Check list
3. Avoids
overlapping
4. Job allocation
5. Accountability
6. Supervision
7. Future planning
8. Defence against negligence

Audit programme specifies the extent and manner of checking and verification to be carried out for accounting
records. It instructs the assistants and staff in knowing how much is to be checked and in what manner.
It serves as a ready check list of audit procedures to be performed.
Work is carried out in a planned and phased manner. So chances of overlapping or ignoring certain aspects are
avoided.
Audit programme helps in selection of assistants for job on the basis of their capability.
Since assistants put their signature on programme, it is possible to fix responsibility for work done and the work
may be traced back to the assistants.
Audit programme enable to supervise and control the work done by the assistants.

It is useful in carrying out the current audit and provides basis for planning the programme for future.

As the audit programme is a record of work done, it may be used as a defence against negligence. 9. Basis for
opinion Audit programme provides a sound basis for the expression of Auditor's opinion.
10. Work review Audit programme helps to know the progress of the work at any point of time.
Q.6.3 2016 - May [1] {C} (c) Descriptive Discuss the following:
How does an audit programme help to plan and perform the audit?

(5 marks) Answer:
Audit programme is a list of examination and verification step to be applied. It is a detailed plan of applying the
audit procedure for accomplishing the audit objectives.
The audit programme shall help to plan and perform the audit in following ways:
1. An audit programme provides the assistant carrying out the audit with

total and clear set of instructions of the work generally to be done. 2. The audit programme shall provide a
perspective of the work to be
performed.
3. With the help of audit programme selection of assistants under a proper
framed programme the risk is significance and the audit can be
performed systematically.
4. The assistants, by putting their signature on a programme accept the
responsibility for work.
5. With help of audit programme principal can control the progress of the
various audits in hand by examination of audit programmes. 6. A properly drawn up audit programme serves as
evidence in the event
of a charge of negligence being brought against the auditor. 7. An audit programme specifies the procedures to be
checked during the
audit.
8. As audit work is split into various elements of procedures to be
performed. The audit programme act as a guiding chart list during the
performance of audit.

Q.6.4 2019 - May [2] (b) Descriptive List out the points that should be kept in mind by the auditor for the purpose
of constructing an audit programme. (3 marks)

Answer:
For the purpose of an audit programme construction, the following points should be kept in mind:
1. The auditor should stay within the scope and limitation of the

assignment.
2. He should determine the evidence reasonably available and identify the
best evidence for deriving the necessary satisfaction.
3. He should apply only those steps and procedures which are useful in
accomplishing the verification purpose in the specific situation. 4. He should consider all the possibilities of error.
5. He should coordinate the procedures to be applied to related items.
Space to write important points for revision

Q.6.5 2019 - Nov [1] {C} (b) Objective

Examine with reasons whether the following statement is correct or incorrect.

(b) Under a properly framed audit programme by the auditor, the danger

is significantly less and audit can proceed systematically. (2 marks)

Q.6.6 2019 - Nov [4] (a) Descriptive Discuss the points to be considered by auditor for the purpose of constructing
an audit programme. (4 marks)
7 Audit Planning and Materiality
Q.7.1 2008 - May [1] (ii) Objective

State with reasons (in short) whether the following statement is True or False:
When inherent and control risks are low, an auditor can accept a lower detection risk. (2 marks)

Answer:
False:
SA-320 on “Materiality in Planning and Performing an Audit” states that the auditor obtains reasonable
assurance by obtaining sufficient appropriate audit evidence to reduce audit risk to an acceptably low level. After the
auditor assesses the inherent and control risks, he should consider the level of detection risk that he is prepared to
accept and based upon his judgment, select appropriate substantive audit procedures. If the auditor does not perform
any substantive procedures, detection risk, that is, the risk that the auditor will fail to detect a misstatement, will be
high. The auditor reduces detection risk by performing substantive procedures - the more extensive the procedures
performed, the lower the detection risk.

Space to write important points for revision

Q.7.2 2009 - Nov [4] (a), RTP Descriptive Explain concept of materiality and factors which act as guiding factors
to this concept. (6 marks)

Answer:
As per SA 320, “Materiality in Planning and Performing an Audit,” material items are, items the knowledge of
which would influence the decision of the user of the financial statements.

As per International Auditing Guideline - 25, materiality is the magnitude or nature of a misstatement (including
an omission) of financial information either individually or in the aggregate that, in the light of the surrounding
circumstances, makes it probable that the judgement of a reasonable person relying on the information would hence
been influenced or his decisions affected as a result of the misstatement.
The concept of materiality is fundamental to the process of 1. Recognition
2. Aggregation
3. Classification
4. Presentation of the financial statement.
Materiality should be considered by the Auditor when
1. Determining the nature, timing, and extent of Audit procedures. 2. Evaluating the effect of misstatement.

There is an inverse relationship between materiality and Audit Risk. The Auditor takes this inverse relationship into
account when determining the nature, timing, and extent of audit procedure.
Factors to be considered for determining materiality
1. The materiality depends on the regulatory or legal considerations. 2. Materiality is not often reckoned with respect
to quantitative details

above. It has qualitative dimensions as well.

3. Even insignificant items in terms of quality may be material in special
circumstances.
4. Item of materiality may be determined individually or in aggregate. 5. An item whose impact is insignificant at
present, but in future it may be
significant, may be material item.
Space to write important points for revision

Q.7.3 2013 - May [7](i) Short Notes Write short note on the Audit Planning and Materiality (4 marks)

Answer:
Audit Planning and Materiality :
The information is material if its misstatement could influence the decision of users taken on the basis of such
financial information. It depends on the size and nature of item, judged in the certain cases of mis-statement. When
planning the audit, the auditor considers what would make the financial information materially mis-stated. The
auditor's preliminary assessment of materiality related to specific account balances etc. helps the auditor to select
audit procedures that in combination can be expected to support the audit opinion at an acceptably low degree of
audit risk. SA-320 on Materiality in Planning and Performing an Audit, requires that an auditor should consider
materiality and its relationship with audit risk. The auditors assessment of materiality regarding various aspects such
as specific account balances and classes of transactions helps him to decide such questions as what items are to be
examined, which methods are to followed etc. This basically leads him to decide and plan out and select the audit
procedure.

Space to write important points for revision

Q.7.4 2015 - Nov [6] (d) Descriptive State the factors which are to be considered in determining materiality. (4
marks)

Answer:
Factors Considered in Determining Materiality:
1. The elements of financial statements (for e.g. assets, liabilities, equity,

revenue, exp.).
2. Whether there are items on which attention of users of the particular
entity’s financial statements tend to be focused (for e.g. for the purpose
of evaluating financial performance users may tend to focus on profit,
revenue or net assets).
3. The nature of the entity, where the entity is at in its life cycle, and the
industry and economic environment in which entity operates. 4. The entity’s ownership structure and the way it is
financed (for e.g. if an
entity is financed solely by debt rather then equity, users may put more
emphasis on assets and claims on them, than on entity’s earnings. Relevant Information Regarding Concept of
Materiality
☐ Accounting Standard 1 defines material items as relatively important and
relevant items, i.e. “items the knowledge of which would influence the
decisions of the users of the financial statements”.
☐ Whether or not the knowledge of an item would influence the decisions
of the users of the financial statements is dependent on the particular
facts and circumstances of each case. It is not possible to lay down
precisely either in terms of specific account or in terms of amounts the
items which could be considered as material in all circumstances. ☐ Materiality is a relative term and what may be
material in one
circumstance may not be material in another.
☐ Therefore, the decision to judge the materiality of the item whether in the
aggregation of items, presentation or classification of items shall depend
upon the judgment of preparers of the account in the circumstances of
the particular case.
☐ In many cases percentage comparison may be useful in indicating the
materiality of an item.
☐ As per SA 320, this percentage criteria for determining materiality levels
is known as Benchmarking. e.g., Part II of Schedule III to the Companies
Act, 2013 requires that any expense exceeding one per cent of the total
revenue of the company or ` 1,00,000 whichever is higher, shall be
disclosed by way of notes as additional information and shall not be
combined with any other item to be shown under miscellaneous
expenses.
☐ Actually the detailed disclosure requirements of Schedule III to the
Companies Act, 2013 seek to ensure that the financial statements
disclose all material items so as to give a true and fair view of the state
of affairs of the company.
Space to write important points for revision

8 Miscellaneous

Audit Procedure Vs. Audit Technique

Q.8.1 2008 - May [1] (iii) Objective

State with reasons (in short) whether the following statement is True or False:
Audit procedure and Audit technique are not one and same thing.

(2 marks) Answer:
True:

Audit procedures are two) Compliance and Substantive. To apply these procedure auditor uses some specific
methods known as audit techniques. Space to write important points for revision

Surprise Check Q.8.2 2008 - May [6] (b) Descriptive

Mention, any four, areas where surprise check can significantly improve the effectiveness of an audit. (4 marks)
Answer:
Surprise checks are mainly intended to ascertain whether the system of internal control is operating effectively and
whether the accounting and other records are prepared concurrently and kept up-to-date.

The areas over which the surprise checks should be employed would depend upon the circumstances of each
audit but should normally include the following areas:
1. Verification of cash and investments.
2. Test verification of stores and stocks and the records relating thereto. 3. Verification of books of prime entry.
4. Verification of statutory registers.

Surprise checks are a part of normal audit. If the surprise check reveals a weakness in the system of internal
control or any fraud or error or the fact that any book or register has not been properly maintained or kept up-to-
date, the auditor should communicate the same to the management and ensure that action is taken on the matters
communicated by him.

Space to write important points for revision

Audit in Depth
Q.8.3 2009 - May [1] (ii) Objective

State with reasons (in short) whether the following statement is True or False:
Auditing in depth implies that the auditor vouches almost all transactions in a manner that the chances of not
checking any transaction are left at minimum. (2 marks)

Answer:
False:
Auditing in depth does not mean the 100% vouching. It is checking selected transactions from beginning to end to
understand the entire system within which the transaction passes through.

Space to write important points for revision

Audit Techniques
Q.8.4 2012 - May [7] (d) Short Notes

Write short note on “Audit Techniques”. (4 marks) Answer:

Meaning : Audit technique refers to the methods and means employed by the auditor for collection and evaluation
of audit evidence in different auditing situations. Audit techniques may vary according to nature of preposition to
be tested. Audit techniques are generally inter-dependent. A combination of techniques is applied in a particular
procedure like in verification of assets, audit techniques are physical examination confirmation from 3rd parties. The
techniques to be adopted vary with the time / period of auditing. They may vary from organisation to organisation
depending upon the nature of business, number of transactions etc.
Techniques of Audit : The important audit techniques are 1. Vouching
2. Physical examination
3. Confirmation
4. Inquiry
5. Scanning
6. Reconciliation
7. Flow Charting
8. Electronic data processing records

Space to write important points for revision

Surprise Check
Q.8.5 2013 - May [1] {C} (b) (i), RTP

Discuss the following:

Is surprised checks desirable in audit, if so recommendations.

Answer:
1. One of the most important parts of audit is the surprise check, the results of these checks are very helpful to the
auditor as they help in deciding the scope of audit and also the reports.
2. Effectiveness of the audit is improved by the element of surprise. This element is also incorporated in audit
programmes.
3. The element of surprise in an audit may be both in relation to the time of audit, that is selection of date, when the
auditor will visit the clients office for audit and selection of the areas of audit.
4. Auditor’s visits for a surprise check in order to know whether the internal control system is working effectively or
not and whether all accounting and other records are kept up to the date as per the statutory regulation.

Descriptive
give important (5 marks)

5. These checks and surprise visits can bring good moral check on the client’s staff.
6. Surprise checks also help in determining the errors and frauds.
7. Surprise checks are very helpful for the organization having weak internal control system, very large and
diversified.
8. Extent of the check will depend upon the auditor.
9. The consequences of the surprise check should be communicated to the management. This is done to overcome
the weakness.
10. The auditor gets satisfied only when proper actions are taken by the management on the matters communicated
by him.
Space to write important points for revision

Continuous Audit
Q.8.6 2013 - May [3] (a) Descriptive

What is continuous audit and what are the precautions which should be taken to avoid the disadvantages of
continuous audit? (8 marks)

Answer:
Continuous Audit
Meaning of Continuous Audit

Features
When auditor's assistants are involved continuously in checking the accounts of the client during the whole year
round or when the staff attends audit work at intervals, during the financial period, it is called a continuous audit. It
is suitable in cases where the final accounts are desired to be presented soon after the close of the financial year or
where the internal check is weak.

1. A continuous audit is one which involves detailed examinations of transactions and accounts by the audit staff
continuously throughout the year or at regular intervals say fortnightly, monthly or quarterly.

2. At the year end the auditor takes up an examination of financial accounts.

3. It enables completion of audit at the quickest possible time after the closing of accounts.
4. It is also known as detailed audit or running audit.

Advantages 1. Immediate detection of errors and frauds: Management can exercise a strict control over the
accounts due to immediate detection of errors and frauds.

2. Deterrent : The frequent attendance of the audit staff deters persons from committing fraud.
3. Up to date accounts : The accounting staff of the client is motivated to keep the books of account up to date.
4. Early final audit : The final audit can be completed sooner than what would be otherwise.
5. Knowledge of client’s affairs : The auditor can obtain a more detailed knowledge of the client’s affairs which
enables him to discharge his duties more efficiently.
6. Detailed coverage: All aspects of verification are carried out in detail as compared to final audit and or when test
checks are applied.
7. Staff planning : Work scheduling can be done effectively and staff can be sent regularly by proper planning.
8. Interim reporting : Interim financial statements can be prepared easily and in a timely manner.

Disadvantages 1. Failure to keep track: Since work is carried out in several instalments, the audit staff may fail to
keep tracks of things which they had not checked on their last or earlier visit. As a result some of the transactions
may escape audit scrutiny.

2. Tampering: The client’s staff may alter the entries in the books of account after checking thereof.
3. Uneconomic: It is uneconomic for a small sized concern as a great deal of time is wasted each time in preparing
for the audit.
4. Interruption of work: The presence of audit staff at regular intervals may affect the regular work flow of the
client.
5. Boredom: Routine checking on a continuous basis may become mechanical.
6. Time consuming: Since all transactions are verified, continuous audit will be time consuming.
7. No guarantee for fraud detection: A complete verification of all transactions in detail, does not guarantee
detection of all errors and frauds. Some material mis-statement may still exist.

Space to write important points for revision

Audit Procedure and Audit Technique

Q.8.7 2014 - May [2] (vi) Objective

State with reasons (in short) whether the following statement is correct or incorrect.
There is no difference in terms “Audit Procedure” and “Audit Technique”.

(2 marks) Answer:
Incorrect:
Audit procedure is a way of performing Audit, while Audit technique is a method for Performing Audit Procedure.

Audit Technique
Q.8.8 2015 - May [2] (vii) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
Scrutiny of Bank Reconciliation statement is one of the audit techniques.

(2 marks) Answer:
Correct:

The scrutiny of bank reconciliation statement is one of the audit techniques. Space to write important points for
revision

Continuous Audit
Q.8.9 2015 - Nov [5] (c) Descriptive

State the precautions to be taken to avoid the disadvantage of a continuous audit. (4 marks)

Answer:
The disadvantage of the continuous audit can be avoided by following precautions:
1. During the course of each audit, the auditor should complete his work

upto a definite stage so as to avoid loose ends.

2. At the end of each visit, important balances should be noted down and
the same should be compared at the time of the next visit. 3. The visits should be at irregular intervals of time so that
the client’s staff
may not know in advance the exact date when the audit would be
resumed and thus, may be able to prepare themselves in advance for
the same.
4. The nominal accounts should be checked only at the time of final
closing.
5. The client’s staff should be instructed not to alter or correct audit figures.
The auditor should also device a special form of ticks (identification
marks) for being placed against figures which have been altered and
neither its purpose nor significance should be disclosed to the client’s
staff.
Space to write important points for revision

Surprise Check
Q.8.10 2015 - Nov [7] (e), RTP Short Notes

Write short note on the Surprise checks (4 marks) Answer:

Surprise checks:
☐ Surprise checks are a part of normal audit procedures. An element of surprise can significantly improve the audit
effectiveness. Wherever practical, an element of surprise should be incorporated in the audit procedures.
☐ The element of surprise in an audit may be both in regard to the time of audit, i.e. selection of date, when the
auditor will visit the client’s office for audit and selection of areas of audit.
☐ Surprise checks are mainly intended to ascertain whether the internal control system is working effectively and
whether the accounting and other records are kept up to date as per the statutory regulations. Surprise checks can
exercise good moral check on the client’s staff. It helps in determining whether errors or frauds exists and if they
exist, brings the matter promptly to the management’s attention, so that corrective action can be taken at the earliest.
Surprise checks are very effective in verification of cash and inventories and investments, test checking of stock,
verification of accounting records, statutory registers and internal control system. The frequency of surprise checks
may be determined by the auditor in the circumstances of each audit but should normally be at least once in the
course of an audit.

MULTIPLE CHOICE QUESTION

1 Audit Planning

1. Formulating audit-plan, laying down two things, one is ‘broad framework for conducting the work and the second
(a) ‘method’ to ensure control over the quality of work’.
(b) ‘method to ensure control over the auditor’s work’.
(c) ‘method to ensure control over the clean’s work’.
(d) None of the above.
2. Auditor should plan his work to enable him to conduct an effective audit in ________ and ______ .
(a) a organised, systematic way.
(b) a timely, efficient manner.
(c) an efficient, timely manner.
(d) a systematic, proper way.

3. Audit Planning covers

(a) acquiring knowledge of the client’s accounting systems, policies and internal control procedure.
(b) establishing the expected degree of reliance to be place on internal control.
(c) determining and programming the nature, timing and extent of the audit procedures to be performed and
coordinating the work to be performed.
(d) All of them.
4. Planning an Audit of financial statement described under.
(a) SA - 200
(b) SA - 220

2 Audit Strategy

5. Strategy which sets the scope, timing and direction of the audit, and guides the development of the more detailed
audit plan is known as (a) Planning strategy.
(b) Planning and execution strategy.
(c) Overall audit strategy.
(d) Overall investigation strategy.

6. Auditor should establish overall audit strategy by.

(a) Identifying the characteristic of the audit engagement and ascertaining the reporting objective,
(b) Evaluate the professional judgement required and directing the engagement team’s efforts.
(c) Ascertain the nature, timing and extent of resources necessary to perform the engagement.
(d) All of them.
7. Overall Audit Strategy and Audit Plan are closely_________.
(a) intra related.
(b) inter related.
(c) inversely related.
(d) interchangeable.

3 Development of Audit Plan

8. The nature, timing and extent of planned risk assessment procedures as determined under
(a) SA - 300
(b) SA - 310

9. Audit Plan is more comprehensive than

(a) Audit procedure
(b) Audit forecasting
(c) Audit strategy
(d) Overall audit strategy.

10. Identifying and Assessing the risk of material misstatement through understanding the Entity and its
Environment describe under (a) SA - 300
(b) SA - 310
(c) SA - 315
(d) SA - 318.

4 Audit Planning
11. Planning is not a discrete phase of an audit, but rather a continual and iterative process.
The Statement is
(a) True
(b) Wrong
(c) Partially wrong
(d) Absolutely wrong.

12. Overall audit strategy and audit plan remain the ________ responsibility. (a) auditor’s
(b) management’s
(c) TCWG’S
(d) client’s

13. The auditor shall __________ the overall audit strategy and the audit plan during the course of the audit if
necessary
(a) not update and change
(b) update and change
(c) update but not change
(d) replace.

14. The nature, timing and extent of the direction and supervision of engagement team members and review of their
work vary depending on the factor(s)
(a) The area of the audit
(b) The size and complexity of the entity
(c) The assessed risks of material misstatement
(d) All of them.

15. The auditor shall document the _________ and any significant changes made during the audit engagement to the
overall audit strategy and the audit plan and the reason for such change.
(a) Overall audit strategy and audit plan
(b) Overall audit strategy
(c) Audit Plan
(d) Strategic Planing.

16. The documentation of overall audit strategy is a record of the _____ necessary for proper planning of audit.
(a) Key strategies
(b) Key planning
(c) Key decisions
(d) Key observations.

5 Audit Programme

17. An audit programme is a detailed plan of applying the _________ in the given circumstances with instructions
for the appropriate techniques to be a doped for accomplishing.
The audit objectives.
(a) Audit Planning
(b) Audit Control
(c) Audit Coordination
(d) Audit Procedures.

18. Audit Programme is universal for all types of business.

(a) True
(b) Wrong
(c) Partially True
(d) None.

19. Audit programme consists of a series of ____________ procedure to be applied for the purpose of obtaining
sufficient evidence for conducting the audit
(a) Planning
(b) Planning and execution
(c) Verification
(d) Authentication.

20. Audit Programme requires a

(a) Continuous follow up
(b) Periodic Change
(c) Periodic Review
(d) All of them.

21. Point(s) should be kept in mind while constructing the Audit Programme. (a) Consider all possibilities of error.
(b) Stay within the scope and limitation of the assignment. (c) Apply only those steps and procedures which are
useful in

accomplishing the verification purpose in the specific situation. (d) All of them.

22. ___________ may be defined as the information used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based. (a) Audit Plan
(b) Audit Programme
(c) Audit Evidence
(d) Audit System.

23. __________ is the very basis for formulation of opinion and an audit __________ is designed to provide for that
by prescribing procedures and techniques.
(a) Audit Plan, Programme
(b) Audit Programme, Planning
(c) Audit Plan, Evidence
(d) Evidence, Programme.

24. An audit picks up evidence from a variety of fields except. (a) Documentary examination
(b) Memorandum and Article of association
(c) Physical examination and Arithmetical calculations of third parties (d) Statements and explanation of third
parties.

25. Audit Programme provides the assistant carrying out the audit with total and clear set of instructions of the work
generally to be done. (a) True
(b) False
(c) Partially True
(d) None.

26. ___________ helps in selection of assistants for the jobs on the basis of capability becomes earlier when the
work is rationally planned, defined and segregated.
(a) Audit Plan
(b) Audit Working Paper
(c) Audit - Note
(d) Audit Programme.

27. _________ serves as a guide for audits to be carried out in the succeeding year.
(a) Audit Plan
(b) Audit Working Paper
(c) Audit Note
(d) Audit Programme.

28. A hard and fast audit Programme may kill the initiative of efficient and enterprising assistants. This statement is
(a) True
(b) False
(c) Partially True
(d) None.

6 Audit Planning and Materiality

29. __________ is an important consideration for an auditor to evaluate whether the financial statements reflect a
true and fair view or not. (a) Audit Plan
(b) Audit Programme
(c) Materiality
(d) Audit evidence.

30. Materiality in Planning and Performing an Audit defines under (a) SA - 300
(b) SA - 315
(c) SA - 320
(d) SA - 318.
31. SA - 320 requires that an auditor should consider _________ and its relationship with __________ while
conducting the audit. (a) materiality audit evidence
(b) materiality, audit risk
(c) audit risk, materiality
(d) audit risk, audit evidence.
32. Auditor’s assessment of materiality and audit risk ___________ at the time of initially planning of the audit as
against at the time of evaluating the result of audit procedures.
(a) must be same
(b) may be different
(c) absolutely different
(d) None of them.
33. When establishing the overall audit strategy, the auditor shall determine materiality for the financial statement
__________.
(a) in part
(b) as a whole
(c) as universal
(d) None of them.
34. 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 misstatements exceeds
materiality for the financial statements as a whole is known as
(a) Materiality
(b) Performance Materiality
(c) Overall audit Plan
(d) Overall audit Procedures.
35. Determining materiality involves the exercise of _________ . (a) professional ethics
(b) professional performance
(c) professional observation
(d) professional judgement.
36. Factor that may not affect the identification of an appropriate benchmark. (a) The elements of the financial
statements
(b) Some items on which the attention of the users of the particular entity’s financial statements tends to be focused.
(c) Management’ behaviors in the entity
(d) The nature of the entity, where the entity is at in its life cycle, and the industry and economic environment in
which the entity operates. 37. ‘Revision of Materiality level is required as the and progresses’. Statement is
(a) True
(b) False
(c) Partially True
(d) None.
38. Audit documentation regarding materiality include:
(a) Materiality for the financial statements as a whole and any revision there on.
(b) Performance materiality
(c) Materiality level or levels for particular classes of transactions, account balance or disclosures.
(d) All of them.

Answer

1. (a) 2. (c) 3. (d) 4. (c) 5. (c) 6. (d) 7. (b) 8. (c) 9. (d) 10. (c) 11. (a) 12. (a) 13. (b) 14. (d) 15. (a) 16. (c) 17. (d) 18.
(b) 19. (c) 20. (c) 21. (d) 22. (c) 23. (d) 24. (b) 25. (a) 26. (d) 27. (d) 28. (a) 29. (c) 30. (c) 31. (b) 32. (b) 33. (b) 34.
(b) 35. (d) 36. (c) 37. (a) 38. (d)

CHAPTER

Audit Documentation and 3 Audit Evidence

This Chapter Covers: Study’s Chapter: 3

Chapter Comprises: Audit Documentation ☹Audit Evidence ☹Written Representations ☹External Confirmation
☹Initial Audit Engagement ☹Meaning of Related Party ☹Concept of True and Fair ☹Auditor and the Subsequent
Events ☹Auditor and the Going Concern Assumption.

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis

Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Objective Short Notes
Legend
Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book. 6.97
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK Repeatedly Asked Questions
2.4, 2.7
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
1.2, 1.5, 1.8, 2.4, 2.9, 1.7, 1.8, 1.13, 2.4, 4.1, 6.2 2.9, 6.2
1 Audit Documentation
Q.1.1 2008 - May [3] (b) Descriptive What does SA ☐230 say about utility, ownership, custody and retention of
working papers? (4 marks)
Answer:
Audit Working Paper
Basic Working paper should: Requirements 1.
2. 3.

4. be designed and properly organized to meet the auditor’s need in the circumstance of each audit. facilitate the
delegation of work.
be sufficiently complete and detailed to obtain an overall understanding.
record the audit plan, audit procedures etc.

Working Papers 1. are classified into

2.

Ownership and 1. Custody of working 2. papers

3.

Permanent audit files : Are those which are of continuing importance and will be required in future audits. They
only need to be updated from time to time.
Current audit files : Contain the information relating to audit of a single period.

Working papers are the property of the auditor. He may, at his discretion, make portions of it, available to his client.
The auditor is entitled to retain them (Chantrey Martin and Co. V. Martin)

Space to write important points for revision

Q.1.2 2008 - Nov [1](vi) Objective

State with reasons (in short) whether the following statement is True or False:
Audit Working Papers to be kept at least for 3 (three) years. (2 marks)

OR 2015 - Nov [2](ii) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
Working papers are property of client, as it contains client’s informations.

(2 marks) Answer:
False:

As per SA – 230, “Audit Documentation” “Documentation” refers to the working papers prepared or obtained by
the auditor and retained by him, in connection with the performance of his audit.
This auditing standard states that the working papers are the property of auditor and he has to retain them for a
period of 7 years.

Space to write important points for revision

Q.1.3 2010 - May [8](b) Short Notes

Write short note on the Audit Working Papers. (5 marks) Answer:

Audit Working Papers
Meaning As per SA-230 “i.e. Audit Documentation”,

(Revised) the audit working papers refer to the documents proposed or obtained by the auditor and retained by him
in connection with the performance of his audit.
Provides for Working papers should provide for :
1. Means of controlling current audit work.
2. Supervision and review of the audit work.
3. Evidence to support the auditor’s opinion.
4. Information about the business being audited, including the recent history.
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Q.1.4 2011 - May [1] {C} (b) Descriptive Comment on the following in relation to SAs:
“Audit documentation serves a number of additional purposes.”

(5 marks) Answer:

Audit Documentation
According to SA 230 on “Audit Documentation”, audit documents once collected serves a number of additional
purposes.
These purpose are as follows:
1. Enabling the conduct of quality control reviews and inspections. 2. Enabling the conduct of external inspections
in accordance with

applicable legal regulatory or other requirements.

3. Enabling the engagement team to be accountable for its work.
4. Retaining a record of matters of continuing significance to future audits.
5. Assisting the engagement team to plan and perform the audit.
6. Assisting members of the engagement team responsible for supervision to direct and supervise the audit work and
to discharge their review responsibilities in accordance with SA 220 “Quality Control for an Audit of Financial
Statements”.
Space to write important points for revision

Q.1.5 2011 - Nov [7] (a) Short Notes Write short note on the Importance of working papers. (4 marks) OR 2013 -
Nov [7] (c) Short Notes

Write short note on the following : Importance of audit working papers. (4 marks) OR 2015 - May [7] (c) Short
Notes Write short note on the Importance of working papers. (4 marks)

Answer:
Importance of Working Papers
1. It provides guidance to the audit staff with regard to the manner of

checking the schedules.

2. The auditor is able to fix responsibility on the staff member who signs
each schedule checked by him.
3. It acts as evidence in the Tribunal of law when a charge of negligence
is brought against the auditor.
4. It acts as the process of planning for the auditor so that he can estimate
the time that may be required for checking the schedules. 5. It is useful in recording and demonstrating the audit
work from one year
to another.
6. Working papers are necessary to draw conclusion from the evidence
obtained.
7. It standardizes the documentation to improve the efficiency of the audit. 8. It facilitates to delegate the work as a
means to control its quality. 9. Helps in fixing responsibility on the staff member who signs each
schedule checked by him.
Therefore, the auditor should adopt reasonable procedures for custody and confidentiality of his working papers and
should retain them for a period of time sufficient to meet the needs of his practice and satisfy any pertinent legal or
professional requirements of record retention.
Space to write important points for revision
Q.1.6 2012 - Nov [6] (a) Descriptive

What are the audit working papers? Discuss various contents of current file. (8 marks) Answer:
Audit Working Papers: Please refer 2008 - May [3] (b) on page no. 98 Current Audit Files : In the current audit
files those audit working papers are kept which contain the information relating to audit of a single period. It records
nature, timing and extent of audit procedure performed and result of such procedures.

The Current Audit File normally includes:

1. Correspondence relating to acceptance of annual reappointment.
2. Analysis of transactions and balances.
3. Evidence of planning process of the audit and audit programme.
4. Evidence that assistant's work are supervised and reviewed.
5. Extracts of important matters related to minutes of Board Meetings and General Meetings which are relevant to
audit.
6. Copies of communication with other auditors, experts and other third parties.
7. Letters of representation or confirmation received from the client.
8. Auditor's conclusions on significant aspects of audit, including how exceptions and unusual matters, if any,
disclosed by the auditor's procedures were resolved or treated.
9. Copies of financial information being reported on and the related audit reports.
10. Record of the nature, timing and extent of auditing procedures performed and the result thereof.
11. Management representations on material matters.
12. Working paper acts as evidence in the Tribunal of law when a charge of negligence is brought against the
auditor.
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Q.1.7 2012 - Nov [7] (b), RTP Short Notes Write short note on the Auditor’s lien. (4 marks) Answer:
Auditor’s lien Meaning
Auditor’s lien

Any person having the lawful possession of somebody else’s property on which he has worked, may retain the
property for non-payment of his dues, on account of the work done on the property.
Auditor can exercise lien on books and documents placed at his possession by the client for non-payment of fees, for
work done on the books and documents.

Conditions for Exercising

Lien by the
Auditor

4.

Is lien possible in case of

Company

1.
2.

3. Documents retained must belong to the client who owes the money.
Documents must have come into possession of the auditor on the authority of the client. They must not have been
received through irregular or illegal means.
The auditor can retain the documents only if he has done work on the documents assigned to him. Such documents
can be retained which are connected with the work on which fees have not been paid. Under Sec. 128(1) of the Act,
2013 books of accounts of a company must be kept at the registered office.
However, Board can pass a resolution and handover the books of account to the auditor and makes the necessary
notification to the Registrar.
However, as per Sec. 128, he must provide reasonable facility for inspection of the books of account by directors
and others authorised to inspect under the Act.
Lien on working papers
It can be done on the following conditions: 1.
2.
3.

Lien is exercised in respect of client’s property. His working papers being his own property, the question of Lien on
them does not arise.

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Q.1.8 2013 - May [1] {C} (a) (ii) Descriptive Discuss with reference to SAs:
Factors affecting form, contents and extent of audit. (5 marks)
OR 2015 - Nov [6] (a), RTP Descriptive The form, contents and extent of audit documents depend on certain
factors. Explain with reference to SA 230. (4 marks)

Answer:
As per SA-230 on “Audit Documentation”, the form, content and extent of audit documentation depend on the
following factors:
1. The size and complexity of the entity.
2. The nature of the audit procedures to be performed.
3. The identified risks of material misstatement.
4. The significance of the audit evidence obtained.
5. The nature and extent of exceptions identified.
6. The need to document a conclusion or the basis for a conclusion not

readily determinable from the documentation of the work performed or audit evidence obtained.
7. The audit methodology and tools used.
Space to write important points for revision
Q.1.9 2015 - May [5] (a) Descriptive Audit documentation serves a number of purposes. Explain with reference to
SA-230. (6 marks)

Answer:
Purposes of Audit Documentation: As per SA 230:
1. It helps for assisting the engagement team to plan and perform the audit. 2. It helps for assisting members of the
engagement team responsible for

supervision to direct and supervise the audit work and to discharge their review responsibilities.

3. Documentation enables the engagement team to be accountable for its work.

4. It helps to retain a record of matters of continuing significance to future audits.
5. It enables the conduct of quality control reviews and inspections.
6. It enables the conduct of external inspections in accordance with applicable legal, regulatory or other
requirements.
7. Working Papers are necessary to record and demonstrate the audit work from one year to another.
8. It draws conclusion from the evidence obtained.
9. Working Papers are necessary to standardize the audit procedures to improve the efficiency of the audits.
10. It facilitates the delegation of work as a means to quality control of work performed.
11. Working Papers provide guidance to the audit staff with regard to the manner of checking the schedules.
12. Working Papers act as evidence in a court of law when a charge of negligence is brought against the auditor.
Space to write important points for revision

Q.1.10 2016 - Nov [2](x) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
Auditor’s right of lien is unconditional. (2 marks)

Answer:
Incorrect:
The auditor can exercise his lien on client's books and records subject to the following conditions:
(a) Document must be of the client who owes the money.
(b) Documents must have come into auditor's possession with the client's

authority.
(c) Some work must have been done and fees for work performed must be
outstanding.

Q.1.11 2018 - May [1] {C}(c) Objective

Examine with reasons (in short) whether the following statement are correct or incorrect :
(c) The Audit Engagement documentations should ordinarily be retained

by the auditor for minimum of six years from the date of the auditor’s report or is later, the date of the group
auditor’s report, whichever is later. (2 marks)

Answer:
Incorrect:
In specific case of audit engagements, the retention period for audit engagement documents shall be not shorter than
seven years from the date of the auditor’s report, or if later, the date of the group auditor’s report.

Space to write important points for revision

Q.1.12 2019 - May [3] (d) Descriptive “Completion Memorandum” is helpful as part of the audit documentation.
Explain. (3 marks)

Answer:
As per SA 230, ‘Audit Documentation’, the auditor may consider it helpful to prepare and retain as a part of the
audit documentation a completion memorandum (i.e. a summary) that describes
– the significant matters identified during the audit., and
– how they were addressed.
Such a summary may facilitate effective and efficient review and inspection of the audit documentation, particularly
for large and complex audits. Further, the preparation of such a completion memorandum may assist auditor’s
consideration of the significant matters. It may also help the auditor to consider whether there is any individual
relevant SA objective that the auditor cannot achieve that would prevent the auditor from achieving the overall
objectives of the auditor.

Q.1.13 2007 - Nov [2] (c), RTP Practical

Comment on the following situation/statement:

M/s. Health Zone, a partnership firm, running a nursing home have decided to discontinue you as an auditor for the
next year and requests you to handover all the relevant working papers of the previous year.

(6 marks) Answer:

Audit Working Paper: Ownership and custody

Facts: According to SA-230 “Audit Documentation”, the working papers are the property of the auditor, the
auditor may, at his discretion make portion of or extracts from his working papers available to the client. Analysis:
In the given case M/s Health Zone, a partnership firm owning a nursing home have requested the Auditor to
handover all relevant working papers of the previous year. The working paper being property of auditor he is under
no obligation to hand them over to M/s Health Zone. However the auditor may at his discretion, make proportions of
working paper available to M/s Health Zone.

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Q.1.14 2010 - Nov [6] (c) Practical R.K. & Company are the auditors of PQR Company Ltd. The Managing

Director of the Company demands copies of the working papers from the auditors. Are the auditors bound to oblige
the Managing Director?

(4 marks) Answer:
Working Papers: Ownership and Custody
Facts : According to SA-230 “Audit Documentation”, the working papers are the property of the auditor, the
auditor may, at his discretion make portion of or extracts from his working papers available to the client. The auditor
is entitled to retain them. (Chantrey Martin and Co. Vs Martin) Analysis : In the given case the managing director of
the company has demanded copies of the working papers from the auditor. He has no right to obtain copies of the
working papers from the auditor because they are the property of the auditor. But the auditor may at his discretion
make portions of or extracts from the working paper to the managing director of R K & Company.
Inference : The auditor is not bound to oblige the managing director by supplying copies of the audit working
papers.

Space to write important points for revision

2 Audit Evidence
Q.2.1 2007 - Nov [1] (vii) Objective

State with reasons (in short) whether the following statement is True or False:
One of the techniques used for gathering evidence is substantial review.

(2 marks) Answer:
Correct:
For collection and accumulation of audit evidence, certain methods and means are available and these are known as
audit techniques. Some of the techniques commonly adopted by the auditors are Posting Checking, Casting
Checking, Physical Examination and count, confirmation, Inquiry, Year end Scrutiny, Re-computation, Tracing in
subsequent period, Bank reconciliation. Substantial review is examination of accounts having large amounts, value
and importance. Substantial review can be used for gathering evidence.

Space to write important points for revision

Q.2.2 2008 - May [1] (xii) Objective

State with reasons (in short) whether the following statement is True or False:
Compliance procedures are tests designed to obtain audit evidence as to completeness, accuracy and validity of the
data produced by accounting system. (2 marks)

Answer:
False :
Compliance procedures are the tests designed to obtain reasonable assurance that those internal controls on which
audit reliance is to be placed are in effect. On the other hand, Substantive procedures are tests designed to obtain
audit evidence as to completeness, accuracy and validity of the data produced by accounting system.

Space to write important points for revision

Q.2.3 2008 - May [3] (a) Descriptive

What are the various assertions an auditor is concerned with while obtaining audit evidence from substantive
procedure? (6 marks) Answer:
Substantive Procedures are tests designed to obtain evidence as to the completeness, accuracy and validity of data
produced by accounting system. They are of two types:
1. Test of details of transaction and balances.
2. Analysis of significant ratios and trends including the resulting

investigation of unusual fluctuations and items.

In obtaining evidence from substantive procedures, the auditor is concerned with the following assertions:

1. Existence 2. Rights and Obligations 3. Occurrence

4. Completeness
An asset or liability exists at a given date. An asset is a right of an entity and a liability is an obligation of the entity
at a given date.
A transaction or event took place which pertains to the entity.
There are no unrecorded assets, liabilities or transactions.
5. Valuation An assets or liability is recorded at an appropriate carrying value.
6. Measurement A transaction is recorded in the proper amount and revenue or expense is allocated to proper
period. 7. P r e s e n t a t i o n An item is disclosed, classified and described in and Disclosure accordance with the
acceptable accounting policies and, when applicable, legal requirements. Space to write important points for revision
Q.2.4 2008 - May [8] (a), 2011 - Nov [7] (b) Short Notes
Write short note on the Reliability of Audit Evidences. (5, 4 marks)
OR 2013 - Nov [1] {C} (c) Descriptive

Discuss the following:

The reliability of audit evidence is influenced by its source, nature and circumstances under which it is obtained. (5
marks)

Answer:

Reliability of Audit Evidence SA 500 on “Audit Evidence” provides that the reliability of information to be used
as audit evidence and therefore of the audit evidence itself, is influenced by its source and its nature and the
circumstances under which it is obtained, including the controls over its preparation and maintenance where
relevant. Therefore, generalisations about the reliability of various kinds of audit evidence are subject to important
exceptions. Even when information to be used as audit evidence is obtained from sources external to the entity,
circumstances may exist that could affect its reliability.

The reliability of 1. audit evidence is 2. influenced by 3.

4.
5.

Generalisations 1. useful in
assessing 2. reliability of
audit evidence 3.

4. Its source i.e. internal and external.

Its nature i.e. visual, documentary or oral. Circumstances under which it is obtained. Consistency of evidence
obtained from different sources or nature.
Nature of assertion obtained and its materiality.

External evidence (e.g.: confirmation received from third party) is more reliable than internal evidence. Internal
evidence is more reliable when related internal control is satisfactory.
Evidence in the form of documents and written representations are usually more reliable than oral representation.
Evidence obtained by the auditor himself is more reliable than that obtained through the entity.

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Q.2.5 2008 - Nov [6] (b) Distinguish Between

Distinguish between Internal evidence and External evidence. (4 marks) Answer:

Sl. Basis Internal Evidence
No.

1. Meaning Internal evidence is one that has been created, used and retained within the client’s organization.

External Evidence

External evidence is one, which originates outside the client’s organization.

2. Use for
accounting
These may not always c o n s t i t u t e a d i r e c t a c c o u n t i n g s o u r c e document.

3. Auditor’s role
4. Reliability
5. Example

It is provided to the auditor by the sources i n t e r n a l t o t h e organization.

It is not as reliable as external evidence.

Sales invoice duplicate copy, inventory report, wage sheets, etc.

T h e s e d o c u me n t s a r e generally proposed in the ordinary course of business activities and form part of its r e
c o r d s w h e t h e r o f a c c o u n t i n g o r n o n accounting nature.

It is obtained directly by the auditor.

It is considered more reliable than internal evidence. P a y e e ’ s rece i p t , b a n k c a n c e l l e d s t a t e m e n t ,
cheques etc. Space to write important points for revision
Q.2.6 2009 - May [1] (iii) Objective

State with reasons (in short) whether the following statement is True or False:
Taking management representation is a convenient, economical and equally acceptable auditing method even where
the direct access by auditor to audit evidence is possible. (2 marks)

Answer:
False :
If it is possible for auditor to check the transaction by himself through direct access, it is not fair for him to merely
rely the management representation as prime audit evidence.

Space to write important points for revision

Q.2.7 2010 - May [8] (a), 2014 - Nov [7] (c) Short Notes

Write short note on the following:

Substantive Procedures (5, 4 marks) Answer:
Substantive Procedures

Meaning
Purpose
Assertions

Substantive tests seek to provide evidence as to the completeness, accuracy and validity of an amount or account
balance.

The auditor carries out substantive tests on all aspects of the financial statements, to obtain sufficient, relevant and
reliable evidence on which to base his opinion.

The auditor is concerned with the following assertions:

1. Existence
2. Rights and Obligations
3. Occurrence
4. Completeness
5. Valuation
6. Measurement
7. Presentation

The specific assertions are 1. Existence An asset or liability exists at a given date. 2. Rights and obligations 3.
Occurrence
An asset is a right of an entity and a liability is an obligation of the entity at a given date.
A transaction or event took place which pertains to the entity.
4. Completeness
5. Valuation
6. Measurement
7. Presentation and Disclosure
Nature of Check
Types
There are no unrecorded assets, liabilities or transactions.
An assets or liability is recorded at an appropriate carrying value.
A transaction is recorded in the proper amount and revenue or expense is allocated to proper period.

An item is disclosed, classified and described in accordance with the acceptable accounting policies and, when
applicable, legal requirements.

It constitutes a check on the specific items e.g.: fixed assets (PPE), debtor account balance etc. They are of two
types:

1. Tests of details of transactions and balances, i.e. vouching and verification and,
2. Analysis of significant ratios and trend including the resulting investigation of unusual fluctuations and items.

Example : Substantive tests are conducted in areas, which are not subject to internal control and are hence
judgmental in nature, e.g. valuation of stock, provision for doubtful debts etc.

Space to write important points for revision

Q.2.8 2010 - Nov [2] (c), RTP Descriptive

What do you mean by the term 'Sufficient Appropriate Audit Evidence' ? State various factors that help the auditor
to ascertain as to what is sufficient appropriate audit evidence. (6 marks)

Answer:
Sufficient appropriate audit evidence:
Meaning : As per SA 200 “the auditor should obtain sufficient appropriate audit evidence through performance of
compliance and substantive procedures to enable him to draw reasonable conclusions therefrom on which to base his
opinion on the financial information”.
SA 500 on ‘Audit Evidence’ again elaborate this concept. As per this standard sufficiency and appropriateness are
interrelated and apply to evidence obtained from both compliance and substantive procedures. Sufficiency means the
quantum of audit evidence obtained whereas appropriateness is related to its relevance and reliability.
Generally, the auditor finds it necessary to rely on audit evidence which is persuasive rather than conclusive.
Auditor may often seek evidence from different sources or of different nature to support the same assertions.
Various factors which help the auditor to ascertain sufficient and appropriate audit evidence : These are the
factors which influence the auditor’s judgment as to what is sufficient and appropriate audit evidence :

(i) The materiality of the item.

(ii) The type of information available.
(iii) The trend indicated by accounting ratios and analysis. (iv) The experience gained during previous audits.

(v) The results of auditing procedures, including fraud and errors which may have been found.

(vi) Degree of risk of misstatements which may be affected by factors such as the nature of items, adequacy of
internal control, nature and size of businesses carried out by the entity, situations which may exert an influence on
management and the financial position of the entity. The auditor obtains the evidence through compliance
procedures and substantive procedures to satisfy assertions contained in the financial statements.
Space to write important points for revision

Q.2.9 2011 - May [2] (a)

Explain various methods to obtain audit evidence.

OR 2015 - May [7] (b), RTP

Write short note on the Methods to obtain audit evidence.
OR 2015 - Nov [4] (b)
Descriptive (8 marks) Short Notes (4 marks) Descriptive

Mr. A was appointed statutory auditor of P Ltd., but he was not able to gather the sufficient audit evidences. Discuss
how he should proceed to gather more audit evidences. (6 marks)

Answer:

The auditor obtains evidence in performing compliance and substantiative procedures by one or more of the
following methods: 1. Inspection.
2. Observation.
3. Inquiry and confirmation.
4. Computation

1. Inspection (i) Inspection refers to examining of records,

documents or tangible assets.

(ii) It provides evidence of varying degrees of
reliability depending upon their
(a) Nature,
(b) Source and
(c) Effectiveness of internal control over their processing.
(iii) E.g. PPE are physically inspected. It provides
reliable evidence as regards existence, but not
necessarily as to their ownership or value. (iv) Four major categories of documentary
evidence, which provide different degrees of
reliability are:

2. Observation
3. Inquiry and Confirmation

Documentary evidence originating from – (a) and held by third parties,

(b) third parties and held by the entity (c) the entity and held by third parties and (d) and held by the entity.

(i) Observation is nothing but witnessing a process or procedure being performed by others.

(ii) E.g. the auditor observes payment of wages or stock-taking conducting at the client’s office.
(iii) This method is useful for evaluating performance of internal control procedure that leaves no audit-trail.

(i) Inquiry involves seeking of appropriate information from knowledgeable persons inside or outside the entity.

(ii) Inquiries may be

(a) Formal written inquiries addressed to third parties, or

(b) Informal oral inquiries addressed to persons inside the entity.
(iii) Responses to inquiries provide the auditor with
(a) information, which he did not previously
possess or, (b) corroborative evidence of
existing information.
(iv) Confirmation is the response to an inquiry to
corroborate information contained in the
accounting records. E.g.: the auditor may
obtain confirmation of account balances by
direct communication from debtors.

6. Analytical Procedure
7. Inquiry
4. Computation (i) Computation involves checking the arithmetical accuracy of source documents and accounting
records or performing independent calculations.

(ii) e.g. of such areas are (a) depreciation, (b) managerial remuneration in case of company etc.

5. Re-performance It involves the auditor’s independent execution of procedures or controls that were originally
performed as part of the entity’s internal control.

Analytical procedures consist of evaluations of financial information made by a study of plausible relationships
among both financial and non- financial data. Analytical procedures also encompass the investigation of identified
fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from
predicted amounts.
Inquiry consists of seeking information of knowledgeable persons, both financial and nonfinancial, within the entity
or outside the entity. Inquiry is used extensively throughout the audit in addition to other audit procedures. Inquiries
may range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral
part of the inquiry process.

Space to write important points for revision

Q.2.10 2013 - May [1] {C} (b) (ii) Descriptive Discuss the following:
Inquiry is one of the audit procedure to obtain audit evidence. (5 marks)

Answer:
Inquiry and Confirmation :
1. Inquiry involves seeking of appropriate information from knowledgeable

persons inside or outside the entity.

2. Inquiries may be
(a) Formal written inquiries addressed to third parties, or
(b) Informal oral inquiries addressed to persons inside the entity. 3. Responses to inquiries provide the auditor with
(a) information, which he
did not previously possess or, (b) corroborative evidence of existing
information.
4. Confirmation is the response to an inquiry to corroborate information
contained in the accounting records. E.g. the auditor may obtain
confirmation of account balances by direct communication from debtors.
Although corroboration of evidence obtained through inquiry is often of particular importance, in the case of
inquiries about management intent, the information available to support management’s intent may be limited. In
these cases, understanding management’s past history of carrying out its stated intentions, management’s stated
reasons for choosing a particular course of action and management’s ability to pursue a specific course of action
may provide relevant information to corroborate the evidence obtained through inquiry. In respect of some matters,
the auditor may consider it necessary to obtain written representations from management and where appropriate,
those charged with governance to confirm responses to oral inquiries.
Space to write important points for revision

Q.2.11 2013 - May [2] (vi) Descriptive

Comment on the following:

Compliance procedures are tests designed to obtain audit evidence as to completeness, accuracy and validity of data
produced by accounting system. (2 marks)

Answer:
As per AS-240, compliance procedure is one of the technique adopted in obtaining audit evidence. These tests are
conducted by the auditors to obtain reasonable assurance that the internal control system on which reliance is to be
placed are effective. Since it constitutes a check on internal control system therefore, it is a part of internal control
system.

Space to write important points for revision

Q.2.12 2016 - May [2] (g) Objective State with reasons (in short) whether the following statement is correct or
incorrect:
Substantive procedures do not test the balances of accounts. (2 marks)

Answer:
Incorrect:
Substantive audit procedure seeks to provide evidence as to accuracy of an amount and balance of account in
financial statements.

Space to write important points for revision

Q.2.13 2016 - Nov [2] (i) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
One of the techniques used for gathering evidence is substantial review.

(2 marks) Answer :
Correct:
For collection and accumulation of audit evidence, certain methods and means are available and these are known as
audit techniques. Some of the techniques commonly adopted by the auditors are Posting Checking, Casting
Checking, Physical Examination and count, confirmation, Inquiry, Year end Scrutiny, Re-computation, Tracing in
subsequent period, Bank reconciliation. Substantial review is examination of accounts having large amounts, value
and importance. Substantial review can be used for gathering evidence.

Space to write important points for revision

Q.2.14 2016 - Nov [7] (e) Short Notes

Write short note on the Management representation (4 marks) Answer:

Management Representations
Meaning
According to SA - 580 (Revised) on written Representation, Management

representation means written or oral confirmations made by the management in relation to the matters of the
financial statements.
Prepared by
Management Representation can either:

(i) be sent by the management itself on its own, or

(ii) It may be outlined by the auditor and subsequently acknowledged and confirmed by the management.
Other Formalities
It must be properly dated and signed by a competent authority. It must be
addressed to the auditor.
As Evidence
Management Representation is a good evidence for the auditor and hence
it is documented as working papers.
Auditors Duty
It is auditor’s duty to obtain written representation that management has
disclosed to the auditor about all known actual or possible non-compliance
with laws and regulations whose effects should be considered while
preparing financial statements.
Basic elements of Management Representation Letter
As per SA 580 “Written Representation”, some of the basic elements of a
Management Representation letter are:
1. It is a written statement by management provided to the auditor to confirm certain matters or to support other
audit evidence.
2. It does not include financial statements, the assertions therein, or supporting books and records.
3. Auditor shall request management to provide a written representation that it has fulfilled its responsibility
regarding preparation of the financial statements in accordance with the applicable financial reporting framework,
including where relevant their fair presentation, as set out in the terms of the audit engagement.
4. The written representations shall be for all financial statements and period(s) referred to in the auditor’s report.
Space to write important points for revision

Q.2.15 2017 - May [6] (b) Descriptive

Answer the question:

With reference to SA 500, “Audit Evidence”, discuss the different sources and their reliability, of audit evidence. (6
marks)

Answer:
Sources of Audit Evidence:
1. Internal Evidence:

Internal evidences are those evidences which originates, used and retained in the clients organisation.
It is provided to the Auditor by the sources internal to the organisation. Example: Employees Wage sheet, Sales
invoice, Counter foils of Receipts, Purchase requisition, Minutes book etc.

2. External Evidence:
External evidences are those evidences which originates outside the clients organisation. It is generally prepared in
the ordinary course of business activities and may be sometimes obtained directly by the auditor. Example:
Purchase invoice, Bank statement confirmation of balances of Debtors, Creditors, Borrowers etc.
Reliability of Audit Evidence:

Reliability of Audit Evidence SA 500 on “Audit Evidence” provides that the reliability of information to be used
as audit evidence and therefore of the audit evidence itself, is influenced by its source and its nature and the
circumstances

The reliability of audit

evidence is influenced by

Generalisations useful in
assessing
reliability of
audit evidence

under which it is obtained, including the controls over its preparation and maintenance where relevant. Therefore,
generalisations about the reliability of various kinds of audit evidence are subject to important exceptions. Even
when information to be used as audit evidence is obtained from sources external to the entity, circumstances may
exist that could affect its reliability.
1. Its source i.e. internal and external.
2. Its nature i.e. visual, documentary or oral. 3. Circumstances under which it is obtained. 4. Consistency of evidence
obtained from different

sources or nature.
5. Nature of assertion obtained and its materiality.
1. External evidence (e.g.: confirmation received from third party) is more reliable than internal evidence.
2. Internal evidence is more reliable when related internal control is satisfactory.
3. Evidence in the form of documents and written representations are usually more reliable than oral representation.
4. Evidence obtained by the auditor himself is more reliable than that obtained through the entity. Space to write
important points for revision

Q.2.16 2019 - Nov [3] (a) Descriptive

Discuss the Various points which auditor needs to consider in determining whether it is appropriate to use audit
evidence about operating effectiveness of controls obtained in previous audit, and if so, the length of the time period
that may elapsed before retesting. (4 marks)

Q.2.17 2019 - Nov [3] (d) Descriptive

Discuss the audit procedure to be considered by an auditor while performing analytical procedure to obtain audit
evidence as to overall reasonableness of purchase quantity and price. (3 marks)

3 External Confirmation
Q.3.1 2019 - May [1] (g) Objective

Positive Confirmation request is a request where the confirming party respond only if it disagrees with the
information provided in the request. (2 marks) Answer:

This Statement is Incorrect

Positive confirmation request is a request that the confirming party respond directly to the auditor indicating whether
the confirming party agrees or disagrees with the information in the request, or providing the requested information.

Space to write important points for revision

4 Concept of True and Fair
Q.4.1 2012 - Nov [2] (a)
Explain the concept of “True and Fair” view. OR 2016 - Nov [1] {C} (b)
Discuss the following:

Descriptive (6 marks)
Descriptive

What constitutes true and fair view is a matter of auditor’s judgement, but some specific points must be seen by the
auditor to ensure true and fair view. (4 marks)

OR 2018 - May [3] (a) Descriptive

What constitutes a ‘true and fair’ view, is the matter of an auditor’s judgement in the particular circumstances of a
case. In order to ensure ‘true and fair’ view, auditor has to review certain points. Mention any such 5 (five) points in
brief. (5 marks)

Answer:
Concept of “True and Fair”: A fundamental concept in auditing is the concept of true and fair audit report. The
statutory auditor of a company has to express the opinion in his report on the true and fair character of the balance
sheet and the result shown by the profit and loss account. This requires that the auditor should examine the accounts
with a view to verify that all assets, liabilities, income and expenses are stated as amounts which are in accordance
with accounting principles and policies which are relevant and no material amount, item or transaction has been
omitted. 1. According to Sec. 129 of the Companies Act, 2013, as amended by

the Companies (Amendment) Act, 2017, the financial statements shall give a true and fair view of the state of
affairs of the company or companies, comply with the accounting standards notified under Sec. 133 of the
Companies Act, 2013 and shall be in the form or forms as may be provided for different class or classes of
companies in Schedule III:
☐ Provided that the items contained in such financial statements shall

be in accordance with the accounting standards;

☐ Provided further that nothing contained in this sub-Sec. shall apply
to any insurance or banking company or any company engaged in
the generation or supply of electricity, or to any other class of
company for which a form of financial statement has been specified
in or under the Act governing such class of company: ☐ Provided also that the financial statements shall not be
treated as
not disclosing a true and fair view of the state of affairs of the
company, merely by reason of the fact that they do not disclose
(a) in the case of a company engaged in the generation or supply of electricity, any matters which are not required to
be disclosed by the Electricity Act, 2003;
(b) in the case of an insurance company, any matters which are not
required to be disclosed by the Insurance Act, 1938, or the
Insurance Regulatory and Development Authority Act, 1999; (c) in the case of a banking company, any matters
which are not
required to be disclosed by the Banking Regulation Act, 1949; (d) in the case of a company governed by any other
law for the time
being in force, any matters which are not required to be
disclosed by that law.
2. At every annual general meeting of a company, the Board of Directors of the company shall lay before such
meeting financial statements for the financial year.
3. If a company has one or more subsidiaries or associate companies it shall, in addition to financial statements
provided under sub-Sec. (2), prepare a consolidated financial statement of the company and of all the subsidiaries
and associate companies in the same form and manner as that of its own and in accordance with applicable
accounting standards which shall also be laid before the annual general meeting of the company along with the
laying of its financial statement under subSec. (2):
☐ Provided that the company shall also attach along with its financial statement, a separate statement containing
the salient features of the financial statement of its subsidiary or subsidiaries and associate company or companies in
such form as is prescribed under Rule 5 of the Companies (Accounts) Rules, 2014.
☐ Provided further that the Central Government may provide for the consolidation of accounts of companies in
such manner as is prescribed under Rule 6 of the Companies (Accounts) Rules, 2014. [As amended by Companies
Act, 2017]
4. The provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a
holding company shall, mutatis mutandis, apply to the consolidated financial statements referred to in sub-Sec. (3).
5. Without prejudice to sub-Sec. (1), where the financial statements of a
company do not comply with the accounting standards referred to in subSec. (1), the company shall disclose in its
financial statements, the
deviation from the accounting standards, the reasons for such deviation
and the financial effects, if any, arising out of such deviation. 6. The Central Government may, on its own or on an
application by a class
or classes of companies, by notification, exempt any class or classes of
companies from complying with any of the requirements of this section
or the rules made thereunder, if it is considered necessary to grant such
exemption in the public interest and any such exemption may be granted
either unconditionally or subject to such conditions as may be specified
in the notification.
7. If a company contravenes the provisions of this section, the managing
director, the whole time director in charge of finance, the Chief Financial
Officer or any other person charged by the Board with the duty of
complying with the requirements of this section and in the absence of
any of the officers mentioned above, all the directors shall be punishable
with imprisonment for a term which may extend to one year or with fine
which shall not be less than fifty thousand rupees but which may extend
to five lakh rupees, or with both.
In the relation of audit of a company, the accounts of a company shall be deemed as not disclosing a true and fair
view, if they do not disclose any matters which are required to be disclosed by virtue of provisions of Schedule III to
that Act, or by virtue of a notification or an order of the Central Government modifying the disclosure requirements.
So, the auditor will have to see that the accounts are drawn up in conformity with the provisions of Schedule III of
the Companies Act, 2013 and whether they contain all the matters required to be disclosed therein. In case of
companies which are governed by special Acts, the auditor should see whether the disclosure requirements of the
governing Act are complied with. It must be noted that the disclosure requirements laid down by the law are the
minimum requirements.

Thus to ensure true and fair view, an auditor has to see:

(i) that the assets are neither undervalued or overvalued, according to the applicable accounting principles;
(ii) no material asset is omitted;
(iii) the charge, if any, on assets are disclosed;
(iv) material liabilities should not be omitted;

(v) the profit and loss account and balance sheet discloses all the matters required to be disclosed;
(vi) accounting policies have been followed consistently; and (vii) all unusual, exceptional or non- recurring items
have been disclosed separately.
Space to write important points for revision
Q.4.2 2014 - Nov [6] (c) Descriptive Casting or totaling is an important tool of audit for an Auditor. (4 marks)

Answer:
☐ Casting and totaling is an important audit tool in normal audit procedure. ☐ As in casting totaling the total of the
particular account is done so that

any error in totaling is detected so that it helps the auditor to given opinion on true and fair view of financial
statement.
☐ So that casting and totaling is an important audit technique to help the auditor.
Space to write important points for revision
5 Miscellaneous
Audit Note Book Q.5.1 2008 - May [8](c) Short Notes Write short note on the Contents of Audit Note-book. (5
marks)

Answer:
Audit Note Book Meaning

Structure
Contents

An audit note book is a bound book in which a variety of matters observed during the course of audit are recorded. It
is a note book containing points or queries that require classification, explanation and investigation and the manner
in which they are finally settled.

The audit note book is generally divided into two parts☐

1. for keeping a record of general information as regards the audit as a whole, and,
2. for recording special points which have been observed during the course of audit of accounts of particular years.

1. General information containing :

(i) Nature of the business carried on,
(ii) Important provisions affecting its functioning like

MOA, AOA, partnership deed, trust deed, bye-laws etc.

(iii) Structure of the financial and administrative organization.

(iv) A list of the books of accounts, etc.
2. Current information containing :
(i) Audit queries not cleared immediately,
(ii) Mistakes in irregularities observed during the course of audit,
(iii) Unsatisfactory book-keeping arrangement, costing method etc.
Space to write important points for revision

Audit Note Book

Q.5.2 2016 - May [4] (b) Descriptive

What are the significant matters observed during the course of audit, a record of which should be kept in the Audit
Note Book? (6 marks)
Answer:
Following are the significant matters observed during the course of audit, a record of which should be kept in
audit note book. (I) General Information which contains following:

1. Nature of the business carried on.

2. Important provisions affecting its functioning like memorandum and Articles of Association, Partnership deed etc.
3. Structure of the financial and administrative organisation.
4. List of the books of account.
5. Name of principal officers, their duties and responsibilities.
6. Particulars of the system of accounts and internal control which are in operation.
7. Particulars of the accounting and financial policies followed.
8. Important contracts to which the client is a party e.g. collaboration contracts, Royalty contracts, etc.
(II) Current Information contains the following:
1. Audit queries not cleared immediately, e.g. missing receipts, vouchers etc.
2. Mistakes or irregularities observed during the course of audit e.g. failure to comply with requirements of the
Companies Act, or the provisions of the memorandum or Articles, change in the basis of valuation of finished stock
and WIP or in computation of depreciation, failure to provide adequate depreciation etc.
3. Unsatisfactory book keeping arrangements, costing method internal or financial administration or organisation.
4. Important information about the company which is not apparent from the accounts.
5. Special points requiring consideration at the time of verification of final accounts.
6. Important matters for future reference.
Space to write important points for revision

6
Account Balance at the end of Reporting Period
Q.6.1 2007 - Nov [3] (a) Descriptive Explain the following in brief :
Precautions to be taken in applying test check technique. (6 marks)

Answer:
Precautions: Test checking technique is an accepted auditing procedure and is generally used in case of large
business organizations having many homogeneous transactions. The precautions to be taken are:

1. Classification
2. System study in a sequential order
3. Evaluation of the internal control

The transactions of the organization must be classified under the appropriate head and may further be sub-classified
(i.e.) stratified, if there are wide variations between transactions of the same kind.

The system and procedure for entering and processing a transaction, from the beginning to the end should be studied
in a sequential order.

(i) The internal control system should be studied and evaluated :

• In the areas of accounts and finance.
• For its efficiency, soundness and

capability so that it produces a reliable accounting and financial data.

4. Clarity of test check plan
5. Scientific sample selection

6. Test check, not applicable (i.e.) prohibited areas

7. Sample size
8. Materiality
• It is done by studying the controls and internal checks.

(ii) For testing the operation of the internal control system:

• A few transactions should be selected

and
• They should be checked in depth by
applying the procedural tests.

A properly thought-out-test checks plan should be prepared and the objective of each check should be clearly
understood by the auditing staff.

The element of bias selection should not be present, while selecting the transactions for the test-check plan. For this
purpose the random number table should be used.

Areas requiring through verification should be listed. Test checks should not be done in these areas e.g. Depreciation
etc.

The number of transactions to be selected for each test check plan should be predetermined. The number to be tested
out of the given population can be easily known by reference to the statistical tables.

While conducting the audit, an error found may be material or immaterial. The immaterial errors do not distort the
overall truth and fairness of the accounts. Hence, it is necessary to decide upon the criteria to judge what constitutes
a material error.

Q.6.2 2014 - May [5] (a) Descriptive You are the auditor of a company. What precautions you will suggest in
adopting test checking technique for audit work? (8 marks) OR 2016 - May [5] (c) Descriptive What precautions
should be taken by an auditor while applying test check techniques? (4 marks)

Answer:
Test checking technique is an accepted auditing procedure and is generally used in case of large business
organisations having many homogeneous transactions.
The precautions to be taken by the auditor in test checking are as follows:

1. Classification
2. System Study
3. Efficiency of Internal Control

The transactions should be classified under appropriate heads and may be stratified, (i.e. classified into different sub-
groups) if wide variations exists between transactions of the same kind.

Systems and procedures for entering into and processing a transaction right from the beginning to the end should be
studied in a sequential order. It involves evaluation of authorisation, documentation and recording and evidencing
the same.

The whole of internal control system in the areas of accounts and finance should be studied and evaluated for its
efficiency, soundness and capability for producing reliable accounting and financial data. If and only if, the auditor
is satisfied about the soundness of controls and their operation in actuality, he can decide to have test checks.

4. Clarity of Plan

5. Scientific Sample Selection

A properly through out test check plan should be prepared and the objective of each check should be clearly
understood by the auditing staff.

The transactions falling under each test check should be selected in an unbiased manner. For this purpose, selection
shall be made by using to random number tables.

6. Prohibited Areas Areas requiring detailed and through can verification should be separately listed. Test checks
should not be done in these areas e.g. depreciation, payment to directors, etc.
7. Sample Size The number of transactions to be selected for each test check plan should be pre-determined this can
be done by deciding upon the degree of reliance that should be placed on the test check result and the confidence
level. Once the degree of reliance and confidence level required in the audit for expression of opinion have been
decided, the number to be tested out of given population can be easily known by reference to statical tables.

8. Materiality Errors that may be found are either material or immaterial in the context of particular audit. Since
errors of immaterial nature are not likely to distort the overall truth and fairness of accounts, it is necessary to decide
upon the criteria to judge what constitutes a material error.

MULTIPLE CHOICE QUESTION

1 Audit Documentation

1. Audit Documentation describe under

(a) SA 200
(b) SA 215
(c) SA 220
(d) SA 230.
2. Audit Documentation also known as
(a) Audit Notes
(b) Audit Note Book
(c) Working Papers
(d) Audit Evidence Book.
3. Audit documentation refers to the record of audit procedures performed, relevant __________ , and conclusions
the auditor reached. (a) Audit planning
(b) Audit evidence
(c) Audit procedures
(d) All of them.
4. Audit Documentation provide evidence that the audit was planned and perform in accordance with
(a) SAs
(b) Applicable legal and regulatory requirement
(c) (a) or (b)
(d) (a) and (b).
5. Which is not a purpose of Audit documentation.
(a) Assisting the engagement team to plan and perform the audit. (b) Assisting the management to form the letter of
engagement. (c) Enabling the engagement team to be accountable for its work. (d) Enabling the conduct of quality
control reviews and inspections. 6. Content and Extent of Audit Documentation does not depend on the factor.
(a) The size and complexity of the entity,
(b) The identified risks of material misstatement.
(c) The significance of audit evidence obtained and the nature and extent of exceptions identified.
(d) The requirements under Investigation.
7. Audit file may be defined as one or more folders or storage media, _____________ , containing the records that
comprise the audit documentation for a specific engagement.
(a) in physical form
(b) in electronic form
(c) (a) or (b)
(d) (a) and (b).
8. Appropriate time limit within which to complete the assembly of the final audit file is ordinarily _________ after
the date of audit report. (a) Less than 60 days
(b) More than 60 days
(c) Not more than 60 days
(d) Less than 90 days.
9. Retention period for audit engagement documents ordinarily is _________ from the date of the auditor’s report.
(a) not less than 7 years
(b) not less than 5 years
(c) less than 7 years
(d) less than 5 years.
10. The retention period for audit engagements ordinarily is no shorter than seven years from the date of the
(a) Auditor’s report
(b) Group Auditor’s report
(c) Auditor’s report or if later, the date of the group auditor’s report. (d) All of the above.
11. Audit Documentation Summary is also known as
(a) Audit Summary
(b) Audit File
(c) Audit Working Paper
(d) Completion Memorandum.
12. Audit Documentation Summary describes
(a) the significant matters identified during the audit.
(b) how they were addressed.
(c) the important conclusions conclude by the auditor.
(d) (a) and (b).
13. Audit Documentation Summary helps
(a) effective and efficient review and inspection of audit documentation for large and complex audit
(b) to assist auditor’s consideration of the significant matters (c) to consider whether there is any individual relevant
SA objectives that the auditor cannot achieve.
(d) All of the above.
14. In general audit documentation is the property of the
(a) Client
(b) TCWG
(c) Auditor
(d) Legal Agencies.
15. Auditor may at his discretion make portions of, or extract from, audit documentation available to clients,
provided
(a) such disclosure does not undermine the validity of the work performed.
(b) In the case of assurance engagements, the independence of the auditor or his personnel.
(c) (a) and (b)
(d) (a) or (b).

2 Audit Evidence

16. Auditing is a
(a) Hypothetical process.
(b) Identification process
(c) Investigation process
(d) Logical process.

17. An auditor is called upon to assess the actualities of the situation, review the statements of accounts and give
__________ about the truth and fairness of such accounts.
(a) a conclusion
(b) a general opinion
(c) a opinion
(d) an expert opinion.

18. ____________ may be defined as the information used by the auditor in arriving at conclusions on which the
auditor’s opinion is based. (a) Engagement letter
(b) Audit documents
(c) Audit Note Book
(d) Audit evidence.

19. Audit evidences are the evidence collected by the

(a) Accountant at the beginning of audit
(b) Accountant during the audit
(c) Auditor during the audit
(d) Auditor at the time of concluding the audit.
20. Audit evidence is necessary to support the __________. (a) auditor’s conclusion
(b) auditor’s investigations
(c) auditor’s opinion
(d) auditor’s opinion and report.

21. Auditor should obtain sufficient and appropriate audit evidence (a) To prepare audit report
(b) To reduce audit risk
(c) To facilitate audit work.

22. The sufficiency and appropriateness of audit evidence are (a) Interdependent
(b) Dependent
(c) Interrelated
(d) Intrarelated.

23. Audit risk and quantity of audit evidence is

(a) Directly related
(b) Indirectly related
(c) Interdependent
(d) Not related.

24. Auditor’s judgement as to sufficiency may be affected by the factors such as

(a) Size and characteristics of the population
(b) Materiality
(c) Risk of material misstatement
(d) All of the above.

25. Audit Evidence includes

(a) Confirmation from third party
(b) Analysts reports
(c) Comparable data about competitors
(d) Any of them.

26. ________________ also refers to the amount or amounts set by the auditor at less than the materiality level or
levels for particular class of transactions, account balances or disclosures.
(a) Audit Trial
(b) Over all audit procedure
(c) Materiality
(d) Performance Materiality.

27. _________ consists of looking at a process or procedure being performed by the others.
(a) Inspection
(b) Observation
(c) Reperformance
(d) Analytical procedures.

28. ___________ procedures also are used to obtain audit evidence about the absence of certain condition.
(a) Observation
(b) External Confirmation
(c) Analytical procedures
(d) Recalculation.

29. ______________ consists of checking the mathematical accuracy of documents or records.

(a) Observation
(b) External Confirmation
(c) Recalculation
(d) Re-performance.
30. ________ involves the auditor’s independent execution of procedures or control that were originally performed
as part of the entity’s internal control.
(a) Analytical Procedure
(b) External Confirmation
(c) Recalculation
(d) Re - Performance.

31. _______ consist of evaluation of financial information made by a study of plausible relationships among both
financial and non financial data. (a) Analytical Procedure
(b) External Confirmation
(c) Recalculation
(d) Inquiry.

32. __________ consists of seeking information of knowledgeable persons, both financial and non financial, within
the entity or outside the entity (a) Analytical Procedure
(b) Recalculation
(c) Re - Performance
(d) Inquiry.

33. ___________ defined as audit procedure designed to evaluate the operating effectiveness of control in
preventing or detecting and correcting, material misstatements at the assertion level. (a) Audit Process
(b) Audit Procedures
(c) Audit Control
(d) Test of Controls.

34. The auditor shall test controls, for which the auditor intends to rely on those controls in order to provide an
appropriate basis for the auditor’s intended reliance.
(a) for the particular time
(b) through out the period
(c) for a point of time
(d) (a) or (b).

35. Audit evidence pertaining ___________ may be sufficient for the auditor’s purpose.
(a) Only for a particular period
(b) For a period of time
(c) Only to a point of time
(d) (a) or (b).

36. When the auditor has determined that an assessed risk of material misstatement at the assertion level is a
significant risk, the auditor shall perform __________ that are specifically responsive to that risk. (a) Audit
Procedure
(b) Compliance Procedures
(c) Substantive Procedures
(d) Overall Audit Procedures.

37. Evidence which originate within the organisation being audited is ____________.
(a) Confined Evidence
(b) Extraordinary Evidence
(c) Internal Evidence
(d) External Evidence.

38. Purchase invoice, supplier’s challan, debit notes and credit notes, quotations are the example of
(a) Confined Evidence
(b) Extraordinary Evidence
(c) Internal Evidence
(d) External Evidence.
39. On the basis of nature, Audit Evidence may be
(a) Visual
(b) Oral
(c) Documentary
(d) Any of them.

40. _________ deals with the logical connection with, or bearing upon, the purpose of the audit procedure and,
where appropriate, the assertion under consideration.
(a) Realiability
(b) Relevance
(c) Reliance
(d) Relativity.

41. Reliability of Audit Evidence increases when

(a) Obtain from independent sources
(b) Obtained in documentary form
(c) Obtained directly by the auditor
(d) Any of them.

3 Written Representations

42. Written representations may be defined as a written statement by ___________ provided to the ____________ to
confirm certain matters or to support other audit evidence.
(a) auditor, management
(b) management, TCWG
(c) TCWG, management
(d) management, auditor.

43. Written representation includes financial statements, the assertions therein, or supporting books and records. The
Statement is (a) True
(b) False
(c) Partically True
(d) None.

44. ______________ are necessary information that the auditor requires in connection with the audit of the entity’s
financial statement (a) Audit Evidence
(b) Audit Inquiry
(c) Auditor’s representation
(d) Written representation.

45. Is written representations act as a audit evidence

(a) Yes
(b) No
(c) Partically True
(d) None of the above.

46. The objectives of the auditor is/are.

(a) To obtain written representations
(b) To support other evidence
(c) To respond appropriately
(d) All of them.

47. Written representations are requested by the ________ from ______. (a) management, auditor
(b) auditor, management
(c) TCWG, management
(d) auditor, TCWG
48. The Auditor may also ask management to reconfirm its acknowledgment and understanding of those
responsibilities is written representations. Statement is
(a) True
(b) Partically True
(c) False
(d) None.

4 Audit Evidence – Specific Items

49. Objective of auditor to obtain sufficient appropriate audit evidence regarding

(a) Existence and condition of inventory
(b) Completeness of litigation and claims involving the entity. (c) Presentation and disclosure of segment
information in accordance

with the applicable financial reporting framework

(d) All of the above.

50. Physical inventory counting is essential part of an audit process. (a) Correct
(b) Partically Correct
(c) Wrong
(d) None.

51. Attendance of an auditor at Physical Inventory Counting involves, inspecting the inventory to ascertain its
existence and evaluate its condition, and
(a) Performing investigation
(b) Performing test counts
(c) Performing compliance test
(d) Any of them.

52. If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the auditor shall
(a) make an alternative arrangement.
(b) leave the said audit
(c) conclude the audit report without verifying the inventory count (d) make or observe some physical counts on an
alternative date, and

perform audit procedures on intervening transaction. 53. The auditor shall design and perform audit procedures in
order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement
including
(a) Reviewing legal expense accounts.
(b) Reviewing minutes of meetings of TCWG and correspondence

between the entity and its external legal counsel.

(c) Inquiry of management including in-house legal counsel. (d) All of them.

54. If law, regulation or the respective legal professional body prohibits the entity external legal counsel from
communicating directly with the auditor, the auditor shall then adopt.
(a) Investigation procedure
(b) Management audit procedure
(c) Alternative audit procedure
(d) Overall audit procedure.

5 External Confermation

55. An audit evidence obtained as a direct written response to the auditor from a third party, in paper form, or by
electronic or other medium is known as
(a) External audit
(b) External investigation
(c) External confirmation
(d) External Procedures.

56. A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the
information provided in the request is called
(a) Positive confirmation request
(b) Negative confirmation request
(c) Non response
(d) Exception.

57. A failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a
confirmation request returned undelivered, is known as
(a) Positive confirmation request
(b) Negative confirmation request
(c) Non response
(d) Exception.

58. Using external confirmation procedures the auditor shall maintain control over external confirmation requests,
includes
(a) Determining the information to be confirmed or requested and

selecting the appropriate confirming party.

(b) Sending the requests, including follow - up requests when applicable
to the confirming party.
(c) (a) or (b)
(d) (a) and (b)
59. Factor not to be consider when designing confirmation request (a) Specific identified risks of material
misstatement, including (b) Defining audit plan and preparing audit procedures
(c) The layout and presentation of confirmation request (d) Prior experience on the audit or similar engagements.

6 Initial Audit Engagement

60. Initial audit engagement is required when

(a) The financial statements for the prior period were not audited. (b) The financial statements for the period were
audited by a

predecessor auditor
(c) (a) or (b)
(d) (a) and (b)

61. In conducting an initial engagement the objective of the auditor with respect to opening balances is to obtain
sufficient appropriate audit evidence about whether
(a) Opening balance contain misstatements that materially affect the

current periods financial statements

(b) Appropriate accounting policies reflected in the opening balances
have been consistently applied in the current period’s financial
statement.
(c) (a) or (b)
(d) (a) and (b).

7 Meaning of Related Party

62. A Person or other entity that has control or significant influence, directly or indirectly through one or more
intermediaries, over the reporting entity, is known as
(a) Associates
(b) Co-owner
(c) Third Party
(d) Related Party.

63. Related parties may operate through an extensive and complex range of relationship and structures, with a
corresponding increase in the ___________ of related party transactions
(a) understanding
(b) clarity
(c) complexity
(d) reliability

64. The auditor has a responsibility to perform audit procedures to identify, assess and respond to the risk of
___________ arising from the entity’s failure to appropriately account for related party relationships, transactions or
balances.
(a) material misstatement
(b) material fact’s and figures
(c) material evidences
(d) audit evidences

65. An understanding of the entity’s related party relationships and transactions is relevant to the auditor’s
evaluation of whether fraud risk factors are present required by __________.
(a) SA - 200
(b) SA - 215
(c) SA - 230
(d) SA - 240

66. In the related parties transactions, the potential effects of inherent limitations on the auditor’s ability to detect
material misstatements are greater for the reason:

(a) Management may be unaware of the existence of all related party relationships.
(b) Related party relationship may present a greater opportunity for collusion, concealment or manipulation by
management
(c) Only (a)
(d) Both (a) and (b).

8 Concept of True and Fair

67. The concept of true and fair is a ____________ concept in auditing. (a) Basic
(b) General
(c) Fundamental
(d) None.

68. “Forming an opinion and Reporting on financial statement” describes as per

(a) SA - 300
(b) SA - 315
(c) SA - 700
(d) SA - 715

69. To ensure ‘true and fair’ an auditor has to see except.

(a) that the assets are neither undervalued or overvalued, according to the applicable accounting principles.
(b) no material assets is omitted and if there is any change then disclosed
(c) Audited Financial Statements of the previous periods
(d) all unusual, exceptional or non-recurring items have been disclosed separately.

9 Auditor and Subsequent Events

70. Event occurring between the date of the financial statements and the date of auditor’ report is known as
(a) Extra events
(b) Extraordinary events
(c) Subsequent events
(d) Conclusive events.

71. The auditor shall take into account the auditor’s risk assessment regarding subsequent events includes
(a) Obtaining an understanding of procedures
(b) Inquiring of management
(c) Reading minutes and interim financial statements
(d) All of the above.

10 Auditor and Going Concern Assumption

72. Financial Statements are prepared on the assumption

(a) Going Concern
(b) Consistency
(c) Accrual
(d) Cost Concept

73. The going concern concept assumes that

(a) The entity continue running until the end of accounting period (b) The entity continue running for foreseeable
future
(c) The entity will close its operation after certain period (d) The entity can’t be liquidated.

74. The potential effects of inherent limitations on the auditor’s ability to detect material misstatements are greater
for future events or conditions that may cause an entity to cease to continue as a going concern, describe under
(a) SA - 200
(b) SA - 210
(c) SA - 215
(d) SA - 230.

75. Events or conditions that may cost significant doubt on the entity’s ability to continue as a going concern.
(a) Indications of withdrawal of financial support by creditor’s and

Adverse Key Ratios

(b) Loss of Key management without replacement
(c) Non- compliance with capital and other statutory or regulatory

requirements, such as solvency or liquidity requirements for financial institutions.

(d) Any of the above.
Answer

1. (d) 2. (c) 3. (b) 4. (d) 5. (b) 6. (d) 7. (d) 8. (c) 9. (a) 10. (c) 11. (d) 12. (d) 13. (d) 14. (c) 15. (d) 16. (d) 17. (b) 18.
(d) 19. (c) 20. (d) 21. (b) 22. (c) 23. (a) 24. (d) 25. (d) 26. (c) 27. (b) 28. (b) 29. (c) 30. (d) 31. (a) 32. (d) 33. (d) 34.
(d) 35. (c) 36. (c) 37. (c) 38. (d) 39. (d) 40. (b) 41. (d) 42. (d) 43. (b) 44. (d) 45. (a) 46. (d) 47. (d) 48. (a) 49. (d) 50.
(a) 51. (b) 52. (d) 53. (d) 54. (c) 55. (c) 56. (b) 57. (c) 58. (d) 59. (b) 60. (c) 61. (d) 62. (d) 63. (c) 64. (a) 65. (d) 66.
(d) 67. (c) 68. (c) 69. (c) 70. (c) 71. (d) 72. (a) 73. (b) 74. (a) 75. (d)

CHAPTER

Risk Assessment and 4 Internal Control

This Chapter Covers: Study’s Chapter: 4

Chapter Comprises: Audit Risk ☹Identifying and Assessing the Risks of Material Misstatement ☹Internal Control
☹Testing of Internal Control ☹Internal Control and “IT” Environment ☹Materiality and Audit Risk ☹Documenting
the Risk ☹Internal Audit ☹Difference between Internal Financial Control and Internal Control over Financial
Reporting.

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis

Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book.
6.152
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK . . . . . . . Weightage Analysis Repeatedly Asked Questions
3.3
Common Answered Questions
2.1, 3.1, 4.3, 4.4, 5.1, 6.8
Must Try Question
3.8, 4.3, 4.9, 6.2, 8.6, 9.2
1 Audit Risk
Q.1.1 2007 - Nov [1] (i) Objective

State with reasons (in short) whether the following statement is True or False:
There is direct relationship between detection risk and combined level of inherent and control risk. (2 marks)

Answer:
False :
There is an inverse relationship between detection risk and combined level of inherent risk and control risk, because
if inherent and control risk decreases detection risk increases.

Space to write important points for revision

Q.1.2 2008 - Nov [1] (x) Objective
State with reasons (in short) whether the following statement is True or False:
When the Auditor uses more Professional Judgement, the Degree of Inherent risk is lower. (2 marks)

Answer:
True :
While developing the overall audit plan, the auditor, should assess inherent risk at the level of financial statements.
To assess inherent risk, the auditor would use professional judgement, evaluate various factors having regard to his
experience of the entity from previous audit engagements of the entity, any controls established by management to
compensate for a high level of inherent risk and his knowledge of any significant changes which might have taken
place since his last assessment.
Therefore, when the auditor uses more professional judgement, the degree of inherent risk is lower. Hence, the
above statement is true.

Space to write important points for revision

Q.1.3 2012 - Nov [7](c) Short Notes

Write short note on the Inherent risk. (4 marks) Answer:

Assessment of Inherent Risk: Assessment of inherent risk should be done by the auditor:
1. At the level of financial statements; and
2. At the level of assertions made in the financial statements.

• The assessment of inherent risk at the level of financial statements should be done in developing the overall audit
plan.
• The inherent risk at the level of material account balances and classes of transactions should be related to the
assessment of inherent risk at the level of financial statements in developing the audit programme.
Factors to be considered while assessing inherent risk at the level of financial statements:
• Management's integrity.
• Management's experience and knowledge.
• Changes in management during the period.
• Unusual pressures for example, the entity is in dire need of a loan.
• The nature of entity's business technological obsolescence of products,
significance of related parties, number of locations, geographical spread
of its facilities.
• Factor's affecting entity's industry for example, changes in technology,
consumer demand and accounting practices prevalent.
Factors to be considered while assessing inherent risk at the level of
account balance or class of transaction:
• Quality of the accounting system.
• Accounts which required adjustment in the prior period.
• Accounts which involve a high degree of estimation.
• Complexity of underlying transactions or other events requiring the use of expert's work.
• The degree of judgement involved in determining account balance.
• Susceptibility to misappropriation-For example highly desirable and movable assets such as cash.
• Unusual or complex transactions, especially at the period end.
• Transactions not subjected to ordinary proceeding-(e.g. nonstandard journal entries).

Q.1.4 2013 - Nov [2] (f) Objective

State with reason (in short) whether the following statement is correct or incorrect.
Inherent and control risk, and detection risk have same meaning.

(2 marks) Answer :
Incorrect:
There are three types of risks, which is interrelated as IR☐CR☐ Inherent

risk (IR) is the susceptibility of an account balance or class of transactions to a material misstatement.
Control risk (CR) is the risk that material misstatement will not be prevented or detected and corrected on a timely
basis by the Internal control system. Detection risk (DR) is the risk that an auditor substantive procedures will not
detect a material misstatement.

Space to write important points for revision

Q.1.5 2014 - Nov [4] (a) Descriptive Discuss in brief the types of audit risk and inter-relationship of components of
audit risk. (6 marks)

Answer:
☐ Audit Risk is the probability or chance that an Auditor may give an inappropriate opinion on financial
information that is materially misstated.
☐ There are three type of audit risk:
(i) Inherent risk
(ii) Control risk
(iii) Detection risk
☐ The inter-relationship between them
Audit risk is a function of the risks of material misstatement and detection risk. The inherent and control risks are
functions of the entity’s business and its environment and the nature of the account balances or classes of
transactions, regardless of whether an audit is conducted. Even though inherent and control risks cannot be
controlled by the auditor, the auditor can assess them and design his substantive procedures to produce on
acceptable level of detection risk, thereby reducing audit risk to an acceptably low level.
For a given level of audit risk, the acceptable level of detection risk bears an inverse relationship to the assessed
risks of material misstatement at the assertion level. For example, the greater the risks of material misstatement the
auditor believes exists, the less the detection risk that can be accepted and accordingly, the more persuasive the audit
evidence required by the auditor
Thus,
— If inherent risk is higher then detection risk is also higher. — If inherent risk is lower then detection risk is also
lower. — If control risk is higher then the detection risk is lower and if control risk is lower then detection risk is
higher.
☐ Detection risk is based on the control risk and inherent risk. So inherent risk and control risk is based on client’s
point of view and detection risk is based on auditor’s point of view.
Space to write important points for revision

Q.1.6 2017 - May [2] (e) Objective

State with reason (in short) whether the following statement is correct or incorrect:
The use of computer facilities by a small enterprise may increase the control risk. (2 marks)

Answer:
Correct:
The use of computer facilities by a small enterprise decreases the control risk. However, many controls which would
be relevant to large entities are not practical in the small business.

2
Identifying and Assessing the Risks of Material Misstatement
Q.2.1 2009 - Nov [8] (Or) (b) Short Notes Write short note on the Audit risk at the account balance level and at the
class of transactions level. (5 marks) OR 2013 - May [7] (v) Short Notes Write short note on the Assertion about
balance at the end of the reporting period. (4 marks) OR 2015 - Nov [1] {C}(b) Descriptive

Discuss the following:

The assertions used by auditor to consider potential misstatements about account balances at the period end. (5
marks)

Answer:
Evaluating Risk at the account balance and class of transaction level: As per SA 315 “Identifying and
Assessing the Risk of Material Misstatement through understanding the Entity and its Environment”, risk of
material misstatement at the assertion level for classes of transactions, account balances and disclosures need to be
considered because such consideration directly assists in determining the nature, timing and extent of further audit
procedures at the assertion level necessary to obtain sufficient appropriate audit evidence. In representing that the
financial statements are in accordance with the applicable financial reporting framework, management implicitly or
explicitly makes assertions regarding the recognition, measurement, presentation and disclosure of the various
elements of financial statements and related disclosures. Assertions at different levels are discussed below:

1. Assertions about classes of transactions and events for the period under audit:
(i) Occurrence: Transactions and events that have been recorded have occurred and pertain to the entity.
(ii) Completeness: All transactions and events that should have been recorded have been recorded.

(iii) Accuracy: Amounts and other data relating to recorded transactions and events have been recorded
appropriately.
(iv) Cut-off-transactions and events have been recorded in the correct accounting period.
(v) Classification: Transactions and events have been recorded in the proper accounts.
2. Assertions about account balances at the period end: (i) Existence: Assets, liabilities and equity interests exist.
(ii) Rights and obligations: The entity holds or controls the rights to assets and liabilities are the obligations of the
entity.
(iii) Completeness: All assets, liabilities and equity interests that should have been recorded have been recorded.
(iv) Valuation and allocation: Assets, liabilities and equity interests are included in the financial statements at
appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.
When making assertions about the financial statements of certain entities, especially, for example, where the
Government is a major stakeholder, in addition to those assertions mentioned before, management may often assert
that transactions and events have been carried out in accordance with legislation or proper authority. Such assertions
may fall within the scope of the financial statement audit.
To assess inherent risk, the auditor would use professional judgement to evaluate numerous factors, having regard to
his experience of the entity from previous audit engagements of the entity, any controls established by management
to compensate for a high level of inherent risk and his knowledge of any significant changes which might have taken
place since his last assessment.

Inherent audit risk at the level of Account Balance and Class of Transactions is:
1. Quality of the accounting system.
2. Financial statements are likely to be susceptible to misstatement, for

example, accounts which required adjustment in the prior period or which involve a high degree of estimation.

3. The complexity of underlying transactions and other events which might require using the work of an expert.
4. The degree of judgement involved in determining account balances.
5. Susceptibility of assets to loss or misappropriation, for example, assets which are highly desirable and movable
such as cash.
6. The completion of unusual and complex transactions, particularly at or near period end.
7. Transactions not subjected to ordinary processing.
Space to write important points for revision

Q.2.2 2019 - Nov [1] {C} (h) Objective

Examine with reasons whether the following statement is correct or incorrect.

(h) For an auditor the Risk assessment procedure provides sufficient

appropriate audit evidence to base the audit opinion. (2 marks) Space to write important points for revision
Q.2.3 2019 - May [3] (a) Practical

“P India” Ltd. is a manufacturer of various sports products. The company is having several cases of litigation
pending in courts. The auditor wanted to identify litigation and claims, which may give rise to risk of material
misstatements. Suggest the audit procedures in the given case.

(4 marks)
Answer:
As per SA 501, Audit Evidence – specific considerations for Selected Items, the auditor shall design and perform
audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of
material misstatement, including,
1. Inquiry, of management and where applicable, others within the entity,

including. in – house legal Counsel :

2. Reviewing minutes of meetings of those charged with governance and
correspondence between the entity and its external legal counsel : and 3. Reviewing legal expenses accounts.
If the auditor assesses a risk of material misstatement regarding litigations or claims that have been identified, or
when audit procedures performed indicate that other material litigation or claims may exist, the auditor shall, in
addition to the procedures required by other SAs, seek direct communication with the entity’s external legal counsel.
The auditor shall do so through a letter of inquiry, prepared by management and send by the auditor, requesting the
entity’s external legal counsel to communicate directly with the auditor. If law, regulation or the respective legal
professional body prohibits the entity’s external legal counsel from communicating directly with the auditor, the
auditor shall perform alternative audit procedures.
Space to write important points for revision

3 Internal Control

Q.3.1 2007 - Nov [5] (a) Descriptive What are the inherent limitations of Internal control ? (7 marks) OR 2013 -
Nov [3] (a) Descriptive Explain inherent limitations of internal control system. (8 marks)

OR 2015 - May [5] (b)

Explain the inherent limitations of Internal Control. OR 2018 - May [4] (c)
Briefly discuss the limitations of Internal Control.
Descriptive (6 marks) Descriptive (6 marks)

Answer:
Objectives of Internal Internal Audit is an independent management

Audit function, which involves a continuous and critical appraisal of the functioning of an entity with a view to
suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity,
including the entity’s risk management and internal control system. Now it is statutory requirement as per the
provisions of Sec. 138 of the Companies Act, 2013.

Inherent Limitations of Internal Control

1 . Reasonable Assurance
2 . Human Error

Internal control, no matter how effective, can provide an entity only reasonable assurance about achieving the
entity’s financial reporting objectives. The likelihood of their achievement is affected by limitations inherent to
internal control.

Human Judgement in decision making can be faulty and breakdowns in internal control can occur because of human
error E.g. there may be an error in the design of, or in the change to a control.
Also, the operation of a control may not be effective, such as where information produced for the purposes of
internal control is not effectively used because the individual responsible for reviewing the information does not
understand its purpose or fails to take appropriate action.

3 . Circumvention/ Override
4. Management
Judgements/Risks
5. Smaller Entities

Controls can be circumvented by the collusion of two or more people or inappropriate management override of
internal control e.g. management may enter into side agreements with customers that alter the terms and conditions
of the entity’s standard sales contracts, which may result in improper Revenue Recognition.
Also, edit checks in a software program that are designed to identify and report transactions that exceed specified
credit limits may be overridden or disabled.

In designing and implementing controls, management may make judgements on the nature and extent of the controls
it chooses to implement and the nature and extent of the risks it chooses to assume.

Smaller entities often have fewer employees which may limit the extent to which segregation of duties is practicable.
However, in a small, owner managed entity, the owner manager may be able to exercise more effective oversight
than in a larger entity. This oversight may compensate for the generally more limited opportunities for segregation
of duties.
However, the owner-manager may be more able to override controls because the system of internal control is less
structured. This is taken into account by the auditor when identifying the risks of material misstatement due to fraud.

6. Other limitations Cost:

Management’s consideration that a control be cost-effective.
Unusual Transaction:
The fact that most controls do not tend to be directed at transactions of unusual nature. Inadequacy:
The possibility that procedures may become inadequate due to changes in conditions and compliance with
procedures may deteriorate. Manipulations:
Manipulations by management with respect to transactions or estimates and judgements required in the preparation
of financial statements.

Space to write important points for revision

Q.3.2 2008 - Nov [1] (ix) Objective

State with reasons (in short) whether the following statement is True or False:
The environment in which internal control operates has no relationship with the effectiveness of the Specific control
procedure. (2 marks)

Answer:
False :
The environment of the internal control to a great extent plays an important role in determining the effectiveness of
Specific control procedure. The environment in which internal control operates has an impact on the effectiveness of
the specific control procedures. The control environment means the overall attitude, awareness and actions of
directors and management regarding the internal control system and its importance in the entity.

Do you know:
The Internal Control Environment may be affected by

1. Organisational Structure: The organizational structure of an entity serves as a framework as practicable, to

preclude an individual from overriding the control system and should provide for the segregation of incompatible
functions.

2. Management Supervision: Management is responsible for devising and maintaining the system of internal
control.
3. Personnel: The proper functioning of any system depends on the competence and honesty of those operating it.
Space to write important points for revision

Q.3.3 2009 - May [8] (b), 2013 - May [7] (iv)

Write short note on the Letter of Weakness Answer:

Letter of Weakness :
The Auditor may become aware of weaknesses in Internal Control System as a result of obtaining an understanding
of accounting and internal control system and tests of control.

The Auditor should communicate in writing to the management, at an appropriate level of responsibility, material
weaknesses in the design or operation of internal control system observed during conducting audit. 1. When the
auditor comes across any weakness in the control points, he

issues letter of weakness.

2. The auditor does compliance procedure to ascertain that the internal
control system exists in the entity; it works effectively; it work
continuously in the entity during review period.
3. Lapses in operation of internal control too are reported in the
communication of weakness.

Short Notes (5 marks each)

4. Letter of weakness is a report issued by auditor stating the weakness in internal control mechanism. It also
suggests measures by which the weakness in the system be corrected and the control system be made better
protected.

5. The communication of weakness is reporting to management of such weakness in design and operation of internal
control as have come to notice of auditor during his auditing and it should not be taken to be review and comment
on adequacy of the control mechanism for management purpose.

Space to write important points for revision

Q.3.4 2011 - May [7] (b) Short Notes Write short note on the Internal control in Small Business (4 marks)

Answer:
The auditor needs the same degree of assurance to give an unqualified opinion on the financial statements of both
small and large entities. Many control which would be relevant to large entities may not be practical for small
business.
In small business, accounting work may be performed by only a few persons having both operating and custodial
responsibilities and segregation of functions may be missing or several limited. However, this may be offset by
personal supervision of owner /manager which may be possible due to low volume of transactions.
So, if the auditor finds that segregation of duties is limited or evidence of supervisory controls is lacking, he would
have to perform extensive substantive procedures to obtain evidence to express his opinion on the financial
statements.

Space to write important points for revision

Q.3.5 2012 - May [2] (a) Descriptive What are the general considerations in framing a system of internal check? (8
marks)

Answer:
Internal Check:
The term Internal check is defined as the checks on day to day transactions which operates continuously as part of
the routine system whereby the work of one person is proved independently or is complementary to the work of
another, the object being the prevention or early detection of frauds and errors.
Steps involved in framing a system of internal check: The special consideration in framing a system of internal
check are:

1. Different Hands No single person should have an independent

2. Job Rotation
3. Leave
4. Assets-Book Differentiation

control over any important aspect of the business. All dealing and acts of every employee should in the ordinary
course, come under the review of another.

The duties of staff member should be changed from time to time without any previous notice. The same officer or
subordinate should not, without a break, perform the same function for a considerable period of time.
Every member of the staff should be encouraged to go on leave at least once in a year. Frauds successfully
concealed by employees are often unearthed when they are on leave.

Persons having physical custody of assets should not be permitted to have access to the books of accounts.

5. Assets
Verification
6. Mechanical Devices
7. Stock-Taking
8. Delegation of Powers
9. Review of Accounts
10. Budgetary Control

There should be an accounting control in respect of each important class of assets. They should be periodically
inspected so as to establish their physical existence.

Mechanical devices such as automatic cash register may be employed to prevent loss or misappropriation of cash.

During year end stock-taking trading activities should preferably, be suspended. Stock☐taking and evaluation
should not be done exclusively by stores staff. Staff from all departments and sections should be employed for this
task.

The financial and administrative powers e.g. signing of cheques, verification of assets etc. should be distributed very
judiciously among different officers and the manner in which these are actually exercised should be reviewed
periodically.

Procedures should be laid down for periodical verification and testing of different sections of accounting records to
ensure that they are accurate.

Budget helps in fixing the standards and enables to review the actual performance with the standards fixed. It helps
to review from time to time the progress of trading activities. In big business houses separate staff is employed for
collection of statistical data, its observation and reconciliation.

Space to write important points for revision

Q.3.6 2013 - May [2] (iv) Descriptive Comment on the following:
Internal check is part of internal control system. (2 marks)

Answer:
Internal check consists of set of rules or procedures that are part of accounting system introduced to ensure that
accounts of business are correctly maintained and errors and frauds eliminated. It is actually a part of the overall
internal control system and operates as a built in device as far as the staff organisation and job allocation aspects of
the control system are concerned.

Space to write important points for revision

Q.3.7 2014 - May [2] (vii) Objective

State with reasons (in short) whether the following statement is correct or incorrect.
Maintenance of internal control system is responsibility of Auditor.

(2 marks) Answer:

Incorrect:
Maintenance of internal control system is responsibility of management and those charged with governance
(TCWG).

Space to write important points for revision

Q.3.8 2015 - May [2] (vi) Objective
State with reasons (in short) whether the following statements are correct or incorrect:
Letter of weakness is issued by the Management. (2 marks)

Answer:
Incorrect:
Letter of weakness is a report issued by auditor stating the weakness in internal control mechanism. It also suggests
measures by which the weakness in the system to be corrected and the control system be made better protected.

Space to write important points for revision

Q.3.9 2018 - May [1] {C} (d) Objective

Examine with reasons (in short) whether the following statement is correct or incorrect :
(d) Inquiry alone is sufficient to test the operating effectiveness of

controls. (2 marks) Answer:

Incorrect:

Inquiry alone is not sufficient to test the operating effectiveness of controls. In addition to inquiry, inspection,
observation, confirmation, recalculation, reperformance and analytical procedures are the audit procedures to test the
operating effectiveness of controls.

Space to write important points for revision

Q.3.10 2019 - Nov [5] (d) Descriptive

“Inadequate internal control over assets may increase the susceptibility of misappropriation of those assets.” State
any three example of such occurrence of misappropriation of such assets. (3 marks)

4 Evaluation of Internal Control by the Auditor

Q.4.1 2009 - May [5] (a) Descriptive

Mention any six points to be considered for good internal control for collection of tuition fees from students of
college. (6 marks) Answer:
Internal control points for collection of tuition fees :
1. College must have a clear cut tuition fee structure which is approved by

the college council.

2. The challan or paying in slip should contain necessary fields for
identifying the roll number of the student, class, and period for which
fees is paid etc. The slips should have such number of counter foils to
cross check the remittance.
3. The paying in slip when filled by the students, should be checked for its
correctness as to applicable amount etc by one clerk and the amount
should be entered in a scroll. He must sign the slip which authorises the
cashier-to accept the fees as per slip.
4. The cashier scroll and the authorising officer/s scroll should be checked
by an officer daily.
5. All remittance should be banked each day. No amount should be
allowed to be spared for meeting any type of expense.
6. Alternatively, the fees may be directly remitted into bank and banker’s
daily remittance slip should be scrutinised by college officers. Arrears list
should be periodically prepared from the students rolls. Any concession,
remission of tuition fees should have approval of competent authority.
Delayed remittance should carry fines or compensating charges for
delay. When students are readmitted after removal for non-payment of
fees, the admission should carry the permission of competent authority.
Space to write important points for revision
Q.4.2 2010 - May [3] Descriptive

A trader is worried that inspite of substantial increase in sales compared to earlier year, there is considerable fall in
Gross Profit after satisfying himself that sales and expenses are correctly recorded and that the valuation of
inventories is on consistent basis, he wants to ensure that purchases have been truthfully recorded.
How will you proceed with this assignment? (10 marks)

Answer:
In order to ensure that purchases have been truthfully recorded, auditor follows the following three steps:
1. Study and evaluation of internal control system
2. Vouching of purchase transaction
3. Analytical procedures

1. Study and evaluation of internal control system : It includes the following steps:

(i) Internal check: It should consist of the segregation of duties at the following points:
(a) Requisitioning the goods: Specified employees from the

stores department or from the production department’s store unit should prepare and approve a purchase requisition
for raw materials or goods used in production. The purchase requisition is sent to the purchase department.

(b) Ordering the goods requisitioned: It should prepare a serially numbered purchase order. The purchase
department is responsible for negotiating the best prices, fixing delivery dates with suppliers and ensuring that
appropriate quality goods are obtained.

(c) Receiving the goods ordered: Goods ordered should be inspected and counted by the receiving department. if
satisfied, it prepares serially numbered receiving report or goods received note and forwards its notification copies to
the stores, purchase department and finance department.

(d) Preparing the payment voucher: The accounts payable department or accounts payable unit of finance
department will receive the invoices and process for its payment and accounting.

(ii) Physical controls: It includes

(a) Physical controls over inventory include locked warehouses and store-rooms and limiting access to them to
authorised personnel and

(b) Printed forms with numbers should be used for purchase requisitions, purchase orders, receiving reports and
vouchers.

(iii) Authorised procedures:

(a) Authorisation procedures should be designed for all the four control points- requesting the goods, ordering the
goods requisitioned, receiving the goods ordered and preparing the payment voucher.
(b) Re-order points should be ascertained for various inventory

items that may trigger a manual request.

(iv) Internal review:

(a) Internal review should ensure that there is adequate separation of duties and proper authorisation procedures with
regard to processing and recording of purchase transactions.

(b) Paid invoices should be reviewed to ascertain the accuracy of the recording of these invoices and if possible,
these invoices should be traced back to purchase requisition through receiving reports or goods received notes and
purchase orders.

2. Vouching of purchases transactions:

Auditor should vouch credit purchases in the following ways: (i) Examine purchase book: The auditor should
examine the
transactions recorded in the purchase book with reference to related purchase invoice.

(ii) Examine purchase invoices:

(a) The auditor should select a small sample of vendors invoices at random and should conduct in-depth audit on
them i.e., trace the transaction from placing the order to the entries in inventory goods for actual receipt and payment
made to the suppliers.

(b) In respect of imports, documents such as bill of lading, customs clearance, etc. should be examined. The auditor
should ensure that subsidies, rebates, duty drawbacks or other similar items have been properly accounted for.

(iii) Examine the numerical sequence of source documents: The auditor should ensure the numerical sequence of
source documents such as purchase requisitions, purchase orders, receiving reports and vouchers have been
maintained and missing numbers have been duly accounted for.

(iv) Examine cut off points:

(a) The auditor should examine cut-off points on pre-numbered purchase requisitions, purchase orders and goods
received notes.
(b) The auditor should, then, trace the goods received notes

pertaining to a few days before the end of the period under audit to the related purchase invoices.
Such a comparison would ensure that purchases represented

by such invoices have been recorded as the purchases of the period under audit.
(v) Examine transition with related parties: The auditor should examine all related parties, transaction
specifically.

3. Analytical procedures: The auditor should compare item-wise and location-wise both quantity and value of
purchases for the current period with the corresponding figures for the previous period and ensure that major
variations are explained and justified. For which, various analytical ratios should also be calculated and compared.

Space to write important points for revision

Q.4.3 2010 - Nov [2] (a), RTP Descriptive

Explain briefly the technique of "Internal Control Questionnaire" to facilitate the accumulation of information
necessary for proper evaluation of internal control. (4 marks)

OR 2013 - May [7] (iii) Short Notes Write short notes on the Internal Control Questionnaire. (4 marks) Answer:
Internal Control Questionnaire
Content of ICQ

It is a comprehensive series of questions designed to provide a thorough view of internal control system prevailing
in an organisation. The questionnaire is usually issued to the client, the client is requested to get it filled up by the
concerned executives and employees.

In the questionnaire, the questions are generally prepared in sections of distinct control areas such as 1. Sales and
Purchases;
2. Debtors and Creditors;
3. Stocks;
4. Fixed Assets; (PPE)
5. Cash and Bank receipts and payments.

These questions are so framed that a 'yes' answer denotes satisfactory position and a 'No' answer suggests weakness.
If the questions are not relevant to the business 'Not Applicable' reply is given.

Advantages 1. In this method, there is less chance of oversight or omission of significant internal control review
procedures.

2. It enables to complete all internal control evaluation at one time. Weakness in the internal control system can
easily be identified by examining answers to the question in the ICQ.

3. ICQ also helps in testing whether the controls or procedures stated to be operating are actually in operation. On
the basis of ICQ analysis the auditor can decide the extent and depth of checking required in accounting areas.

4. ICQ analysis helps the auditor to adopt more detailed checking in weak control areas. Space to write important
points for revision
Q.4.4 2013 - Nov [7] (b)
Write short note on the following :
Use of flow charts in evaluation of internal control. OR 2016 - May [4] (c)
Short Notes
(4 marks) Short Notes Write short note on the use of flowcharts in evaluation of internal control.
Answer:
Flowchart Meaning Flow Chart is a graphic presentation of the plan of

documents through system or subsystem with installed check or control recorded on the lines of flow. Flow charts
are important tool in the evaluation of Internal Control System.

Need

Use of Flowchart in evaluation of Internal control

1.
2.

3. It is the most concise way of recording the auditor's review of the system.
It helps in minimising the amount of narrative explanation and thereby achieves a consideration or presentation not
possible in any other form. It gives bird's eye view of the system and the flow of transactions and integration &
documentation can be easily spotted and improvements can be suggested.

The evaluation of internal control system with the help of flow chart can be done in following manner: 1.

2. Reviewing the flow charts themselves (working for inappropriate divisions of duties or lack of automatic checks
etc.)
Reviewing the flow chart by preparing an internal control check list.
Further, an attempt to chart the activities of the whole organisation in one flow chart may be avoided since it would
become a cumbersome document to read, understand and follow the trial.

Space to write important points for revision

Q.4.5 2016 - Nov [2](iii) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
A flow chart is a graphic presentation of each point of the company’s system of internal control. (2 marks)

Answer :
Correct:
Flowcharts are a great tool to use to visualise complex systems involved in an organisation. It makes it easier for an
auditor to see the redundancies and an organisation’s system of internal control.

Space to write important points for revision

Q.4.6 2016 - May [2] (d) Objective

State with reasons (in short) whether the following statement is correct or incorrect.
Internal control questionnaires are a good source of identifying weakness in internal control system. (2 marks)

Answer:
Correct:
Weaknesses in Internal Control Systems can be known by examining answers to the question of Internal Control
Questionnaire.

Space to write important points for revision

Q.4.7 2016 - Nov [4] (c) Distinguish Between What is the difference between Narrative records and Check-list?

Answer :
Difference between Narrative Records and Check List:
Narrative Record:
This is a complete and exhaustive description of the system as found in operation by the auditor.
Actual testing and observation are necessary before such a record can be developed.
It is recommended in case no formal control system is in operation and would be more suited to small business.
Check List:
This is a series of questions which an auditing staff must follow. It is an on job requirement and questions are
framed having regard to the desirable elements of control. The complete check list by the senior auditor to ascertain
existence of internal control and evaluate its efficiency and implementation.

Space to write important points for revision

Q.4.8 2017 - May [1] {C} (a) Descriptive Discuss the following:

“A satisfactory internal control environment may help reduce the risk of fraud but is not an absolute deterrent for
fraud.” Explain. (5 marks) Answer:
A satisfactory internal control environment may help reduce the risk of fraud but is not an absolute deterrent for
fraud. The reasons being:

1. Reasonable Assurance
2. Human Error

Internal control, no matter how effective, can provide an entity only reasonable assurance about achieving the
entity’s financial reporting objectives. The likelihood of their achievement is affected by limitations inherent to
internal control. Human Judgement in decision making can be faulty and breakdowns in internal control can occur
because of human error E.g. there may be an error in the design of, or in the change to a control.

3. Circumvention/ Override
4. Management
Judgements/Risks
5. Smaller Entities

Also, the operation of a control may not be effective, such as where information produced for the purposes of
internal control is not effectively used because the individual responsible for reviewing the information does not
understand its purpose or fails to take appropriate action. Controls can be circumvented by the collusion of two or
more people or inappropriate management override of internal control e.g. management may enter into side
agreements with customers that alter the terms and conditions of the entity’s standard sales contracts, which may
result in improper Revenue Recognition.
Also, edit checks in a software program that are designed to identify and report transactions that exceed specified
credit limits may be overridden or disabled.
In designing and implementing controls, management may make judgements on the nature and extent of the controls
it chooses to implement and the nature and extent of the risks it chooses to assume.
Smaller entities often have fewer employees which may limit the extent to which segregation of duties is practicable.
However, in a small, owner managed entity, the owner manager may be able to exercise more effective oversight
than in a larger entity. This oversight may compensate for the generally more limited opportunities for segregation
of duties.
However, the owner-manager may be more able to override controls because the system of internal control is less
structured. This is taken into account by the auditor when identifying the risks of material misstatement due to fraud.

Q.4.9 2017 - May [7] (b), RTP Short Notes

Write short note on the Important requirements which should be kept in mind to establish a system of internal
control for application process at a service bureau. (4 marks)

Answer:
Requirement to be kept in mind in establishing or evaluating a system of Internal Control for applications
processed at a Service Organisation are:

1. Co-ordination The relationship between the organisation and the

2. System Testing

3. Data
Movement Controls

4. Processing
5. Master Data Controls

user should be clearly defined by a separate Liaison Officer from the User Entity’s staff, who will be responsible for
total co-ordination.

☐ The system of data generation and transmission should be analysed.

☐ If required, clerical procedures at the User Entity should be simplified and regulated.

☐ There should be control over the physical movement of data i.e. vouchers sent for data input and returned after
processing etc.

☐ A copy or microfilm of documents sent to the Service Organisation may be kept as backup.

☐ There should be adequate file conversion checking procedures by the User Entity.
☐ The processing time for various activities should be laid down.

☐ There should be a high degree of control over the maintenance of data on master files.
☐ This is necessary because the User Entity has no physical control over the files.

6. Output
Distribution or Reports

7. Rejection Procedures

8. Review of Data
Processed

9. Overall Review of Software

☐ The type, number and frequency of reports generated by the Service Organisation should be specified.

☐ In case of junk or erroneous data, the Service Organisation must provide sufficient reports for error identification.

☐ The User Entity must ensure prompt correction and re-submission of rejections to meet the Service organisation’s
processing schedules.

☐ There should be clerical controls at the User Entity to verify the accuracy of computer processing (e.g. test
checking of details on output).

☐ If there are significant program checks, the User Entity may review Reports to ensure that software check is
functioning regularly.

Space to write important points for revision

Q.4.10 2018 - Nov [6] (c) Descriptive
Answer the following:
“The Auditor should examine the efficacy of various internal controls over advances, to determine the nature, timing
and extent of his substantive procedures.” Discuss briefly. (5 marks)

Answer:
The auditor should examine the following for the efficacy of various internal controls over advances, to
determine the nature, timing and extent of his substantive procedures.
1. As far as possible, the system should specify the following.

• Total amount upto which loans may be made;

• The purposes for which loans may be made;
• Maximum amount of loans which may be made for each such purpose in individual cases;
• The terms on which such loans may be made;
• The persons who are authorized to make loans;
• Procedure for ensuring compliance with relevant legal requirements.

2. All variations in the terms of loans and advances should be duly approved in writing by the competent authority.
3. Where security is taken against the loans, the form and adequacy of security should be reviewed by a responsible
official.
4. The loan and security documents should be kept in safe custody of a responsible official. A record of all such
documents should be maintained and the documents should be periodically verified with reference to such records.
5. The system should provide for identification of cases where principal and/or interest have become overdue or
where any other terms are not being complied with.
6. Confirmation of balances should be obtained at periodic intervals in the same manner as in the case of debtors.
Space to write important points for revision

Q.4.11 2008 - May [2] (a) Practical

As an auditor how would you react to the following situation/comment? Director (Finance) of KK Ltd. Informed
their newly appointed statutory auditor that they have sound Internal control system implemented by a renowned
professional firm and he is satisfied with its effectiveness and functioning and therefore, the statutory auditor should
concentrate on verifying only the routine books and financial statements. (8 marks)

Answer:
As per the requirement of SA-200, Overall objectives of the independent auditor and the conduct of an audit
in accordance with standards on auditing, auditor should study and evaluate the internal control system and
accounting system and should decide how much degree of reliance could be placed on internal control by applying
his compliance procedure to ultimately decide the nature, timing and extent of his substantive procedure.

Further SA-315 Identifying and assessing the Risk of Material Misstatement through understanding the
entity and its environment, emphasises that Auditor should assess the inherent risk and control risk at high unless
he has convincing evidence in its support to assess these risks at less than high. Further all the reasons why the risk
is assessed at less than high should be documented. On the other hand if auditor assumes that the inherent and
control risks are high he should extend his audit procedure to that extent from where he can assess his detection risk
at lowest.

As in the given case director finance of the client is of opinion that auditor must not study and evaluate the internal
control system as it is designed by the most renowned firm and he is satisfied with such controls. Present Case : It
is quite clear that mere implementing an internal control does not suffice it’s existence effectiveness and continuity
shall be verified by the auditor by applying compliance procedures as defined in SA ☐ 500 ‘Audit Evidences’.
Hence we can conclude that the view of director finance is not in support with the requirements of the SAS.

Space to write important points for revision

Q.4.12 2018 - May [5] (c) Practical

XYZ & Associates, Chartered Accountants, while evaluating the operating effectiveness of internal controls, detects
deviation from controls. In such a situation, state the specific inquiries to be made by an auditor to understand these
matters and their potential consequences. (5 marks)

Answer:
In case of deviation from controls, the specific inquires to be made by the auditor to understand these matters
and their potential consequences are:
☐ Enquiries directed towards those charged with governance may help the

auditor understand the environment in which the financial statements are prepared.

☐ Enquiries directed toward internal audit personnel may provide information about internal control procedures
performed during the year relating to the design and effectiveness of the entity’s internal control and whether
management has satisfactory responded to findings from those procedures.

☐ Enquiries of employees involved in initiating, processing or recording complex or unusual transactions may help
the auditor to evaluate the appropriateness of the section and application of certain accounting policies.

☐ Enquiries directed towards in house legal counsel may provide information about such matters as litigation,
compliance with laws and regulations, knowledge of fraud or suspected fraud affecting the entity, warranties, post
sales obligations, arrangements (such as joint ventures) with business partners and the meaning of contract terms.

☐ Enquiries directed towards marketing or sales personnel may provide information about changes in the entity’s
marketing strategies, sales trends, or contractual arrangements with its customers.

☐ Enquiries directed to the risk management function (or those performing such roles) may provide information
about operational and regulatory risks that may affect financial reporting.

☐ Enquiries directed to information systems personnel may provide information about system changes, system or
control failures or other information system - related risks.

Space to write important points for revision

5 Testing of Internal Control
Q.5.1 2007 - Nov [8] (c)
Write short note on Examination in depth. OR 2012 - Nov [7] (e), RTP
Write short note on the following:
Examination in depth.

Short Notes (5 marks)

Short Notes

(4 marks)

Answer:
Examination in Depth:
Examination in Depth means an examination of a few selected transactions from the beginning to the end through
the entire flow of transaction. This examination includes studying, the recording of transactions at each stage and
judging, whether the person who has exercised the authority in relation to the transaction is fit to do so. The
selection must be correct and proper. A sample size may be small but it should be a true representative of the
universe of transaction. Infact, the size depends upon the auditor’s ‘level of confidence’, there is a inverse
relationship between them.
For example: A purchase of goods may commence when the company reaches its re-order level.
The probable steps of purchase are as follows :
1. Requisition: pre-printed, pre-numbered, authorised.
2. Formal purchase order: sequentially pre-numbered and authorisedplaced with the approved supplier only.

3. Receipt of supplier’s invoice.

4. Receipt of supplier’s statement.
5. Entries made in purchase day book.
6. Posting to purchase ledger and purchase ledger control A/c. and
7. Cheque issued in settlement.
8. Entry on bank statement and returned ‘paid’ cheque if requested.
9. Entry in cash book.
10. Posting from cash book to ledger and it’s ledger control (taking into account the discounts, if any).
11. Receipt of goods, along with delivery or advice note.
12. Issuance of goods received note and inspection certificate containing initials or rubber stamp to show that goods
are verified and inspected.
13. Admission of goods to store.
14. Entries of goods to store.
It should be kept in mind that the above list is not a fixed list and its sequence can be changed.
So we can see that as soon as the company reaches the re-order level, it has to follow a chain of events, also leaving
an audit trail.
Thus, examination in depth is necessary, as if it is conducted properly, then it will reveal both the functioning or
malfunctioning of the client’s system. Space to write important points for revision

Q.5.2 2013 - Nov [2] (b) Objective

State with reason (in short) whether the following statement is correct or incorrect.
“Examination in depth” implies that the auditor vouches almost all transactions in a manner that the chances of not
checking any transaction are left at minimum. (2 marks)

Answer:
Incorrect:
Examination in Depth means an examination of a few selected transactions from the beginning to the end through
the entire flow of transaction. This examination includes studying, the recording of transactions at each stage and
judging, whether the person who has exercised the authority in relation to the transaction is fit to do so. The
selection must be correct and proper. A sample size may be small but it should be a true representative of the
universe of transaction. Infact, the size depends upon the auditor’s ‘level of confidence’, there is a inverse
relationship between them.

Space to write important points for revision

Q.5.3 2015 - Nov [6] (b) Descriptive
Why Tests of Control are performed? Also explain what does they include. (4 marks)

Answer:
Test of controls are performed to obtain audit evidence about the effectiveness of the :
1. design of the accounting and internal control system, that is whether

they are suitably designed to prevent or detect and correct material misstatements and
2. operation of the internal controls throughout the period.
Test control may include test of elements of control environment where
strengths in the control environment are used by auditors to reduce control
risk.
Test of control further include the following:
1. Inspection of documents supporting transactions and other events to gain audit evidences that internal controls
have operated properly for e.g. verifying that the transaction has been authorised.
2. Inquires about and observation of internal controls which leave no audit trails for e.g. Determining who actually
performs each function and not merely who is supposed to perform it.
3. Re-performance of internal controls, for e.g. reconciliation of bank accounts, to ensure they were correctly
performed by the entity.
4. Testing of internal control operating on specific computerised applications or over the overall information
technology function, for e.g. access or program change controls.
Space to write important points for revision

6 Internal Control and “IT” Environment

Q.6.1 2008 - May [4] (a) Descriptive How would you assess the reliability of Internal control system in
computerised information system ? (6 marks)
Answer:
For the purpose of assessing the reliability of internal control system in computerised information system (C.I.S.),
the auditor has to review the internal controls :

Review of General CIS Controls

Review of CIS Application Controls

The auditor should consider how general CIS controls affect the CIS applications significant to the audit. General
CIS controls that relate to some or all applications are typically interdependent controls in their operation are often
essential to the effectiveness of CIS application controls. Accordingly, it may be more efficient to review the design
of the general control before reviewing the application controls.

Controls over input processing, data files and output may be carried out by CIS personnel , by users of the system,
by a separate control group or may be programmed into application software, CIS application controls which the
auditor may wish to test include the following:

1. Manual control exercised by the user: If manual controls exercised by the user of the application system are
capable of providing reasonable assurance that the system’s output is complete, accurate and authorised, the auditor
may decide to limit tests of control to these manual controls.

2. Control over system output : If, in addition to manual controls exercised by the user, the controls to be tested
use information produced by the computer or are contained within computer programs, it may be possible to test
such controls by examining the system’s output using either manual or computer assisted audit techniques (CAATs).
Alternatively, where the reconciliation is performed by computer, the auditor may wish to test the reconciliation by
re-performing the control with the use of CAATs.

3. Programmed control procedures: In case of certain computer systems, the auditor may find that it is not
possible or, in some cases, not practical to test controls by examining only user’s controls or the systems’ output.
The auditor may consider performing tests of control by using CAATs, such as test data , reprocessing transactions
data or, in unusual situations, examining the coding of the application program.

4. Evaluation : The general CIS controls may have a pervasive effect on the processing of transactions in
application systems. If these controls are not effective, there may be a risk that misstatements might occur and go
undetected in the application systems. Thus, weaknesses in general CIS controls may preclude testing certain CIS
application controls; however manual procedures exercised by users may provide effective control at the application
level.

Space to write important points for revision

Q.6.2 2008 - Nov [4] (b), RTP Descriptive In a CIS environment, what are the different Design and Procedural
aspects, which are different from those found in Manual systems? (4 marks)

Answer:
The use of computers changes the processing, storage, retrieval and communication of financial information and
may affect the accounting and Internal Control systems employed by the entity.

CIS environment may affect the following audit areas-

1. The procedures followed by the auditor in obtaining a sufficient understanding of the accounting and Internal
Control System.
2. The evaluation of inherent risk and control risk through which the auditor assesses the audit risk.
3. The auditor’s design and performance of tests of control and substantive procedures appropriate to meet the audit
objective.
The different designs and procedural aspects, which are different from those found in manual systems are as
follows:

1. Consistency of performance
2. Single
transaction update of
multiple
computer file

3. System
generated transactions

The CIS system performs more consistently than the manual system. This is because computer performs exactly in
the manner as it is programmed. In a CIS system certain internal control procedures can be incorporated into
computer programs. Some program control procedures in CIS system may be such that they are not visible but there
may be others which can be reviewed through manual procedures. Thus, a program can incorporate automatic check
which indemnified transaction exceeding certain limits. Password control can be used for protection of the data
against unauthorized action.

A single transaction fed into a CIS system may automatically update all records associated with the transaction. This
insures that all relevant records are kept upto date. On the other hands this also applies that if one erroneous input is
given, it may contaminate many records and files.

The CIS system can be so programmed that certain transactions can be automatically generated.

4. Vulnerability Vulnerability of data and programme storage media so that large volume of data may be stored on
magnetic disc and tape.

Space to write important points for revision

Q.6.3 2010 - May [2] (c) Descriptive

The management of ABC Ltd. wants to design a detective control mechanism for achieving security policy objective
in a computerised environment. As an auditor explain, how audit trails can be used to support security objectives.
(10 marks) [CA Final - II]

Answer:
Audit trails can be used to support security objectives in three ways: 1. Detecting unauthorized access to the
system,
2. Facilitating the reconstruction of events, and
3. Promoting personal accountability.
Each of these is described below:

Detecting Detecting unauthorized access can occur in real time Unauthorized or after the fact.
Access ☐ The primary objective of real-time detection is to

protect the system from outsiders who are attempting to breach system controls.

☐ A real-time audit trail can also be used to report on changes in system performance that may indicate infestation
by a virus or worm.

☐ Depending upon how much activity is being logged and reviewed, real-time detection can impose a significant
overhead on the operating system, which can degrade operational performance.

☐ After-the-fact detection logs can be stored electronically and reviewed periodically or as needed.

Reconstructing Events
Personal
Accountability

When properly designed, they can be used to determine if unauthorized access was accomplished, or attempted and
failed.
☐ Audit analysis can be used to reconstruct the steps
that led to events such as system failures, security violations by individuals, or application processing errors.

☐ Knowledge of the conditions that existed at the time of a system failure can be used to assign responsibility and
to avoid similar situations in the future.

Audit trail analysis also plays an important role in accounting control.

☐ For example, by maintaining a record of all

changes to account balances, the audit trail can be used to reconstruct accounting data files that were corruption by a
system failure.

☐ Audit Trails monitor user activity even at the lowest level. This serves as a preventive control.
☐ Individuals are afraid of social stigma and hence hesitate to hence hesitate to violate security policy if they know
that their actions are recorded in an audit log. This minimises security violations. Space to write important points for
revision

Q.6.4 2010 - May [4] (a) Descriptive Discuss Internal Controls in a CIS Environment. (5 marks)

Answer:
Internal Controls in CIS Environment : The internal controls over computer processing, which help to achieve
the overall objectives of internal control, include both manual procedures and procedures designed into computer
programmes. Such manual and computer controls affect the CIS environment (general CIS controls) and the specific
controls over the accounting applications (CIS application controls).
(A) General CIS Controls : The use of general CIS controls is to establish

a framework of overall control over the CIS activities and to provide a reasonable level of assurance that the overall
objectives of internal control are achieved. These controls may include:
# Organisation and management controls are designed to

establish an organizational framework over CIS activities, including:

• Policies and procedures relating to control functions.
• Appropriate segregation of incompatible functions.

# Application systems development and maintenance controls are designed to establish control over.
• Testing, conversion, implementation and documentation of new

or revised systems.
• Changes to application systems.
• Access to systems documentation.
• Acquisition of application systems from third parties.

# Computer operation controls are designed to control the operation of the systems and to provide reasonable
assurance that:
• The systems are used for authorised purposes only.
• Access to computer operations is restricted to authorised

personnel.
• Only authorised programs are used.
• Processing errors are detected and corrected.

# Systems software controls include:

• Restriction of access to systems software and documentation to authorised personnel.

• Authorisation, approval, testing, implementation and documentation of new systems software and systems
software modifications.

# Data entry and program controls are designed to provide reasonable assurance that:
• An authorisation structure is established over transactions being
entered into the system.
• Access to data and programs is restricted to authorised
personnel.
• Offsite back-up of data and computer programmes.
• Recovery procedures for use in the event of theft, loss or
international or accidental destruction.
• Provision for offsite processing in the event of disaster; (B) CIS Application Controls : The use of CIS
application controls is to establish specific control procedures over the accounting applications to provide reasonable
assurance, so that all transactions are authorised and recorded, and are processed completely, accurately and on a
timely basis. These cover:
# Controls over input are designed to provide reasonable assurance that:
• Transactions are properly authorised before being processed by
the computer.
• Transactions are accurately converted into machine readable
form and recorded in the computer data files.
• Transactions are not lost, added, duplicated or improperly
changed.
• Incorrect transactions are rejected, corrected and if necessary,
resubmitted on a timely basis.
# Controls over processing and computer data files are designed to provide reasonable assurance that:
• Transactions, including system generated transactions, are
properly processed by the computer.
• Transactions are not lost, added, duplicated or improperly
changed.
• Processing errors are identified and corrected on a timely basis.

# Controls over output are designed to provide reasonable assurance that:

• Results of processing are accurate.
• Access to output is restricted to authorised personnel.
• Output is provided to appropriate authorised personnel on a

timely basis.
Space to write important points for revision
Q.6.5 2010 - May [6] (a), RTP Descriptive

‘Doing the audit in EDP environment is simpler since Trial Balance always tallies.’ Analyse the statement critically.
(5 marks) Answer:
The Audit in EDP environment is simpler since Trial Balance always tallies.
• But the same cannot imply that the job of an auditor becomes simpler.
• There can still be some accounting errors like omission of certain entries,

compensating errors, duplication of entries, errors of commission in the form of wrong head of accounts etc.

• Possibility of “Window Dressing” and/or “Creation of Secret Reserves” can be possible in EDP environment also
in spite of tallied trial balance.
• At present, due to complex business environment the importance of trial balance cannot be judged only upto the
arithmetical accuracy but the nature of transactions recorded and their classification in the books should be focused.
• The emergence of new forms of financial instruments like options and futures, derivatives, off balance sheet
financing etc. have given rise to further complexities in recording and disclosure of transactions.
• In an audit, besides the tallying of a trial balance, there are other issues also like estimation of provision for
depreciation, estimation of tax liability, valuation of inventories, obtaining audit evidence, ensuring compliance with
various laws, regulations and standards, verification of existence and valuation of assets and liabilities, reporting
requirement as per statute etc. which still requires judgement to be exercised by the auditor.
• The EDP processing and recording has its own complexities and requires lot of controls, safeguards and
application which requires specialised knowledge and skill for proper implementation.
• Responsibility of expressing an audit opinion and objectives of an audit are not changed in the audit in EDP
environment. Compliance with various laws and standards are still to be verified, ensured and reported. Hence, it
can be said that simply because of EDP environment and tallying of the trial balance, the audit can’t be said to have
become simpler.
Space to write important points for revision

Q.6.6 2010 - Nov [2] (b) Descriptive State clearly the circumstances where “Auditing through the computer”
approach must be used. (6 marks)

Answer:
Auditing Through the Computer:
1. The auditor takes the computer as a target of audit. It is treated as a live

and dynamic device, which has added value to the process of auditing. 2. He can use the computer to test:
(a) the program logics and program controls existing within the system, and
(b) the records produced by them.
3. Methods: There are three methods of auditing through the computer i.e.
testing the systems, can be done in three ways,:
(i) Test data: This is a special set of input data, prepared specifically to test a programme or set programs of the
entity under audit. (ii) Controlled processing : This means that a processing run is under-taken using a already
tested programme under the control of the auditor.
(iii) Computer audit programme : The auditor uses computer programmes for (i) testing and evaluating the system
if internal control and (ii) validity of transactions processed by an electronic data processing system.
Once, the auditor is satisfied with the computer system & its controls, he need not have to spend much time on
detailed verification.
4. Situations where it must be used :
It is used if :
(i) The computer processes a large volume of output and resultantly produces a large volume of output (because in
that situation, it is difficult to make extensive direct examination of the validity of the input and output).
(ii) The significant parts of the internal control system are embodied in the computer system itself, (e.g. on line
banking,)
(iii) The logic of the system is complex.
(iv) Because of cost – benefit considerations, there are substantial gaps in the visible audit trail.
Space to write important points for revision

Q.6.7 2013 - May [4] (a) Descriptive

To prepare an audit plan in CIS environment an auditor should gather information. Mention any four such important
information which he has to collect. (4 marks)

Answer:
Information to be gathered to prepare an Audit Plan in CIS Environment: The auditor should gather
information about the CIS environment that is relevant to the audit plan, including information as to: 1. How the CIS
function is organized and the extent of concentration or

distribution of computer processing throughout the entity.

2. The computer hardware and software used by the entity.
3. Each significant application processed by the computer, the nature of the processing (e.g. batch, on-line) and data
retention policies.
4. Planned implementation of new applications or revisions to existing applications.
5. When considering his overall plan the auditor should consider matters, such as:
(i) Determining the degree of reliance, if any, he expects to be able to place on the CIS controls in his overall
evaluation of internal control. (ii) Planning how, where and when the CIS function will be reviewed including
scheduling the works of CIS experts as applicable. (iii) Planning auditing procedures using techniques.
Space to write important points for revision

computer-assisted audit
Q.6.8 2016 - May [1] {C} (d) Discuss the following:
Descriptive
What are the specific risks related to internal control in an IT environment? (5 marks) OR 2019 - May [3] (b)
Descriptive Which are specific risks to the company’s internal control having IT environment? (4 marks)

Answer:
As per SA-315, “Identification and Assessing the Risks of Material Misstatements Through Understanding
the Entity and its Environment”, the specific risk related to internal control in an IT environment are as follows:
1. Reliance on systems or programs that are inaccurately processing data,

processing inaccurate data or both.

2. Unauthorised assess to data that may result in destruction of data or
improper changes to data, including the recording of unauthorised or
non-existent transactions, or inaccurate recording of transactions.
Particular risks may arise where multiple users access a common
database.
3. The Possibility of IT personnel gaining access beyond those necessary
to perform their assigned duties.
4. There by breaking down segregation of duties.
5. Unauthorised changes to data in master files.
6. Unauthorised changes to systems or programs.
7. Failure to make necessary changes to systems or programs. 8. Inappropriate manual intervention.
9. Potential loss of data or inability to access data as required. Space to write important points for revision

Q.6.9 2016 - Nov [1] {C} (d) Descriptive

Discuss the following:

Auditor’s job becomes simpler in CIS environment, where trial balance always tally. (5 marks)

Answer:
The Audit in EDP environment is simpler since Trial Balance always tallies.
• But the same cannot imply that the job of an auditor becomes simpler.
• There can still be some accounting errors like omission of certain

entries, compensating errors, duplication of entries, errors of commission in the form of wrong head of accounts etc.

• Possibility of “Window Dressing” and/or “Creation of Secret Reserves” can be possible in EDP environment also
in spite of tallied trial balance.
• At present, due to complex business environment the importance of trial balance cannot be judged only upto the
arithmetical accuracy but the nature of transactions recorded and their classification in the books should be focused.
• The emergence of new forms of financial instruments like options and futures, derivatives, off balance sheet
financing etc. have given rise to further complexities in recording and disclosure of transactions.
• In an audit, besides the tallying of a trial balance, there are other issues also like estimation of provision for
depreciation, estimation of tax liability, valuation of inventories, obtaining audit evidence, ensuring compliance with
various laws, regulations and standards, verification of existence and valuation of assets and liabilities, reporting
requirement as per statute etc. which still requires judgement to be exercised by the auditor.
• The EDP processing and recording has its own complexities and requires lot of controls, safeguards and
application which requires specialised knowledge and skill for proper implementation.
• Responsibility of expressing an audit opinion and objectives of an audit are not changed in the audit in EDP
environment. Compliance with various laws and standards are still to be verified, ensured and reported. Hence, it
can be said that simply because of EDP environment and tallying of the trial balance, the audit can’t be said to have
become simpler.
Space to write important points for revision

7 Materiality and Audit Risk

Q.7.1 2014 - Nov [7] (d) Short Notes

Write short note on Materiality and audit risk (4 marks) Answer:

As per SA-320, Materiality in planning and performing an Audit the auditor
should consider materiality and its relationship with audit risk while conducting an audit. Materiality
Audit Risk

The information is material if its misstatement could influence the decision of users taken on the basis of such
financial information. It depends on the size and nature of item, judged in the certain cases of misstatement.

Audit risk is the probability that an auditor may give an inappropriate opinion on financial information that is
materially mis-stated. Such risk may exist at overall level or while verifying various transactions and Balance Sheet
items.

Relationship between
Materiality
and Audit Risk

1. The auditor should:

(i) Assess the inherent and control risks; (ii) Consider the level of detection risk ; and (iii) Select appropriate
substantive audit

procedure based upon his judgement. 2. Audit risk can be reduced by performing substantive procedure. If it is not
performed the auditor would fail to detect a misstatement. The more extensive the procedure performed, the lower
the detection risk. Nature and timing of substantive procedure will also affect the detection risk.

3.

The Auditor’s assessment of audit risk may change during the course of an audit. For example, in planning the audit,
the auditor may believe that he has low inherent and control risk based on his assessment of the probability of errors
occurring on his review and testing of internal control system. After performing audit procedures, if the auditor
conclude that his earlier assessment was too low in such case, he would have to carry out additional audit procedures
to reduce the level of detection risk.

Space to write important points for revision

8 Internal Audit
Q.8.1 2007 - Nov [1] (vi) Objective

State with reasons (in short) whether the following statement is True or False:
Internal auditor of the company cannot also be its cost auditor. (2 marks)

Answer:
True :
Internal auditor cannot be appointed as cost auditor. As per rule 14 of the Companies (Audit and Auditors) Rules,
2014, in case of companies which are required to constitute an audit committee the Board shall appoint a cost
auditor who is a cost accountant or a firm of cost accountants in practice on recommendation of audit committee.

Space to write important points for revision

Q.8.2 2011 - Nov [2] (a) Descriptive

Explain the objectives of internal audit. (8 marks) Answer:

The objects of internal audit can be stated as follows :

1. To verify the accuracy and authenticity of the financial accounting and statistical records presented to the
management.
2. To ascertain that the standard accounting practices, as have been decided to be followed by the organisation are
being adhered to.
3. To establish that there is a proper authority for every acquisition, retirement and disposal of assets.
4. To confirm that liabilities have been incurred only for the legitimate activities of the organisation.
5. To analyse and improve the system of internal check in particular to see (i) that it is working ; (ii) that it is sound ;
and (iii) that it is economical.
6. To facilitate the prevention and detection of frauds.
7. To examine the protection afforded to assets and the uses to which they are put.
8. To make special investigations for management.
9. To provide a channel whereby new ideas can be brought to the attention of management.
10. To review the operation of the overall internal control system and to bring material departures and non-
compliance to the appropriate level of management. The review also generally aims at locating unnecessary and
weak controls for making the entire control system effective and economical.
As per SA – 610, the scope and objectives of internal audit vary widely and are dependent upon the size and
structure of the entity and the requirements of its management.
Space to write important points for revision

Q.8.3 2015 - May [2] (iv) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
As per Section 138 of the Companies Act, 2013 private companies are not required to appoint internal auditor. (2
marks)

Answer:
Incorrect:
The private company are required to appoint internal auditor as per Sec.138 of the Companies Act, 2013.

Space to write important points for revision

Q.8.4 2016 - May [2] (a) Objective State with reasons (in short) whether the following statement is correct or
incorrect.
The scope of work of an internal auditor may extend even beyond the financial accounting. (2 marks)

Answer:
Correct:
The scope of work of an internal auditor is examination of financial transaction as well as review of operation and
records and detection of fraud or misstatements.

Space to write important points for revision

Q.8.5 2016 - May [7] (a), RTP Short Notes Write short note on the following:
Provisions for applicability of internal audit as per Companies Act, 2013.

(4 marks) Answer:
Applicability of Provisions of Internal Audit:
As per Section 138 of the Companies Act, 2013 the following class of companies (prescribed in Rule 13 of
Companies (Accounts) Rules, 2014), shall be required to appoint an internal auditor or a firm of internal auditors,
namely:
(a) every listed company;
(b) every unlisted public company having
(i) paid up share capital of fifty crore rupees or more during the

preceding financial year; or

(ii) turnover of two hundred crore rupees or more during the preceding
financial year; or
(iii) outstanding loans or borrowings from banks or public financial
institutions exceeding one hundred crore rupees or more at any
point of time during the preceding financial year; or
(iv) outstanding deposits of twenty five crore rupees or more at any point
of time during the preceding financial year.
(c) every private company having
(i) turnover of two hundred crore rupees or more during the preceding
financial year; or
(ii) outstanding loans or borrowing from banks or public financial
institutions exceeding one hundred crore rupees or more at any
point of time during the preceding financial year.
Thus, any of the conditions is required to be satisfied for the applicability of the provision. The internal auditor to be
appointed shall either be a chartered accountant whether engaged in practice or not or a cost accountant, or such
other professional as may be decided by the Board to conduct internal audit of the functions and activities of the
company. Auditor may or may not be an employee of the company.

Q.8.6 2016 - Nov [1] {C} (a), RTP Descriptive Discuss the following:
Relationship between statutory auditor and internal auditor. (5 marks)

Answer :
As per SA – 610, Using the Work of Internal Auditors, the following points, explain the inter-relationship
between the statutory and internal auditor.
1. Review by Internal Auditor: The areas covered by an internal auditor are:

(i) review of accounting system and internal control,

(ii) examination of financial and operating information for the benefit of management,

(iii) examination of the economy, efficiency and effectiveness of operations,

(iv) reviews of controls including non-financial controls of tangible assets of the company.
2. Scope of Internal Audit: The scope of internal audit is determined by
the management. Its primary objective differs from that of the external
auditor who is appointed to report independently on financial information.
But, the means of achieving their respective objectives are similar and
thus much of the work of the internal auditor may be useful to the
external auditor in determining the nature, timing and extent of the
procedures.
3. Review of Internal Audit by Statutory Auditor
☐ The function of an internal auditor being an integral part of the system of internal control. It is statutory
requirement too as per Sec. 138 of the Companies Act, 2013 where the Audit Committee of the company or the
Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology
for conducting the internal audit.
☐ However, it is obligatory for a statutory auditor to examine the scope and effectiveness of the work carried out by
the internal auditor. ☐ For this he should examine the Internal Audit Department of the organisation, the strength of
the internal audit staff, their qualification and their powers. Afterwards the procedures should be studied; also the
scope of the audit examination carried out should be ascertained on referring to audit programmes, reports
submitted, points raised in audit and how these had been dealt with subsequently. ☐ The extent of independence
exhibited by the internal auditor in the discharge of his duties and his status in the organisation are important factors
for determining the effectiveness of his audit. In a large business, it has been increasingly recognised that, if their
functions and those of statutory auditors could be integrated, it might not be necessary for the statutory auditors to
go over the same facts and figure as have been previously examined by a competent and trustworthy internal audit
staff. But so far, the practice of audit being conducted jointly by the internal auditors is of great assistance to
statutory auditors.
☐ If the statutory auditor is satisfied on an examination of the work of the internal auditor, that the internal audit has
been efficient and effective, he often decides to curtail his audit programme by dispensing with some of the detailed
checking already carried out by the Internal Audit Department after or without testing the work already done. He, at
times, also decides to entrust certain items of work to the internal auditor.
☐ Given below are items of audit work in regard to which the statutory auditor accepts the checking that has
already been carried out by the internal auditor;
(i) Verification of the system of internal control;
(ii) Verification of assets, e.g., inventory in trade, fixed assets (PPE), book debts, etc; and
(iii) Verification of amounts provided for expenses as well as amounts adjusted as prepaid expenses.
☐ It must however be mentioned that the area of co-operation between the statutory and the internal auditor is
limited by the fact that the statutory auditor and the internal auditor owe their allegiance to separate authorities, the
shareholders in one case and the management in the other.
☐ Therefore, the former is not protected against the liability for negligence which may arise in such a case.
Space to write important points for revision
Q.8.7 2018 - May [1] {C} (a) Objective

Examine with reasons (in short) whether the following statement is correct or incorrect :
(a) Few members of the Board of Directors oppose the appointment of

Mr. N, an employee of the company, as an Internal Auditor, stating that Mr. N is not a chartered accountant and
further he is an employee of the company. (2 marks)

Answer:
Incorrect
As per Sec. 138 of the Companies Act, 2013, the internal auditor shall either be a Chartered Accountant or a Cost
Accountant (whether engaged in practice or not) or such other professional as may be decided by the Board to
conduct internal audit. The internal auditor may or may not be an employee of the company. So any person who is
not a Chartered Accountant and is an employee of the company can be appointed as internal auditor.

Space to write important points for revision

Q.8.8 2008 - May [2](c) Practical

As an auditor how would you react to the following situation/comment? PP Ltd., a garment exporter, asked their
Internal auditor, a practicing chartered accountant, to conduct physical verification of the year end inventory and the
report of such verification was handed over to the statutory auditor for their view and use. Can Statutory auditor rely
on such report? (6 marks)

Answer:
When the “Principal auditor” uses the work of another auditor, then the principal auditor should determine how the
work of other auditor will affect the audit. The auditor should consider whether his own participation is needed for
giving his opinion. When planning to use the work of another auditor, the principal auditor should consider the
professional competence of the other auditor in the context of specific assignment.

The principal auditor should apply reasonable care and skill and should perform procedures so as to obtain sufficient
appropriate audit evidence, that the work of other auditor is adequate for the principal auditor’s purposes, in the
context of the specific assignment.
Present Case:
Thus, in the above case of PP Ltd., statutory auditor can rely upon the report of Internal auditor regarding
verification of stock, but he has to apply reasonable care and skill in assessing the verification of stock and reports
presented by the internal auditors.

Space to write important points for revision

Q.8.9 2008 - Nov [2] (b) Practical

As an Auditor how would you react to the following situations/ comments? A company has ` 60 lakhs of paid up
Capital and ` 3 crore of average Annual Turnover of past three years preceding the Financial year under Audit. The
Company does not have any Internal Audit system because the Management does not think it necessary. (6 marks)

Answer:
Applicability of Provisions of Internal Audit:
As per Section 138 of the Companies Act, 2013 the following class of companies (prescribed in Rule 13 of
Companies (Accounts) Rules, 2014), shall be required to appoint an internal auditor or a firm of internal auditors,
namely:
(a) every listed company;
(b) every unlisted public company having
(i) paid up share capital of fifty crore rupees or more during the

preceding financial year; or

(ii) turnover of two hundred crore rupees or more during the preceding
financial year; or
(iii) outstanding loans or borrowings from banks or public financial
institutions exceeding one hundred crore rupees or more at any
point of time during the preceding financial year; or
(iv) outstanding deposits of twenty five crore rupees or more at any point
of time during the preceding financial year.
(c) every private company having
(i) turnover of two hundred crore rupees or more during the preceding
financial year; or
(ii) outstanding loans or borrowing from banks or public financial
institutions exceeding one hundred crore rupees or more at any
point of time during the preceding financial year.
Thus, any of the conditions is required to be satisfied for the applicability of the provision. The internal auditor to be
appointed shall either be a chartered accountant whether engaged in practice or not or a cost accountant, or such
other professional as may be decided by the Board to conduct internal audit of the functions and activities of the
company. Auditor may or may not be an employee of the company.
Present Case:
The company is having paid up capital less than fifty crore rupees and turnover less than two hundred crore rupees.
Further, maximum outstanding loan or borrowing from public financial institution has not been given. Therefore,
assuming that outstanding loans or borrowings from banks or public financial institutions are also not exceeding
hundred crore rupees during the previous financial year. Therefore, any of the conditions in respect of paid up
capital, turnover or outstanding loans is not satisfied. So, the company is not liable for internal audit as per Sec. 138
of the Companies Act, 2013.
Space to write important points for revision

Q.8.10 2018 - Nov [4] (d) Practical

“MMJ Ltd., an unlisted public company, did not appoint any internal auditor for the financial year ending on 31st
March, 2019. The company had paid up capital of ` 20 crores and reserves of` 25 crores. Its turnover for the
preceding 3 years were` 75 crores for the year ended 31st March, 2018, ` 150 crores for March, 2017 and ` 190
crores for March, 2016. The company had availed term loan from the bank of ` 130 crores. The outstanding balance
of the term loan as on 31st March, 2018 is ` 90 crores.” (5 marks)

Answer:
As per Sec. 138 of the Companies Act. 2013, following class of companies (Prescribed in Rule 13 of Companies
Accounts Rules, 2014) shall be required to appoint an internal auditor or a firm of internal auditors, namely: (A)
Every listed company.
(B) Every unlisted public company having.

1. Paid up share capital of fifty crore rupees or more during the preceding financial year; or
2. Turnover of two hundred crore rupees or more during the preceding financial year; or
3. Outstanding loans or borrowings from banks or public financial institution exceeding one hundred crore rupees or
more at any point of time during the preceding financial year; or
4. Outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year;
and (C) Every Private Company
1. Turnover of two hundred crore rupees or more during the preceding financial year;
2. Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees
or more at any point of time during the preceding financial year.

Present Case:
In this case, MMJ Ltd. is an unlisted public company. It has taken term loan of` 130 crore. The outstanding balance
of the term loan as on 31st March 2018 is` 90 crore. If during at point if such term loan outstanding balance exceeds
or equal to` 100 crore, during the preceding financial year, the company shall require to appoint internal auditor. So,
the company is required to appoint internal auditor as per Sec. 138 of the Companies Act, 2013.

Space to write important points for revision

Q.8.11 2019 - Nov [4] (c) Practical
Board of Directors of MN Ltd. wants to appoint CA B, a practicing Chartered Accountant, as an internal auditor of
the company as they believe that they could not appoint any other person as an internal auditor other than practicing
chartered accountant.
Examine the correctness of the statement of Board of Directors of MN Ltd. with respect to provision of Companies
Act, 2013. (3 marks)

9
Basics of Internal Financial Control and Reporting Requirement
Q.9.1 2019 - Nov [1] {C} (a) Objective

Examine with reasons whether the following statement is correct or incorrect.

(a) The auditor’s reporting on internal financial control will be applicable

with respect to interim financial statements. (2 marks)

Q.9.2 RTP Descriptive

Auditor’s reporting on internal financial controls is a requirement specified in the Act and, therefore, will apply only
in case of reporting on financial statements prepared under the Act and reported under Section 143. Explain stating
clearly the auditor’s responsibility for reporting on internal financial controls over financial reporting.

Answer:
Auditors’ Responsibility for Reporting on Internal Financial Controls over Financial Reporting in India
Clause (i) of Sub-section 3 of Section 143 of the Act requires the auditors’ report to state whether the company has
adequate internal financial controls system in place and the operating effectiveness of such controls. It may be noted
that auditor’s reporting on internal financial controls is a requirement specified in the Act and, therefore, will apply
only in case of reporting on financial statements prepared under the Act and reported under Section 143.
Accordingly, reporting on internal financial controls will not be applicable with respect to interim financial
statements, such as quarterly or half-yearly financial statements, unless such reporting is required under any other
law or regulation.
Objectives of an auditor in an audit of internal financial controls over financial reporting: The auditor's
objective in an audit of internal financial controls over financial reporting is, “to express an opinion on the
effectiveness of the company's internal financial controls over financial reporting.” It is carried out along with an
audit of the financial statements. Reporting under Section 143(3)(i) is dependent on the underlying criteria for
internal financial controls over financial reporting adopted by the management. However, any system of internal
controls provides only a reasonable assurance on achievement of the objectives for which it has been established.
Also, the auditor shall use the concept of materiality in determining the extent of testing such controls.

Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires the board report of all companies to state the
details in respect of adequacy of internal financial controls with reference to the financial statements. The inclusion
of the matters relating to internal financial controls in the directors responsibility statement is in addition to the
requirement of the directors stating that they have taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of the 2013 Act for safeguarding the assets of the company
and for preventing and detecting fraud and other irregularities.

Space to write important points for revision

10 Miscellaneous
Q.10.1 2015 - May [4] (b) Descriptive

The auditor may exercise his judgement to identify which risks are significant risks. Explain the above in context of
SA-315. (6 marks) Answer:
Judgement to identify which risks are significant risks: As per SA - 315: 1. Significant Risk:

☐ As part of the risk assessment as described in Para 25, the auditor shall determine whether any of the risk
identified are in the auditor’s judgement, a significant risk. In exercising this judgement, the auditor shall exclude
the effects of identified controls related to the risk.

2. Factors:
☐ In exercising judgement as to which risks are significant risks, the auditor shall consider atleast the following:
(a) Whether the risk is a risk of fraud.
(b) Whether the risk is related to recent significant economic,

accounting or other developments like changes in regulatory transactions etc. and therefore requires specific
attention. (c) The complexity of transactions.

(d) Whether the risk involves significant transactions with related parties.
(e) The degree of subjectivity in the measurement of financial information related to the risk, especially those
measurements involving a wide range of measurement uncertainty.
(f) Whether the risk involves significant transactions that are outside the normal course of business for the entity or
that otherwise appear to be unusual.
3. Controls:
☐ When the auditor has determined that a significant risk exists, the
auditor shall obtain an understanding of the entity’s controls,
including control activities, relevant to that risk.
Space to write important points for revision

MULTIPLE CHOICE QUESTION

1 Audit Risk

1. The risk that the auditor may fail to express an appropriate opinion is an audit assignment, in known as
(a) Audit Risk
(b) Assessment Risk
(c) Inherent Risk
(d) Control Risk

2. Risk of material misstatement may be defined an the risk that the financial statements are material misstated prior
to audit this consists (a) Inherent Risk
(b) Control Risk
(c) (a) or (b)
(d) (a) and (b)

3. The assessment of risks is based on audit procedures to obtain information necessary for that purpose and
evidence obtained _______. (a) At the time of audit report
(b) At the time protection judgement
(c) Throughout the investigation
(d) Throughout the audit

4. Audit risk ______the risk that the auditor might express an opinion that the financial statements are materially
misstated when they may not this risk is ordinarily insignificant
(a) should include
(b) will be include
(c) not include
(d) must include

5. The risk of material misstatement may exist at two level, one is at the assertion level for classes of transaction,
account balance and disclosures another is at
(a) The auditing level
(b) The investigation level
(c) The overall financial statement level
(d) The discussion level with TCWG

6. The risk of material misstatement at the assertion level consist of (a) Inherent Risk
(b) Control Risk
(c) Defection Risk
(d) (a) and (b)
7. Inherent risk and control risk are the entity’s risks, they exist ________of the audit of the financial statement.
(a) dependently
(b) independently
(c) inter dependently
(d) intra dependently

8. inherent risk factors are considered while designing test of controls and _________.
(a) compliance procedures
(b) substain line procedures
(c) audit procedures
(d) investigation procedures

9. _________is a function of the effectiveness of the design, implementation and maintenance of internal control by
management (a) Audit Risk
(b) Inherent Risk
(c) Control Risk
(d) Assertion Risk

10. Internal control can_________risks of material misstatement in the financial statements because of it’s inherent
limitations (a) can not reduce
(b) can reduce
(c) eliminate
(d) can only reduce but not eliminate

11. Auditor assesses control risk as _________on control

(a) rely
(b) not rely
(c) partially rely
(d) rely or not rely

12. Audit Risk = Risk of Material misstatement x__________ (a) Inherent risk
(b) Control risk
(c) Detection risk
(d) None

13. Risk of material misstatement =__________x control risk (a) Inherent risk
(b) Control risk
(c) Detection risk
(d) None

14. Audit Risk is a

(a) Inherent risk x Control risk
(b) Control risk x Detection risk
(c) Inherent risk x Detection risk
(d) Inherent risk x Control risk x Detection risk

2
Identifying and Assessing the Risks of Material Misstatement

15. “Identifying and assessing the risk of material misstatement through understanding the entity and its
environment” define under (a) SA - 300
(b) SA - 310
(c) SA - 315
(d) SA - 318

16. Information obtained by performing risk assessment procedures useds as__________.

(a) Audit evidence
(b) Assertion
(c) Conclusion
(d) Supporting documents

17. The risk assessment procedures shall include

(a) Analytical procedures
(b) Observation and inspection
(c) Inquiries of management and other within the entity (d) All of them

18. ___________ may support inquires of management and others, and may also provide information about the
entity and its environment (a) Observation
(b) Inspection
(c) Analytical procedures
(d) Observation and inspection

3 Internal Control

19. The term “control” refers of any aspects of one or more of the components of _________.
(a) Control
(b) Internal control
(c) External control
(d) Overall control

20. Internal control assists the auditor in

(a) identifying types of potential misstatements.
(b) identifying factors that affect the risk of material misstatement . (c) designing the nature, timing, and extent of
further audit procedures. (d) all of them

21. Control can be________ related to an assertion.

(a) directly
(b) indirectly
(c) directly or indirectly
(d) none

22. Internal control facilitates in entity’s objectives like __________. (a) The reliability of entity’s financial
reporting
(b) The effectiveness and efficiency of its operations and safeguarding

of assets
(c) Its compliance with applicable laws and regulations
(d) All of them

23. The way in which internal control is designed, implemented and maintained varies with
(a) an entity’s size
(b) entity’s complexity
(c) entity’s structure
(d) an entity’s size and complexity

24. There is a ________relationship between an entity’s objectives and the controls it implements to provide
reasonable assurance about their achievement.
(a) direct
(b) indirect
(c) partially direct
(d) none

25. The division of internal control into_________components provides a useful framework for auditors to consider
how different aspects of an entity’s internal control may effect the audit.
(a) Two
(b) There
(c) Four
(d) Five

26. Which is not a component useful for a internal control.

(a) The control environment
(b) The economic environment of the state
(c) The entity’s risk assessment process
(d) Control activities and monitoring of control

27. Control environment excludes

(a) The governance and management functions
(b) The attitudes awareness, and actions of TCWG and management (c) The social welfare of the economy
(d) Control environment sets the tone of an organization, influencing

the control consciousness of its people.

28. The auditor shall obtain an understanding of how the entity communicates financial reporting roles and
responsibilities includes (a) Communications between management and TCWG (b) External communications, such
as those with regulatory authorities. (c) Either (a) or (b)
(d) Both (a) and (b)
29. The objectives of an internal audit function not vary in spite of its size

and structure of the entity statements

(a) True
(b) False
(c) Partially True
(d) None

4 Evaluation of Internal Control by the Auditor

30. Internal control helps the external auditor for evaluation, the statement is.
(a) True
(b) False
(c) Partially True
(d) None

31. Formulation of audit programme by an audits after the satisfactory understanding of the internal control system
and their actual operation the statement is.
(a) True
(b) False
(c) Partially True
(d) None

32. A review of the internet control can be done by a process of study, examination and evaluation of control system
installed by the__________.
(a) Internal Auditor
(b) Statutory Auditor
(c) Internal Control System
(d) Management

33. Evaluation of internal control with help of

(a) Narrative Record
(b) Check List
(c) Questionnaire
(d) Any of them
34. __________is a complete and exhaustive description of the system as found in operation by the auditor.
(a) Narrative Record
(b) Check List
(c) Questionnaire
(d) Flow Chart

35. The basic disadvantages of narrative records are except (a) To comprehend the system in operation is quite
difficult. (b) Its suitable for small business specially where take of format control

system.
(c) To identify weakness or gaps in the system
(d) To incorporate changes arising on account of reshuffling of

manpower etc.
36. A series of instructions and/or questions which a member of the auditing staff must follow and/or answer is
known as
(a) Narrative Record
(b) Check List
(c) Questionnaire
(d) Flow Chart

37. _________is the must widely used from for collecting information about the existence, operation and efficiency
of internal control is an organization.
(a) Narrative Record
(b) Check List
(c) Questionnaire
(d) Flow Chart

38. An important_________ of the questionnaire approvals is that oversight or omission of significant internal
control review procedures is less likely to occur with this method.
(a) Advantage
(b) Disadvantage
(c) Usage
(d) None

5 Testing of Internal Control

39. Test of controls include tests of elements of the control environment where strengths in the control environment
are used by auditors to reduce ________.
(a) audit risk
(b) inherent risk
(c) detection risk
(d) control risk

40. Testing of internal control is done on the __________ basis. (a) Comprehensive
(b) Continuous
(c) Selective
(d) None

6 Internal Control and “IT” Environment

41. Benefits of IT in an entity’s internal control include

(a) Effective segregation of duties through security control (b) Enhance the timeliness, availability, and accuracy of
information (c) Enhance the additional analysis of information
(d) All of them

42. IT poses specific risks to an entity’s internal control eg.

(a) Reliance on system
(b) Programs that are inaccurately processing date, processing

inaccurate data
(c) (a) or (b)
(d) (a) or (b) / both (a) & (b)
43. Controls in IT systems consist of a combination of manual controls and

___________.
(a) audit controls
(b) IT controls
(c) automated controls
(d) internal controls

7 Materiality and Audit Risk

44. The concept of materiality is applied by the auditor both in planning and ___________ the audit
(a) evaluating
(b) performing
(c) concluding
(d) none

45. ___________ is the risk that the auditor expresses an in appropriate audit opinion when the financial statements
are materially misstated. (a) Inherent Risk
(b) Detection Risk
(c) Control Risk
(d) Audit Risk

46. Audit risk is a function of the risks of material and __________. (a) Inherent Risk
(b) Detection Risk
(c) Control Risk
(d) Audit Risk

47. Materiality and audit risk are considered throughout the audit in particular, when
(a) Determining the nature, timing and extent of further audit procedures (b) Identifying and assessing the risk of
material misstatement (c) Evaluating the effect of uncorrected misstatements, if any (d) In all of the above cases

8 Internal Audit

48. Every listed company shall appoint an internal auditor under the companies Act 2013, under __________.
(a) Section 130
(b) Section 132
(c) Section 135
(d) Section 138

49. The internal auditor _________ be an employee of the company (a) Shall
(b) May
(c) Shall not
(d) May or may not

50. As per the section 138 of the Companies Act, 2013, an internal auditor shall be
(a) Chartered accountant
(b) Cost accountant
(c) Other professional as may be decided
(d) All of them

51. “Using the work of an internal auditor”, describes under (a) SA - 570
(b) SA - 603
(c) SA - 610
(d) SA - 705
52. The objective and scope of internal audit functions typically include assurance and consulting actives designed
to evaluate and improve the effectiveness of the entity’s __________.
(a) governance process
(b) risk management
(c) internal control
(d) all of them
53. Activities relating to internal control except (a) Evaluation of internal control
(b) Activities relating to governance

Answer

1. (a) 2. (d) 3. (d) 4. (c) 5. (c) 6. (d) 7. (b) 8. (b) 9. (c) 10. (d) 11. (d) 12. (c) 13. (a) 14. (d) 15. (c) 16. (a) 17. (d) 18.
(d) 19. (b) 20. (d) 21. (c) 22. (d) 23. (d) 24. (a) 25. (d) 26. (b) 27. (c) 28. (d) 29. (b) 30. (a) 31. (a) 32. (d) 33. (d) 34.
(a) 35. (b) 36. (b) 37. (c) 38. (a) 39. (d) 40. (c) 41. (d) 42. (d) 43. (c) 44. (b) 45. (d) 46. (b) 47. (d) 48. (d) 49. (d) 50.
(d) 51. (c) 52. (d) 53. (b)

CHAPTER

Fraud and Responsibilities of 5 the Auditor in this Regard

This Chapter Covers: Study’s Chapter: 5

Chapter Comprises: Meaning of Fraud ☹Characteristics of Fraud ☹Detection of Fraud and Error ☹Fraud Risk
Factors and Possibility of
Fraud ☹Fraud Reporting ☹Auditor unable to continue the engagement.

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis

Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Objective Short Notes
Legend
Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book.
6.226
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8
4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK . . . . . . . Weightage Analysis Repeatedly Asked Questions
Common Answered Must Try Question Questions
1.3, 2.2, 3.1
1 Characteristics of Fraud
Q.1.1 2009 - May [4] (b) Descriptive

As an auditor of a Limited Company, you observe that during the month of March, 2009, sales invoices were not
recorded in books of accounts. You also observe that payment of wages was much higher compare to last year.
Keeping in mind above, analyse possible ways of manipulation of accounts. (6 marks)

Answer:
Manipulation of Accounts :
Accounts are falsified in order to conceal the true position of the business for some purpose. They are always
intentional, for a predetermined purpose and are generally committed either by the owners or top management
personnel or senior officers of the business. This type of fraud is generally committed: 1. to avoid incidence of
income-tax or other taxes by showing profits at a

lower figure.
2. to withhold declaration of dividend even there is adequate profit.
3. for receiving higher remuneration where managerial remuneration is payable by reference to profits.
4. for delaying a dividend when there are insufficient profits by showing profits at inflated figures.
Such types of frauds are difficult to be detected as they are committed by persons holding position of trust and use
carefully guarded by them. Such frauds are generally of the following nature:
1. Recording fictitious purchases or suppression of purchases
2. Recording fictitious sales or omission of sales
3. Recording fictitious expenses or omission of expenses
4. Over valuation or under valuation of stock.
5. Taking credit for accrued income not likely to be received or omission of income.
6. Revenue expenses changed to capital and vice-versa. SA 240 “Auditor’s Responsibility to consider fraud and
Error in an Audit of Financial Statements” deals with the auditor’s responsibilities for the detection of material
misstatement resulting from fraud and error. It requires a considerable skill and vigilance on the part of an auditor.
In doubtful cases he may refuse to believe the information supplied to him by any officer of the concern.
An auditor who uses adequate skill and reasonable care, is legally exempt from liability if he fails to discover a well
concealed detection. But an auditor by a skilled auditor should rarely permit such a failure.
All possible opportunities for dishonesty and manipulation of the accounts must be considered and guarded against
and the degree of checking and investigation should be determined by the circumstances surrounding the
transactions and the effectiveness of the system of intended check in operation.
Space to write important points for revision

Q.1.2 2011 - May [2] (b) Descriptive List out some examples of fraud that can be done by ledger keeper in Bought
ledger and Sales ledger. (8 marks)

Answer:
Ledger Keeper and Frauds
Examples of frauds that can be done by ledger keeper in Bought Ledger:
1. Crediting an amount due to a supplier not in his account but under a

fictitious name and misappropriating the amount paid against the credit balance.
2. (i) Crediting the account of a supplier by fictitious invoice, showing that certain supplies have been received from
the firm, where no goods have been received.

(ii) Crediting the accounts of supplier on the basis of duplicate invoice from a supplier, the original amount whereof
has already been adjusted to the credit of the supplier in the Bought Ledger.

3. Suppressing a credit note issued by a supplier in respect of return or an allowance and misappropriating an
amount equivalent thereto out of the payment made to him. For if a credit note issued by a supplier either in respect
of goods returned to him or for an allowance granted by him, is not debited to his account, the balance in his account
in the Bought Ledger would be larger than the amount actually due to him. The ledgerkeeper thus will be able to
misappropriate the excess amount standing to the supplier’s credit.

Examples of frauds that can be done in Sales Ledger:

1. Teeming and Lading: Amount received from a customer being misappropriated; also to prevent its detection the
money received from another customer sub-sequently being credited to the account of the customer who has paid
earlier.
Similarly, moneys received from the customer who has paid thereafter being credited to the account of the second
customer and such a practice is continued so that no one account is outstanding for payment for any length of time,
which may lead the management to either send out a statement of account to him or communicate with him.
2. Adjusting an unauthorised credit or fictitious rebate, allowance, discount, etc. in the account with a view to reduce
the balance and when payment is received from the debtor, misappropriating an amount equivalent to the credit.
3. Writing off the amount receivable from a customer’s bad debt account and misappropriating the amount received
in payment of the debt. Space to write important points for revision

Q.1.3 2015 - May [7] (e) Short Notes

Write short note on Defalcation of cash with examples. (4 marks) Answer:

Defalcation of Cash
Defalcation of cash may take place in following ways:

1. By Inflating cash payment

2. By suppressing cash receipts
3. By casting wrong total in the cash book.
The defalcation of cash is occurred due to the transaction affecting the cash balances which are as follows:
☐ The cash payment made for purchases
☐ The payment made to supplier for credit purchases
☐ The payment made for expenses
☐ Cash in transit in case of consignment
☐ Bad debt incurred
☐ Purchase of fixed assets (PPE)
☐ Redemption of debentures and buyback of the share capital ☐ Dividend paid for the year etc.
Space to write important points for revision

Q.1.4 2019 - May [1] (b) Objective

Satisfactory Control environment is not an absolute deterrent to fraud. (2 marks) Answer:

This Statement is Correct
The existence of a satisfactory control environment can be a positive factor when the auditor assesses the risks of
material misstatement. However, although it may help to reduce the risk of fraud, a Satisfactory control environment
is not an absolute deterrent to fraud.

Space to write important points for revision

2 Detection of Fraud and Error
Q.2.1 2010 - May [1] (vi) Objective

State with reasons (in short) whether the following statement is True or False:
When an auditor identifies a Misstatement resulting from fraud, it is his responsibility to communicate it to the
regulatory and enforcement authorities apart from those charged with governance. (2 marks)

Answer:
True :
According to SA 240 “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”,
if an auditor identifies a misstatement resulting from fraud or error, it is his responsibility to communicate the matter
with those charged with the governance and, in some circumstances, when so required by laws or regulations, to
regulatory and enforcement authorities also.

Q.2.2 2015 - May [1] {C} (c), RTP Descriptive

Discuss the following:

Is detection of fraud and error duty of an auditor? (5 marks) Answer:
As per SA-240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”,
primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the
entity and management. It is important that management, with the oversight of those charged with governance, place
a strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place, and fraud deterrence,
which could persuade individuals not to commit fraud because of the likelihood of detection and punishment. This
involves a commitment to creating a culture of honesty and ethical behaviour which can be reinforced by an active
oversight by those charged with governance. In exercising oversight responsibility, those charged with governance
consider the potential for override of controls or other inappropriate influence over the financial reporting process,
such as efforts by management to manage earnings in order to influence the perceptions of analysts as to the entity’s
performance and profitability.
☐ The primary responsibility for detection of fraud and error is of

management only. However, if the auditor finds out any issues or doubts relating to financial statements creating
possible frauds and errors then it shall becomes responsibility of the auditor to find out where such fraud exists.

☐ So, the auditors primary duty is to provide opinion on the financial statement however, if the auditor finds out
any frauds or errors of possibility of occurrence then he/she should perform extended audit procedure to find out
where such fraud exists.

☐ If the auditor finds any frauds and errors resulting from mis-statement then he should communicate the same to
the management or he should mention the same in his audit report.
So, we can conclude that it is not primary responsibility of the auditor to detect and correct fraud and error.
However, if he finds any doubt of fraud and error that it will become the duty of auditor to detect the same.

As per SA-200, Overall Objectives of the Independent Auditor and the conduct of Audit in accordance with
standards on auditing, the purpose of an audit is to enhance the degree of confidence of intended users in the
financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial
statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. In
the case of most general purpose frameworks, that opinion is on whether the financial statements are presented
fairly, in all material respects, or give a true and fair view in accordance with the framework. An audit conducted in
accordance with SAs and relevant ethical requirements enables the auditor to form that opinion.
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance
that the financial statements are free from material misstatement due to fraud or error. This is because there are
inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions
and bases the auditor’s opinion being persuasive rather than conclusive.
Auditors Responsibilities Relating to Fraud under Companies Act, 2013 Auditing and Investigation under
Companies Act, 2013
☐ Audit never undertakes discovery of specific happenings and is never

started with a preconceived notion about the state of affairs. ☐ The auditor seeks to report what he finds in the
normal course of
examination of the accounts adopting generally followed techniques
unless circumstances call for a special probe: fraud, error, irregularity,
whatever comes to the auditor’s notice in the usual course of checking,
are all looked into in depth and sometimes investigation results from the
prima facie findings of the auditor.
☐ But as per sub Section 12 of Section 143 of the Companies
Amendment Act, 2015 Notwithstanding anything contained in this
section, if an auditor of a company in the course of the performance of
his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be
prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the
matter to the Central Government within such time and in such manner as is prescribed under Rule 13 of Companies
(Audit and Auditors) Rules, 2014.
Provided that in case of a fraud involving lesser than the specified amount, the auditor shall 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
may be prescribed.
Provided further that the companies, whose auditors have reported frauds under this sub- section 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. ☐ Rules 13 of the Companies (Audit and
Auditors) Rules, 2014,
describes that in case the auditor has sufficient reason to believe that
an offence involving fraud, is being or has been committed against the
company by officers or employees of the company, he shall report the
matter to the Central Government immediately but not later than sixty
days of his knowledge and after following the procedure indicated herein
below:
(a) Auditor shall forward his report to the Board or the Audit Committee, as the case may be, immediately after he
comes to knowledge of the fraud, seeking their reply or observations within forty-five days;
(b) On receipt of such reply or observations the auditor shall forward his report and the reply or observations of the
Board or the Audit Committee alongwith his comments (on such reply or observations of the Board or the Audit
Committee) to the Central Government within fifteen days of receipt of such reply or observations;
(c) In case the auditor fails to get any reply or observations from the Board or the Audit Committee within the
stipulated period of fortyfive days, he shall forward his report to the Central Government alongwith a note
containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he
failed to receive any reply or observations within the stipulated time. (d) Thereafter the report shall be sent to the
Secretary, Ministry of
Corporate Affairs in a sealed cover by Registered Post with
Acknowledgment Due or by Speed post followed by an e-mail in
confirmation of the same.
(e) This report shall be on the letter-head of the auditor containing
postal address, e-mail address and contact number and be signed
by the auditor with his seal and shall indicate his Membership
Number.
(f) The report shall be in the form of a statement as specified in Form
ADT-4.
☐ No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by
reason of his reporting the matter above if it is done in good faith. (g) In case of a fraud involving lesser than the
amount specified in subrule (1), the auditor shall report the matter to Audit Committee
constituted under Section 177 or to the Board immediately but not
later than two days of his knowledge of the fraud and he shall report
the matter specifying the following:
(i) Nature of Fraud with description;
(ii) Approximate amount involved; and
(iii) Parties involved.
(h) The following details of each of the fraud reported to the Audit
Committee or the Board under sub-rule (3) during the year shall be
disclosed in the Board’s Report:
(i) Nature of Fraud with description;
(ii) Approximate Amount involved;
(iii) Parties involved, if remedial action not taken; and (iv) Remedial action taken.
Important Note: The provision of this rule shall also apply, mutatis mutandis, to a cost auditor and a secretarial
auditor during the performance of his duties under Sec. 148 and Sec. 204 respectively. If any auditor, cost
accountant or company secretary in practice do not comply with the provisions of sub-Sec. (12) of Sec. 143, he shall
be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh
rupees.
Space to write important points for revision

3 Fraud Risk Factors and Possibility of Fraud

Q.3.1 2015 - Nov [7](d), RTP Short Notes

Write short note on Fraudulent financial reporting (4 marks) Answer :

Fraudulent Financial Reporting:

• Fraudulent financial reporting involves intentional misstatements including omissions of amounts or disclosures in
financial statements to deceive financial statement users.
• It can be caused by the efforts of management to manage earnings in order to deceive financial statement users by
influencing their perceptions as to the entity’s performance and profitability.
• Such earnings management may start out with small actions or inappropriate adjustment of assumptions and
changes in judgements by management. Pressures and incentives may lead these actions to increase to the extent that
they result in fraudulent financial reporting.
• Such a situation could occur when due to pressures to meet market expectations or a desire to maximize
compensation based on performance, management intentionally takes positions that lead to fraudulent financial
reporting by materially misstating the financial statements.
• In some entities, management may be motivated to reduce earnings by a material amount to minimize tax or to
inflate earnings to secure bank financing.
Fraudulent financial reporting may be accomplished by the following:
☐ Manipulation, falsification or alteration of accounting records or supporting documents from which the financial
statements are prepared.
☐ Misrepresentation in or intentional omission from the financial statements of events, transactions or other
significant information.
☐ Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation or
disclosure.
Fraudulent financial reporting often involves, management overrides of
controls that otherwise may appear to be operating effectively. Space to write important points for revision

Q.3.2 2018 - Nov [5] (d) Descriptive

Write any five circumstances of conflicting or missing evidence that indicate the possibility of fraud. (5 marks)
Answer:
The following are the circumstances of conflicting or missing evidence that indicate the possibility of fraud.
• Missing documents.
• Documents that appear to have been altered.
• Unavailability of other than photocopied or electronically transmitted

documents when documents in original form are expected to exist.

• Significant unexplained items on reconciliations.
• Unusual balance sheet changes, or changes in trends or important

financial statements ratios or relationships, for example, receivables growing faster than revenues.

• Inconsistent, vague, or implausible responses from management or employees arising from inquiries or analytical
procedures.
• Unusual discrepancies between the entity’s records and confirmation replies.
• Large numbers of credit entries and other adjustments made to accounts receivable records.
• Unexplained or inadequately explained differences between the accounts receivable sub-ledger and the control
account, or between the customer statements and the accounts receivables sub-ledger.
• Missing or non-existent cancelled checks in circumstances where cancelled checks are ordinarily returned to the
entity with the bank statement.
• Missing inventory or physical assets of significant magnitude.
• Unavailable or missing electronic evidence, inconsistent with the entity’s record retention practices or policies.
• Fewer responses to confirmations than anticipated or a greater number of responses than anticipated.
• Inability to produce evidence of key systems development and program change testing and implementation
activities for current year system changes and deployments.
Space to write important points for revision

4 Fraud Reporting
Q.4.1 2017 - May [2] (i) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
Fraud against the company shall be reported by the auditor to the Central Government within 45 days of his
knowledge. (2 marks)

Answer:
Incorrect:
As per Rule 13(1) of Companies (Audit and Auditors) Rules, 2014, 1. If an auditor of a company, in the course of
the performance of his duties

as statutory auditor, has reason to believe that an offence of fraud, which involves of is expected to involve
individually an amount of rupees one crore or above, is being or has been committed against the company by its
officers or employees, the auditor shall report the matter to the Central Government. [Rule 13(1)]

2. The auditor shall report the matter to the Central Government as under :
(a) the auditor shall report the matter to the Board or the Audit

Committee, as the case may be, immediately but not later than two days of his knowledge of the fraud, seeking their
reply or observations within forty-five days;
(b) on receipt of such reply or observations, the auditor shall 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 fifteen days from the date of
receipt of such reply or observations;

(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the
stipulated period of fortyfive days, he shall forward his report to the Central Government along with a note
containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has
not received any reply or observations. [Rule 13(2)]

Space to write important points for revision

Q.4.2 2018 - May [5] (d) Practical

Mr. A is appointed as statutory auditor of a company for the Financial Year ended 31st March, 2018. During the
course of audit, it was found that few doubtful transactions had been committed by finance manager who retired in
March, 2018. The fraud was going on since last 2-3 years and the total amount misappropriated exceeding` 100
lakhs. As a statutory auditor, what would be reporting responsibilities of Mr. A? (5 marks)

Answer:
Provision
• As per Sec. 143(12) of the Companies Act, 2013, if an auditor of a

company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud,
which involves or is expected to involve individually an amount of one crore rupees or above is being or has been
committed against the company by its officers or employees, the auditor shall report the matter to the Central
Government.
Present Case:
• In the instant case, a fraud had been committed by a general manager and the amount involved of such
misappropriation is exceeding to`100 lakhs i.e. ` 1 crore. Therefore, reporting of fraud should be done to Central
Government in accordance with Section 143 (12) of the Act.
• The manner of reporting the matter to the Central Government is as follows:
(i) the auditor shall report the matter to the Board or the Audit Committee as the case may be, immediately but not
later than two days of his knowledge of the fraud, seeking their reply or observations within forty five days;
(ii) on receipt of such reply or observations, the auditor shall 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 fifteen days from the date of receipt of such reply or observations;
(iii) in case the auditor fails to get reply or observations from the Board or the Audit Committee within the stipulated
period of forty five days, he shall forward his report to the Central Government along with a note containing the
details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received
any reply or observations:
(iv) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a Sealed cover by Registered Post with
acknowledgment due or by Speed Post followed by an email in confirmation of the same;
(v) the report shall be on the letter - head of the auditor containing postal address, e-mail address and contact
telephone number or mobile number and signed by the auditor with his seal and shall indicate his Membership
Number; and
(vi) the report shall be in the form as statement as in Form ADT- 4 Space to write important points for revision

MULTIPLE CHOICE QUESTION

1 Meaning of Fraud

1. “The auditor’s responsibilities relating to fraud in an Audit of Financial Statement” defines under
(a) SA - 200
(b) SA - 205
(c) SA - 230
(d) SA - 240

2. Fraud is an intentional act by one or more individuals among management, TCWG, employees or third parties,
involving the use of deception to obtain
(a) legal advantage
(b) illegal advantage
(c) an unjust
(d) an unjust or illegal advantage

3. The auditor is concerned with fraud that causes a __________ in the financial statements.
(a) fraudulent effect
(b) errors and omissions
(c) misstatement
(d) material misstatement

4. Intentional misstatements relevant for an auditor:

(a) misstatements resulting from misappropriation of assets (b) misstatements resulting from fraudulent financial
reporting (c) Only (a)
(d) Both (a) and (b)

2 Characteristics of Fraud

5. Fraud causes a material misstatement in the financial statements involve (a) Fraudulent Financial Reporting
(b) Misappropriation of Goods
(c) Defalcation of Cash
(d) All of them

6. Fraudulent financial reporting may by accomplished by

(a) Manipulation or Falsification or Alteration including forgery (b) Intentional Misapplication of accounting
principles
(c) Misrepresentation or Intentional Omission
(d) Any of then

7. Defalcation of cash arises when

(a) Inflating Cash Payment
(b) Suppressing Cash Receipts
(c) Casting Wrong Totals in the Cash Book
(d) Any of the above

3
Detection of Fraud and Error-Duty of an Auditor

8. As per SA - 240 “The Auditor’s Responsibilities Relating to Fraud in the Audit of Financial statements”, the
primary responsibility for the prevention and detection of fraud rests with
(a) Auditor
(b) Management
(c) Those charged with governance
(d) Both TCWG and Management

9. For detection of fraud and error auditor should _________. (a) overview specific areas
(b) analyse meticulously
(c) analyse superficially
(d) appoint internal auditor for verifications.

10. An auditor conducting an audit in accordance with SA is responsible for obtaining reasonable assurance that the
financial statement are free from
(a) Fraud & errors
(b) Misappropriations
(c) Misstatements
(d) Material misstatement, whether caused by fraud or error

11. Teeming and lading is one of the techniques of inflating cash payments. (a) True
(b) False
(c) Partially True
(d) None

4 Fraud Risk Factors and Possibility of Fraud

12. __________ many be defined as events or conditions that indicate an incentive or pressure to commit fraud or
provide an opportunity to commit fraud.
(a) Fraud Factors
(b) Errors Factors
(c) Risk Factors
(d) Fraud Risk Factors

13. If, as a result of a misstatement resulting from fraud, the auditor encounters exceptional circumstances that bring
into question his ability to continue performing the audit, he shall:
(a) Ask the management for his withdrawal
(b) Withdraw from the engagement immediately
(c) Report to audit team regarding withdrawal
(d) Determine the professional and legal responsibilities applicable in

the circumstances
14. Misappropriation of assets may occur because there is:
(a) Adequate record keeping with respect to assets
(b) Lack of complete and timely reconciliations of assets (c) Dispute between shareholders in a closely held entity
(d) Known history of violations of securities laws.

15. Adverse Relationships may be created by

(a) Known or anticipated future employee layoffs
(b) Recent or anticipated changes to employee compensation or benefit

plans
(c) Promotions, compensation, or other rewards inconsistent with
expectations
(d) All of the above.
16. In which situation possibility of fraud arises
(a) Discrepancies in accounting records
(b) Conflicting or missing evidence
(c) Problematic or unusual
management.
(d) Any of the above situation relationship between Auditor and

17. Unsupported or unauthorised balances or transactions is the example of: (a) Discrepancies in accounting records
(b) Conflicting or missing evidence
(c) Problematic relationship between auditor and management (d) Non compliances of standards of audit.

18. Unusual delays by the entity in providing requested information is an example of:
(a) Discrepancies in accounting records
(b) Conflicting or missing evidence
(c) Problematic relationship between auditor and management (d) Non compliances of standards of audit.

5 Fraud Reporting

19. As per _________ the primary responsibility for the prevention and detection of fraud rests with management
(a) SA - 200
(b) SA - 210
(c) SA - 220
(d) SA - 240

20. A Reporting of Fraud involving amount of less than 1 crore rupees: Auditor to report Board/Audit Committee
(a) within 2 weeks of knowledge of fraud
(b) within 1 weeks of knowledge of fraud
(c) within 2 days of knowledge of fraud
(d) within 10 day of knowledge of fraud.

21. Reporting of fraud to the Central Government governed under. (a) Section 143(12) of Companies Act, 2013
(b) Section 143 sub-section 13 of Companies Act, 2013 (c) Rule 13 of the Companies (Audit and Auditors) Rules,
2014 (d) (a) & (c) both

22. The auditor should Report

(a) Nature of fraud with description
(b) Approximate amount involved
(c) Parties involved
(d) All of the above.

23. Company is bound to disclose certain specified details in Board’s Report as

(a) Nature of fraud with description
(b) Approximate amount involved
(c) Parties involved and Remedial action taken
(d) All of the above
24. Reporting of Fraud involving amount of rupees 1 crore or above: The auditor shall report the matter to the
_________. Board or audit committee with 2 days of his knowledge of the fraud, and seeking their reply or
observation
(a) within 2 days
(b) within 15 days
(c) within 30 days
(d) within 45 days

25. As per Rule 13 of CAAR 2014, if an auditor received the reply or observation from Board or Audit Committee
within stipulated time, the audit is required to forward report along with reply/observation and comments to.
(a) TCWG with 15 days
(b) Shareholders within 30 days
(c) Central state Govt. Within 15 days
(d) Central Government within 15 days

Answer

1. (d) 2. (d) 3. (d) 4. (d) 5. (d) 6. (d) 7. (d) 8. (d) 9. (b) 10. (d) 11. (b) 12. (d) 13. (d) 14. (b) 15. (d) 16. (d) 17. (a) 18.
(c) 19. (d) 20. (c) 21. (d) 22. (d) 23. (d) 24. (d) 25. (d)

CHAPTER

Audit in an Automated 6 Environment

This Chapter Covers: Study’s Chapter: 6

Chapter Comprises: Key features of an Automated Environment ☹Relevance of ‘IT’ in an Audit ☹Risk & Controls
in an Automated
Environment ☹Testing methods ☹Internal Financial Controls as per
Regulatory Requirements ☹Data Analytics for Audit ☹Reporting Audit
Findings.

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis

Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Objective Short Notes
Legend
Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book. 6.247
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK Repeatedly Asked Questions
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
3.2, 4.1 4.1
1 Relevance of IT in an Audit
Q.1.1 2018 - May [6] (e) Descriptive

(e) The auditor should understand and consider the risks that may arise from the use of Information Technology (IT)
Systems. (5 marks) Answer:
The auditor should understand and consider the following risks that may arise from the use of Information
Technology (IT) Systems. ☐ Inaccurate Processing of data, processing inaccurate data, or both. ☐ Unauthorized
access to data.
☐ Direct data changes (back-end changes)
☐ Excessive access / Privileged access (Super users). ☐ Lack of adequate segregation of duties.
☐ Unauthorized changes to systems or programs.
☐ Failure to make necessary changes to systems or programs. ☐ Loss of data.

Space to write important points for revision

Q.1.2 2019 - Nov [2] (d) Descriptive

The auditors responsibility include reporting on Internal Financial Controls over Financial Reporting which include
and understanding IT environment of the company and relevant risks and control. Mention any three situation where
IT will be relevant to an audit. (3 marks)

2
Risk and Controls in an Automated Environment
Q.2.1 2008 - May [7] (d) Short Notes

Write short note on Firewalls. (5 marks) [CA Final - II] Answer :

Firewalls

1. Meaning Firewall is a computerized system (Firewall are mainly

specialized software) installed between organization private network and public organization private network access.
network to protect

from unauthorized Firewall is like a insulator which insulate organization private network from invaders coming
from public network.
A firewall is a System that enforces access control between two networks. To accomplish this : ☐ All traffic
between the outside network and the

organisation’s Internet must pass through the firewall.

☐ Only authorized traffic between the organization and the outside, as specified by formal security policy, is
allowed to pass through the firewall.

☐ The firewall must be immune to penetration from both outside and inside the organisation.
2. Needs Now the questions arises, why does organization connect their network with public network i.e. internet?
The answer is; you imagine a bank, can a bank function without providing services like net banking to their
customers? I think banks can not function without services like net banking. Therefore it has become almost
compulsion for organizations to connect their private network with outside world through internet, and when they
connect their private network with internet for providing various net services, naturally the computer criminals
roaming on internet also try to intrude into private network unauthorisely.

3. Benefits Firewall act as a security between private and public networks and it checks any data packets from
outside world into private network, it check data packets for authentication and authorization etc. In addition to
insulating the organisation's network from external networks, firewalls can also be used to insulate portions of the
organisations intranet from internal access.

4. Types There are a number of firewall products on the market. Firewalls can be grouped into two general types:
Network-level firewalls, and application-level firewalls. (i) Networklevel
firewalls

(ii) Application
level
firewalls

It provide low cost and low security access control. This type of firewall consists of screening router that examines
the source and destination addresses that are attached to incoming message packets. The firewall accepts or denies
access requests based on filtering rules that have been programmed into it. It provide a high level of customizable
network security, but can be extremely expensive. These systems are configured to run security applications called
proxies that permit routine services such as e-mail to pass through the firewall, but can perform sophisticated
functions such as logging or user authentication for specific tasks. If an outside user a t t e mp t s t o c o n n e c t to a
n unauthorized service or file, the network administrator or security group can be notified immediately.

Q.2.2 2014 - Nov [2] (c) Descriptive

As an IS auditor, what are the risks reviewed by you relating to IT systems and processes as part of your functions?
(4 marks) [CA Final - II] Answer:
Risks to be reviewed relating to IT systems and processes as part of audit functions are as follows:
☐ It is required to check whether information security is adequate? ☐ Auditor review and check whether IT
resources are efficiently utilized? ☐ Review and check IT related frauds.
☐ Review and check whether organizations have adequate IT related

policies.
☐ Review and check whether system development and maintenance
process is controlled processes or not?
Space to write important points for revision

Q.2.3 2018 - May [2] (d) Descriptive

List any five points that an auditor should consider to obtain an understanding of the Company’s automated
environment. (5 marks) Answer:
Points that an auditor should consider to obtain an understanding of the company’s automated environment :
☐ Information systems being used (one or more application systems and

what they are).

☐ Their purpose (financial and non-financial).
☐ Location of IT systems - local vs global.
☐ Architecture (desktop based, client - server, web application, cloud

based)
☐ Version (functions and risks could vary in different versions of same
application).
☐ Interfaces within systems (in case multiple systems exits). ☐ In-house vs packed.
☐ Outsourced activities (IT maintenance and support). ☐ Key persons (CIO, CISO, Administrators).
Space to write important points for revision

3 Testing Methods
Q.3.1 2013 - May [3] (a) Descriptive

What is scope of output control of an application system? Suggest various types of output controls which are
enforced for confidentiality, integrity and consistency of output. (6 marks) [CA Final - II]

Answer:
The scope of output controls of an application system is to provide functions that determine the data content
availability to users, data, format, timeliness of data and how data is prepared and routed to users.

Various types of output controls, which are enforced for confidentiality, integrity and consistency of output
are as follows: 1. Storage and

logging of sensitive,
critical forms

2. Spooling

Pre-printed stationery should be stored securely to prevent unauthorized destruction or removal and usage.

This is a process used to ensure that the user is able to continue working, even before the print operation is
completed. When a file is to be printed, the operating system stores the data stream to be sent to the printer in a
temporary file on the hard disk. This file is them ‘spooled’ to the printer as soon as the printer is ready to accept the
data. This intermediate storage of output could lead to unauthorized disclosure and/or modification.

3. Retention controls

4. Existence/Recovery
Controls

Consider, the duration for which outputs should be retained before being destroyed. Consideration should be given
to the type of medium on which the output is stored.

These are needed to recover output in the event that it is lost or destroyed. If the output is written to a spool of files
or report files and has been kept, then recovering and new generation is easy and straight forward.

Space to write important points for revision

Q.3.2 2015 - May [7] (b) Short Notes Write short note on Effect of Computers on Evidence Collection for audit. (4
marks) [CA Final - II] OR 2016 - May [6] (a) Descriptive

The advent of computer has drastically transformed the mode of evidence collection by an auditor. Discuss the
various issues involved in the performance of evidence collection and understanding the reliability of controls. (6
marks) [CA Final - II]

Answer:
Effect of Computers on Evidence Collection for Audit
Evidence collection for Audit by computers have following effects: 1. Data Retention and Storage

A client’s storage capabilities may restrict the amount of historical data that can be retained on line. Insufficient data
retention capacities make unable the auditor to review whole required transactions.

2. Audit Evidence

3. Lack of Visible Output

4. Lack of Visible Audit Trail

5. A b s e n c e o f Input
Documents

6. Legal Issues

Certain transaction may be generated automatically by the computer system in which formal transaction
authorisation may not have been explicitly provided.

The results of transaction processing may not produce hard copy form of output i.e. printouts.

The audit trails in some computer systems may exist for only a short period of time. It makes auditor’s job very
difficult.
Transaction data may be entered into the computer directly without the presence of supporting documentation.

The use of computers are in increasing trend. Both public and private sector intend to make use of EDI and
electronic trading over the Internet.

Space to write important points for revision

Q.3.3 2018 - Nov [1] {C} (i) Objective

Examine with reason (in short) whether the following statement is correct or incorrect :
When auditing in an automated environment, inquiry is often the most efficient and effective audit testing method.
(2 marks)

Answer:
Incorrect :
When auditing in an automated environment, inquiry is often the most efficient audit testing method but less
effective. Morever, testing through inquiry alone is not sufficient. Inquiry should be corroborated by applying any
one or a combination of observation, inspection or reperformance.

Space to write important points for revision

4 Data Analytics for Audit
Q.4.1 2007 - Nov [4] (a) Descriptive

Why are computer assisted audit techniques (CAAT) needed in a Computer Information Systems (CIS) environment
and how it helps the auditor in obtaining and evaluating audit evidences ? (6 marks)

OR 2011 - Nov [4] (a) Descriptive

What is CAATS? Why are CAAT required in Computerised information system (CIS) environment ? (8 marks)
Answer:
CAAT in EDP Audit: The use of computers may result in the design of systems that provide less visible evidence
than those using manual procedures. Also many persons may access these systems. System characteristics
resulting from the nature of EDP processing that demand the use of Computer Aided Audit Techniques:

1. Absence of input documents

2. Lack of visible transaction trail

Data may be entered directly into the computer system without supporting documents. In online transaction systems,
written evidence of individual data entry authorisation (e.g. approval for order entry) may be replaced by other audit
procedures, such as authorisation controls contained in computer programs (e.g credit limit approval).

Certain data may be maintained on computer files only. In a manual system, it is normally possible to follow a
transaction through the system by examining source documents, books of accounts, records, files and reports. In an
EDP environment, however, the transaction trail may be partly in machine readable form, and it may exist for a
limited period of time.
3. Lack of visible output

4. Ease of access to data and

computer
programs

In a manual system it is normally possible to examine visually the results or processing. In an EDP systems, the
results of processing may not be printed or only summary data may be printed. Thus, the lack of visible output may
result in the need to access data retained on files readable only by the computer.

Data and computer programs may be accessed and altered at the computer through the use of computer equipment at
remote locations. Therefore, in the absence of appropriate controls, there is an increased potential for unauthorised
access to and alteration of data and programs by persons inside or outside the entity.

Advantages of CAAT’s: 1. Audit

effectiveness
2. Savings in time

The effectiveness and efficiency of auditing procedures will be improved through the use of CAAT in obtaining and
evaluating audit evidence, for e.g. :
(a) Some transactions may be tested more

effectively for a similar level of cost by using the computer to examine all or greater number of transactions than
would otherwise be selected.

(b) In applying analytical review procedures, transactions or balance details of unusual items may be reviewed and
reports printed more efficiently by using the computer.

The auditor can save time by reviewing the EDP controls using CAAT than through other audit procedures.

3. Effective test checking and examination in depth

CAAT permits effective examination in depth of selected transactions since the auditor “construct” the lost audit
trail.

Space to write important points for revision

Q.4.2 2018 - Nov [2] (d) Descriptive Discuss the following:
With respect to audit in an automated environment, explain the following:

(i) CAATs
(ii) Data Analytics
(iii) Database
(iv) Information Systems
(v) Privileged access (5 marks)

Answer:
(i) CAATs :
CAATs, shorter form of Computer Assisted Audit Techniques, are a collection of computer based tools and
techniques that are used in an audit for analysing data in electronic form to obtain audit evidence.

(ii) Data Analytics :

Data Analytics is a combination of processes, tools and techniques that are used to tap vast amounts of electronic
data using information systems.

(iii) Database :
Database is a logical subsystem within a larger information system where electronic data is stored in a predefined
form and retrieved for use.
(iv) Information Systems :
Information Systems refers to a collection of electronic hardware, software, networks and processes that are used in
a business to carry out operations and transactions.

(v) Privileged Assess :

It is a type of super user access to information systems that enforces less or no limits on using that system.

Space to write important points for revision

MULTIPLE CHOICE QUESTION
1 What is an automated environment?

1. __________ basically refer’s to a business environment where the processes, operations, accounting and even
decisions are carried out by using computer systems.
(a) Business Environment
(b) Computer Environment
(c) System Environment
(d) Automated Environment

2. Automated Environment is also known as

(a) Information Systems
(b) Information Technology System
(c) Automated Technology System
(d) (a) or (b)

3. The fundamental principle of an automated environment is the ability to carry out business with
(a) manual intervention and system driven
(b) less manual intervention and less system driven
(c) less system driven and more manual intervention
(d) less manual intervention and more system driven

4. Complexity of a business environment is __________ related with Automated Environment.

(a) Directly
(b) Indirectly
(c) Independently
(d) None

5. Benefits of automated environment except. (a) Enable faster business operations

(b) Ability to process large volume of transactions (c) More prove to human errors
(d) Integration between business operations

2 Relevance of IT in an Audit

6. As the complexity, automation and dependence of business operation on IT system increases, the severity and
impact of IT risk ____________ accordingly.
(a) decreases
(b) increases
(c) sustain
(d) adjusted

7. For audit of financial statements auditor __________ understand the IT system and its relevance
(a) should not
(b) should
(c) may
(d) not necessary to

8. With the introduction of ___________, there is greater emphasis given to internal financial control (IFC) from a
regulatory point of view (a) CAAR 2014
(b) SEBI Regulation
(c) Standard of Auditing
(d) Companies Act 2013

9. Who is responsible for the implementation of internal control framework with in the company?
(a) Directors
(b) TCWG
(c) Auditor
(d) Directors and TCWG,

10. Situation in which IT will be not relevant for an audit

(a) Complexity of transaction has increased
(b) Regulatory requirements Companies Act 2013, IFC, IT Act 2008 (c) Decreases efficiency and effectiveness of
audit
(d) Volume of Transactions are high

11. IT can be relevant to Audit is by using _________ using computer assisted audit techniques (CAAT)
(a) Data System technique
(b) Data Statistics (c) Data Analytics (d) Data Analysis

3
Risk and Controls in an Automated Environment

12. Understanding of a company’s IT environment that is obtained should be documented as per

(a) SA - 200
(b) SA - 210
(c) SA - 215
(d) SA - 230

13. Impact on substantive Audit due to IT related risks except (a) cannot rely on the data obtained from system
(b) cannot rely on IT dependent manual controls
(c) more audit evidence is needed
(d) system data and reports should be tested substantively for

completeness and accuracy.

14. Which of the following is a General IT control?
(a) IT Environment
(b) Application Control
(c) Access Security
(d) IT Dependent Control
15. Which of the following is an automated control?

(a) System Generated Report

(b) Configuration
(c) Program Change
(d) Application Control

16. Which is not a type of control in automated environment. (a) General IT control
(b) Application control
(c) IT-Dependent Control
(d) Entity level control

17. ____________ are policies and procedures that relate to many applications and support the effective functioning
of application control (a) General IT control
(b) Application control
(c) IT Dependent control
(d) None of the above
18. General IT controls are apply to, except
(a) main frame
(b) mini frame
(c) maga frame
(d) end-user environment

19. General IT control is also known as

(a) Direct control
(b) In Direct control
(c) Pervasive control
(d) (b) or (c)

20. Application controls include ______________ that operate at a business process level.
(a) automated controls
(b) manual controls
(c) IT controls
(d) both automated or manual controls.

21. Automated application controls are embedded into IT applications which helps in ensuring the
_______________ of date in those systems (a) completeness
(b) accuracy
(c) integrity
(d) all of these.

22. General IT Controls and Application controls over IT systems are _________.
(a) interrelation
(b) independent
(c) dependent
(d) intra related

23. Testing in automated environment, which method is commonly use (a) Inspect the configuration defined in an
application
(b) Observe how a user processes transactions under different

scenarios
(c) Obtain an understanding of how an automated transaction is
processed by doing a walkthrough one end-to-end transaction using
a combination of inquiry, observation and inspection (d) Any of the above mode

4
Internal Financial Controls As per Regulatory Requirement

24. Internal Financial Controls refers to the policies and procedures put in place by companies for ensuring.
(a) reliability of financial reporting
(b) compliance with applicable laws and regulations
(c) prevention and detection of frauds and safeguarding of assets (d) All of the above conditions

25. _____________ has placed a greater emphasis on the effective implementation and reporting on internal controls
for a company (a) Companies Act 2013
(b) CAAR, 2014
(c) SEBI 1992
(d) Companies rules 2017

26. Auditor’s opinion on Internal Financial Controls (IFC) is applicable for a listed companies from the financial
year
(a) 2013-2014 onwards
(b) 2014-2015 onwards
(c) 2015-2016 onwards
(d) 2016-2017 onwards

27. The _____________ have primary responsibility of implementing and maintaining and effective internal
controls framework.
(a) Statuary auditors
(b) Directors
(c) Management
(d) Directors and management

28. Who is responsible for evaluation, validation and reporting on the designing and operating effectiveness of
internal financial control (a) Statutory auditors
(b) Internal auditors
(c) Directors
(d) Management

29. Control based audit approach exclude

(a) Risk assessment
(b) Audit Programme
(c) Understand and Evaluation
(d) Test for Operating Effectiveness

30. Risk assessment under controls based audit approach include (a) Qualitative and Quantitative Consideration
(b) Relevant Financial Statement Assertions (FSA)
(c) Identify likely sources of misstatement
(d) All of the above

31. Understand and evaluate under control based audit approach excludes

(a) Document understanding of business processes using flowcharts/Narrative.

(b) Prepare Risk and Control Matrices (RCM)
(c) Relevant Financial Statement Assertions (FSA)
(d) IT General Controls, Application Controls
32. Reporting under controls based audit approach excludes
(a) Evaluate Control Deficiencies
(b) Prepare Risk and Control Matrices (RCM)
(c) Internal Controls Memo (ICM)
(d) Auditor’s report

5 Data Analytics for Audit

33. A combination of processes, tools and techniques that are used to tap vast amounts of electronic data to obtain
meaningful information is called __________.
(a) data statistic
(b) data science
(c) data analytics
(d) data analysis

34. The tools and techniques that auditors use in applying the principles of data analytics are known as
(a) Computer Aided Auditing Techniques
(b) Computer Assisted Auditing Techniques
(c) Computerised Audit Assisted Technique
(d) Computerised Aided Audit Technique

35. Data analytics can be used in

(a) testing of accounting records
(b) testing of electronic records
(c) data residing in IT system
(d) (b) and (c) both

6 Miscellaneous

36. _________________ refers to the digital content that is stoned in electronic form with computer system
(a) Data
(b) Data Science
(c) Data Analysis
(d) Data Analysis

37. A logical subsystem within a large information system where electronic data in stored in a predefined form and
retrieved for use, is known as: (a) Data
(b) Database
(c) Data Analysis
(d) Data Analytics

38. A type of super user access to information system that enforces less or no limits on using that system, is known
as:
(a) Risk assessment
(b) Risk evaluation
(c) Privileged access
(d) None of them

Answer

1. (d) 2. (d) 3. (d) 4. (a) 5. (c) 6. (b) 7. (b) 8. (d) 9. (d) 10. (c) 11. (c) 12. (d) 13. (b) 14. (c) 15. (b) 16. (d) 17. (a) 18.
(c) 19. (d) 20. (d) 21. (d) 22. (a) 23. (d) 24. (d) 25. (a) 26. (b) 27. (d) 28. (a) 29. (b) 30. (d) 31. (c) 32. (b) 33. (c) 34.
(b) 35. (d) 36. (a) 37. (b) 38. (c)

CHAPTER

7Audit Sampling

This Chapter Covers: Study’s Chapter: 7

Chapter Comprises: Meaning of Audit Sampling ☹Approaches to Sampling ☹Sample Design, Size and Selection of
Items for testing ☹Performing Audit Procedures ☹Nature and cause of deviations and Misstatements ☹Projecting
Misstatements ☹Evaluating results of Audit Sampling.

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis

Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Objective Short Notes
Legend
Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book. 6.267
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning
i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK Repeatedly Asked Questions
2.1
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
3.3 2.1, 2.2, 3.2
1 Sampling : An Audit Procedure
Q.1.1 2009 - Nov [1] (i) Objective

State with reasons (in short) whether the following statement is true or false.
While auditing the accounts of a company, it is obligatory that the auditor must adopt sampling technique. (2 marks)

Answer:
False:
It is not obligatory that the auditor must adopt sampling technique while auditing the accounts of a company. But he
should ensure that the relevant standard on auditing has been followed. It is in the interest of the auditor if he
decides to form his opinion on the basis of audit sample using standards and techniques which are widely followed
and recognised.

Space to write important points for revision

2 Approaches to Sampling
Q.2.1 2008 - May [8] Or (b), 2011 - Nov [7] (e), Short Notes 2014 - May [7] (c)

Write short note on Advantages of Statistical sampling in Auditing. (5, 4, 4 marks) Answer:
Statistical Sampling

Meaning
Statistical sampling involves use of mathematical

and statistical techniques to determine the appropriate sample size. Under this the samples are determined by (i)
theory of probability, and (ii) theory of random numbers.

These sampling have a wide usage in the case of homogenous population. Selection of sample involves quantifiable
relationship between sample size and degree of risk.

Advantages of Statistical Sampling 1. Scientific

2. Sample selection more objective
It is more scientific as the judgement is replaced by mathematical and statistical techniques. The selection of sample
is more objective.
3. P o s s i b i l i t y o f Measuring of Risk 4. High degree of refinement
5. Means for taking calculated risks
6. Better description of large mass of data

It enables the auditor to measure the risk he takes for expressing a particular opinion.
It involves high degree of refinement due to the use of statistical procedure, rules, formulas and tables.

It also provide a means for taking a calculated risk and corresponding precision i.e., the probable difference in the
result due to checking of transaction on sample basis in lieu of checking the entire universe.

It may provide a better description of large mass of data than a complete examination of all date.
Space to write important points for revision
Q.2.2 2016 - May [2] (e), RTP Objective State with reason (in short) whether the following statement is correct or
incorrect Cluster sampling is less effective than random sampling. (2 marks)

Answer:
Correct:
Cluster sampling is less effective than random sampling.

Space to write important points for revision

Q.2.3 2018 - May [1] {C} (i) Objective

Examine with reasons (in short) whether the following statement is correct or incorrect :
When statistical sampling is used to select a sample, sample need not be representative because the statistical
sampling takes care of the representation. (2 marks)

Answer:
Incorrect:
Whatever may be the approach non-statistical or statistical sample, the sample must be representative. This means
that it must be closely similar to the whole population although not necessarily exactly the same. The sample must
be large enough to provide statically meaningful results.

Space to write important points for revision

Q.2.4 2018 - Nov [2] (a) Descriptive

Discuss the following:

Factors that should be considered for deciding upon the extent of checking on a sampling plan. (5 marks)

Answer:
The factors that should be considered for deciding upon the extent of checking on a sampling plan are
following :
1. Size of the organisation under audit.
2. State of the internal control.
3. Adequacy and reliability of books and records.
4. Tolerable error range.
5. Degree of the desired confidence.

Space to write important points for revision

Q.2.5 2019 - Nov [1] {C} (f) Objective

Examine with reasons whether the following statement is correct or incorrect.

(f) The non-statistical sampling in criticized on the grounds that it is

neither objective nor scientific. (2 marks)

3
Sample Design, Size and Selection of items for Testing
Q.3.1 2010 - Nov [3] (a) Descriptive

“The auditor is faced with sampling risk in both tests of control and substantive procedures.”
Comment on this statement with reference to SA 530 on “Audit Sampling”.
(8 marks) OR 2019 - May [2] (a) Descriptive “Sampling risk can lead to erroneous conclusions”. Justify. (4 marks)

Answer:
As per SA 530 ‘Audit Sampling’
• Audit sampling helps the auditor to obtain and evaluate audit evidence

about some characteristics of the items selected in order to form or conclusion concerning the population from
which the sample is drawn.
• Audit sampling can be applied using either non-statistical or statistical sampling approaches.

• At the time of designing a sample, the auditor determines tolerable misstatement in order to address the risk that
the aggregate of individually immaterial misstatements may cause the financial statements to be materially misstated
and provide a margin for possible undetected misstatements.
• The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire
population were subjected to the same audit procedure.
• Sampling risk can lead to two types of incorrect conclusions : (i) ☐ In the case of a test of controls, that controls
are more effective

than they actually are, or in the case of a substantive procedure, that a material misstatement does not exist when in
fact it does.

☐ The auditor is primarily concerned with this type of incorrect conclusion because it affects audit effectiveness and
is more likely to lead to an inappropriate audit opinion.

(ii) ☐ In the case of a test of controls, that controls are less effective than they actually are, or in the case of a
substantive procedure, that a material misstatement exists when in fact it does not.

☐ This type of incorrect conclusion affects audit efficiency as it would usually lead to additional work to establish
that initial conclusions were incorrect.

Space to write important points for revision

Q.3.2 2011 - May [7] (c), RTP Short Notes

Write short note on Stratified Sampling (4 marks) Answer:

Stratified Sampling :

1. Under this method, the population is divided into different classes or strata. Each stratum is treated as if it were a
separate population and a sample is taken from each such class of stratum.

2. The number of groups into which the whole population has to be divided is determined on the basis of auditor’s
judgement.
Example: In debtor confirmation, the auditor may classify customers based on:

(i) Geographic locations,

(ii) Amount receivable,
(iii) Volume of transaction, etc.

In each class or stratum, he may choose different sample sizes verification.

3. This method is appropriate for a highly diversified population. Weights are allocated to reflect these differences
and different sample sizes are drawn from each class.

Q.3.3 2013 - Nov [1] {C} (d) Descriptive

Discuss the following:

As per SA 530, meaning of audit sampling, sample design, sample size and selection of items for testing. (5 marks)

OR 2016 - May [1] {C} (b) Descriptive

Discuss the following:
With reference to SA - 530, meaning of audit sampling and requirements relating to sample design, sample size and
selection of items for testing.

(5 marks) Answer:
Meaning of Audit Sampling:

As per SA- 530 sampling refers to selecting less than 100% items of the population. In this techniques all sampling
units have an equal chance of selection. It shall provide the auditor with a reasonable basis on which to draw
conclusions about entire population.
Requirements relating to sample size, sample design and selection of items for testing:
When designing an audit sample, the auditor shall require to consider the following matters.
1. The auditor shall consider the purpose of the audit procedure and the

characteristics of the population from which the sample will be drawn. 2. The auditor shall determine a sample size
sufficient to reduce sampling
risk to an acceptably low level. The level of sampling risk that the auditor
is willing to accept affects the sample size required. The lower the risk
the auditor is willing to accept, the greater the sample size will need to
be.
3. The auditor shall select items for the sample in such a way that each
sampling unit in the population has a chance of selection.

Q.3.4 2015 - May [7] (d) Short Notes

Write short notes on Random Sampling. (4 marks) Answer:

Random Sampling:
In this sampling, all items in the population or within each class have an equal or known chance of selection. It may
involve use of random number table. It means obtaining samples randomly from the populations. There are two
types of Random Sampling:
1. Simple Random Sampling:

☐ In this method each unit of the population has an equal chance of being selected.
☐ The selection may be based on random number tables, with the help of computers or by picking up numbers
randomly from a drum.
☐ It is appropriate in case of the homogeneous population with all items falling within a reasonable range.
2. Stratified Random Sampling:
☐ The population is divided into different classes or strata. Each stratum is treated as if it were a separate
population and a sample is taken from each such class or stratum.
☐ The number of groups into which the whole population has to be divided is determined on the basis of auditor’s
judgement e.g. in debtors confirmation, Auditor may classify customers based on geographic locations or amount
receivable or volume of transactions etc. In each class or stratum, he may choose different sample sizes for
verification.
☐ It is appropriate for a highly diversified population, that weights are allocated to reflect these differences and
different sample sizes are drawn from each class.

MULTIPLE CHOICE QUESTION

1 Sampling : An Audit Procedure

1. Sampling is a __________ theory used by and auditor during the audit process
(a) Mathematical
(b) Statistical
(c) Economic
(d) Arbitrary

2. Statistical theory of sampling is based on a ____________. (a) statistical law

(b) mathematical law
(c) scientific law
(d) economic law

2 Meaning of Audit Sampling

3. Audit Sampling in defined under

(a) SA - 220
(b) SA - 318
(c) SA - 360
(d) SA - 530
4. Auditor should select sample items in such a way that the sample can be expected to be representative of the
(a) groups
(b) population
(c) sampling
(d) arbitrary population
5. Sample is a comprehensive term than population
(a) True
(b) False
(c) Partly True
(d) None
6. Auditor should ensure the population is ___________ for fixing the audit procedure
(a) absolute
(b) adequate
(c) appropriate
(d) evident
7. Characteristics of population except
(a) Appropriateness
(b) Completeness
(c) In sufficient
(d) Reliable

3 Approaches to Sampling

8. Audit sampling disable the auditor to obtain and evaluate audit evidence for forming a conclusion
(a) Statement is correct
(b) Statement is incorrect
(c) Statement is partially correct
(d) None of them

9. ____________ is a approach to sampling that has the random selection of sample items
(a) Statistical sampling
(b) Non statistical sampling
(c) (a) or (b)
(d) (a) and (b)

10. Characteristics of statistical sampling approach excludes.

(a) An approach to sampling that has the random selection of the sample items
(b) Entire population can be use as a sample for decision making
(c) The use of probability theory to evaluate sample results
(d) The use of probability theory including measurement of sampling risk characteristics
11. The decision whether to use a statistical or non-statistical sampling
approach is a matter for the
(a) size and nature of the business
(b) managerial decisions
(c) auditors judgement
(d) audit procedure required
12. The sample must be __________ to provide statistically meaningful
results.
(a) smallest one
(b) large
(c) large enough
(d) equal to the population
13. Audit testing done through statistical sampling is __________ than
testing based entirely on the auditor own judgement
(a) more statistical
(b) more specific
(c) more systematic
(d) more scientific
14. Under non-statistical sampling, the sample size and its composition are
determined on the basis of the __________.
(a) Standard of Auditing
(b) Accounting standards & SAs
(c) Personal experience and knowledge of the auditor
(d) Decisions taken by management
15. The non-statistical sampling in criticized on the ground that it is
(a) a non-systematic system
(b) a non-specific and non systematic
(c) neither objective non scientific
(d) not as per the auditing standards
16. Factor that should not be considered for deciding upon the extent of checking on a sampling plan is ________.
(a) Size of the organization and state of the internal control (b) Adequacy and reliability of books and records
(c) Letter of engagement
(d) Tolerable error range and degree of the desirable confidence
17. If is a mathematical truth that the sample, if picked purely on a _________ would reveal the feature and
characteristics of the population,
(a) Statistical sampling basis
(b) Random basis
(c) Continuous basis
(d) Intermittent basis
18. Under statistical sampling the sample results are measurable as to the __________ of the audit objectives
(a) adequacy
(b) reliability
(c) appropriateness
(d) adequacy an reliability
19. In non-statistical sampling the auditor’s opinion determines the sample size ________ now far the sample size
would fulfill the audit objective (a) and also measured
(b) but it cannot be measured
(c) but it may or may not measure
(d) Any of the above
20. Sample size is ________________ a valid criterion to a distinguish between statistical and non-statistical
approaches.
(a) a valid
(b) a not valid
(c) a adequate
(d) a only

4
Sample Design, Size and Selection of items for Testing

21. In designing an audit sample, auditor shall consider the

(a) purpose of the audit procedure
(b) characteristics of the population
(c) (a) or (b)
(d) (a) and (b)

22. The auditor shall determine a sample size sufficient to reduce sampling risk ___________.
(a) to a high level
(b) to a very low level
(c) to an acceptably low level
(d) to a moderate level

23. Which of the following factors is (are) considered in determining the sample size for tests of control?
(a) Projected error
(b) Tolerable error
(c) Expected error
(d) Both (b) and (c)

24. ___________ provides, guidance to the auditor on the use of stratification and value-weighted sampling
techniques
(a) SA - 300
(b) SA - 320
(c) SA - 500
(d) SA - 530

25. ___________ may be improved if the auditor stratifies a population by dividing it into discrete sub-populations
which have an similar characteristics
(a) Audit evidence
(b) Audit efficiency
(c) Audit trail
(d) Audit procedure

26. Stratification allows sample size to be reduced

(a) with increasing sampling risk
(b) without decreasing sampling risk
(c) without increasing sampling risk
(d) with decreasing sampling risk.

27. The process of inspecting, cleaning transforming and modelling data with the goal of highlighting useful
information, suggesting conclusions and supporting decision making is defines as _________. (a) Data Science
(b) Data Analysis
(c) Data Analytics
(d) Data interpretation

28. The principal method(s) of selecting samples is (are) the use of (a) Random selection
(b) Systematic selection
(c) Haphazard selection
(d) All of them

29. __________ is considered appropriate provided the population to be sampled consists of reasonably similar units
and fall within a reasonable range
(a) Simple random sampling
(b) Stratified sampling
(c) Systematic sampling
(d) Haphazard sampling

30. ____________ is a selection method in which the number of sampling units in the population is divided by the
sample size to give a sampling interval.
(a) Simple Random Sampling
(b) Stratified Sampling
(c) Systematic Sampling
(d) Block Sampling

31. Sampling in which sample size selection and evaluation results in a conclusion in monetary amount.
(a) Stratified Sampling
(b) Interval Sampling
(c) Haphazard Sampling
(d) Monetary Unit Sampling

32. Risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire
population where subjected to the same audit procedure is known as __________.
(a) Audit Risk
(b) Sampling Risk
(c) Non-sampling Risk
(d) Population Risk

33. Non-Sampling risk can be measured mathematically. This statement is (a) True
(b) False
(c) Paretically True
(d) None

Answer

1. (b) 2. (c) 3. (d) 4. (b) 5. (b) 6. (c) 7. (c) 8. (b) 9. (a) 10. (b) 11. (c) 12. (c) 13. (d) 14. (c) 15. (c) 16. (c) 17. (b) 18.
(d) 19. (b) 20. (b) 21. (d) 22. (c) 23. (d) 24. (d) 25. (b) 26. (c) 27. (c) 28. (d) 29. (a) 30. (c) 31. (d) 32. (b) 33. (b)

CHAPTER

8Analytical Procedures

This Chapter Covers: Study’s Chapter: 8

Chapter Comprises: ☹Meaning of Analytical Procedures ☹Purpose and timing of Analytical Procedures
☹Substantive analytical procedures ☹Suitability of Particular Analytical Procedures for given Assertions ☹Extent of
Reliance of Analytical Procedures ☹Risk of material Misstatements ☹Investigating Results of Analytical Procedures
☹Considerations specific to Public sector entities.

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis

Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book. 6.283
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK Repeatedly Asked Questions
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
2.2
1 Meaning of Analytical Procedures
Q.1.1 2018 - May [1] {C} (e) Objective

Examine with reasons (in short) whether the following statement is correct or incorrect :
During the audit process, the Auditor can easily identify all mistakes or manipulations that may exist in the accounts
through routine checking processes. (2 marks)

Answer:
Incorrect:
Routine checking processes cannot easily identify all mistakes or manipulations that may exist in the accounts,
certain other procedures also have to be applied like trend and ratio analysis in addition to reasonable tests.

Space to write important points for revision

2 Purpose and Timing of Analytical Procedure
Q.2.1 2009 - Nov [1] (x) Objective

State with reasons (in short) whether the following statement is true or false.
(x) Analytical procedures are unable to help the Auditor in determining the

nature, timing and extent of other audit procedures at the planning stage. (2 marks) Answer:
False:
SA 520 “Analytical Procedure” puts forward that application of analytical
procedures helps the auditor to find the aspects of the business of which he
was unaware and it will also assist him in determining the nature, timing and
extent of audit procedures.
Space to write important points for revision

Q.2.2 2014 - May [6] (a), RTP Descriptive

Describe “Analytical Review Procedures” in Audit. Briefly discuss analytical procedures for verification of debtors.
(8 marks) Answer:
SA - 520 Analytical Procedure:
Analytical Procedure refers to the analysis of significant ratios and trends as well as finding out reasons for unusual
fluctuations.

Analytical review procedure includes both interfirm and intrafirm comparisons.

1. Comparable information for prior Periods.
2. Predictive estimates prepared by auditor.
3. Anticipated results of the entity such as budgets or forecasts. 4. Similar industry information - entity’s ratio of
sales to debtors with

industry averages.
Apart from above it also includes consideration of following relationships: 1. gross margin percentage
2. financial information and non financial information such as payroll costs

to number of employees.
Analytical Procedure for debtors:
1. Comparison of closing balance of debtors, loans and advances with the

corresponding figures of the previous year

2. Comparison of ageing schedule
3. Comparison of Significant Ratios with industry norms.
Space to write important points for revision

Q.2.3 2017 - May [2] (g) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
Analytical procedure is a part of routine audit checking. (2 marks)

Answer:
Incorrect:
Routine checking is the detailed checking of all transactions and calculations in subsidiary books, checking of
postings into the ledgers, casting of ledgers etc. while analytical procedures means evaluation of financial
information through analysis of plausible relationships between financial and non financial data. Hence, analytical
procedure is not a part of routine checking.

Space to write important points for revision

3 Substantive Analytical Procedures
Q.3.1 2018 - May [4] (d) Descriptive

Discuss the techniques available as Substantive Analytical Procedures. (5 marks) Answer:

The design of a substantive analytical procedure is limited only by the availability of reliable data and the experience
and creativity of the audit team.
Substantive analytical procedures generally take one of the following forms :

(i) Trend analysis A commonly used technique is the comparison of current data with prior period balance or with a
trend in two or more prior period balances. We evaluate whether the current balance of an account moves in line
with the trend established with previous balances for that account, or based on an understanding of factors that may
cause the account to change.

(ii) Ratio analysis ☐ Ratio analysis is useful for analysing asset and liability accounts as well as revenue and
expense accounts. An individual balance sheet account is difficult to predict on its own, but its relationship to
another account is often more predictable (e.g. the trade receivables balance related to sales). Ratios can also be
compared over time or to the ratios of separate entities within the group, or with the ratios of other companies in the
same industry. ☐ Financial ratios may include : ☐ Trade receivables or inventory turnover. ☐ Freight expense as a
percentage of sales

revenue.

(iii) Reasonableness Unlike trend analysis, this analytical procedure tests does not rely on events of prior periods,
but upon non-financial data for the audit period under consideration (e.g., occupancy rates to estimates rental income
or interest rates to estimate interest income or expense). These tests are generally more applicable to income
statement accounts and certain accrual or prepayment accounts.

(iv) Structural modeling A modeling tool constructs a statical model from financial and /or non-financial data of
prior accounting periods to predict current account balances (e.g., linear regression).
Space to write important points for revision
Q.3.2 2019 - Nov [1] {C} (g) Objective

Examine with reasons whether the following statement is correct or incorrect.

(g) The auditor’s substantive procedure at the assertion level means

substantive analytical procedures only. (2 marks)

Q.3.3 2019 - Nov [4] (d) Practical

CA A, auditor of ABC Ltd. wants to design substantive analytical procedure and for that he wants to check whether
the data is reliable or not. Mention the relevant points which he has to consider whether data is reliable for purpose
of designing the substantive analytical procedures.

(3 marks)
4 Extent of Reliance of Analytical Procedure
Q.4.1 2010 - Nov [3] (b) Descriptive

What are the factors that determine the extent of reliance that the auditor places on results of analytical procedures?
Explain with reference to SA520 on “Analytical procedures”. (8 marks)

Answer:
As per SA - 520, Analytical Procedures’
The application of analytical procedures is based on the expectation that relationships among data exist and continue
in the absence of known conditions to the contrary :
1. The presence of these relationships provides audit evidence as to the

completeness, accuracy and validity of the data produced by the accounting system.

2. Whereas, reliance on the results of analytical procedures will depend on the auditor's assessment of the risk that
the analytical procedures may identify relationships as expected when, in fact, a material misstatement exists.

The degree of reliance that the auditor places on the results of analytical procedures depends on the following
factors : 1. Accuracy with which the expected results of analytical procedures can

be predicted, e.g., auditor will ordinarily expect greater consistency in comparing gross profit margins from one
period to another than in comparing discretionary expenses, such as research or advertising.

2. Materiality of the items involved, e.g., when inventory balances are material, the auditor does not rely only on
analytical procedures in forming conclusions.
• Whereas, the auditor may rely solely on analytical procedures for

certain income and expense items when they are not individually material.

3. Assessments of inherent and control risks, for example, if internal control over sales order processing is weak and,
therefore, control risk is high, more reliance on tests of details of transactions and balances than on analytical
procedures in drawing conclusions on receivables may be required.

4. The auditor will need to consider testing the controls, if any, over the preparation of information used in applying
analytical procedures. When such controls are effective, the auditor will have greater confidence in the reliability of
the information and, therefore, in the results of analytical procedures.

5. Other audit procedures directed toward the same audit objectives, for example, other procedures performed by the
auditor in reviewing the collectibility of accounts receivable, such as the review of subsequent cash receipts, might
confirm or dispel questions raised from the application of analytical procedures to an ageing schedule of customers'
accounts.

MULTIPLE CHOICE QUESTION

1 Meaning of Analytical Procedures
1. Which standard on Auditing defines Analytical Procedures. (a) SA - 200
(b) SA - 320
(c) SA - 500
(d) SA - 520
2. Evaluations of financial information through analysis of plausible relationships among both financial and non-
financial data, is known as. (a) Substantive procedures
(b) Analytical procedures
(c) Audit procedure
(d) Investigation procedures
3. Analytical Procedures includes
(a) Comparisons of the entity’s financial information
(b) Consideration of relationship
(c) Only (a)
(d) Both (a) and (b)
4. Which is the appropriate type for Analytical Procedures (a) Comparison of client and industry data
(b) Comparison of client data with similar prior period date (c) Comparison of client data with client-determined
expected results (d) All of the above.

2 Purpose and Timing of Analytical Procedures

5. ____________ is use for comparisons and relationships to assess whether account balances or other data appear
reasonable, (a) Audit Procedures
(b) Sampling procedures
(c) Analytical procedures
(d) Substantiative procedures

6. Analytical procedures are used to obtain relevant and reliable audit evidence when using _____________.
(a) Audit procedures
(b) Sampling procedures
(c) Analytical procedures
(d) Substantive analytical procedures.

7. Procedures is helpful to design and perform analytical procedures near the end of the audit that assist the auditor
when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s
understanding of the entity.
(a) Audit procedures
(b) Sampling procedures
(c) Analytical procedures
(d) Substantive Analytical Procedures.

8. Overall tests under Analytical procedures can be extended for making ________ comparison of trading results.
(a) inter-firm
(b) intra-firm
(c) inter-firm or intra-firm
(d) inter firm and intra-firm

9. Analytical procedures are generally required in the

(a) Planning phase
(b) Implementation phase
(c) Evaluation phase
(d) Testing phase

10. Analytical procedures are required in planning phase and it is often done during the _________.
(a) Programming phase
(b) Implementation phase
(c) Evaluation phase
(d) Testing phase
11. Analytical procedures are required in
(a) Planning phase
(b) Testing phase
(c) Completion phase
(d) All of the above

12. Analytical procedures in planning the audit is/are useful for (a) financial data information
(b) non-financial information
(c) financial and non-financial information both
(d) None of than

3 Substantive Analytical Procedures

13. Auditor’s substantive procedures at the assertion level may be _______. (a) Tests of details
(b) Substantive analytical procedures
(c) Either (a) or (b)
(d) Both (a) and (b)

14. The auditor may inquire of management as to the availability and reliability of information needed to
apply__________, and the result of any such analytical procedures performed by the entity
(a) Analytical procedures
(b) Substantive procedures
(c) Substantive analytical procedures
(d) Overall audit procedure

15. While implementing substantive Audit Procedure, auditor should consider of the following factor(s).
(a) Availability of reliable and relevant data
(b) Degree of disaggregation in available data
(c) Focused on income statement accounts rather than Balance sheet

accounts
(d) All of the above.

16. Substantive analytical procedures are generally less applicable to large volumes of transactions that tends to be
predictable overtime (a) True
(b) False
(c) Partially True
(d) None

17. Substantive analytical procedures are more appropriate when an account balance or relationship between items
of data are ________ (a) Predictable
(b) Non-predecticable
(c) Well defined
(d) Haphazards

18. Predictive analytical procedures using __________ can be used to address completeness, valuation and
occurrence
(a) data evaluation
(b) data analysis
(c) data analytics
(d) data comparisons

19. When inherent risk is higher, auditor may design tests of details to address the ________.
(a) Lower inherent risk
(b) moderate inherent risk
(c) higher inherent risk
(d) Any of the above.
20. Substantiative analytical procedures generally take in the form of (a) Ratio & Trend Analysis
(b) Reasonableness Tests
(c) Structural modelling
(d) Any of the above

21. Application of planned analytical __________ that relationships among data exist and continue in the absence of
known conditions to the contrary.
(a) exception
(b) expectation
(c) assumption
(d) hypothesis

22. Suitability of a particular analytical procedure is generally depend upon (a) auditor’s needs
(b) auditor’s review
(c) auditor’s willingness
(d) auditor’s assessment

23. Different types of analytical procedures provide different levels of assurance. The statement is
(a) True
(b) False
(c) Partly True
(d) None

4 Suitability of Particular Analytical Procedures for given assertions

procedures in based on the
5 Extent of Reliance on Analytical Procedure

24. Reliability of data is influenced by its __________ and is dependent on the circumstances under which it is
obtained
(a) nature
(b) source
(c) condition
(d) source and nature

25. _________ establishes requirements and provides guidance in determining the audit procedures to be performed
on the information to be used for substantive analytical procedures
(a) SA - 300
(b) SA - 320
(c) SA - 500
(d) SA - 700

Answer

1. (d) 2. (b) 3. (d) 4. (d) 5. (c) 6. (d) 7. (c) 8. (d) 9. (a) 10. (d) 11. (d) 12. (c) 13. (d) 14. (c) 15. (d) 16. (b) 17. (a) 18.
(c) 19. (c) 20. (d) 21. (b) 22. (d) 23. (a) 24. (d) 25. (c)

CHAPTER

9A Audit of Balance Sheet Items

This Chapter Covers: Study’s Chapter: 9 Unit-1

Chapter Comprises: ☹Balance Sheet Caption ☹Share Capital ☹Reserve and Surplus (Other Equity under Ind AS)
☹Borrowings ☹Trade Receivables ☹Cash and Cash Equivalents ☹Inventories ☹Fixed Assets (PPE) ☹Trade Payables
and Other Current Liabilities ☹Loans and Advances, and Other Current Assets ☹Provisions and

Contingent Liabilities
Marks of Objective, Short Notes, Distinguish Between, Descriptive &Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book.
6.296
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK . . . . . . . Weightage Analysis Repeatedly Asked Questions
7.1, 9.1, 10.2, 13.1
1
Common Answered Must Try Question Questions
10.3 7.1, 9.1, 10.2, 13.1
Income Statement Captions Comprising Revenue and Expense Balances
Q.1.1 2018 - May [2] (a) (ii) Descriptive Discuss the following :
(a) Name the assertions for the following audit procedures: (ii) Depreciation has been properly charged on all assets.
(1 mark)

Answer:
Assertions for Depreciation has been properly charged on all assets ☐ Valuation assertion

Space to write important points for revision

2
Balance Sheet Captions Comprising Assets, Liabilities and Equity Balances
Q.2.1 2018 - May [2] (a) (i)
Discuss the following :
(a) Name the assertions for the following audit procedure:

(i) Year end inventory verification.

Answer:
Year and inventory verification
☐ Existence Assertion
Space to write important points for revision
Descriptive
(1 mark)
Q.2.2 2018 - May [2] (a) (iii)
Discuss the following :
(a) Name the assertions for the following audit procedure:
Descriptive

(iii) The title deeds of the lands disclosed in the Balance Sheet are held in the name of the company. (1 mark)
Answer:
The title deeds of the lands disclosed in the balance sheet are held in the name of the company.
☐ Rights and Obligation Assertion

Space to write important points for revision

Q.2.3 2018 - May [2] (a) (iv) Descriptive Discuss the following :
(a) Name the assertions for the following audit procedure:

(iv) All liabilities are properly recorded in the financial statements. (1 mark) Answer:
All liabilities are properly recorded in the financial statements. ☐ Completeness Assertion

Space to write important points for revision

Q.2.4 2018 - Nov [3] (c) (i), (ii) Descriptive Write the audit procedures to be performed as an auditor for valuation
(assertion) of following:
(i) Loans and Advances and other current assets. (5 marks) (ii) Finished goods and goods for resale. (5 marks)
Answer:
(i) Audit Procedures to be performed while auditing of Loans and

Advances and other Current Assets.

Assertions
Existence
Explanation To establish ☐ the existence of loans and advances and other current assets as at the period-end

Audit Procedures
For establishing existence of loans and advances, direct confirmation procedures, similar to those performed for
“Accounts receivables” balances are undertaken with the only difference that while undertaking circulation of direct
confirmations, in addition to the principal amount, interest received / receivable, if any, as per the agreed terms
between the parties, may also be included as part of the balance to be confirmed.

Completeness L o a n s a n d ☐ advances and other current assets

balances that ☐ were suppos e d t o b e recorded have been recognised in the financial statements.

☐ Obtain a list of all advances and other current assets and compare them with balances in the ledger.
Inspect loan agreements and acknowledgements of parties in respect of outstanding loans. A loan or an advance; if
material, can be granted only if authorised by the Memorandum and Articles of Association in the case of company.
In addition the auditor should confirm that loans advanced were within the competence of persons who had
advanced the same, directions in the case of a company, partners in case of a firm and trustees in case of a trust.
Inspect the minutes of meeting of board of directors to confirm if all material loans and advances were approved by
the board of directors.
Verify that the loan has been acknowledged by the party and in addition, inspect if any security has been deposited
against due repayment of the loan. Ascertain if loans are being recovered r e g u l a r l y a s p e r agr e e d
instalments.
☐
Valuation L o a n s a n d advances and other current asset balances have been v a l u e d appropriately.

☐ Related party loans and advances

If there are any related party loans
and advances, review whether they
were properly authorized and the
value of such transactions were
reasonable and at arm’s length.
☐

☐ In relation to balances with statutory authorities like Service tax / VAT / Excise input credit, prepare a
reasonability with respect to purchases / expenses by applying the applicable rate to the purchases / expenses and in
case of any variance with the asset recorded by the entity, reasons for variance should be requested from client and
in case found satisfactory, the same should be maintained as part of audit documentation.
Further, the auditor should obtain copies of statutory returns filed with the authorities like excise returns / VAT
returns etc. and verify whether the amount recorded as per books of account tallies with the claim made with
authorities.
Assess the allowance for doubtful accounts. Review the process followed by the company to derive an allowance for
doubtful i n c l u d e comparison with the method accounts. This will

a c o n s i s t e n c y used in the last year, and a determination of whether the method is appropriate for the u n d e r l
y i n g b u s i n e s s environment.

☐ Obtain the ageing report of loans and advances, split between not currently due, 30 days old, 30 60 days old, 60 -
180 days old, 180 - 365 days old and more than 365 days old. Also obtain the list of loans and advances under
litigation and compare with previous year.

☐ Scrutinize the analysis and identify those loans and advances that appear doubtful; Discuss with management
their reasons, if any of these loans / advances are not included in the provision for bad recoverable; Perform further
testing where any disputes exist; Reach a final c o n c l u s i o n r e g a r d i n g t h e adequacy of the bad and
doubtful loans / advances provision.

☐ Assess bad loans / advances write - offs, prepare schedule of movements on Bad loans / advances - Provision
accounts and loans / advances written off.

☐ Check that write - offs or other reductions in the recoverable ☐

Presentation and
Disclosure

R e q u i r e d ☐ disclosures for l o a n s a n d advances and other current assets have ☐ b e e n appropriately made

☐
☐

☐ balances have been approved by an appropriate and authorised member of senior management, for example, the
financial controller or finance director. Check that the restatement of foreign currency loans and advances / other
current assets has been done properly.
Ensure whether the following disclosures as required under Ind AS complaint Schedule III to the Companies Act,
2013 have been made:
Whether loans have been classified as:
☐ Security deposits
☐ Loans to related parties

(giving details thereof) ☐ Other Loans (specify nature) Whether all the above loans have been further sub -
classified as :
☐ Secured, considered good ☐ Unsecured, considered good ☐ Doubtful
Whether allowance for bad and doubtful loans has been disclosed separately under the relevant heads i.e. separately
for each category of loans.
For loans, whether separate disclosure has been made for amounts due by :

☐ Director(s) of the company ☐ Director(s) of the company jointly with other persons ☐ Other officer(s) of the

company
☐ Other officer(s) of the company jointly with other persons. ☐ Firm(s) in which director is a

partner
☐ Private company(ies) in
which director is a director or
a member.

Other Current Assets

☐ Does the entity classify current assets that do not fit into any other asset category as other current assets ?
☐ Whether other current assets are classified as :
☐ Advances other than capital advances which are further Sub-classified as :
☐ Security Deposits ☐ Advances to
parties (giving
related details thereof)
☐ Other advances (specify nature)
☐ Other current assets (specify
nature)
☐ For adva n c es, whether separate disclosure has been made for amounts due by :

☐ Director(s) of the company ☐ Director(s) of the company jointly with other persons

☐ Other officer (s) of the company jointly with other persons

☐ Firm(s) in which director is a partner.
☐ Private company(ies) in which director is a director or a member.

(ii) Finished goods and goods for resale :

☐ Enquire into what costs are included, how these have been established and have been established and ensure that
the overheads included have been determined based on normal costs and appear reasonable in relation to the
information disclosed in the draft financial statements.

☐ Ensure that inventories are valued at net realisable value if they are likely to fetch a value lower than their cost.
For any such items, also verify if the relevant semi / partly processed inventories (Work in progress) and raw
materials have also been written down.

☐ Follow up for items that are obsolete, damaged, slow moving and ascertain the possible realizable value of such
items. For the purpose, request the client to provide inventory ageing split between less than 30 days, 30 - 60 days
old, 60 - 90 days old, 90 180 days old, 180 - 365 days old and more than 365 days old.

☐ Follow up any inventories which at time of observance of physical counting were noted as being damaged or
obsolete.
3 Presentation and Disclosure

Q.3.1 2018 - May [2] (a) (v) Descriptive Discuss the following :

(a) Name the assertions for the following audit procedure: (v) Related party transactions are shown properly. (1
mark) Answer:
Related party transactions are shown properly. ☐ Presentation and Disclosure Assertion

Space to write important points for revision

4 Share Capital
Q.4.1 2019 - May [4] (d) Descriptive
The securities premium account may only be applied by the company towards the issue of unissued shares of the
company to the members of the company as fully paid bonus shares, Comment. (3 marks)

Answer:
The Securities premium account may be applied by the company: 1. towards the issue of unissued shares of the
company to the members of

the company as fully paid bonus shares

2. in writing off the preliminary expenses of the company;
3. in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of
the company:
4. in providing for the premium payable on the redemption of any redeemable preference shares or of any
debentures of the company : or
5. for the purchase of its own shares or other securities under section 68. Thus, we cannot say that Securities
Premium Account may only be applied by the company towards the issue of unissued shares of the company to the
members of the company as fully paid bonus shares.

Q.4.2 2019 - Nov [3] (b) Descriptive Validity and consequence of issue of shares at discount, check with respect to
the provisions of the Companies Act, 2013. (4 marks)
Q.4.3 2009 - Nov [2] (b) (ii) Practical

Mr. X, a shareholder of the company pointed out that :

Premium received on issue of shares prior to the date of balance sheet has been transferred to Profit and Loss
account for arriving at the figure of commission payable to the managing director. (3 marks)

Answer:
Premium received on issue of shares is capital receipt and should not be credited to profit and loss account.
According to the Companies Act, 2013 premium on issue of shares should not be considered in computation of net
profit for the purpose of managerial remuneration. The auditor should have qualified the audit report and qualified
the amount by which the profit stands inflated.

Space to write important points for revision

5
Reserves and Surplus (Other Equity under Ind AS)
Q.5.1 2008 - May [1] (viii) Objective

State with reasons (in short) whether the following statement is True or False: The term ‘fund’ and ‘reserve’ can be
used interchangeably. (2 marks) Answer:
False :
The word “fund” in relation to any “Reserve” should be used only where such reserve is specifically represented by
earmarked investments. The reserve is created out of the profits but it is not necessary the same amount is present in
that reserve actually, but in case of fund the equal amount is appropriated to the fund.

Q.5.2 2012 - May [1] {C} (c) Distinguish Between Distinguish between “Reserves and Provisions”. (5 marks)
Answer:
S. Basis No.
1. Meaning Reserves Provisions

Reserves are amounts appropriated out of profits which are not intended to m e e t a n y l i a b i l i t y , contingency,
commitment or diminution in the value of assets known to exist at the date of the Balance Sheet.

It is an appropriation of profit.
2. Nature

Provisions are amounts charged against revenue to provide for:

(i) depreciation, renewal or diminution in the value of assets; or

(ii) a known liability the amount whereof cannot be determined with substantial accuracy; or

(iii) a claim which is disputed. It is a charge on profit.

3. Source

It is not created for determining true and fair view of profit or loss.

It may be used for any purposes other than those for which it was created. It is not created for the purpose of
providing depreciation, renewals or reduction in the assets value or for a known It is created out of profits. It too is
created out of profit.

4. Aim
5. Usage
6. Purpose
But it has also to be created even if there is no profit.

It is created for determining true and fair view of profit or loss.

It cannot be used for any other purpose for which it is not created.
It is created for the purpose of p r o v i d i n g d e p r e c i a t i o n , renewals or reduction in the assets value or for
any known liability whose amount can be

7. Creation
8. Duty of Auditor

liability whose amount cannot be ascertained accurately and correctly. It is optional to create general reserve.
Auditor need not to worry about the adequacy reserve.
creation or of general ascertained accurately and correctly.

It is compulsory to create provision.

Auditor has to ensure the creation and adequacy of provision.

Space to write important points for revision

Q.5.3 2016 - Nov [2] (v) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
Capital Reserve and Reserve Capital are the same. (2 marks)

Answer :
Incorrect:
Capital reserve means that part of profit reserved by the company for a particular purpose. Reserve capital means
that part of the authorised capital that has not yet been called up by the company.

Space to write important points for revision

Q.5.4 2019 - Nov [3] (c) Descriptive Explain the disclosure requirements of IND AS compliant Schedule III to
Companies Act, 2013 for each component of “Other Equity.” (3 marks)
Q.5.5 2008 - Nov [2] (a) Practical

As an Auditor how would you react to the following situations/ comments? In a company PPE have been revalued
and there has been resulting surplus of ` 2,00,000, which is transferred to revaluation reserve. The Company has a
Debit balance in Profit and Loss account ` 1,20,000 as accumulated brought forward losses. The company has
adjusted this loss balance against Revaluation reserve. (8 marks)

Answer:
The above accounting treatment is not correct because the debit balance of one lakh twenty thousand rupees in the
statement profit and loss A/c is actual loss whereas two lakh rupees in Revaluation Reserve is unrealized gain and as
per accounting policies, standards, statutes, conventions etc. actual losses cannot be set off against anticipated profits
or gains in the reserves.
The revalued amounts of PPE are presented in financial statements either by restating both the gross book value and
accumulated depreciation so as to give a net book value equal to the net revalued amount or by restating the net
book value by adding therein the net increase on account of revaluation. An upward revaluation does not provide a
basis for crediting to the profit and loss statement the accumulated depreciation existing at the date of revaluation.
Further, an increase in net book value arising on revaluation of PPE is normally credited directly to owner's interests
under the heading of revaluation reserves and is regarded as not available for distribution.

A decrease in net book value arising on revaluation of PPE is charged to profit and loss statement except that, to the
extent that such a decrease is considered to be related to a previous increase on revaluation that is included in
revaluation reserve, it is sometimes charged against that earlier increase. It sometimes happens that an increase to be
recorded is a reversal of a previous decrease arising on revaluation which has been charged to profit and loss
statement in which case the increase is credited to profit and loss statement to the extent that it offsets the previously
recorded decrease.

On disposal of a previously revalued item of fixed asset (PPE), the difference between net disposal proceeds and the
net book value is normally charged or credited to the profit and loss statement except that, to the extent such a loss is
related to an increase which was previously recorded as a credit to revaluation reserve and which has not been
subsequently reversed or utilised, it is charged directly to that account. The amount standing in revaluation reserve
following the retirement or disposal of an asset which relates to that asset may be transferred to general reserve.

Space to write important points for revision

6 Borrowings
Q.6.1 2008 - May [1] (vi) Objective

State with reasons (in short) whether the following statement is True or False:
Interest accrued but not due on “Secured loans” is required to be shown under appropriate sub-heads under the head
“Secured loans”.

(2 marks)

Answer:
False:
Schedule III to the Companies Act, 2013, prescribes the form of balance sheet and the requirements relating
thereto. According to this, the interest accrued and due on “Secured Loans” should be included under the appropriate
sub-heads under the head “Secured Loans,” but the interest accrued but not due on secured loans is required to be
shown under “Current Liabilities”.

Space to write important points for revision

Q.6.2 2008 - May [7] (Or) (b) Descriptive How would you vouch/verify the following?
Borrowing from Bank (5 marks)
Answer:
Borrowing from Banks can be verified as follows: Sl. Documents to be No. vouched
1. Reconciliation from Pass Book

2. Securities
Certificate and Records of Registrar

3. Purpose and
Authority of Loan Incrementation Aspects to be verified

Borrowings may be in the form of overdraft or loan. Reconcile the balances of loan A/c with that of the Bank Pass
Book.

Also confirm the balance stated at last by obtaining a certificate from Bank showing the accounts balances at the
year end.

Obtain a securities certificate from the bank that shows the particulars of securities deposited with the bank as
security for loan or charge created on an asset (s) of the business.

Also ensure that these facts have been appropriate disclosed and duly registered with the Registrar of the companies
and written down in the Register of charges.

Determine the purpose for raising loan or overdraft and the mode of utilising it and also that it has not caused any
damage to the concern.

Also check the authority under which the loan or overdraft has been raised.
In a company, only the Board of Director can raise loan or borrow from banks.

Q.6.3 2009 - Nov [7] (c) Descriptive How would you vouch/verify the following :
Bank overdraft.
Answer:
Bank Overdraft:
S. Documents to be No. vouched 1. Minute Book
(5 marks)
Aspects to be verified

The Auditor should ensure that the facility of overdraft is authorised by the Board. of Directors.

2. Agreement Document
(i) The Auditor should pursue the agreement

with the bank and see whether the overdraft is clean or against hypothecation or pledge of company’ property.

3. Certificate from Bank

(ii) The Auditor should verify the rate of interest and other terms and conditions from the agreement.

The Auditor should if the overdraft is against hypothecation of assets like stocks, a certificate from the bank should
be obtained.

4. Financial Statement
(i) The Auditor should if the overdrafts is

against hypothecation of assets or pledge of company’s property, see that overdraft is properly shown under ‘secured
loans’ and nature of security has been properly disclosed.

5. Register of Charges

(ii) The Auditor should verify the amount of overdraft from the books of accounts and compare it with the passbook.

The Auditor should verify the register of charges and ensure that the charge has been registered with Registrar of
Companies.

7 Trade Receivables
Q.7.1 2007 - Nov [7] (Or) (b), 2014 - May [3] (c), Descriptive 2016 - May [3] (d)

Recovery of Bad Debts written off. (5, 4, 4 marks) Answer:

Recovery of Bad Debts written off can be verified as follows

Sl. Document to be No. vouched 1. Schedule of bad debts

2. Proof of collection
3. Credit manager's file
4. Bank statement
5. Receipt Aspects to be verified
Verify whether the amount of bad debts recovered has been shown in the bad debts schedule of the preceding years.

Verify the relevant proof of recovery submitted, e.g: Tribunal decree, notice from bankruptcy trustee, letters from
collecting agency or lawyer or party etc.

(i) Verify whether amount received has been noted in the file.
(ii) Ascertain any specific matter materially affecting accounts has been noted in the file.

(i) Trace receipt of amount in bank statement

(ii) Confirm that the cheque received from party has not been dishonoured.

Verify whether proper acknowledgments have been issued to parties.

Q.7.2 2009 - May [7] (c) Descriptive How would you vouch/verify the following :
Bad debt (5 marks)

Answer:
Bad Debts :
1. Major amount of bad debts in the schedule be taken for scrutiny. 2. The amount of bad debts should be traced to
the schedule of bad debts

written off during the year.

3. The bad debts should be properly disclosed in P&L account according
to its materiality.
4. Check that the amount considered in write off had been overdue for long
and scrutinize the correspondence files.
5. Check the authority for write off and the level of authority is sufficient
higher than the executive involved in collection.
6. If provision had already been created for bad debts, see that to the
extent of actual bad debts written off, the provision is released.
Space to write important points for revision

Q.7.3 2011 - Nov [6] (c) Descriptive

Disclosure requirements of debtors in the financial statements.(5 marks) Answer:

Disclosure: The auditor should satisfy himself that trade receivables, loans and advances have been disclosed
properly in the financial statements. Where the relevant statute lays down any disclosure requirements in this behalf,
the auditor should examine whether the same have been complied with.
Note: 6(P) of Part I of Schedule III to be Companies Act, 2013 requires that company shall disclose “Trade
Receivables” in notes to accounts as follows:

(i) Aggregate amount of Trade Receivables outstanding for a period exceeding six months from the Date they are
due for payment should be separately stated.
(ii) Trade receivables shall be sub-classified as:

(a) Secured, considered good;

(b) Unsecured considered good;
(c) Doubtful.

(iii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.
(iv) Debts due by directors or other officers of the company or any of them either severally or jointly with any other
person or debts due by firms or private companies respectively in which any director is a partner or a director or a
member should be separately stated.
Space to write important points for revision

Q.7.4 2012 - Nov [7] (a) Short Notes Write short note on “Audit of discounted bills receivable dishonoured”. (4
marks) Answer:
Discounted Bill Receivable dishonoured can be audited as follows Sl. Documents to No. be vouched 1. Bill-
wise
Schedule
2. Bank
Statements
3. Bills Receivable (B/R)
Aspects to be verified.
Obtain a schedule of bills discounted dishonoured and examine the same.

(i) Trace the credit entry and subsequent dishonour entry in the bank statement.
(ii) Confirm that no deficit is raised by the banks for dishonour, without first crediting the amount to the client's
account.

(i) Verify whether B/R has been returned alongwith banker's advice.
(ii) Ensure that the dishonour has been properly "Noted" on the B/R.

4. Debtors Ledgers
(i)

(ii) Verify entries for dishonour passed in the parties account.

Confirm whether bank charges, noting charges, etc have been debited to party concerned.

5. Lawyer
Correspondence File

Examine correspondence with the lawyer and other subsequent events, which may provide other evidence of the
debt becoming bad or doubtful etc.

Space to write important points for revision

Q.7.5 2014 - Nov [1] {C} (b) Descriptive Discuss the following:
Disclosure requirement relating to Trade Receivables under Revised Schedule III to the Companies Act, 2013. (5
marks)

Answer:
Disclosure requirement relating to Trade Receivables under Schedule III to the Companies Act, 2013.
☐ Aggregate amount of Trade Receivables outstanding for a period

exceeding 6 months from the date they are due for payment should be separately stated.

☐ Security - wise classification: Trade Receivables shall be separately sub-classified as:

(a) Secured, considered good
(b) Unsecured, considered good
(c) Doubtful.

☐ Bad/Doubtful: Allowance for bad and doubtful loans and advances shall be disclosed under the relevant heads
separately.
☐ Directors etc: Debts due by directors or other officers of the company or any of them either severally or jointly
with any other person or debts due by firms or Private Companies respectively in which any director is a partner or a
director or a member should be separately stated.

8 Cash and Cash Equivalents

Q.8.1 2011 - Nov [1] {C} (d) Descriptive

Comment on the following :

What procedure an auditor should adopt to test the authenticity of cash at bank. (5 marks)

Answer:
Bank Balances can be verified as follows
Sl. Documents to No. be vouched

1. Bank
Statements

2. Bank
Reconciliation Statements

3. Certificates
4. Balance Sheet Aspects to be verified
Check the bank balances by referring the bank statements.

Investigate the bank reconciliation statement prepared as on the last day of the year and check :

(i) Whether cheques issued but not presented for payment has been duly debited in the subsequent period.

(ii) Whether cheques deposited for collection by the entity but not credited in the Bank A/c has been duly credited in
the subsequent period

Investigate the relevant certificates with respect to fixed or any other type of deposits with banks duly supported by
bank advices.

Note 6(Q) of Part I of Schedule III to the Companies Act, 2013 requires that company shall disclose “Cash
and cash equivalents” in notes to accounts as follows:
(Q) Cash and Cash Equivalents

5. Accounting Policy
6. Postage

(i) Cash and Cash Equivalents shall be classified as:

(a) Balances with Bank;
(b) Cheques, Drafts on hand;
(c) Cash on hand;
(d) Others (specifying nature)

(ii) Earmarked balances with banks shall be separately stated.

(iii) Balances with bank to the extent held as margin money or security against the b o r r o w i n g s , g u a r a n t e e
s , o t h e r commitments shall be disclosed separately.
(iv) Repatriation restrictions, if any, in respect of cash and bank balances shall be separately stated.
(v) Bank deposits with more than 12 months maturity shall be disclosed separately.

The auditor should satisfy himself that cash and bank balances have been valued and disclosed in the financial
statements in accordance with recognized accounting policies and practices and relevant statutory requirements, if
any. In this regard, the auditor should examine that following items are not included in cash and bank balances. 1.
Temporary advances.
2. Stale or dishonoured of cheques.

Postage and revenue stamps, if material in amount, may be shown separately instead of being included under cash
and bank balances.

Q.8.2 2015 - Nov [2] (vii) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
Teeming and lading is one of the techniques of inflating cash payments.

(2 marks) Answer:

Incorrect:
Teeming and lading is one of the techniques of suppressing cash receipts and not of inflating cash payments.

Space to write important points for revision

Q.8.3 2009 - May [4] (a) Practical

M, Statutory Auditors of ABC Ltd. wants to verify cash on hand as on 31st March, 2009. The Management informs
Mr. M. that it is not possible to cooperate, as cashier has been hospitalised. Advise Mr. M., how to deal with the
situation. (4 marks)

Answer:
The scope of audit may be limited for various reasons,
(i) the entity may impose restriction on scope of audit,

(ii) the limitation may be imposed by circumstances.

(a) When the audit is carried out under and as per statute, the auditor should not accept the assignment when his
duties are curtailed by agreement, unless required by any Law.

(b) When audit is carried out in accordance with the entity’s terms voluntarily, the auditor may indicate his scope in
his audit report. In some cases, the circumstances may impose restrictions on audit scope. e.g. when the auditor is
appointed after the year end, he may not be able to participate in stock verification. Or sometimes, the records
required may not be available so that the auditor may not be able to check details in the manner he likes. Such
limitations in scope may warrant an auditor to express disclaimer of opinion or qualified opinion in his audit report
depending upon the circumstances.

The non co-operation of ABC Limited will amount to limitation on scope of auditors.
Space to write important points for revision
9 Inventories
Q.9.1 2008 - May [7] (c), 2013 - May [4] (b) (iii), 2015 - May [3] (c)
How would you vouch/verify the following? Work in progress.
Answer:
Work-in-progress will be verified as follows: Descriptive
(5, 4, 4 marks)
Sl. Documents to No. be vouched 1. Cost Sheets
2. Cost Records
3. Cost
Comparison
4. Allocation of Expenses Aspects to be verified

The cost sheets of work-in-progress should be duly attested by the works engineer and works manager.

The correctness of cost disclosed by the cost records should be properly examined by verifying the cost and quantity
of materials, wages and other charges included in the cost sheets with reference to the records maintained in respect
of that.

Mark comparison between the “unit or job cost” shown by the cost sheet and the “standard or estimated cost”
expected.

The allocation of overhead expenses should be done on a rational basis.

5. General ☐ Examine whether the internal controls are working satisfactorily.

☐ If it is not possible to physically verify the stage of completion of WIP, examine whether the procedure followed
by the entity for ascertaining the same is reliable.

☐ Ascertain stage of completion of WIP for accessing appropriateness of its valuation.

☐Examinesubsequentrecordsof

corroborative production/sales to obtain evidence.

Space to write important points for revision
Q. 9.2 2009 - May [7] (b)
How would you vouch/verify the following?
Goods lying with third party.

Answer:
If the goods are lying with Third Party, Auditor should : 1. Check the materiality of the item under this caption
included in stocks. 2. Obtain confirmation of the amount of goods lying with them. The

confirmation may be directly obtained by auditor or be produced by client depending upon the situation.

3. Inquire into the necessity of sub contractor retaining the stock. He should ensure the process that they perform are
related to the business requirement and there is no ground for suspicion on this score.

4. The records, voucher/slips for the regulating the movement of stock into and out of entity for sub-contracting
work be reviewed by vouching for few transaction for ensuring existence and working of internal control system for
them.

5. The goods lying with them for very long period would merit auditors’ special attention for making provision.
Descriptive
(5 marks)

6. The excise gate pass, entry in such records, information in returns, be also cross-verified.
7. The valuation of stocks should be correctly made for including material cost on appropriate stock valuation
formulae and also for inclusion of proportionate processing charges for the work in process with the contractors.
8. The provision should be created for work done, billed for processing and also for incidence of any applicable levy
like service tax payable. Space to write important points for revision

Q. 9.3 2009 - May [8] (a) Short Notes

Write short note on Physical attendance by auditor during inventory taking (5 marks) Answer:
Physical Attendance at stock taking by Auditor during Inventory Taking 1. The physical verification of stock is
the responsibility of the management.

The auditor may find it appropriate to attend the stock taking, if the inventory value is material in his opinion.

2. The extent of participation in inventory taking depends upon the internal control system prevailing, results of
examination of inventory records and analytical review procedures.

3. When auditor attends inventory taking, he ensures that the instructions given for inventory taking are followed.
4. Auditor should test check few items by himself for their existence and quantum. He selects to test high value
items importantly.
5. The physical conditions of stock - like its age, deterioration, obsolescence etc., are looked into by auditor.
6. The auditor reviews stores records and notes down major discrepancies for reconciling them in a subsequent date.
7. The cut off arrangement is also looked in to ensure that the entity accounts for stock for which liability had been
booked and excludes stock which has been sold.
Space to write important points for revision

Q. 9.4 2017 - May [6] (c) Descriptive

Answer the question:

State the analytical review procedures normally carried out in the audit of inventories. (6 marks)

Answer:
Inventories will be verified as follows
S. Area to be No. Verified 1. Stock
Records
2 Instruction and Programmes

3. Original
Sheets of Verification

4. Confirmation of Parties
5. Accounting Treatment Aspects to be Verified

Examine the stock records referring to the important documents viz, goods received notes, inspection reports etc.

Investigate the verification programmes and instructions prepared by the management in order to satisfy that the
work has been properly conducted to cover the different location and kinds of stock.
Critically examine the original sheets of verification and point out the selected items including the precious items
into the final inventories.
Test the confirmation from the parties holding the stock with reference to the stock lying with others. Also ensure
that appropriate cut-off procedure was followed.
Determine the existence of obsolete and slow moving items and check that proper adjustments have been made for
that.

6. Accounting Treatment

Note 6(O) of Part I of Schedule III to the Companies Act, 2013 requires that company shall disclose “Inventories”
in notes to accounts as follows:
(i) Inventories shall be classified as:

(a) Raw materials;

(b) Work-in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods

acquired for trading);

(e) Stores and spares;
(f) Loose tools;
(g) Others (specify nature).

(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories.

(iii) Mode of valuation shall be stated.
Space to write important points for revision

Q. 9.5 2018 - Nov [5] (c) Descriptive Briefly mention the matters that are relevant in planning attendance at
physical inventory counting. (5 marks)

Answer:
Matters relevant in planning attendance at physical inventory counting include, for example:
1. Nature of inventory.
2. Stages of completion of work in progress.
3. The risks of material misstatement related to inventory.
4. The nature of the internal control related to inventory.
5. Whether adequate procedures are expected to be established and

proper instructions issued for physical inventory counting.

6. The timing of physical inventory counting.
7. Whether the entity maintains a perpetual inventory system.
8. The locations at which inventory is held, including the materiality of the inventory and the risks of material
misstatement at different locations, in deciding at which locations attendance is appropriate.
9. Whether the assistance of an auditor’s expert is needed. Space to write important points for revision

10 Fixed Asset : Tangible & Intangible

Q. 10.1 2008 - Nov [7] (b) Descriptive How would you vouch/verify the following ?
Trade Marks and Copyrights. (5 marks)

Answer:
Trademarks and Copyright may be verified as follows : Sl. Document to be No. Vouched 1. Schedule of
Trademark and Copyright

2. Written
Agreement and Assignment deed

3. Contract
4. Value and Cost Aspects to be verified

Get the schedules of trademarks and copyright duly signed and scrutinized by the responsible authority and also
confirm that these are shown in the B/S.
Examine the written agreement for assigning the copyright and assignment deed for transfer of trademark and also
ensure that trademark and copyright are duly registered.

Verify the existence of copyright referring to the contract between the author and the entity and note down the
payment terms of royalty.

Check that the value has been properly determined and cost incurred for obtaining the trademarks and copyright is
capitalised. 5. Legal life and Make certain that the legal life of the trademark

Payment and copyright has not expired and also ensure that the payment for them is properly amortised with
regards to appropriate legal and commercial considerations.

Space to write important points for revision

Q. 10.2 2008 - Nov [8] (c), 2013 - May [7] (ii) Short Notes

Write short note on “Impairment of Assets”. (5, 4 marks) Answer:

Impairment of asset : An asset is impaired if its carrying amount exceeds

the amount to be recovered through use or sale of the asset and in the given situation the standard requires the
enterprise to recognize an impairment loss i.e. the amount by which the carrying amount of an asset exceeds its
recoverable amount.
Impairment loss = Carrying amount - Recoverable Amount. Impairment loss is a normal expense and thus will
have impact on distributable profit and other provisions of the Companies Act 2013 and applicable enactment
(Acceptance of Deposit Rules).
AS-28 requires recoverable amount to be measured as the higher of net obtainable selling price and value in use
(present value of estimated future cash flows expected to arise from continuing use and on disposal). After the
recognition of impairment loss, the depreciation/amortization charge for the asset should be adjusted in future
period, to allocate the assets revised carrying amount less residual value on a systematic basis over its remaining
useful life.
Impairment of assets does not apply to inventories, construction contract assets, deferred tax assets, investments
covered by AS-13 and financial instruments, because other AS provide for recognizing and measuring these assets.

Assessment for impairment of assets needs to be made at the B/S date as to any indication in this context based on
external or internal source of information.

Space to write important points for revision

Q. 10.3 2009 - Nov [7] (b)
How would you vouch/verify the following? Leasehold property.
OR 2011 - Nov [7] (d)
Write short note on the following:
Verification of assets acquired on lease.

Answer:
Various steps involved in the verification of leasehold rights are stated below :

Sl. Documents to be No. Verified 1 Lease Deed

Descriptive

(5 marks) Short Notes

(4 marks)
2 Agreement
3 Lease Rental Receipt
Aspects to be verified

(i) Scrutinise the lease deed or assignment thereof to see that the conditions thereon are duly fulfilled and the lease is
in force.

(ii) Wherever possible, physically inspect the property to ensure whether same confirm to description and details in
Lease Deed and also with the documents relating to s u b s e q u e n t i m p r o v e m e n t s a n d constructions.

Examine the counterpart of the tenant's agreements if part of the leasehold property has been sublet.
Ensure that all payments have been duly made and that there are no arrears.

4 General Ledger
5 F i x e d A s s e t s (PPE) Register
6 Financial Statement
7 Special
Considerations

(i) Ensure that rent outstanding, if any, has been properly accounted at the end of the year.

(ii) Ensure that the outlays as well as any legal expenses incurred to acquire the lease which are shown as an asset in
the Balance Sheet are being written off at a rate which could completely wipe off the asset over the unexpired term
of the lease.

Verify from the Fixed Assets (PPE) Register, the relevant particulars of lease including the number & location of
leasehold property.

(i) Verify that appropriate accounting principles are followed for amortisation or charging of lease rent in the a/c.

(ii) Ensure that leasehold property has been accounted for in the books of account & proper disclosures have been
made in consonance with AS - 19 on Accounting for lease issued by ICAI

(iii) Ensure that necessary provision is made in the accounts for the cost of dilapidation on an estimated basis.

(iv) Ensure that the assets under lease have

☐

☐ been property disclosed as per the requirements of Schedule III.

Inspect the assignment of lease in case the property has been received in second or subsequent lease.
If the leasehold property has been mortgaged, obtain a certificate in respect of the title deed, which will be in the
possession of the mortgagee.

Q. 10.4 2010 - Nov [4] (b) Short Notes Write short note on the following :
Physical verification of fixed assets (PPE) “at reasonable intervals”.

(4 marks) Answer:
Reasonable Intervals for verification of fixed assets (PPE):
• “Reasonable Intervals” depends upon the circumstances of each case.
• The factors to be considered regarding this are, number of assets,
nature of assets, relative value of assets, difficulty in verifications, situation and spread of the assets etc.

• The management may decide about the periodicity of physical verification of fixed assets (PPE) considering the
above factors while an annually verification may be reasonable.
• It may be impracticable to carry out the same in some cases. Even in such cases the verification program should be
such that all assets are verified at least once in every three years where verification of all assets is not made during
the year.
• It will be necessary for the auditor to report the fact, but if he is satisfied regarding the frequency of verification, he
should also make a suitable comment on this regard.
• The auditor is required to comment, if any material discrepancies were noticed on verification and, if so, whether
the same have been properly dealt with in the books of account.
• It would be appropriate for the auditor to obtain a management representation letter confirming that the fixed assets
(PPE) are physically verified by the company in accordance with the policy of the company.
• The management representation letter should also mention the periodicity of the physical verification of fixed
assets (PPE).
• The letter should also include the details of the material discrepancies noticed during the physical verification of
the fixed assets (PPE).
• If no discrepancies were noticed during the physical verification, the management representation letter should also
mention this fact clearly.

Space to write important points for revision

Q. 10.5 2013 - May [2] (viii) Descriptive

Comment on the following:

Computer software which is the integral part of the related hardware can be treated as intangible assets or fixed
assets (PPE)? (2 marks)

Answer:
Intangible assets are those assets which do not have physical identity but are used by the enterprise for production or
supply purpose. As such computer software which is an integral part of related hardware has to be treated as a
fixed asset (PPE).

Space to write important points for revision

Q. 10.6 2013 - May [4] (b) (ii) Descriptive

How will you vouch/verify the followings?

Patterns, dies, loose tools etc. (4 marks) Answer:
Patterns, dies, loose tools etc.
Several entities have large investments in such assets which have a relatively short useful life and low unit cost, their
treatment in the books of account differs from entities to entities. So, the auditor has to see what accounting
treatment has been followed by the auditor enterprise. The auditor should consider the following points:
1. Production Accounts :

(i) Ensure that small tools and other similar items are charged off to the production A/c.
(ii) A proper record of issues and receipts of tools has also been maintained.
(iii) Obtain list of those items which are not usable / in damaged or depleted condition.
(iv) Ensure that sum total of opening balance plus purchase minus value of closing stock of these assets is charged
off to Production Account.
2. Cost : The auditor should find out
(i) The method of valuation adopted by the management
(ii) The cost of purchase on the basis of date of acquisition and the market price either from the latest purchase or
from market quotations.
☐ Examine copy of invoice for purchased items and costing records for internally manufactured items.
3. Valuation method : Verify whether the method of valuation is adopted consistently.
Following are the methods for different items:

Items Method of valuation

Purchased items Cost of purchase reduced by the amount of depreciation.
Manufactured items On the basis of Standard Cost with necessary

adjustment for material variances reduced by the amount of depreciation decided by the management considering
the life of the tools.

Obsolete items Valued on Net Realizable scrap value.

Defective / Damaged items
Relevant adjustment in valuation shall be made after evaluating the conditions. ☐ Any change in the methods of
valuation shall be disclosed along with its effect on the financial results of the company. Space to write important
points for revision
Q. 10.7 2013 - Nov [4] (b) Descriptive How will you vouch and verify the following?
Assets acquired on hire purchase. (4 marks)

Answer:
Asset acquired on Hire Purchase S. Documents to No. be vouched

1. Minutes
Book and
Resolution

Agreement
2. Payment Vouchers
3. General Ledger
4. Financial Statement Aspects to be verified

Examine the Resolution of General Meeting of Board Meeting for proper approval for the acquisition of asset on HP
basis

Note: ☐ ☐ ☐ ☐

from the hire purchase agreement.

Verify the instalment payments made to the HP company and confirm whether they are as per the terms of
agreement.
Verify whether the receipt issued by the HP company is valid.
In case of default in payment, check that a note is given in the financial statements that the assets are liable to be
repossessed due to default.

Verify that the assets have been capitalized at their cash value and also ensure that computation of depreciation is
made on that price only.
Verify whether hire charge / finance charges for the period have been duly charged as expenditure.

Ensure that adequate disclosure of the manner of acquisition of asset on HP basis are made. Ensure that the liability
to the HP Company has been properly disclosed. Statement of account may be obtained from the HP Company for
confirmation purposes.
Description of the assets, Cost of the assets,
Hire purchase charges, Terms of payment, and Date of purchase

Q. 10.8 2014 - May [3] (b) Descriptive How will you vouch/verify the following?
Building (4 marks)

Answer:
Building should be verified as follows

Sl. Documents No. Vouched 1. Title Deeds

2. Building Cost Records
3. Depreciation
4 Lease Deed Aspects to be Verified

Investigate the title deeds of the building to check whether the client holds the title on the date of B/S, if the building
has been pledged, the title deeds would be in the possession of the pledgee, and a certificate should be obtained from
him to that effect.

Verify the original cost of the building by referring the conveyance deed. In case, the building has been constructed
by the client, verify the original cost with reference to the cost as per accounts book of the year in which the
construction was completed.

Check that appropriate depreciation is provided against the building if no depreciation is provided there should be an
appropriate note given to this effect in the P & L A/c.

Look into the appropriate lease deed, if the building on lease for the purpose of ascertaining the cost amortisation
etc. Also ensure that the client has fulfilled all the conditions in the lease deed.

5. Accounting Treatment
6. Fixed Assets (PPE) Records

The building should be valued at cost less depreciation. If there is any revaluation, verify its basis and then ensure
that proper disclosure has been made.
For a company, the requirements of schedule VI should be complied with.

Verify that relevant particulars of the building are entered into the records of fixed assets (PPE) maintained by the
clients.

Space to write important points for revision

Q. 10.9 2015 - Nov [3] (d) Descriptive How will you vouch/verify the following:
Intangible Assets. (4 marks)

Answer:
Intangible Assets:
☐ An intangible asset is that asset which does not have a physical identity

but which is used by the enterprise for production or supply of goods for retails to other or for administrative
purpose.

☐ Examine the list of intangible assets owned by client as on balance sheet date.
☐ Verify the existence and ownership by examining certificates and letters.
☐ Examine due dates for renewal fees for assets.
☐ The auditor should take schedule of intangible assets and agreement made with other parties.
☐ The auditor should ensure that valuation has been made on a fair and reasonable basis.
☐ The auditor should check amortization made in P&L a/c and balance of assets as on the balance sheet date.
☐ The auditor ensures that the treatment of intangible assets have been made as per the AS-26 – Intangible Assets.

Note 6(I) of Part I of Schedule III to the Companies Act, 2013 requires that company shall disclose “Tangible
Assets” in notes to accounts as follows:

(i) Tangible Assets

(i) Classification shall be given as:
☐ Land
☐ Buildings
☐ Plant and Equipment
☐ Furniture and Fixtures
☐ Vehicles
☐ Office Equipment
☐ Others (specifying nature).
(ii) Assets under lease shall be separately specified under each class of asset.
(iii) A reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the
reporting period showing additions, disposals, acquisitions through business combinations and other adjustments
and the related depreciation and impairment losses/reversals shall be disclosed separately.
(iv) Where sums have been written-off on a reduction of capital or revaluation of assets or where sums have been
added on revaluation of assets, every balance sheet subsequent to date of such write-off, or addition shall show the
reduced or increased figures as applicable and shall by way of a note also show the amount of the reduction or
increase as applicable together with the date thereof for the first five years subsequent to the date of such reduction
or increase.
Space to write important points for revision

Q. 10.10 2015 - Nov [7] (b) Short Notes

Write short notes on “Payment for Acquisition of Assets”. (4 marks)

Answer :
Payment for Acquisition of Assets:
The asset if acquired for the business, then payment made shall be in the capital nature expenditure and it should be
included in the cost of fixed assets (PPE) of the company. Such payment shall be either on the agreed term or
quotation term or the market term. Such, payment shall be made in cash or through Bank.
In this case, auditor should ensure that such payments are actually made and should also check the entry in seller
books. He should also check the amount and validity of the payment.

S. Documents to No. be vouched 1. Bill or Receipt

2. Title Deed in case of

Purchase of Immovable Property

3. Registration
Document in case of
purchase of
movable
property

4. Authorisation of Purchase by Board

Aspects to be verified

The purchase of an asset must be duly supported by the receipt for the amount paid.

In case of an immovable property the auditor must also inspect the title deeds.
The title of an immovable property passes only on registration. It is therefore essential for an auditor to see that
property has been registered in the purchaser’s name as required by the relevant regulations and also that the title of
the transfer to sell property has been verified by a solicitor or an advocate.

In the case of movable property requiring registration of ownership, e.g., a car or a ship, it must be verified that such
a registration has been made in favour of the purchaser. It is necessary for the auditor to satisfy himself generally as
regards existence, value and title of the assets acquired.

It must also be verified that the assets were purchased only by a person who had the authority to do so. Companies
Act, 2013 provides that only

5. Financial Treatment

the Board of Directors can invest the funds of the company. Thus the Board alone can sanction the purchase of a
fixed asset (PPE).

• If the benefit of an item of expense has been acquired by the purchaser along with the asset, its value should be
debited to a separate account, e.g., when a motor car has been purchased on which certain taxes and insurance
charges were paid by the seller for a period that had not expired.
• In the case of an asset constructed or manufactured by the client himself, e.g., where a building has been
constructed or a plant or machinery manufactured by the concern with its labour and materials, it must be verified
that the cost of labour, materials and other direct expenses incurred has been charged as cost of the asset on a proper
allocation of the total expenditure debited under these heads.
• It must also be seen that neither expenses on repairs and maintenance have been capitalised nor the cost of
additions to assets charged off as revenue expenses.

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Q. 10.11 2016 - Nov [2] (ix) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
All intangible assets are not required to be amortized. (2 marks)

Answer:
Incorrect:
As per AS-26, the depreciable amount of an intangible asset should be allocated on a systematic basis over the best
estimate of its useful life. The useful life of an intangible asset may be very long but it is always finite.

Space to write important points for revision

Q. 10.12 2016 - Nov [4] (b) Descriptive
Mention the purposes for which capital expenditure is incurred. (6 marks)

Answer :
Capital Expenditure
Capital expenditures are those expenditures which are non recurring in nature and whose benefit is accrued over a
long period of time i.e. more than one accounting period.
Purposes for which Capital Expenditure is incurred:
1. Acquiring of fixed asset (PPE).
2. Acquiring of intangible asset.
3. Repairing an existing asset so as to improve its useful life. 4. Upgrading an existing asset if it results in a superior
fixture. 5. Preparing an asset to be used in business.
6. Restoring property or adapting it to a new use.
7. Starting or acquiring a new business.

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Q. 10.13 2009 - Nov [2] (b) (i) Practical

Mr. X, a shareholder of the company pointed out that :

The goodwill in the Balance Sheet of the company has appeared on same figure during the past three years. (3
marks)

Answer:
Facts: According to provisions of AS 26 “Intangible Assets”, an intangible asset should be carried in the books at
cost less accumulated amortization and accumulated impairment losses. The depreciable amount of an intangible
asset should be allocated on a systematic basis over the best estimate of its useful life. There is a reputable
presumption that the useful life of an intangible asset will not exceed ten years from the date when the asset is
available for use according to Para 63 of AS 26.
Analysis and Conclusion:
In the given question, the company has not amortized any value of goodwill since past three years. The auditor
should have indicated this fact in his report that no amount of goodwill has been written off during the past three
years.

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Q. 10.14 2010 - Nov [6] (b) Practical A partnership firm revalued its PPE like land and building. The firm
adequately disclosed the revalued amounts in the Balance Sheet.

Do you, as an auditor, approve the disclosure given by the partnership firm? (4 marks) Answer:
Disclosure of revalued PPE of a partnership firm:
Facts : According to AS 10 “Property, Plant and Equipment”, revalued amounts substituted for historical costs of
PPE, method adopted to compute the revalued amounts, nature of indices used, year of any appraisal made, and
whether an external valuer was involved, in case where PPE are stated at revalued amounts, the fact should be
disclosed in the financial statements. Analysis : In the given case, the partnership firm revalued its PPE like building
and land and adequately disclosed the revalued amounts in the Balance sheet. The firm did not disclose the method
adopted by it for arriving at the revalued figures.
Inference : The firm had disclosed the revalued amounts in the balance sheet but the method and nature of indices
used etc. are not disclosed. So, this act of the firm is in contravention with the AS 10 for “Property, Plant and
Equipment”.

Therefore, the auditor cannot approve the disclosure given by the partnership firm and shall have to qualify the
report.
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Q. 10.15 2019 - May [4] (a) Practical

You are an auditor of PQR Ltd. which has spent ` 10 lakhs on Research activities of the product during period under
audit. Board of Directors want to recognize it as an internally generated intangible assets. Advise and discuss the
conditions necessary to be fulfilled to recognize the intangible assets in the financial statements. (4 marks)

Answer:
Provision
As per AS 26, Intangible Assets’ the recognition of on item as an intangible asset requires an enterprise to
demonstrate that the item meets the definition of an intangible asset and recognition criteria set out as below: (a) It is
probable that the future economic benefit that are attributable to the

asset will flow to the enterprise. An enterprise uses judgement to assess the degree of certainly attached to the flow
of future economic benefits that are attributable to the use of the asset on the basis of the evidence available at the
time of initial recognition, giving greater weight to external evidence and

(b) The Cost of the asset can be measured reliably.

☐ When assessing the probability of expected future economic benefits, reasonable and supportable assumptions
should be used. representing management’s best estimate of the set of economic conditions that will be exist over
the useful life of asset.

☐ Further, AS 26 provides that no intangible asset arising from research or from the research phase should be
recognised. Expenditure on research or on the research phase Should be recognised as an expense when it is
incurred.

Present Case:
So, PQR Ltd. can not recognised ` 10 lakhs as incurred in the research phase / activities as intangible asset.

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11 Trade Payables and Other Current Liabilities
Q. 11.1 2007 - Nov [7] (b) Descriptive

How would you vouch/verify the following ?

Trade Creditors. (5 marks) Answer:
Trade Creditors :
1. Check the adequacy of cut off procedure to ensure that transaction of

next period are not accounted and all transactions of year end are accounted.
2. Check positing in the bought ledger from books of prime entry.
3. Compare the balances with the schedule of creditors with balances in bought ledger.
4. Compare the balances with the confirmation or statement of account received from trade creditors.
5. Pay special attention to long outstanding items and enquire about the reason thereof.
6. Verify subsequent payments and reversal entries in the bought ledger of year end entries.
7. See that trade creditors are classified and shown in the balance sheet as per requirement of Schedule III of the
Companies Act, 2013.

Q. 11.2 2007 - Nov [7] (c) Descriptive How would you vouch/verify the following?
Advances to suppliers. (5 marks)

Answer:
Advance given to Suppliers
Sl. Document to be No. vouched

1. Schedules and Ledgers

2. Accounting Treatment

3. Final Documents Aspects to be verified

Get the debit balance schedule in the account of creditors and give particular attention to the age of the balances.
Also examine in detail Bought Ledger. Investigate the unadjusted outstanding and check if any of them require
provisioning. Also examine that according to Sec. 143(1)of the Companies Act, 2013, the advances have not been
shown as deposits in the B/S. Obtain the confirmation of balances and ensure that any discrepancies or differences
have been properly reconciled.

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12 Provision and Contingent Liabilities
Q. 12.1 2009 - May [1] (ix) Objective

State with reason (in short) whether the following statement is True or False:
Contingent liabilities are provided for in the accounts if they crystallize between the end of the accounting year and
the date of signing the audit report. (2 marks)

Answer:
False :
Contingent liabilities existing on the balance sheet date are disclosed by way of note and not provided for even if it
had crystallized subsequently.

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Q. 12.2 2012 - May [4] (b) Descriptive

You are the auditor and examining the book debts of a company. Give some indications which leads to doubt about
recovery as uncollectible debts from debtors and advances. (8 marks)

Answer:
Indications of doubtful and uncollectible debts, loans and advances: 1. The terms of credit have been repeatedly
ignored.
2. There is stagnation or lack of healthy turnover in the account. 3. Payments are being received but the balance is
continuously increasing. 4. Payments though being received regularly, are quite small in relation to

the total outstanding balance.

5. An old bill has been partly paid (or not paid), while later bills have been
fully settled.
6. The cheques received from the debtors have been repeatedly
dishonoured.
7. The debt is under litigation, arbitration, or dispute.
8. The auditor becomes aware of unwillingness or inability of the debtor to
pay the dues, e.g., a debtor has either become insolvent, or has closed
down his business, or is not traceable.
9. Amounts due from employees, which have not been repaid on
termination of employment.
10. Collection is barred by statute of limitation.

Q.12.3 2014 - Nov [3] (c) Descriptive How you will vouch/verify the following?
Provision for income tax. (4 marks)

Answer:
Provision for Income Tax:
☐ General consideration as provision has been provided in the P&L A/c. ☐ Check whether such provision is
created every year for tax liability

because it is current provision.

☐ Check whether it has been properly stated in P&L A/c and in Balance
Sheet in liability side.
☐ Check whether tax paid has been properly deducted from provision for
taxation.
☐ Provision has been created and written off every year.
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Q. 12.4 2015 - Nov [4] (c) Descriptive

Discuss the recognition principles of contingent liability. (4 marks) Answer:

As per AS - 29 (Revised) on Provisions, Contingent Liabilities and Contingent Assets, an enterprise should not
recognise a contingent liability.

A contingent liability is disclosed, as required by paragraph 68, unless the possibility of an outflow of resources
embodying economic benefits is remote.
As per Para 68, Unless the possibility of any outflow in settlement is remote, an enterprise should disclose for each
class of contingent liability at the balance sheet date a brief description of the nature of the contingent liability and,
where practicable:
(a) an estimate of its financial effect, measured under paragraphs 35-45; (b) an indication of the uncertainties
relating to any outflow; and (c) the possibility of any reimbursement.
Further, Where an enterprise is jointly and severally liable for an obligation, the part of the obligation that is
expected to be met by other parties is treated as a contingent liability. The enterprise recognises a provision for the
part of the obligation for which an outflow of resources embodying economic benefits is probable, except in the
extremely rare circumstances where no reliable estimate can be made.
Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to
determine whether an outflow of resources embodying economic benefits has become probable. If it becomes
probable that an outflow of future economic benefits will be required for an item previously dealt with as a
contingent liability, a provision is recognised in accordance with paragraph 14 in the financial statements of the
period in which the change in probability occurs (except in the extremely rare circumstances where no reliable
estimate can be made).

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13 Miscellaneous

Capital Subsidy
Q.13.1 2010 - May [7] (b), 2016 - Nov [3] (b) Descriptive

How would you vouch/verify the following?

Receipt of Capital subsidy. (5, 4 marks) Answer:
Receipt of Capital subsidy can be verified as follows
Sl. Document to be No. vouched 1. Application for subsidy
Aspects to be verified

Examine the application made by the entity towards claim of subsidy to ascertain the purpose and the scheme under
which the subsidy has been made available.
2. Subsidy file
correspondence
3. General Ledger
4. Financial Statements

(i) Examine the correspondence and other documents for the grant of subsidy and note the conditions relating to its
use.

(ii) Verify whether the conditions under which subsidy is granted have been fulfilled. e.g.
(a) Purchase of a specific asset. (b) Setting up a factory at a specific

location.

(i) Vouch the relevant entries for the receipt of capital subsidy, tracing the same into the cash book & the general
book.

(ii) Examine whether subsidy receivable, if any, has been properly accounted for.

Ensure compliance with requirements of AS-12 on "Accounting for Government grants", i.e. whether it relates to
specific amounts or in the form of promoters contribution and also compliance with the disclosure requirements.

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Investment in Subsidiary
Q. 13.2 2014 - Nov [3] (b) Descriptive

How you will vouch/verify the following?

Investment in the shares and debentures of subsidiary. (4 marks) Answer:
Investments in the shares and debentures of subsidiary: ☐ See that the unquoted shares held are investment by
the company are

properly accounted for in the investment register.

☐ Ensure that the shares are valued at cost.
☐ Ascertain from previous annual reports the trend of such investments. ☐ If the shares held is more than 50%, It
has been properly disclosed in

Balance Sheet.
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Current Investments
Q. 13.3 2016 - May [4] (a) Descriptive

Mention the disclosure requirement of current investments as per Schedule III of the Companies Act, 2013. (6
marks) Answer:
Note 6 (N) of Part (i) of Revised Schedule (III) requires that company shall disclose “Current Investments” in
notes to accounts as follows : Current investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investments in Preference Shares
(c) Investments in government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) Investments in partnership firms
(g) Other investments (specify nature).

(i) Under each classification, details shall be given of names of the bodies corporate (indicating separately whether
such bodies are (i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special purpose entities) in
whom investments have been made and the nature and extent of the investment so made in each such body corporate
(showing separately investments which are partly-paid). In regard to investments in the capital of partnership firms,
the names of the firms (with the name of all their partners, total capital and the shares of each partner) shall be given.

(ii) The following shall also be disclosed:

(a) The basis of valuation of individual investments

(b) Aggregate amount of quoted investments and market value thereof;

(c) Aggregate amount of unquoted investments;
(d) Aggregate provision made for diminution in value of investments.
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MULTIPLE CHOICE QUESTION

1
Income Statement Captions Comprising Revenue and Expense Balances

1. All transactions that were supposed to be recorded have been recognized in the financial statements and further,
transactions have been recognized in the correct accounting period, it is known as : (a) Occurrence
(b) Completeness
(c) Measurement
(d) Existence

2. “Transactions have been recorded accurately at their appropriate amounts and further, transactions have been
classified and presented fairly in the financial statements” is acknowleged as:
(a) Occurrence
(b) Completeness
(c) Measurement
(d) Existence

2
Balance Sheet Captions Comprising Assets, Liabilities and Equity Balances

3. The term “Existence” means

(a) Assets, Liabilities and equity balances exist as at the period end (b) Assets, Liabilities and equity balances have
been valued

appropriately
(c) All Assets and Liabilities and equity balance that are supposed to be
recorded have been recognized in the financial statement. (d) None of the above.
4. Under ___________ “entity has the right to ownership or use of the recognised assets, and the liabilities
recognised in the financial statements represent the obligations of the entity.”
(a) Existence
(b) Completeness
(c) Valuation
(d) Rights and Obligations.

3 Presentation and Disclosure

5. All related parties, related party transactions and balances that should have been disclosed in the note forming part
of financial statements, is represents its ___________.
(a) Occurrence and Existence
(b) Completeness
(c) Measure

4 Balance Sheet Captions

6. As per Section 2(8) of the Companies Act, 2013, “Capital as is authorised by the memorandum of a company to
be the maximum amount of share capital of the company.” is called ________. (a) Authorised Capital
(b) Nominal Capital
(c) Issued Capital
(d) Authorised Capital or Nominal Capital

7. Part of the authorised Capital which is offered by the company for subscription and includes the share allotted for
consideration other than cash called.
(a) Nominal Capital u/s 2(8) of the Companies Act, 2013 (b) Authorised capital u/s 2(10) of the Companies Act,
2013 (c) Issued capital u/s 2(50) of the Companies Act, 2013 (d) None of the above.

8. When there was in crease in authorised share capital, auditor should verify whether the:
(a) The company has accurately calculated the fee.
(b) Stamp duty and Fees are duly paid to MCA and copy of such receipt

are to be obtain.
(c) Either (a) or (b)
(d) Both (a) and (b)

9. In case there is any change, auditor should:

(a) Obtains the certified copies of relevant resolutions passed at the meetings of Board of Directors.
(b) Obtain whether the shareholders are authorising the increase or decrease in Authorised Capital.
(c) Obtain and verify copies of forms filed with MCA and filed it with RBI.
(d) All of the above
10. Verifying reduction of capital, the auditor should undertake the procedure
except:
(a) Verify that the meeting of the shareholder held to pass the special resolution was properly convened and the
proposal was circularised in advance among all the shareholders.
(b) Verify that the Memorandum of Association authorises reduction of capital.
(c) Examine the order of the Tribunal confirming the reduction and verify that a copy of the order and the minutes
have been registered and filed with the Registrar of Companies.
(d) Confirm whether the revaluation of assets has been properly disclosed in the Balance Sheet.
11. According to Ind AS, Provision are the amounts charged against
revenue to provide for:
(a) Renewal or diminution in the value of assets.
(b) A known liability, the amount whether of could only be estimated and cannot be determined with accuracy.
(c) A claim which is disputed,
(d) Any one of the above
12. At the time of examination of the Balance Sheet, at a given time, and
deduct the total liabilities to outside trade payables from the value of
assets, the difference between the two figures will represent the______.
(a) Equity Capital
(b) Reserve and Surplus
(c) Net worth of the company based on the intrinsic value,
(d) Net worth of the company based on the book value of assets as on the date.
13. Capital Reserve, generally, can be utilised for:
(a) Writing down fictitious assets
(b) Writing off the losses
(c) Issuing bonus shares if it is realised
(d) Any one of the above
14. In case of “Borrowings” auditor should adopts general audit procedure
except :
(a) Review board minutes for approval of new lending agreement.
(b) Make sure that any new loan agreements or bond issuances are duly authorised.
(c) Ensure that significant debt commitments should not be approved by the board of directors,
(d) Gain an understanding of the business rationale for such significant unusual transaction
15. Audit procedure required for the presentation and disclosure for the
trade receivable except.
(a) Cheek that the restatement of foreign currency trade receivables has been done properly.
(b) Verify that the split between more than 6 months and less than 6 months has been done from the due date instead
of sales invoice date.
(c) Check classification of amount due is properly disclosed as:
– Secured, Considered good
– Unsecured, Considered good
– Doubtful
(d) None of the above
16. Audit procedures required for the disclosures requirement regarding
cash and cash equivalent according to Ind AS, except:
(a) Cash and cash equivalents shall be classified as:
(i) Balance with Bank
(ii) Cheques, drafts on hand,
(iii) Cash in hand,
(iv) Others (Specify nature)
(b) Earmarked balances with banks (e.g. for unpaid dividend ) shall be separately stated.
(c) Bank deposits with more than 3 months maturity shall be disclosed separately.
(d) Repatriation restrictions, if any, in respect of cash and bank balances shall be separately stated.
17. Inventory is valued at lower of cost and net realisable value, according
to AS-2 and Ind AS -2 except:
(a) Raw Material
(b) Finished Goods
(c) Semi Finished Goods
(d) Work -in- progress arising under construction contracts.
18. Steps of audit procedure adopted by an audit regarding presentation and Disclosure except:
(a) Examine whether mode of valuation has been stated separately. (b) Examine whether goods - in -transit have
been disclosed separately under each sub-head of inventory.
(c) Examine whether inventory has been classified as :
– Raw Materials
– Work - in - progress
– Finished goods
– Stores and spares
– Loose tools etc.
(d) None of the above
19. Property, Plant and Equipment have valued appropriately and as per generally accepted accounting policies and
practices, auditor should follow the following audit procedures except:
(a) Examine that the entity has charged depreciation on all items of PPE unless any item of PPE is non- depreciating
like freehold land. (b) Verify that the depreciation method used reflects the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity.
(c) Verify if management has undertaken an impairment assessment to determine whether an item of property, plant
and equipment is impaired.
(d) None of the above.
20. Audit procedure should not be followed by an auditor regrading completeness of disclosures of loan and
advances and other current assets.
(a) Examine a list of all advances and other current assets and compare then with balances in the ledger.
(b) Inspect the minutes of meeting of Board of director to confirm if all material loans and advances were approved
by the BoD, (c) If there are any related party loans and advances, review whether they where properly authorised
and the value of such transactions were reasonable and at arm’s length.
(d) None of the above.
21. Contingent Liabilities shown in Balance sheet under the classification of: (a) Claim against the company not
acknowledged as debts. (b) Other money for which the entity is contingently liable. (c) Guarantees
(d) All of the above.

Answer

1. (b) 2. (c) 3. (a) 4. (d) 5. (b) 6. (d) 7. (c) 8. (d) 9. (d) 10. (b) 11. (d) 12. (d) 13. (d) 14. (c) 15. (d) 16. (c) 17. (d) 18.
(d) 19. (d) 20. (d) 21. (d)
CHAPTER

9B
Audit of Statement of P&L Accounts Items

This Chapter Covers: Study’s Chapter: 9 Unit - 2

Chapter Comprises: ☹Income Statement Captions ☹Sales of Products and Services ☹Interest Income, Dividend
Income, Gain/Loss on Sale of Investments ☹Purchases ☹Employee Benefits Expense ☹Depreciation and
Amortisation ☹Power and Fuel, Rent, Repair to Building, Plant and Machinery, Insurance, Travelling, Legal and
Professional , Miscellaneous Expenses.
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Objective Short Notes
Legend
Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book. 6.356
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICKLOOK . . . . . . . . Weightage Analysis Repeatedly Asked Questions
Common Answered Questions
Must Try Question
1.1, 2.2, 4.1, 5.1, 6.1, 4.1, 4.3, 5.1, 6.2, 7.2, 9.1 9.1 2.2, 6.1, 9.1
1 Sale of Product and Services
Q.1.1 2009 - Nov [7] (Or) (b), 2016 - Nov [3] (d) Descriptive How would you vouch/verify the following.
Goods sent out on Sale or Return Basis. (5, 4 marks)
Answer:
Goods Sent out on Sale or Return Basis can be verified as follows Sl. Documents to be No. vouched 1. Sale or
Return Day Book
Aspects to be verified
(i)
(ii)
(iii)
(iv)
(i) 2. Order book or Confirmation Book

Examine the sale or return day book for the manner of accounting.
Check actual movement of goods from Despatch register/Goods outward register.
Note the period of approval in the case of different goods/customers.
Verify whether goods returned have been properly reversed in the day book.

Examine this register to verify sale confirmed by customers and goods held by customers at their end as sale or
return stock.

3. Sales Register Ensure that sales have been recognised

whenever:
(i) approval is received from the party, (ii) goods are appropriated by the party,

(iii) period of approval has expired and goods have not been returned. 4. Stock Registers and Statements
(i) Ensure that closing stock includes good lying with customers and period of approval has not expired.

(ii) Ensure that goods validly returned by customers are duly accounted in stock.

Space to write important points for revision

Q.1.2 2010 - Nov [4] (c) Short Notes

Write short note on “Verification of credit sales”. (4 marks) Answer:

Verification of the credit sales : The credit sales should be verified by reference to copies of invoices issued to
customers and, in the process. The Auditor should consider the following points:
1. The credit sales should be verified by reference to copies of invoices

issued to customers and in the process, attention should be paid to the following matters:
(i) that each item of sales relates to the period of account under audit. (ii) that the goods are those that are normally
dealt in by the concern.

(iii) that the sale price has been correctly arrived at and the copy of the requisition slip issued by the Sales
Department and the copy of the Despatch Notes showing the date and mode of despatch of goods are attached with
the invoice.

(iv) that the amount of the invoice has been adjusted in an appropriate account; and

(v) that the sale has been authorised by a responsible official and in token thereof he has initialed the invoice also
that any alteration in the invoice has been attested by the same person.

2. If any additional charges are recovered along with the sale price, these should be credited to separate accounts,
appropriately headed, and not to the sales account.

3. When a trade discount is allowed, the amount thereof should be deducted from the sale price. When any special
trade discount has been allowed, the reason thereof should be ascertained.

4. Small concerns generally do not have well organised sales and despatch departments. In such cases, for verifying
sales the auditor should trace a small preparation of sales invoice into the stock book, specially of goods sold at the
beginning and at the close of the year.
5. The sale of goods on hire-purchase basis or goods sent out on sale or return basis or on consignment basis should
be separately recorded.
6. When credit sales are not adjusted in the account at the time they are made but at the time sale proceeds are
collected, there can be no guarantee that any amount collected in such sales has not been misappropriated. The
auditor should, therefore, draw the attention of the management to the risk involved in adopting such practice. Space
to write important points for revision

Q.1.3 2013 - Nov [4] (c) Descriptive

How will you vouch and verify the following?

Profit or loss arising on sale of plots held by real estate dealer. (4 marks) Answer:
Profit or Loss arising on sale of plots held by Real Estate Dealer.

Sl. Document to be No. vouched 1. Minutes book or Resolutions Aspects to be verified

Check requisite sanction for sale of assets, manner of sale, the party to whom it should be sold, consideration etc.

2. Correspondence, agreements etc.

(i)
(ii)

3. Receipt voucher and Bank

Statement

(i)

(ii) Ascertain the sale proceeds through proper evidence, e.g. correspondence, agreement to sell etc.
Confirm whether the proceeds are at reasonable market value.

Check that the amount shown as received is the actual sales price of the asset less any expenditure incurred has been
deducted.
Trace the receipt of sale consideration into the bank statements.

4. General Ledger Ensure credit to asset account and not to sales account.
5. Journal Voucher

(i) Ensure capital - revenue distinction in case of profits arising from disposal.
(ii) Ensure appropriate accounting treatment in case the asset had been revalued earlier using a revaluation reserve.
Space to write important points for revision

2
Q.2.1 2008 - May [7] (b)

How would you vouch/verify the following? Sale of Scrap.

Answer:
Sale proceeds of Scrap Material can be Verified as follows

Other Income
Descriptive
(5 marks)
Sl. Documents to be No. vouched 1. Accounting
Manual
2. Production Registers Aspect to be verified

Examine whether the internal check system for (a) Generations (b) Storage (c) Identification, (d) Disposal & (e)
Accounting, of junk materials or scrap, is working satisfactorily.

(i) Review the nature and extent of production and cost records maintained for junk materials.
(ii) Compare the actual scrap quantity during the period with standards set for normal loss, if any, in the cost
accounting system.

3. Invoice Copies

4. Excise Registers and Sales Tax Registers

5. Financial Statements

(i) Verify whether all junk materials have been billed and check the calculations on rates agreed.

(ii) Compare the rates of disposal of the current year, with that of previous year and obtain explanations for
abnormal differences if any.

(iii) Examine whether the internal control system ensures that good quality materials are not billed as junk material /
scrap to interested parties, at lower rates.

(i) Examine the records maintained under the central excise rules and compare the same with the amounts and
quantities recorded in the books of accounts.

(ii) Examine the sales tax returns and compare the same with books of accounts.

Compare the income generated from sale of junk material with preceding years. In case of substantial difference,
call for adequate explanations.

Space to write important points for revision

Q.2.2 2008 - Nov [7] (a), 2015 - May [3] (d) Descriptive How would you vouch/verify the following ?
Insurance Claim. (5, 4 marks)
Answer:
Insurance Claim can be verified as follows Sl. Documents to No. be Vouched 1 Copy of
Insurance Claim Aspects to be verified

Insurance claim may be in respect of fixed assets (PPE) or current assets.

Examine a copy of the insurance claim lodged with the insurance company while vouching the receipts of insurance
claim.

3 Counterfoils of Receipts.
4 Adjustment

5 Certificate/ Report
6 Treatment

7 Profit & Loss Account

2 Correspondence Check the correspondence with the insurance company and the insurance agent.
Check the counterfoils of the receipts issued to the insurance company.
The auditor should determine the adjustment of the amount received in excess or short of the value of the actual loss
as per the insurance policy.
Verify the copy of certificate / report containing full particulars of the amount of loss.
The accounting treatment of the amount received should be seen particularly to ensure that revenue is credited with
the appropriate amount and that in respect of claim against an asset, the profit & loss a/c is debited with the shortfall
of the claim admitted against the book value.
When the claim was lodged in the previous year but no entries were passed, entries in the profit & loss account
should be appropriately described.

Q.2.3 2011 - Nov [7] (c) Short Notes

Write short note on “Audit of sale of Investments”. (4 marks) Answer:

The Special points to be considered while conducting the Audit of Sale of Investments:

S.N. Areas to be Covered 1 Internal Control System

2 Method of Selling of Investments

3 Broker’s Note
4 Test - Checking
5 Computation of P & L
6 AS - 13
Auditor’s Duty

Verify that the Internal Control System and procedures have been designed and fulfilled with regards to sale of
investments.
(i) Ascertain the method of selling

investments.
(ii) It may be through
(a) Broker
(b) Direct
(c) Bank

Examine the Broker’s Note if sold through stock broker.

Testcheck the computation of amount received on sale as shown in Broker’s Note as well as net amount received
from broker.

Verify the Profit/Loss shown in P & L A/c as computed by the client.

Ensure Compliance with AS - 13 i.e. Accounting for Investment which requires disclosures as follows:
1. The accounting policies for the

determination of carrying amount of investments.

2. The amounts included in profit and loss statement for :

(i) interest, dividends (showing separately dividends from subsidiary companies), and rentals on investments
showing separately such income from long term and current investments. Gross income should be stated, the amount
of income tax deducted at source being included under Advance Taxes Paid;

(ii) profits and losses on disposal of current investments and changes in carrying amount of such investments;

(iii) profits and losses on disposal of longterm investments and changes in the carrying amount of such investments;

3. Significant restrictions on the right of ownership, realisability of investments or the remittance of income and
proceeds of disposal;

4. The aggregate amount of quoted and unquoted investments, giving the aggregate market value of quoted
investments;

5. Other disclosures as specifically required by the relevant statute governing the enterprise.

7 Entry Trace relevant entry in Cash Book/Bank statement.

Q.2.4 2015 - May [3] (a) Descriptive How will you vouch/verify the following?
Rental Receipts (4 marks) Answer:
Rental Receipts can be verified as follows:
Aspects to be verified Sl. Documents to No. be vouched 1 Statement of Rental Receipt

2 Carbon Copies of Rent

Receipts

3 Agreement

4 Account of Collecting Agent

5 TDS
Certificate

In case, where tenants or properties are numerous, the auditor should obtain statement of Rental Receipts, prepared
tenant – wise or property – wise or combination of both.

Trace the rent receipt amounts into the Collection Register, Cash Book and/or Bank statement based on the carbon
copies of receipts issued.

Note the following aspects from the tenancy agreement–

(i) Period of tenancy;
(ii) Amount of rent payable;
(iii) Details of amount payable e.g. maintenance charges etc.

The auditor should scrutinize the account of collecting agent where amount is collected by such agent.

(i)

(ii) The auditor should see whether TDS Certificates are properly received and kept in safe custody.
Verify whether any tax has been deducted to source u/s 194 – I from rental income.

Q.2.5 2015 - Nov [3] (a) Descriptive How will you vouch/verify the following:
Refund of General Insurance premium paid. (4 marks) Answer:
S. Documents to be No. vouched 1. Insurance File
2. Refund Advice
3. Receipt
4. Insurance Policy Aspects to be verified

1. To ascertain the nature of General Insurance Premium refunded.

2. To verify the nature and reason for refund, which may be either of the following: (i) Earlier provisional payment
of premium, or
(ii) Acceptance of policy at a part amount, or
(iii) Cancellation of a policy at a later date.
3. To scrutinise correspondence between the Insurance Company and the client. The auditor should examine the
covering letter or refund advice sent by the Insurance Company, and ascertain the actual amount of refund.
The auditor should verify the nature of receipt sent. Sometimes the Insurance Company may issue the refund, only if
a stamped receipt is sent in advance.
The auditor should examine the Insurance Policy or Cover Note to find out the amount of premium.

5. Bank Statement
6. Financial Statement

The auditor should trace the receipt amount in the Pay-in-Slip Counterfoils and Bank Statement
The auditor should ensure that the proper treatment in books of account are done or not.

Space to write important points for revision

Q.2.6 2015 - Nov [3] (c) Descriptive

How will you vouch/verify the following:

Sale Proceeds of junk material (4 marks) Answer:
Sale Proceeds of Junk Material:
• The auditor should review the internal control on junk materials, as
regards its generation, storage and disposal and see whether it was properly followed at every stage or not.

• The auditor should ascertain whether the organization is maintaining reasonable records for the sale and disposal of
junk materials.
• The auditor should review the production and cost records for determination of the extent of junk materials that
may arise in a given period.
• The auditor should compare the income from the sale of junk materials with the corresponding figures of the
preceding three years.
• The auditor should check the rates at which different types of junk materials have been sold and compare the same
with the rates that prevailed in the preceding year.
• The auditor should see that junk materials sold have been billed and check the calculations on the invoices.
• The auditor should ensure that there exists a proper procedure to identify the scrap material and good quality
material is not mixed up with it.
• The auditor should make an overall assessment of the value of the realisation from the sale of scrap materials as to
its reasonableness.

Q.2.7 2016 - May [7] (e) Short Notes

Write short note on “Recognition of interest on deposits”. (4 marks) Answer:

Recognition of interest on deposits:
☐ Deposits are the advances taken by the company on which they shall

pay a certain amount of interest.

☐ The interest on deposits are the income for the company and shall be
disclosed in P&L A/c.
☐ The interest income on deposits shall be recognised as and when the
right to receive the income is established as per AS-9 Revenue
Recognition.
☐ Interest on deposits shall be recognised in financial statements and the
auditor shall check that the director’s or boards report shall states that
there is no default in payment of deposits.
☐ The auditor shall checks the documents related to deposits and checks
its existence.
Space to write important points for revision

Q.2.8 2016 - Nov [3] (c)

How will you vouch/verify the following? Royalties received

Answer:
Vouching/Verification of Royalties Received

Sl. Documents to be No. vouched

1. Agreement deed or contract
Aspects to be verified

The auditor should see agreement deed contract to study the terms of contract governing both the parties,
particularly:

(i) Rate of Royalty

(ii) Mode of Calculation
(iii) Due date
Descriptive
(4 marks)
the relevant
2. Periodical Statement
3. Acknowledgment Statement
4. Cash Book
5. Nominal Account
6. Records of Earlier Royalty Receipts
7. Adjustment Entry

The auditor should check the periodical statements from the payer (publisher or lessee) in order to verify royalty
due.

The auditor should examine the acknowledgment issued.

The auditor should verify the entry of royalty in cash book.
The auditor should ensure correctness of posting in nominal account.

If there is any deduction on account of recoupment of royalty for the past period the records of earlier royalty receipt
must be seen to ensure that amount of deduction is as per the contract.

The auditor should also verify the adjustment regarding royalty due but not received.

Space to write important points for revision

Q.2.9 2018 - May [3] (c) Descriptive (c) As statutory auditor of the company, list out audit procedures required to
be undertaken for the following :

(i) Interest income from fixed deposits. (4 marks) (ii) Dividend income. (2 marks) (iii) Gain/(loss) on sale of
investment in Mutual funds. (2 marks)

Also indicate disclosure requirements of above as per Companies Act, 2013. (2 marks)
Answer:
(i) Interest income from fixed deposits:

☐ For verifying interest income on fixed deposits following audit procedures need to be followed :
☐ Obtain a listing of fixed deposits opened during the period under audit along with the applicable interest rate and
the number of days for which the deposit was outstanding during the period. Verify the arithmetical accuracy of the
interest calculation made by the entity by multiplying the deposit amount with the applicable rate and number of
days during the period under audit.
☐ For deposits still outstanding as at the period - end, trace the same to the direct confirmation obtained from the
respective bank financial institution.
☐ Obtain a confirmation of interest income from the bank and verify that the interest income as per bank reconciles
to the calculation shared by the entity.
☐ Also, obtain a copy of from 26 AS (TDS withholding by the bank/financial institution) and reconcile the interest
reflected therein to the calculation shared by client.
(ii) Dividend income:
☐ For dividend income following audit procedure need to be followed for dividends, verify that the same are
recognised in the statement of profit and loss only when the entity’s right to receive payment of the dividend is
established, provided it is probable that the economic benefits associated with the dividend will flow to the entity
and the amount of the dividend can be measured reliably. (iii) Gain/(loss) on sale of investment in Mutual Funds:
☐ Verify that Gain/(loss) on sale of investment in mutual funds is recorded as other income only on transfer of title
from the entity and is determined as the difference between the redemption price and carrying value of the
investments. For the purpose, obtain the mutual fund statement and trace the gain/loss as recorded in the books of
account to the gain/loss as reflected in the statement.

Disclosure Requirements:
☐ Ensure whether the following disclosures as required under Ind AS compliant Schedule III to the Companies Act,
2013 have been made:
Whether ‘other income’ has been classified as:
☐ Interest income
☐ Dividend income
☐ Other non-operating income (net of expenses directly attributable to such income)
Space to write important points for revision
3 Purchase
Q.3.1 2008 - Nov [7] (c) Descriptive

How would you vouch/verify the following?

Customs Duty (5 marks) Answer:
Customs Duty : Customs duty is paid through clearing agent. Their bills and receipted bills of entry are available
for vouching. If accounts are voluminous then current a/c is maintained with custom authorities. From time to time a
lump sum money is advanced against which custom duty is met. For this, statement of account would be available
and spot money receipts are issued by customs authorities.

In case of dispute in respect of the amount charged, the auditor must go through the related correspondence and
orders along with refunds granted for adjustments in the accounts. Heavy demurrage charges is a matter for special
enquiry by the auditor.
Clearing agent will forward to the company the original receipts for the following charges:
• Customs duties
• Port charges
• Their bills for services
• Claim for refund
• Claim against loss or damage etc.

Particulars of goods should be scrutinized to find out the portion capitalized and that treated as revenue.
In case of duty drawback, the auditor should see that the refund of duty has been claimed.

Sl. Documents to No. be vouched Aspects to be verified

1. Bills of Entry

2. Receipt for Payment of Custom Duty

3. Provisional Assessment and Other Orders

It is a document issued by the custom authorities for the duty paid, bill submitted and advice received from the
clearing agent. Verify to ascertain actual import of goods and other pertinent details relating to the consignment.

Vouch the payment made based on the challan receipt. Examine the agent's bill in case the customs duty is paid
through clearing and forwarding agent.

In case of dispute as to amount payable, verify the provisional amount paid in line of the final amount.

Also verify the final amount determined as payable.

In case the provisional payment was more than the actual amount verify the refund/adjustment of such excess
amount.

Space to write important points for revision

Q.3.2 2010 - Nov [7] (a) Descriptive

What points shall an auditor keep in mind while auditing an account of Bought Ledger having a debit balance? (4
marks) Answer:
Auditing an account of Bought Ledger:
The basic structure of every account in the Bought Ledger is opening balance, credits on account of goods purchased
and debits raised in respect of returns, allowances and discount receivable, advances paid against goods, payments
and transfers.
• An account in the Bought Ledger may be in debit. The balance may

represent the amount receivable on account of goods returned, rebate allowed by the supplier or advance paid
against an order.

• The auditor should confirm that the advance against the order had been paid in pursuance of a recognised trade
practice, also that subsequently goods have been received against the advance or will be received, for such an
advance may represent a disguised loan to accommodate a business associate.
• The book balance also may represent the cost of goods purchased wrongly debited to the account of the supplier,
instead of the Purchase Account.

For the above case, auditor should be ascertained :

(i) That the book balance is good and recoverable and if it is not considered recoverable, a provision against the
same has been made. The book balances should be appropriately classified for purposes of disclosure in the Balance
Sheet.

(ii) If the debit balance represents a loan to a director or officer of the company, either jointly or severally with
another person or it is a debit due by a firm or a private company in which the director is a partner or a member, the
same should be separately disclosed in the Balance Sheet in accordance with the provisions contained in Schedule
III to the Act. The maximum account due from the directors or other officers of the company at any time during the
year and debts due from companies under the same management should also be disclosed alongwith the names of
companies (Schedule III to the Companies Act, 2013).

Space to write important points for revision

Q.3.3 2013 - May [4] (b) (i) Descriptive How will you vouch/verify the following?
Purchase with invoice (4 marks)

Answer:
Vouching of purchases transactions:
Auditor should vouch credit purchases in the following ways:

S. Documents to be No. vouched

1. Purchase Book

2. Purchase Invoices Aspects to be Verified

The auditor should examine the transactions recorded in the purchase book with reference to related purchase
invoice.

(a) The auditor should select a small sample of vendors invoices at random and should conduct in-depth audit on
them i.e., trace the transaction from placing the order to the entries in inventory goods for actual receipt and payment
made to the suppliers.

(b) In respect of imports, documents such as bill of lading, customs clearance, etc. should be examined. The auditor
should ensure that subsidies, rebates, duty drawbacks or other similar items have been properly accounted for.

3. Numerical
Sequence of
Source Documents

4. Disclosure Requirement

The auditor should ensure the numerical sequence

purchase
of source documents such as requisitions, purchase orders,

receiving reports and vouchers have been maintained and missing numbers have been duly accounted for.

Schedule III - Disclosure requirement regarding purchase:

A company shall disclose separately by way of notes on the face of the Statement of Profit and Loss additional
information regarding aggregate expenditure and income as under:
(a) In the case of manufacturing companies,

1. raw materials under broad heads.

2. goods purchased under broad heads. (b) In the case of trading companies, purchases in respect of goods traded in
by the company under broad heads.
(c) In the case of companies rendering or supplying services, gross income derived from services rendered or
supplied under broad heads.
(d) In the case of a company, which falls under more than one of the categories mentioned in (a), (b) and (c) above,
it shall be sufficient compliance with the requirements herein if purchases, sales and consumption of raw material
and the gross income from services rendered is shown under broad heads.
(e) In the case of other companies, gross income derived under broad heads.

5. Cut off Points

6. Transaction with Related Parties

(a) The auditor should examine cut-off points on pre-numbered purchase requisitions, purchase orders and goods
received notes.

(b) The auditor should, then trace the goods received notes pertaining to a few days before the end of the period
under audit to the related purchase invoices.
Such a comparison would ensure that purchases represented by such invoices have been recorded as the purchases of
the period under audit.

The auditor should examine all related party, transactions specifically.

Space to write important points for revision
Q.3.4 2019 - May [4] (b) Descriptive

While auditing purchases which types of analytical procedures will be performed by the auditor to obtain audit
evidence as to overall reasonableness of purchase quantity and price. (4 marks)

Answer:
While auditing purchases the following types of analytical procedures will be performed by the auditor to obtain
audit evidence as to overall resonableness of purchase quantity and price.
1. Consumption Analysis Auditor should scrutinize raw material

consumed as per manufacturing account and compare the same with previous years with closing stock and ask for
the reasons from management if any significant variations found.

2. Stock Composition Analysis

Auditor to collect the reports from management for composition of stock i.e. raw materials as a percentage of total
stock and compare the same with previous year and ask for reasons from management in case of significant
variations.

3. Ratio ☐

☐ Auditor should compare the creditors turnover ratios and stock turnover ratios of the current year with previous
years. Auditor should review quantitative reconciliation of closing stocks with o p e n i n g s t o c k , p u r c h a s e s
a n d consumption.

Space to write important points for revision

4 Employee Benefit Expense
Q.4.1 2007 - Nov [7] (a)
How would you vouch/verify the following? Payment of Retirement Gratuity to employees. OR 2012 - May [3] (a),
2014 - Nov [3] (d) Descriptive
(5 marks) Descriptive How will you verify/vouch the retirement gratuity to employees? (6, 4 marks)

Answer:
1. The auditor should see whether the organization follows: (i) The Gratuity Act, 1972, or
(ii) It has its own Gratuity Rules.

2. The aspects to be vouched in the following documents are: Sl. Documents to No. be vouched 1. Agreement
or Trust Deed
2. Computation Sheets
3. Financial Statements Aspects to be verified

(i) Basics of working: The working of liability for gratuity may be on:
(a) Actual basis,
(b) Rules of agreement, or
(c) The presumption that all employees retire on the Balance Sheet date.

(ii) Validity and consistency - ensure that the basis of working is valid and consistent. In other words there is no
frequent change every year.

(iii) Ensure that the accounting treatment of gratuity is as per AS-15, if applicable.

(i) Arithmetical accuracy: Check the gratuity calculation on an aggregate basis.

(ii) Tally the amount paid with the service book of the concerned - employee who retired: Check the amount of
employees who have retired during year with reference to number of years of services rendered by them.

(i) P&L A/c: If the organization is a member of the LIC group gratuity scheme, the gratuity of the employee will be
paid by the LIC. But an annual premium is calculated and paid by the organization to the LIC and LIC in turn issues
a receipt. Hence, the auditor should see that the premium amount has been debited to the P&L A/c.

(ii) Disclosure as per AS 5: Verify any alteration in the retirement benefit costs arising out of: (i)

4. Disclosure Requirement of Schedule III to the

Companies Act, 2013

Introduction of new scheme, (ii) Improvements to existing schemes (iii) Changes in actual methods, (iv) Changes in
assumptions. Ensure that the changes are properly displayed and disclosed as per AS - 5 requirements.

In respect of Statement of Profit and Loss, a company shall disclose by way of notes additional information
regarding aggregate expenditure and income on the following items :
(i) Employee Benefits Expense [showing

separately
(a) salaries and wages,
(b) contribution to provident and other funds, (c) expense on Employee Stock Option

Scheme (ESOP) and Employee Stock Purchase Plan (ESPP),

(d) staff welfare expenses];

(ii) Long-term provisions: The amounts shall be
classified as:
(a) Provision for employee benefits;
(b) Others (specify nature)
(iii) Short-term provisions: The amounts shall be
classified as:
(a) Provision for employee benefits;
(b) Others (specify nature).
Space to write important points for revision

Q.4.2 2009 - May [7] (a) Descriptive How would you vouch/verify the following :
Production incentive paid to workers. (5 marks)

Answer:
Production Incentive paid to workers
The auditor should verify the following aspects:
S. Documents to be No. Vouched
1. P&L A/c
2. Details of Incentive Scheme
3. Details of Actual Production
4. Payment List and Slips
5. Analytical Procedure Aspects to be Verified

Trace the total production incentive paid to workers from P&L Account to prime records/division wise/dept wise
records.

Get the details of incentive scheme from the management and see that it is approved and updated by a competent
authority.

Check the production figures from independent source and should correlate them with the incentive payment
working computed by the accounts department.

Check list of payment and also acquitted d i s b u r s e m e n t s l i p s o f s e l e c t departments/periods for scrutiny

of various data generated in the fields for their accuracy and completeness.

Make an overall analytical procedure of ensuring the expense booked is commensurate in quantum with statistical
data on production and strength of workers.

Space to write important points for revision

Q.4.3 2013 - Nov [4] (a) Descriptive How will you vouch and verify the following?
Remuneration paid to directors. (4 marks)
OR 2015 - Nov [7] (a) Short Notes

Write short note on “Remuneration paid to directors in case of a Public Limited Company”. (4 marks) Answer:
Remuneration Paid to Directors
1. A director is not the servant of the company but he is the incharge and

controls the affairs of the company. He has no implied right to remuneration for his services as director. Specific
provisions for providing for their remuneration can be made through.
(i) The articles or

(ii) The shareholders may resolve in the general meeting. 2. The remuneration can be paid by way of

(i) Fees for meeting,

(ii) Monthly, quarterly, annual salary for whole time director or (iii) For a director who is not a whole-time director
by the approval of the

Central Government.
Remuneration paid to director should be vouched in the following way: Sl. Documents to No. be vouched

1. Minutes book
2. Articles of Association
3. Register of Director Aspects to be verified

Check the resolution of board meeting or general meeting for the appointment or reappointment. It must be as per
the provisions of the Companies Act. To find out :

(i) The authority to pay, and

(ii) The mode of payment which may be

– Monthly,
– Quarterly, or
– By way of commission.
To find out that the person to whom the remuneration is paid - is a director for the period of payment. It can also be
verified from the returns filed with the ROC.

4. Agreement

5. D i r e c t o r ' s Attendance Register

6. Companies Act, 2013

See that the agreement between the company and the director includes the terms as per the articles, resolutions and
provisions of the Companies Act. The attendance of the directors in board meetings can be obtained from it.

(i)
(ii)
7. Payment Voucher

(iii) Ensure the Compliance of the Sec. 197, 198 & Schedule V of the Companies Act, 2013.

(i) Sec. 197(1), which has prescribed the overall limit to managerial remuneration.
(ii) Proviso to Sec. 197(1) which provides for increase in remuneration with the approval of the Central
Government.
(iii) Sec. 197(5) which deals with payment of fee to directors for attending meetings of Board or Committee thereof.
(iv) Sec. 197(6) which deals with manner of payment of managerial remuneration.
(v) Schedule V to the Act that has laid down conditions for payment of remuneration for companies having no
profits or inadequate profits and companies having negative effective capital.
Eligibility: Whether the payment is in accordance with the articles of association? Computation: See that the
amount has been properly calculated.
Discharge: Whether proper receipt or acknowledgment has been obtained?

8. Financial Statements
Ensure that proper disclosure has been made.
Q.4.4 2016 - Nov [5] (c) Descriptive

State the disclosure requirements in respect of Statement of Profit and Loss as per Schedule III of Companies Act,
2013, in case of Employee benefits expenses. (4 marks)

Answer :
Requirement of Disclosure under Schedule III of Companies Act, 2013 regarding expenses
Requirement as stated in Schedule III to the Companies Act, 2013, related to disclosure of expenses in case of
Companies are as follows:

(i) A Company shall disclose aggregate of the following expenses separately on the face of the Statement of Profit
and Loss: Item IV. Expenses:
(a) Cost of Materials Consumed
(b) Purchases of Stock-in-trade
(c) Changes in Inventories of Finished Goods, Work-in-progress and

Stock-in-trade:
(d) Employee Benefits Expense
(e) Finance Costs
(f) Depreciation and amortization expense
(g) Other Expenses

(ii) A Company shall disclose separately by way of notes on the face of the Statement of Profit and Loss additional
information regarding aggregate expenses as under:
(a) Consumption of stores and spare parts;
(b) Power and fuel;
(c) Rent;
(d) Repairs to buildings;
(e) Repairs to machinery;
(f) Insurance;
(g) Rates and taxes, excluding, taxes on income;
(h) Miscellaneous expenses

Q.4.5 2019 - May [4] (c) Descriptive

While reviewing Employee benefits expenses of a company, how you as an auditor you will evaluate its hiring,
appraisal and retirement process? (3 marks)

Answer:
For the purpose of evaluations hiring, appraisal and retirement process of Employee benefits expenses the following
reviews shall be made: 1. An auditor should test the controls the entity has set around employee

benefit payment process to determine how strong and reliable they are. If they are strong, the auditor can minimise
the amount of transaction testing. Common internal controls over the employee benefit payment cycle includes
maintaining of attendance records, employee master, authorisation and approval of monthly payroll processing and
disbursement. Computation of employee deductions like payroll taxes, accrual of other benefits like gratuity, leave
encashment, bonus etc.

2. The auditor then selects a random sample of transactions and examines the related appointment letters, appraisal
letters, attendance records, HR policies, employee master etc.

3. Performing substantive audit procedure is must. Substantive analytical procedure will consist of monthly expense
reasonability, comparison with previous accounting period, any analysis auditor may find relevant and most
important of all setting an expectation in relation to the expense incurred during the period under audit and compare
that with the client’s business operations overall trends in the industry.

Space to write important points for revision

5 Depreciation & Amortisation
Q.5.1 2011 - May [4] (b) Define depreciation and depreciation.
Descriptive discuss various purposes of providing (8 marks)
OR 2012 - Nov [1] {C} (c), 2014 - Nov [6] (b) Descriptive Discuss on the following:
Purposes of providing depreciation. (5 marks) OR 2017 - May [7] (c) Short Notes

Write short note The purpose of providing depreciation. (4 marks) Answer:

Definition of Depreciation : According to AS -10, “Property, Plant and Equipment,” Depreciation is the systematic
allocation of the depreciable amount of an asset over its useful life.
Further as per AS - 10 :
☐ Each part of an item of property, plant and equipment with a cost that is

significant in relation to the total cost of the item should be depreciated separately.

☐ An enterprise allocates the amount initially recognised in respect of an item of property, plant and equipment to
its significant parts and depreciates each such part separately. For example, it may be appropriate to depreciate
separately the airframe and engines of an aircraft, whether owned or subject to a finance lease.

☐ A significant part of an item of property, plant and equipment may have a useful life and a depreciation method
that are the same as the useful life and the depreciation method of another significant part of that same item. Such
parts may be grouped in determining the depreciation charge.

☐ To the extent that an enterprise depreciates separately some parts of an item of property, plant and equipment, it
also depreciates separately the remainder of the item. The remainder consists of the parts of the item that are
individually not significant. If an enterprise has varying expectations for these parts, approximation techniques may
be necessary to depreciate the remainder in a manner that faithfully represents the consumption pattern and/or useful
life of its parts.
☐ An enterprise may choose to depreciate separately the parts of an item that do not have a cost that is significant in
relation to the total cost of the item.

☐ The depreciation charged for each period should be recognised in the statement of profit and loss unless it is
included in the carrying amount of another asset.

☐ The depreciation charged for a period is usually recognised in the statement of profit and loss. However,
sometimes, the future economic benefits embodied in an asset are absorbed in producing other assets. In this case,
the depreciation charge constitutes part of the cost of the other asset and is included in its carrying amount. For
example, the depreciation of manufacturing plant and equipment is included in the costs of conversion of
inventories. Similarly, the depreciation of property, plant and equipment used for development activities may be
included in the cost of an intangible asset recognised in accordance with AS 26, Intangible Assets.

The main purpose of providing depreciation are stated as under : 1. To keep intact the amount of capital
invested in PPE : This purpose can be attained by retaining the amount of depreciation charged in the Statement of
P & L A/c in the business.
2. To ascertain the accurate production cost : Since the value of PPE depletes gradually by consumption during
the production process, it is essential to charge such consumption of value in the accounts for determining the true
cost of production.
3. For determining the Profit or Loss for the year : Depreciation is an expense representing the loss in the value
of fixed asset (PPE) arising on account of the use and other factors like efflux of time. Therefore, it is charged to
statement of P& L A/c for determining the profit or loss made during a year.
4. For presenting true and fair value of the business assets in the Financial Statement: Since the original cost of
a fixed asset (PPE) decreases gradually due to its uses and other factors, therefore, it is inappropriate to continue to
carry such asset at its original cost. Thus, the depreciation amount charged in Statement of P & L A/c representing
the loss in the assets value should be deducted from the original cost on cumulative basis in order to reflect the true
and fair value of the fixed asset (PPE) in the Financial Statement.

Q.5.2 2013 - May [2] (v) Descriptive

Comment on the following:

A company can consider an useful life of the asset longer than the one prescribed by Schedule II of the Companies
Act, 2013.

[Modified] (2 marks) Answer:

For prescribed class of company longer useful life can be permitted if justification thereof is given for other
companies longer useful life is not permissible.

Space to write important points for revision

Q.5.3 2016 - Nov [6] (b) Descriptive

Is there any statutory necessity to make disclosure of depreciation in company’s accounts? (6 marks) Answer :
Schedule III “General Considerations for preparation of Balance Sheet and Statement of Profit and Loss of a
Company”, to the Companies Act, 2013 requires Separate disclosure of depreciation charged and impairment
losses or reversals alongwith a reconciliation of the gross and net carrying amounts of each class of assets at the
beginning and end of the reporting period showing additions disposals, acquisitions through business combinations
and other adjustments.
Thus, there is a statutory necessity to make disclosure of depreciation in Company’s Accounts.

Space to write important points for revision

Q.5.4 2018 - May [3] (b) Descriptive Mention any five attributes to be considered by an auditor while verifying for
depreciation and amortisation expenses. (5 marks)

Answer:
Auditor needs to consider the following attributes while verifying for depreciation and amortisation
Expenses:
☐ Obtain the understanding of entity’s accounting policies related to
depreciation and amortisation.
☐ Ensure the company policy for charging depreciation and amortisation is
as per the relevant provisions of companies Act, applicable accounting
standards.
☐ Whether the depreciation has been calculated after making adjustment
of residual value from the cost of the assets.
☐ Whether depreciation and amortisation charges are valid. ☐ Whether depreciation and amortisation charges are
accurately calculated
and recorded.
☐ Whether all depreciation and amortisation charges are recorded in the
appropriate period.
☐ Ensure the parts (components) of each item of property, plant and
equipment that are to be depreciated separately has been properly
identified.
☐ Whether the most appropriate depreciation method for each separately
depreciable component has been used. Space to write important points for revision

6
Q.6.1 2008 - May [7] (a), 2013 - Nov [4] (d), 2014 - May [3] (a)

How would you vouch/verify the following? Advertisement Expenses.

Answer:
Advertisement Expenses
Advertisement is necessary for various purposes and there are several advertisement media.

Other Expenses
Descriptive
(5 marks each)

Documents to be vouched and aspects to be verified are as follows: Sl. Documents to No. be vouched

1. Advertisement Schedule/
Register

2. Advertisement Contract

3. Bills and
Statement of Account

4. Payment Vouchers

5. General
Ledger and Financial Statement Aspects to be verified

(i) Acquire the complete list of media of advertisement, showing the dates, exact location, timings etc along with
amount paid in respect of each category.

(ii) Verify that it relates to the client's business. (iii) Compare the actual expenditure with budget, if any, study the
causes of deviations in it.

(i) See whether there is a regular contract with the advertising agency.
(ii) Note the discounts if any.

(i) See that the statement of account has been collected from the advertising agency and it contains the name of
advertising media and amount debited to the client.

(ii) Discounts if any, should be properly adjusted in the bills.

(i) Verify that the payments are supported by bills.
(ii) Check the receipts for amounts paid. (iii) Trace the payment cheque into the bank statement.
(iv) Verify that the tax has been deducted at source.

(i) Ascertain whether allocation has been done properly (i.e.) capital, deferred revenue or revenue.

(ii) See that outstanding advertising expenses have been properly accounted for as a liability.

Q.6.2 2011 - Nov [1] {C} (b) Comment on the following :

Vouching of payment of taxes.
OR 2015 - Nov [3] (b)
How will you vouch/verify the following: Payment of Taxes

Answer:
Vouching of Payment of Taxes: It is presumed that income-tax payment is the organisation's tax liability. TDS
recovery and remittance is not considered here-in.

Descriptive
(5 marks) Descriptive
(4 marks)
S l . Documents No. to be

Vouched 1. Depreciation Schedule Aspects to be verified

2. Statement of Total Income

(i)
(ii)

(iii) Check the depreciation schedule as eligible under IT act, and trace the same in the statement of total income.
Check the memo of total income and confirm whether:

Taxable income has been properly computed as per the provisions of IT Act,
Tax and surcharge payable has been correctly derived, after considering TDS, if any. Rebates and reliefs have
appropriately by the assessee.

Examine the challan for: (i)

(ii)

3. Tax
Payment Challan

(iii) Nature of payment – self-assessment tax, regular tax etc.

Date of payment – Date of deposit of cheque, date of clearing of cheque etc.
Amount paid – With break up of tax, surcharge, interest etc.
been claimed

Advance tax,

4. Bank
Statements
5. Financial Statements

Trace the payment of tax on the appropriate dates.

Verify whether the amount of tax payable has been duly provided in the accounts and shown in the balance sheet,
also ensure compliance with the accounting standard on taxes on income.
6. Income-tax File
(i)

(ii) (iii) Examine the demand notice issued by the assessing officer, final assessment order etc in case the tax
payment relates to regular assessment of earlier assessment years. Interest on refund of tax is treated as income.
Interest paid at the time of final assessment order is charged as expenditure.

7. PAN/TAN
Require
ment under e-payment of Taxes

Payment on account of income-tax and other taxes consequent upon a regular assessment should be verified by
reference to the copy of the assessment order, assessment form, notice of demand and the receipted challan.
Payments or advance payments of income-tax should also be verified with the notice of demand and the receipted
challan acknowledging the amount paid. The interest allowed on advance payments of income-tax should be
included as income and penal interest charged for non-payment should be debited to the interest account.
At present, electronic payment of taxes is also in trend. Electronic payment of taxes means payment of taxes by way
of internet banking facility or credit or debit cards. The assessee can make electronic payment of taxes also from the
account of any other person. However, the challan for making such payment must clearly indicate the Permanent
Account Number (PAN) of the assessee on whose behalf the payment is made. It is not necessary for the assessee to
make payment of taxes from his own account in an authorized bank. While vouching such E Payment the auditor
should cross verify the payments of taxes through the receipted challan alongwith PAN No/TAN No. etc.

Space to write important points for revision

Q.6.3 2012 - Nov [6] (b) Descriptive Explain, what are the factors to be considered while “Vouching of travelling
expenses”? (8 marks) Answer:
Vouching of Traveling Expense
S. Documents to be No. Vouched
1. Authorisation
2. Reasonableness of Payment
3. Bills Aspects to be Verified

Ensure that all payments with respect of travel have been authorized / sanctioned by proper official.

Check reasonableness of payments as per client’s internal rules and regulations and its controls.

Vouch copies of the air/railways tickets/ hotel bills, and restaurant bills.
5. Reasonableness of Sundry Expense
6. Entry in Bank Statement
4. Permission of RBI Check whether permission of RBI has been obtained for expenditure in foreign currency.

Ensure reasonableness of sundry expenses such as daily allowance, conveyance and tips etc.

Trace relevant entry in bank statement, if paid in cheque.

7. Accounting Entry 8. Analytical
Review
Check posting in travelling expenses account.

Compare amount of travelling expenses with the previous year’s figures and inquire into abnormal changes, if any.

Space to write important points for revision

Q.6.4 2013 - May [2] (i) Descriptive

Comment on the following:

PQR Ltd. Includes underwriting commission and stamp duty as preliminary expenses. (2 marks)

Answer:
Preliminary expenses are the expenses incurred by the promoters on behalf of the proposed company before
incorporation of a company. Under writing expenses are incurred for issue of shares and debentures after
incorporation of a company. Hence, PQR Ltd. should include stamp duty but exclude underwriting commission.

Space to write important points for revision

Q.6.5 2014 - May [2] (ix) Objective

State with reasons (in short) whether the following statement is correct or incorrect.
ABC Ltd., a government company came into existence in year 2012, donated ` 50,000 to a political party. (2 marks)

Answer:
Incorrect:
No, Government Company cannot give donation to political party as per Sec. 182 of Companies Act, 2013.

Space to write important points for revision

Q.6.6 2015 - May [3] (b) Descriptive

How will you vouch/verify the following?

Repair to assets (4 marks) Answer:
Vouching of Repair to Assets

S. Documents to be No. Vouched 1. Internal Control Manual

2. AMC Agreements

3. Bills and
Statements of Account

4. Payment Vouchers Aspects to be Verified

Examine the internal control relating to repairs expenses in the company like (a) repairs to assets etc.

Where the company has entered into “Annual Maintenance Contract” agreements with maintenance service
providers examine the agreement and note the terms and conditions thereof.

(i) Examine repairs bills for the period and see if the bills are addressed in the name of the company.

(ii) Scrutinize the bills to see the nature of repairs expenditure.

(iii) Note that the capital revenue distinction has been correctly applied and ensure that no capital expenses have
been debited to P&L a/c.

(i) Verify the payment vouchers and receipts issued by the parties and check whether the payments have been
properly recorded.

(ii) Vouch the purchase of consumable stores e.g. oils, lubricants, cotton waste etc. for use by maintenance
department: with underlying records and trace a few entries into the stores register.

5. Bills Register

6. Financial
Ledger/Financial Statements

(iii) Trace the payment entries into the bank pass book/statement.
(iv) See whether TDS has been deducted and remitted properly, in case of Annual Maintenance contract wherever
applies.

(i) Verify whether provision have been made in respect of repairs committed for in the year end but not paid for the
end of the year.

(ii) In case of advance for expenditure paid by the company in the year-end see whether expenditure has been
actually expanded in the subsequent year.

(i) Compute the percentage of repairs to total turnover and compare the same with the previous year to ensure
reasonableness.

(ii) Compute the percentages of repairs and depreciation to the total value of assets and compare that with that of
previous year.

Space to write important points for revision

Q.6.7 2016 - May [3] (a) Descriptive How you will vouch/verify the following?
Preliminary expenses (4 marks)

Answer:
Preliminary Expense:
The expenses incidental to forming and saving capital for a proposed company are known as preliminary expenses.
Prospectus, Memorandum of Association, Article of Association are source documents which inform the prospective
investors about the preliminary expenses. The related matters are decided in the meetings of the board, shareholders
etc. The bills and receipts of each item of preliminary expenses act as documentary evidence. Lastly, no expenses
other than preliminary expense should be booked under this.
Auditor should examine Compliance with AS -26 with respect to accounting treatment of preliminary expense.

No. Documents to be vouched 1. Minutes book

2. Journal,
vouchers and supporting evidence
Aspects to be verified

Check for - (i) The resolution approving expenses claimed by the promoters and payment of an extra amount than
mentioned in the prospectus, (ii) The treatment and writing off of preliminary expenses.

Following documentary evidences can be verified for the purposes: Stamp duty : Stamp affixed on MOA submitted
to the ROC.
Registration fees : ROC receipt
Legal cost: Bill and receipt received from advocate or counsel.
Consultation fees: Bill and receipt received from the consultant.
Printing fees: Bill and receipt received from the printer of the MOA, share certificate etc.
Other expenses: Vouchers, contracts and agreements etc. in support of promoter claim.

3. Financial • Statements:
(a) Profit & •

Loss A/c ; and • (b) Balance

Sheet •

Verify the amount debited and charged in the P&L A/c.

Ensure the amount not yet written off in the B/S under the miscellaneous head.
No expense other than those what constitutes preliminary expenses.
Under writing commission and brokerage paid for shares and debentures should not be included under the head
preliminary expenses.

Space to write important points for revision

Q.6.8 2016 - Nov [3] (a) Descriptive How will you vouch/verify the following?
Foreign Travel Expenses (4 marks)

Answer:
Expenditure on Foreign Traveling

Sl. Documents No. to be vouched 1. Accounting Manual

2. Travelling Allowance Bills (T.A. bills) and Payment Vouchers Aspects to be verified

Examine that the internal control system is adequate for submission and passing of T.A. bills and in operation.

Examine and confirm the following points:

(i)
(ii)
(iii)

(iv) Person–whether the programme is undertaken by employee only?

Purpose– the purpose of the tour is business or not?
Authorization – the tour was authorized by a competent person through a sanction or not? Advance – if advance had
been paid, then proper adjustment is done or not?

3. Tour
Report
4. Standing Rules of Employment

5. RBI
Approval
6. General
Ledger
7. Financial Statements
Confirm whether the purpose of the tour is the same as authorized.

(i) Amount claims: Whether the tickets produced by the employee care for the entire amount claimed?

(ii) Entitlement: Employee is entitled for full reimbursement of all expenses or not?

Verify whether RBI permission has been obtained - in case the amount of expenditure in foreign currency exceeds
the permissible limit.
Verify that the expenditure has been properly accounted.

Special disclosure requirements must be checked and if any, then get ensured that disclosure has been made.

Space to write important points for revision

Q.6.9 2018 - Nov [3] (b) Descriptive

“While the auditor may choose to analyse the monthly trends for expenses like rent, power and fuel but for other
expenses, an auditor generally prefers to verify other attributes.” Mention those attributes. (5 marks)

Answer:
While the auditor may choose to analyse the monthly trends for expenses like rent, power and fuel an auditor
generally prefers to vouch for other expenses to verify following attributes :
☐ Whether the expenditure pertained to current period under audit. ☐ Whether the expenditure qualified as a
revenue and not capital

expenditure;
☐ Whether the expenditure had a valid supporting like travel tickets,
insurance policy, third party invoice etc;
☐ Whether the expenditure has been classified under the correct expense
head;
☐ Whether the expenditure was authorized as per the delegation of
authority matrix;
☐ Whether the expenditure was in relation to the entity’s business and not
a personal expenditure.
Space to write important points for revision
Q.6.10 2009 - Nov [2] (a) Practical

Comment on the following situation:

XYZ Ltd. Co. gave a donation of` 50,000 each to a Charitable Society running a school and a trust set up for the
service of Blinds during financial year ending on 31stMarch, 2009. The average net profits of the company for the
last three years were 15 lakhs. (8 marks)

Answer:
Donation to Charitable Institutions
According to Sec. 181 of the Companies Act, 2013, the Board of Directors of a company may contribute to bona
fide charitable and other funds with prior permission of the company in general meeting for such contribution in
case any amount the aggregate of which, in any financial year, exceeds five per cent of its average net profits for the
three immediately preceding financial years.
Facts: In the said case, the company has given donation of fifty thousand rupees each to the two charitable
organisations which amounts to one lakh rupees. Assuming that the charitable organisations are not related to the
business of the company, the average profits of the last three years is fifteen lakh rupees and the five percent of this
works out to seventy five thousand rupees. So, the maximum of donation could be seventy five thousand rupees
only. For excess of twenty five thousand rupees the company is required to take prior permission in general meeting
which is not been taken. Conclusion: After paying donations of one lakh rupees which is more than seventy five
thousand rupees, the Board has contravened the provisions of Sec. 181 of the Companies Act, 2013. Hence, the
auditor should qualify his audit report accordingly.

Space to write important points for revision

7 Factors Affecting Gross Profit
Q.7.1 2011 - May [4] (a) Descriptive Give various factors which result in increase in gross profit. (8 marks)
Answer:

Factors 1. Opening Stock

2. Closing Stock
3. Valuation of Stock

4. Sale on Approval Basis

5. Fictitious Entry

6. Provision Increase in GP
Undervaluation of opening stock increases GP. It

may be either due to:

(i) Non – inclusion of certain stock items; or

(ii) Valuation of stock at lower rate than that warranted by the basis of valuation adopted; or
(iii) Miscalculation of value of stock items. Overvaluation of closing stock; it may be either due to:
(i) Inclusion of fictitious stock items; or
(ii) Over – statement of values of stock items.
(i) Opening stock valued at market rate which is lower than cost.
(ii) Closing stock valued at market price which is higher than cost
(i) Goods received for the sale on approval or on a consignment basis included in the closing stock.
(ii) Treatment of goods sent out for sale on consignment basis as regular sales.
Entry of fictitious purchases to boost up profits. If such a practice has been resorted to, it would have the effect of
reducing the rate of gross profit in the ensuing (i.e. coming next) year.
No provision or under – provision in the expenses accounts included in the Trading Account.

7. Wrong Entry
8. Adjustment
Wrong allocation of expenses:
Example: carriage inwards either in whole or in part may be wrongly taken to the P & L account.

Under statement of opening stock or overstatement of closing stock due to adjustment of the amount of sales, when
goods sold but not delivered are included in closing stock or when goods were delivered and taken out of stock last
year, but sales invoices are raised in the current year.

Space to write important points for revision

Q.7.2 2015 - Nov [5] (b) Descriptive

As the statutory auditor of A Ltd., you have observed that the gross profit of the company has decreased in
comparison to last years. Mention the possible factors which may be responsible for decrease in gross profit.

(6 marks) OR 2017 - May [1] {C} (d) Descriptive

Discuss the following:

In the course of audit of Steadfast Ltd., a manufacturing company, you find that there is a sharp fall in the rate of
gross profit in comparison to the previous year. State the steps you would take to verify the same.

(5 marks) Answer:

As a statutory auditor of A Ltd. if there is decrease in GP as compared to previous year then we have to consider
following factors.

Higher Supplier One of the simplest factors that can lead to declining Cost margin is higher costs of goods sold.
Over time, suppliers naturally want to increase their own revenue and margins. Their own costs to produce or supply
may go up so that the cost goes up and gross profit margin falls.

Lower Prices
Competition
Valuation of Stock

Lowering prices to generate sales can also reduce gross profit margin. Some companies offer discounts and
promotions to attract buyers while you may get a sale, large price cuts minimize the gross profit you get on it so that
if there is lower the prices then the gross profit margin will fall due to such reduction. In this world there is
competition in the market, so that companies offer the products at lower rate so in this case the company have to
decline its prices which can affect GP margin.
☐ If there is over or under valuation of the closing

stock or opening stock there is decline in GP. ☐ If the closing stock of current year is under
valued as compared to previous year then GP
margin falls.
☐ If the opening stock of current year is over valued
as compared to previous year then GP margin
falls.
Space to write important points for revision

Q.7.3 2018 - May [2] (b) Descriptive

Expenses which are essentially of a revenue nature if incurred for creating an asset or adding to its value for
achieving higher productivity are regarded as expenses of a capital nature. Describe any five such expenses. (5
marks)

Answer:
Expenses which are essentially of a revenue nature, if incurred for creating an asset or adding to its value for
achieving higher productivity, are also regarded as expenditure of a capital nature.

Following are examples of such capital expenditure:

(i) Material and Wages :
Capital expenditure when expanded on the construction of a building or erection of machinery;

(ii) Legal Expenses :

Capital expenditure when incurred in connection with the purchase of land or building;

(iii) Freight :
Capital expenditure when incurred in respect of purchase of plant and machinery ;

(iv) Repair :
Major repairs of a fixed asset (PPE) that increases its productivity; (v) Wages :
Wages paid on installation costs incurred in Plant & machinery;

(vi) Interest :
Interest incurred during the eligible period as defined under Ind AS 23 i.e. during the period of construction of the
asset.

8 Scrutiny of General Ledger

Q.8.1 2016 - Nov [7] (d) Short Note

Write short note on “Scrutiny of General Ledger”. (4 marks) Answer :

Audit of General Ledger:
The Auditor should consider the following points while conducting the audit of General Ledger:

1. Structure The general ledger includes all the balances of the P&L A/c & B/S. Its examination, therefore, should
be carried out with great deal of care in as much as it is the final review of balances which on inclusion in final
accounts, cumulatively reflect the financial position of the concern.

2. Posting

3. Observance of Accounting Principles

Entries in the general ledger are posted in summary from the cash book, journals and from other subsidiary books
like sales & purchase books etc. The auditor before starting its examination must ensure that all the posting in the
various accounts have been verified, total have been checked and the final balance have been linked.

It should be ascertained that balances in all the income & expenditure account have been adjusted: (i) (ii) According
to standard accounting practices On a consideration of legal provisions which are applicable to the concern.

4. Comparison
5. Consistency

Wherever practicable, balances in general ledger should be traced simultaneously on into the trial balance, the
grouping schedules and final accounts. The corresponding balances in the previous year's final accounts also should
be compared.

It should be confirmed that the accounts have been kept according to Accepted Accounting Principles & the Balance
Sheet and the Profit & Loss Account have been drawn up on the same basis as in the previous year. It requires that
any items shown in the Profit & Loss Account, affected by any change on the basis of accounting, the account
involved should be disclosed.

9 Cut off Procedure

Q. 9.1 2007 - Nov [8] (Or) (b), 2011 - May [7] (e) Short Notes
Write short note on “Cut-off Procedure”. (4 marks each)
OR 2009 - Nov [8] (b), 2014 - May [3] (d) Write short note on “Cut-off arrangements”.

Answer:
Cut-off Procedure is the procedure adopted by the management for ensuring that the transactions of one period are
distincted from those at the beginning of the next following period. The cut-off procedure is very noteworthy in
order to ensure that the revenue and expenditure of one year are not getting recorded in the following year since they
will distort the true and fair view of the accounts.
Such a procedure is applied to ensure that :
1. The goods purchased, the property in which has passed to the client,

have been infact included in the inventories and liability has been provided for in case of credit purchase.

2. The goods sold have been excluded from the inventories and the credit has been taken for sales, if the sales value
is to be received, the concerned party has been debited.

3. The proper procedure has been followed for the adjustment of the inventories to take into account the movements
to and from the stock which have taken place between the stock taking date and the B/S date where the stock has
been taken on a date other than the B/S date.

Short Notes (5 marks each)

MULTIPLE CHOICE QUESTION
1 Income Statement Captions

1. Auditor need to obtain adequate understanding about the organisation and its revenue centres except:
(a) To identify the control points over sales.
(b) Tests the controls the entity has set-up for the sales cycle to

determine how strong and reliable they are. If they are strong, the auditor can reduce the amount of transactions
testing he must do. (c) Select a random sample of transactions and examines the related customer purchase orders,
invoices and customer statements, if the control being tested is numbered sales invoices.

(d) None of the above

2. An auditor should verify that following disclosures are required under Ind
AS except regarding sale:
(a) Whether revenue from operation is disclosed separately in the notes as revenue arising from:
– Sales of Products
– Sales of Services
– Other operating revenues.
(b) Ensure that the brokerage and discount on sales has not been disclosed.
(c) Whether disclosure of sales in respect of each class of goods has been made.
(d) Whether the transactions with related parties are appropriately disclosed in notes to accounts.
3. Dividends are recognised in the Statement of profit and loss only when :
(a) the amount of the dividend can be measured reliably
(b) the entity’s right to receive payment of the dividend is established
(c) it is probable that the economic benefits associated with the dividend will flow to entity
(d) Any of the above
4. Which is the following is not an example of revenue expenditure?
(a) Development expenditure of Land
(b) Salaries and wages
(c) Repairs and maintenance of fixed assets
(d) Legal and professional expenses.
5. Cut-off testing is performed during audit of sales to address the following
income statement assertion:
(a) Occurrence
(b) Measurement
(c) Completeness
(d) All of the above
6. Wages paid to workers would always qualify as:
(a) Revenue Expenditure
(b) Capital Expenditure
(c) Revenue or Capital expenditure depending upon facts and circumstances
(d) None
7. Auditor should verify the disclosure requirements under Ind AS compliant
Schedule III of the Companies Act, 2013 have been made except :
(a) Whether purchase of stock-in-trade has been specifically disclosed.
(b) Whether changes in inventories of finished goods, stock-in-trade and work -in- progress has been specifically
disclosed.
(c) Whether the transactions with related parties are appropriately disclosed in notes to accounts.
(d) None of the above
8. Auditor should ensure the required disclosure as per Ind AS regarding
the classification of employee benefit expense, except:
(a) Salaries and wages
(b) Staff welfare expenses
(c) Contribution to provident and other funds
(d) None
9. Auditor needs to consider the following attributes with an exception while
verifying the depreciation expenses.
(a) Ensure the company policy for charging depreciation and amortisation.
(b) Whether the depreciation and amortisation charges are invalid. (c) Whether the depreciation has been calculated
after making
adjustment of residual value from the cost of the assets. (d) Whether the most appropriate depreciation method for
each
separately depreciable component has been used.
10. Profit and Loss Account will be debited regarding depreciation is: (a) Depreciation
(b) Depreciation expenses
(c) Net Asset Value
(d) Book Value
11. Auditor should adopt - the audit procedure for “Insurance Expenses” (a) Obtain a summary of insurance policies
taken along with their
validity period,
(b) Verify if the expense has been correctly classified between prepaid
and expense for the period based on number of days. (c) Both (a) and (b)
(d) None
12. Audit procedure required by an auditor except :
(a) Obtain a month wise expense schedule along with the rent
agreement.
(b) Specific consideration should be given to escalation clause in the
agreement to verify if the rent was to be increased / adjusted during
the period under audit.
(c) Verify if the agreement is in the name of the entity and whether the
expense pertains to premises used for running business operation
of the entity.
(d) None of the above.

Answer
1. (d) 2. (b) 3. (d) 4. (a) 5. (c) 6. (c) 7. (d) 8. (d) 9. (b) 10. (b) 11. (c) 12. (d)
CHAPTER

10 Company Audit

This Chapter Covers: Study’s Chapter: 10

Chapter Comprises: ☹Eligibility, Qualifications and Disqualification of An Auditor ☹Appointment of Auditor

☹Rotation of Auditors ☹Provisions Relating to Audit Committee ☹Auditor’s Remuneration ☹Removal of Auditors
☹Ceiling on Number of Audits ☹Power/Rights of Auditors

☹ Duties of Auditors ☹Reporting under Companies (Auditor’s Report) Order, 2016 ☹Joint Audit ☹Audit of Branch
Office Accounts ☹Cost Audit

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis

Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Objective Short Notes
Legend
Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book.
6.410
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK Repeatedly Asked Questions
3.1, 3.2, 11.2
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
1.3, 4.6, 5.2, 6.3, 11.2, 1.7, 4.6, 6.3, 9.8, 11.3 11.2, 14.1
1
Eligibility, Qualifications and Disqualifications of an Auditor
Q.1.1 2008 - Nov [1] (xii) Objective

State with reasons (in short) whether the following statement is True or False:
C.A. Mr. X is the Auditor of PQ Ltd. in which one of his relative is having substantial interest, whether Mr. X is
qualified to be an Auditor?

(2 marks)

Answer:
False:
CA Mr. X is not qualified to be an auditor of PQ Ltd. according to Sec. 141(3) of Act, 2013 and Rule 10 of
companies (Audit and Auditor’s Rule, 2014).
Space to write important points for revision
Q.1.2 2013 - Nov [2] (a) Objective

State with reason (in short) whether the following statement is correct or incorrect.
Rajat, an auditor recovers his fees on progressive basis is said to be indebted to company. (2 marks)

Answer:
Incorrect:
If an auditor recovers fees from the company on a progressive basis, even though the audit has not been completed,
he cannot be said to be indebted to the company and therefore, he shall not vacate the office of auditor held by him.

Space to write important points for revision

Q.1.3 2013 - Nov [2] (e) Objective State with reason (in short) whether the following statement is correct or
incorrect.
Mr. ‘R’, a practicing Chartered Accountant, is appointed as a “Tax Consultant” of MN Ltd., in which his father Mr.
‘C’ is the managing director.

(2 marks) OR 2016 - May [2] (j) Objective

State with reasons (in short) whether the following statement is correct or incorrect :
Mr. Pawan, a practicing Chartered Accountant, is appointed as “TaxConsultant” of ABC Ltd., in which his father.
Mr. Singh is the Managing Director. (2 marks)

Answer:
Correct:
A Chartered Accountant appointed as an auditor of a company, should disclose his interest while making the audit
report. If this disclosure is not made, it would amount to “misconduct” under the Chartered Accountants Act, 1949
read with Guidance Note on Independence of Auditors. In this case, Mr. R is a “Tax Consultant” and not a
“Statutory Auditor” or “Tax Auditor” of MN Ltd., hence he is not liable to disclose his relationship with Managing
Director of the company.

Space to write important points for revision

Q.1.4 2015 - May [2] (ix) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
Director’s relative can act as an auditor of the company. (2 marks)

Answer:
Incorrect:
As per Sec. 141(3) of the Companies Act, 2013, a person shall not be eligible for appointment as an auditor of a
company whose relative is a Director or is in the employment of the Company as a director or Key Managerial
Personnel.

Space to write important points for revision

Q.1.5 2017 - Nov [4] (b) Descriptive

Answer the question:

A person shall not be eligible for appointment as an auditor of a company where subsidiary or associate company or
any other form of entity is engaged as on the date of appointment in consulting and specialized services as provided
in Sec. 144. Explain. (6 marks)

Answer:
Sec. 144 of the Companies Act, 2013 is prescribes certain services not to be rendered by the auditor. An auditor
appointed under this Act shall provide to the company only such other services as are approved by the Board of
Directors or the audit committee, as the case may be, but which shall not include any of the following services,
namely:
(i) Accounting and book keeping services;
(ii) Internal audit;
(iii) Design and implementation of any financial information system; (iv) Actuarial services;

(v) Investment advisory services;

(vi) Investment banking services;
(vii) Rendering of outsourced financial services;
(viii) Management services; and

(ix) Any other kind of services as may be prescribed.

Space to write important points for revision
Q.1.6 2015 - May [2] (x) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
If an LLP (Limited Liability Partnership Firm) is appointed as an auditor of a company, every partner of a firm shall
be authorized to act as an auditor.

(2 marks) Answer:
Incorrect:
☐ As per Sec. 141(2) of the Companies Act, 2013, where a firm including

a limited liability partnership (LLP) is appointed as an auditor of a company, only the partners who are Chartered
Accountants shall be authorised to act and sign on behalf of the firm.

Q.1.7 2015 - Nov [2] (i), (ix), (x) Objective

State with reasons (in short) whether the following statements are correct or incorrect:
(i) AB & Co. is an audit firm having partners Mr. A and Mr. B. Mr. C, the

relative of Mr. B is holding securities having face value of ` 2,00,000 in XYZ Ltd. AB & Co. is qualified for being
appointed as an auditor of XYZ Ltd. (2 marks)

(ix) A Chartered Accountant holding securities of S Ltd. having face value of ` 950 is qualified for appointment as
an auditor of S Ltd. (2 marks)

(x) Mr. N, a member of the Institute of Chartered Accountants of England and Wales, is qualified to be appointed as
auditor of Indian Companies. (2 marks)

Answer:
(i) Incorrect:
As per Sec. 141 (3) of the Company’s Act, 2013 and Rule 10 of Companies (Audit & Auditor’s Rule, 2014) a
person is disqualified to be appointed as an auditor of a company if his relative is holding any security of or interest
in the company of face value exceeding one lakh rupees.

Therefore, AB & Co. shall be disqualified for being appointed as an auditor of XYZ Ltd. as Mr. C, the relative of
Mr. B who is partner in AB & Co., is holding securities in XYZ Ltd. having face value of ` 2 lakh i.e. exceeding ` 1
lakh.

(ix) Incorrect:
A who is holding any security of the company during the year is disqualified for being appointed as the auditor.

(x) Incorrect:
The auditor should be the member of institute of the Chartered Accountants of India. So here, Mr. N is disqualified
for being appointment of auditor of Indian companies.

Q.1.8 2018 - May [1] (b) Objective Examine with reasons (in short) whether the following statement is correct

or incorrect :
An Auditor is considered to lack independence if the partner of the audit firm deals with shares and securities of the
audited entity. (2 marks)

Answer:
Correct:
As per Section 141 (3)(d), a person shall not be eligible for appointment as an auditor of a company namely- a
person, or his relative or partner is holding any security of or interest in the company or its subsidiary, or of its
holding or associate company or a subsidiary of such holding company. From the above it can be concluded that if
the partner deals with shares and securities of the audited entity, he would be lacking independence, hence,
disqualified to be appointed as an auditor.
Further, the Code of Ethics for Professional Accountants, prepared by the International Federation of
Accountants (IFAC) identifies five types of threats and if partner of the firm deals with shares and securities of the
audited firm then such threat is known as the Advocacy Threats and auditor will be lacking independence.

Space to write important points for revision

Q.1.9 2018 - Nov [6] (a) Descriptive

Answer the following:

“CA NM who is rendering management consultancy service to LA Ltd. wants to accept offer letter for appointment
as an auditor of the LA Ltd. for the next financial year,” Discuss with reference to the provision of the Companies
Act, 2013. (5 marks)

Answer:
Provision:
As per Sec. 144 of the Companies Act, 2013, an auditor appointed under this Act shall provide to the company
only such services as approved by the board of directors or the audit committee, as the case may be. But such
services shall not include management consultancy services. So that auditor is prohibited to serve management
consultancy services to the company.

Present Case:
In this case, CA. NM is rendering management consultancy Services to LA Ltd. wants to appoint offer letter for
appointment as an auditor of LA Ltd. for the next financial year. So as per above provision LA Ltd. cannot appoint
CANM as the auditor and it still appoints him it is invalid appointment of auditor as per the provisions of the
Companies Act, 2013.

Space to write important points for revision

Q.1.10 2018 - May [6] (a) Practical Answer the following:

M/s. ABC & Co. is an Audit firm, having partners CA. A, CA. B and CA. C. The firm has been offered the
appointment as an Auditor of XYZ Ltd. for the Financial Year 2017-18.
Mr. D, the relative of CA. A, is holding 25,000 shares (face value of` 10 each) in XYZ Ltd. having market value of`
90,000. Are M/s. ABC & Co. qualified to be appointed as Auditors of XYZ Ltd.? (5 marks)

Answer:
Provision:
As per Section 141 (3) (d) (i), a person is disqualified to be appointed as an auditor if he, or his relative or partners
is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a
subsidiary of such holding company, Further as per proviso to this section, the relative of the person may hold the
securities or interest in the company of face value not exceeding one lakh rupees.
Present Case:
In the instant case, M/S ABC & Co., will be disqualified for appointment as an auditor of XYZ Ltd. For the
Financial Year 2017-18 as the relative of CA A. (i.e. Partners of M/S ABC & Co.) Is holding securities in XYZ Ltd.
of ` 2,50,000 (25,000 shares of` 10 face value) which is exceeding the limit specified in proviso to Section 141 (3)
(d) (i). The market value of shares for this section in irrelevant.

2
Appointment of Auditor: Appointment of First Auditor
Q.2.1 2008 - May [1] (iv) Objective

State with reason (in short) whether the following statement is True or False:
An auditor can be appointed as first auditor of a newly formed company simply because his name has been stated in
the Articles of Association.

(2 marks) Answer:
False:
According to Sec 139 (6) of the Companies Act, 2013, the first auditor of

a company can be appointed by the Board of Directors within thirty days of the date of registration of the company
to hold office till the conclusion of first AGM.

Space to write important points for revision

Q.2.2 2013 - Nov [2] (d) Objective

State with reason (in short) whether the following statement is correct or incorrect.
The first auditor of PQR Ltd., a Government Company was appointed by the board of directors of company. (2
marks)

Answer:
Incorrect:
In respect of any Government Company, appointment of auditor is governed by the provisions of Sec. 139(5) and
139(7) of the Companies Act, 2013. As per this Sec. the auditor of a Government Company shall be appointed or
reappointed by the Comptroller and Auditor General of India.

Q.2.3 2014 - Nov [2] (viii) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
The first Auditor is generally appointed by the company at a General Meeting. (2 marks)

Answer:
Incorrect:
The first auditor shall be appointed by board of directors in board meeting within thirty days from date of
registration of the company.

Space to write important points for revision

Q.2.4 2015 - May [2] (iii) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
The first auditor of a Government company was appointed by the Board in its meeting after 10 days from the date of
registration. (2 marks)

Answer:
Incorrect:
As per Sec. 139(7), the appointment of first auditor of a government company shall be done by Comptroller and
Auditor General of India (CAG) within sixty days from the date of registration of the company. In case CAG does
not appoint such auditor within the said period, BOD of the company shall appoint such auditor within next thirty
days.

Space to write important points for revision

Q.2.5 2015 - Nov [2] (viii) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
Managing director of A Ltd. himself appointed the first auditor of the company. (2 marks)

Answer:
Incorrect:
As per Sec. 139(6) of the Companies Act, 2013, the first auditor of a company, other than a government company,
shall be appointed by the Board of Directors within 30 days from the date of registration of the company.

Space to write important points for revision

Q.2.6 2017 - May [2] (j) Objective

State with reason (in short) whether the following statement is correct or incorrect:
If the Board of Directors fails to appoint the first auditor in case of a company other than a Government Company,
then the Central Government shall appoint the auditor. (2 marks)

Answer:
Incorrect:
As per Sec. 139 of Companies Act, 2013, if the BOD fail to appoint first auditor the Board shall inform the
members who shall then appoint the auditor in EOGM within ninety days.

Space to write important points for revision

Q.2.7 2018 - May [1] (g) Objective

Examine with reasons (in short) whether the following statement is correct or incorrect :
K Ltd., a non-government company, was incorporated on 01-10-2017. Mr. B, Managing Director of K Ltd., himself
appointed the first auditor of the company on 31-12-2017. (2 marks)

Answer:
Incorrect:
As per Sec. 139 (6), of the Companies Act, 2013, first auditor of a company shall be appointed by the Board of
Directors within 30 days from the registration of the company. So, Mr. B. Managing Director of K Ltd. alone cannot
appoint the first auditor of the company.

Space to write important points for revision

Appointment of Auditor: Appointment of 3 Subsequent Auditor/ Re appointment of Auditor

Q.3.1 2008 - Nov [5] (b), 2013 - Nov [5] (b) Descriptive

Under what circumstances the retiring Auditor cannot be re-appointed? (5, 6 marks) Answer:
Re-appointment of Retiring Auditor
As per Sec. 139(2) of Companies Act, 2013, no listed company or a company belonging to such class or classes of
companies as is prescribed, shall appoint or re-appoint:
1. an individual as auditor for more than one term of five consecutive years;

and
2. an audit firm as auditor for more than two terms of five consecutive
years:
Provided that:
1. an individual auditor who has completed his term under clause (a) shall
not be eligible for re-appointment as auditor in the same company for
five years from the completion of his term;
2. an audit firm which has completed its term under clause (b), shall not be
eligible for re-appointment as auditor in the same company for five years
from the completion of such term:
Provided further that as on the date of appointment no audit firm having a common partner or partners to the other
audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as
auditor of the same company for a period of five years.
Further Sec. 139(9) provides that
Subject to the provisions of sub-section (1) and the rules made thereunder a retiring auditor may be re-appointed at
an annual general meeting, if: 1. he is not disqualified for re-appointment;
2. he has not given the company a notice in writing of his unwillingness to be re-appointed; and
3. a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that
he shall not be reappointed.
Space to write important points for revision

Q.3.2 2010 - May [1] (vii), 2015 - Nov [2] (vi) Objective

State with reason (in short) whether the following statement is True or False:
The auditor should study the Memorandum and Articles of Association to see the validity of his appointment. (2, 2
marks)

Answer:
False:
MOA lays down the object to be carried on and AOA reflect the regulations of the company to govern its internal
management and to regulate the rights of the members. Auditor should ascertain whether the company has complied
with provisions of Sec. 139.

Q.3.3 2017 - May [7] (d) Short Notes

Write short note on the following:

Provisions regarding re-appointment of a retiring auditor at the Annual General Meeting, for a company not covered
under auditor rotation provisions. (4 marks)

Answer:
Sec. 139(1) of the Companies (Amendment) Act, 2017 which is applicable to all companies, irrespective of size,
provides that an auditor shall be appointed ‘who shall hold office from the conclusion of that meeting till the
conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting’.
Sub-section (2) of the Sec. 139 requires mandatory rotation of auditors for certain classes of companies only.
For a company fall which outside the purview of Sec. 139(2) of the Act, the mandatory rotation will not be
applicable.
However, this does not mean that Sec. 139(1), which is applicable to all companies, shall not apply to such
companies.
Hence, the tenure of auditors appointed by the said companies would have to be for a continuous period of five
years.

Space to write important points for revision

4
Appointment of Auditor: Filing of Casual Vacancy
Q.4.1 2007 - Nov [1] (xi) Objective

State with reasons (in short) whether the following statement is True or False:
If appointment of a person as an auditor is void-ab-initio, it should be treated as a casual vacancy. (2 marks)

Answer:
False:
Casual vacancy arises due to accidental or fortuitous circumstances. Thus if appointment of a person as an auditor is
void-ab-initio, it cannot be treated as casual vacancy.

Space to write important points for revision

Q.4.2 2012 - Nov [1] {C} (d) Descriptive Discuss on the following:
Filling of a casual vacancy of auditor in respect of a company audit.

(5 marks) Answer:
Filling of a Casual Vacancy
As per Sec. 139(8) of Companies Act, 2013, any casual vacancy in the office of an auditor shall:

(i) In the case of a company other than a company whose accounts are subject to audit by an auditor
appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within thirty
days.
If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the
company at a general meeting convened within three months of the recommendation of the Board and he shall hold
the office till the conclusion of the next annual general meeting;

(ii) In the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller
and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within thirty days:
In case the Comptroller and Auditor-General of India does not fill the vacancy within the said period the Board of
Directors shall fill the vacancy within next thirty days.

Q.4.3 2014 - May [2] (x) Objective

State with reasons (in short) whether the following statement is correct or incorrect.
The Board of Directors can fill the casual vacancy caused by the resignation of an auditor, who shall hold office
until the conclusion of the next annual general meeting. (2 marks)

Answer:
Incorrect:
Casual vacancy caused by the resignation of an auditor shall only be filled by the company in general meeting.

Space to write important points for revision

Q.4.4 2018 - May [1] (f) Objective

Examine with reasons (in short) whether the following statement is correct or incorrect :
PQR & Co., Chartered Accountants, resigned from the audit of a Government Company and filed the resignation
with the company and the registrar within 30 days. Comment, whether PQR & Co. has complied with the provisions
of the Companies Act, 2013. (2 marks)

Answer:
Incorrect:
As per Sec. 140 (2) of the Companies Act, 2013, the auditor who has resigned from the Government company
shall within 30 days from the date of resignation, require to file a statement with the company and the Registrar, and
auditor shall also require to file such statement with the comptroller and Auditor General of India. In this case, PQR
& Co has not complied with the provisions of the Companies Act, 2013. As it has filed a statement with the
company and the Registrar within 30 days but not with the Comptroller and Auditor General of India.

Q.4.5 2018 - Nov [1] {C} (g) Objective

Examine with reason (in short) whether the following statement is correct or incorrect :
The Board of Director of ABC Ltd., a listed company at Bombay Stock Exchange, is required to fill the casual
vacancy of an auditor only after taking into account the recommendations of the audit committee. (2 marks)

Answer:
Correct :
As per Sec. 139(11), where a company is required to constitute an audit committee under Sec. 177, all appointments
including filing of a casual vacancy of an auditor under this Section shall be made after taking into account the
recommendations of such committee.

Space to write important points for revision

Q.4.6 2019 - Nov [1] {C} (e) Objective

Examine with reasons whether the following statement is correct or incorrect.

(e) CA. K has resigned as auditor, after 2 months from appointment of a

NML Ltd. He needs to file ADT-3 with the Registrar within 60 days from the date of resignation. (2 marks)
Q.4.7 2009 - May [2] (c) Practical

Comment on the following situation:

P, the first auditor of XYZ Ltd. resigned as auditors of the Co. Board of Director appointed Mr. Q as statutory
auditors in their place. (6 marks)

OR 2018 - May [5] (b) Practical

At the AGM of HDB Pvt. Ltd., Mr. R was appointed as the statutory auditor. He, however, resigned after 3 months
since he wanted to pursue his career in banking sector. The Board of Director has appointed Mr. L as the statutory
auditor in board meeting within 30 days. Comment on the matter with reference to the provisions of Companies Act,
2013. (5 marks)

Answer:
Casual Vacancy on Account of Resignation:
As per Sec. 139(8) of Companies Act, 2013, any casual vacancy in the office of an auditor shall:

In the case of a company other than a company whose accounts are subject to audit by an auditor appointed
by the Comptroller and Auditor-General of India, be filled by the Board of Directors within thirty days.

If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the
company at a general meeting convened within three months of the recommendation of the Board and he shall hold
the office till the conclusion of the next annual general meeting;
Analysis and Conclusion: The casual vacancy created on account of resignation by Mr. P, cannot be filled in by the
Board of Directors itself, such appointment shall also be approved by the company at general meeting convened
within three months of the recommendation of the board.

Space to write important points for revision

5 Rotation of Auditor
Q.5.1 2015 - Nov [2] (v) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
Manner of rotation of auditor will not be applicable to company A, which is having paid up share capital of` 15
crores and having public borrowing from nationalized bank of ` 50 crore because it is a Private Limited Company.
(2 marks)

Answer:
Incorrect:
According to Sec. 139(2) of the Companies Act, 2013 and Companies (Audit and Auditors) (Amendment) Rules,
2017, the provisions related to rotation of auditor are applicable to all private limited companies having paidup share
capital of fifty crore rupees or more; and all companies having paidup share capital of below threshold limit
mentioned above, but having public borrowing from financial institutions, banks or public deposits of fifty crore
rupees or more.

Space to write important points for revision

Q.5.2 2015 - May [4] (c) Descriptive State the manner of rotation of auditors on expiry of their term. (4 marks) OR
2017 - May [1] {C} (c) Descriptive What are the provisions regarding appointment of auditors by rotation,

after expiry of the term of the current auditor, that a company should consider? (5 marks)

Answer:
Rotation of Auditors
As per Companies Act, 2013

Sec. 139(2) No listed company or a company belonging to such class or classes of companies as may be prescribed,
shall appoint or re-appoint:
(a) an individual as auditor for more than one term of

five consecutive years; and

(b) an audit firm as auditor for more than two terms of
five consecutive years.

1st Proviso to Sec. Provided that:

139(2) (i) an individual auditor who has completed his term under clause (a) shall not be eligible for reappointment
as auditor in the same company for five years from the completion of his term; (ii) an audit firm which has
completed its term under clause (b), shall not be eligible for re- appointment as auditor in the same company for five
years from the completion of such term.

2ndProviso to Sec. 139(2)

3rd Proviso to Sec. 139(2)
4th Proviso to Sec. 139(2)
Section 139(3)
Sec. 139(4)

Provided further that as on the date of appointment no audit firm having a common partner or partners to the other
audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as
auditor of the same company for a period of five years.

Provided also that every company, existing on or before the commencement of this Act which is required to comply
with the provisions of this sub-section, shall comply with requirements of this sub-section within a period which
shall not be later than the date of the first annual general meeting of the company held, within the period specified
under sub-section (1) of Sec. 96, after three years from the date of commencement of this Act.

Provided also that, nothing contained in this subsection shall prejudice the right of the company to remove an
auditor or the right of the auditor to resign from such office of the company.

Subject to the provisions of this Act, members of a company may resolve to provide that :
(a) in the audit firm appointed by it, the auditing

partner and his team shall be rotated at such intervals as may be resolved by members; or (b) the audit shall be
conducted by more than one

auditor.

The Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors in
pursuance of sub-section(2).

As per Companies (Audit and Auditors) (Amendment) Rules, 2017.

Eligibility Criteria: Class of

Companies
[Rule 5]

1. Manner of
Rotation [Rule 6]
2.

3. For the purposes of sub-section (2) of Section 139, the class of companies shall mean the following classes of
companies excluding one person companies and small companies:
(a) all unlisted public companies having paid up share

capital of rupees ten crore or more;

(b) all private limited companies having paid up share
capital of rupees fifty crore or more;
(c) all companies having paid up share capital of
below threshold limit mentioned in (a) and (b)
above, but having public borrowings from financial
institutions, banks or public deposits or rupees fifty
crores or more.

The Audit Committee shall recommend to the Board, the name of an individual auditor or of an audit firm who may
replace the incumbent auditor on expiry of the term of such incumbent. Where a company is required to constitute
an Audit Committee, the Board shall consider the recommendation of such committee, and in other cases, the Board
shall itself consider the matter of rotation of auditors and make its recommendation for appointment of the next
auditor by the members in annual general meeting.
For the purpose of the rotation of auditors: (i) in case of an auditor (whether an individual or

audit firm), the period for which the individual or the firm has held office as auditor prior to the commencement of
the Act shall be taken into account for calculating the period of five consecutive years or ten consecutive years, as
the case may be;
(ii) the incoming auditor or audit firm shall not be

eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of
audit firms.

Explanation I: For the purposes of these rules the term “same network” includes the firms operating or functioning,
hitherto or in future, under the same brand name, trade name or common control.
Explanation II: For the purpose of rotation of auditors: (a) a break in the term for a continuous period of five

years shall be considered as fulfilling the requirement of rotation;

(b) if a partner, who is in charge of an audit firm and also certifies the financial statements of the company, retires
from the said firm and joins another firm of chartered accountants, such other firm shall also be ineligible to be
appointed for a period of five years.

4. Where a company has appointed two or more individuals or firms or a combination thereof as joint auditors, the
company may follow the rotation of auditors in such a manner that both or all of the joint auditors, as the case may
be, do not complete their term in the same year.

Space to write important points for revision

Q.5.3 2017 - May [6] (a) Descriptive Specify the class of companies to whom rotation of auditor applies, under the
provisions of Companies Act, 2013. (4 marks)

Answer:
Class of Companies to whom Rotation of Auditor’s Applies [(Rule 5 of Company (Audit and Auditors)
(Amendment) Rules, 2017] 1. All listed Companies.
2. All unlisted Public Companies having paid up share capital of ten crore

rupees or more.
3. All Private Limited Companies having paid up share capital of fifty crore
rupees or more.
4. All companies having paid up capital below the above specified limits but
having Public Borrowing from Financial Institutions, Banks or Public
Deposits of fifty crore rupees or more.
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6 Removal of Auditors
Q.6.1 2007 - Nov [1] {C} (ii) Objective

State with reasons (in short) whether the following statement is True or False:
The first auditor appointed by the board of directors can be removed by the board at its subsequent meeting. (2
marks)

Answer:
False:
According to Sec. 140 of the Companies Act, 2013 an auditor may be removed from his office before the expiry of
his term by the company in general meeting after obtaining prior approval of the Central Government in that behalf.

Q.6.2 2008 - Nov [1] (v) Objective

State with reasons (in short) whether the following statement is True or False:
An Auditor may be removed from Office before the expiry of his term, by the company in General Meeting. (2
marks)

Answer:
True:
Sec. 140(1) of the Companies Act, 2013 provides that first auditor appointed by the BOD can be removed by the
company at a general meeting before the expiry of his term by passing special resolution.
The other auditors of the company can be removed at the general meeting after obtaining prior approval of
Central Government.

Space to write important points for revision

Q.6.3 2009 - Nov [2] (c) Practical A, B & C Company Ltd. removed its first Auditor before the expiry of his term
without obtaining approval of the Central Government. (6 marks) OR 2010 - Nov [7] (b) Practical

PQR Company Ltd. removed their first auditor by passing a resolution in the meeting of the Board of Directors for
his removal without obtaining prior approval from the Central Government. Offer your comments in this regard. (4
marks)

OR 2011 - Nov [1] {C} (c) Descriptive Comment on the following :

Removal of auditor before expiry of term. (5 marks) OR 2015 - Nov [5] (a) Descriptive Discuss about the
provisions for removal of auditor before expiry of term. (6 marks)

Answer:
Removal of First Auditor before expiry of term:
As per Sec. 140(1), of the Companies Act, 2013 the auditor appointed under Sec. 139 may be removed from his
office before the expiry of his term only by a special resolution of the company, after obtaining the previous
approval of the Central Government (Power now delegated to Regional Director vide Notification No. S.O. 4090(E)
dt. 19.12.2016 w.e.f. 19.12.2016.) in that behalf in the manner prescribed under Rule 7 of Companies (Audit and
Auditors) Rules 2014.
Provided that before taking any action under this sub-section , the auditor concerned shall be given a reasonable
opportunity of being heard. As per Rule 7 prescribed under Companies (Audit and Auditors) Rules, 2014:
1. The application to the Central Government for removal of auditor shall

be made in Form ADT - 2 and shall be accompanied with fees as provided for this purpose under the Companies
(Registration Offices and Fees) Rules, 2014.

2. The application shall be made to the Central Government within thirty days of the resolution passed by the Board.
3. The company shall hold the general meeting within sixty days of receipt of approval of the Central Government
for passing the special resolution. Analysis and Conclusion:
The first auditor appointed by the Board of Directors was removed by a resolution in the meeting of the Board of
Directors. Inspite of the special resolution of the Company as per the requirement of Sec. 140 (1) was not obtained
the prior approval of the Central Government in that behalf. Due to contravention of the provision of sub-Sec. (1)
Sec. 140, the removal of auditor is not justified.

Q.6.4 2019 - May [5] (a) Practical

Board of Directors of “XYZ Ltd.” found the auditors of the Company acted in a fraudulent manner, and decided to
remove the auditors in board’s meeting. Comment on the action of Board of Directors and describe correct
procedure to be followed for removal of auditors before expiry of their term. (4 marks)

Answer:
Provision
☐ According to Section 140(1) of the Companies Act, 2013, the auditor

appointed under Section 139 may be removed from his office before the expiry of his term only by a special
resolution of the company, after obtaining the previous approval of the Central Government in that behalf as per
Rule 7 of CAAR, 2014

☐ The following procedures shall be followed for removal of auditor: 1. The application to the Central
Government for removal of auditor shall be made in Form ADT -2 and shall be accompanied with fees as provided
for the purpose under the Companies (Registration Offices and Fees) Rules, 2014

2. The application to the Central Government shall be made within 30 days of receipt of approval of the Central
Government for passing the special resolution.

☐ It is important to note that before taking any action for removal of auditor before expiry of his terms, the auditor
concerned shall be given a reasonable opportunity of being heard.

Present Case:

☐ In this case, contention of Board of Director of XYZ Ltd. for removal of auditor by way of passing resolution in
Board meeting is not valid in law.
☐ XYZ Ltd. shall require to follow the above procedures for the removal of auditor before expiry of his term.

7 Ceiling on Number of Audits

Q.7.1 2012 - Nov [1] {C} (b) Descriptive Discuss on the following:
Ceiling on number of audits in a company to be accepted by an auditor.

(5 marks) Answer:
Ceiling on Number of Audits:

The provision related to ceiling on number of audits is laid down in Sec. 141(3)(g) of the Companies Act, 2013.

Sec. 141(3)(g) of the Companies Act, 2013 prescribes that a person who is in full time employment elsewhere or a
person or a partner of a firm holding appointment as its auditor, if such person or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than twenty companies;

In the case of a firm of auditors: It has been further provided that ‘specified number of companies’ shall be
construed as the number of companies specified for every partner of the firm who is not in full time employment
elsewhere.

This limit of 20 company audits is per person: In the case of an audit firm having 4 partners, the overall ceiling
will be 4×20=80 company audits. Sometimes, a Chartered Accountant is a partner in a number of auditing firms. In
such a case, all the firms in which he is partner or proprietor will be together entitled to 20 company audits on his
account. Subject to the overall ceiling of company audits, how they allocate the 20 audits between themselves is
their affairs.
In the case of a firm of Chartered Accountants in practice: The specified number of audit assignments shall be
construed as the specified number of audit assignments for every partner of the firm.

Where any partner of the firm of Chartered Accountants in practice is also a partner of any other firm or
firms of chartered accountants in practice: The number of audit assignments which may be taken for all the firms
together in relation to such partner shall not exceed the specified number of audit assignments in the aggregate.
Where any partner of a firm or firms of Chartered Accountants in practice accepts one or more audit
assignments in his individual capacity: Or in the name of his proprietary firm, the total number of such assignment
which may be accepted by all firms in relation to such Chartered Accountant and by him shall not exceed the
specified number of audit assignments in the aggregate.
In computing the specified number of audit assignments. 1. the number of such assignments, which he or any
partner of his firm has
accepted whether singly or in combination with any other Chartered Accountant in practice or firm of such
Chartered Accountants, shall be taken into account.

2. the number of partners of a firm on the date of acceptance of audit assignment shall be taken into account.
3. a Chartered Accountant in full time employment elsewhere shall not be taken into account.
Space to write important points for revision

8 Powers/Rights of Auditors
Q.8.1 2015 - Nov [2] (iii) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
The auditor of a Ltd. Company wanted to refer to the minute books during audit but board of directors refused to
show the minute books to the auditors. (2 marks)

Answer:
Incorrect:
The client or directors should provide such information which the auditor required from them. So here, directors
should provide minute books to auditors during the course of audit.

Space to write important points for revision

Q.8.2 2019 - May [5] (b) Descriptive

Auditors have right to attend only those general meetings at which the accounts audited by them are to be discussed.
Comment. (4 marks) Answer:
☐ As per Sec. 146, of the Companies Act, 2013, all the notices of, and

other communications relating to, any general meeting shall be forwarded to the auditor of the company, and the
auditor shall, unless otherwise exempted by the company, attend either by himself or through his authorised
representative, who shall also be qualified to be an auditor, any general meeting and shall have right to be heard at
such meeting on any part of the business which concerns him as the auditor.

☐ The auditor of a company have right to receive the notices. The auditors of a company are entitled to attend any
general meeting of the company as this right is not restricted to those at which the accounts audited by them are to
be discussed. The auditor shall also to receive all the notices and other communications relating to the general
meetings, which members are entitled to receive and to be heard at any general meeting in any part of the business
of the meeting which concerns them as auditors.
Thus, it is right of the auditor to receive notices and other communications relating to any general meeting and to be
heard at such meeting, relating to the matter of his concern, however, it is duty of the auditor to attend the same or
through his authorised representative unless otherwise exempted.

Space to write important points for revision

Q.8.3 2019 - May [5] (c) Descriptive

Though legally auditor may exercise right of Lien in case of companies, it is mostly impracticable for legal and
practicable constraints. Do you agree? (3 marks)

Answer:
The statement provided is correct and can be agreed. Right of Lien means any person having the lawful possession
of somebody else’s property, on which he has worked, may retain the property for non-payment of his dues on
account of the work done on the property. On this premise, auditor can exercise lien on books any documents placed
at his possession by the client for non-payment of fees, for work done on the books and documents. Section 128 of
the Companies Act, 2013, ordinarily make it impracticable for the auditor to have possession of the books and
documents. The company provides reasonable facility to auditor for inspection of the books of account by directors
and others authorised to inspect under this Act. Taking an overall view of the matter, it seems that though legally,
auditor may exercise right of lien in cases of companies, it is mostly impracticable for legal and practicable
constraints.
Space to write important points for revision
9 Duties of Auditor
Q.9.1 2008 - Nov [1] (iv) Objective

State with reasons (in short) whether the following statement is True or False:
The Auditor of a Company is entitled to attend any General Meeting of the company as his duty. (2 marks)

Answer:
True :
According to Sec. 146 of Act, 2013, unless otherwise exempted by the company the auditor shall attend either by
himself or through, his authorised representative (who shall also be qualified to be an auditor), any general meeting
of the company.

Space to write important points for revision

Q.9.2 2009 - May [1] (v) Objective

State with reasons (in short) whether the following statement is True or False:
It is no part of subsequent auditor's duty to verify opening balances of Ledger accounts of current years, on the basis
of Balance Sheet audited by Previous Auditor. (2 marks)

Answer:
False :
According to SA - 510 “Initial Audit Engagement-Opening Balances”, it is the duty of the auditor to verify and
obtain appropriate evidence in respect of opening balances brought forward from the preceding period.

Space to write important points for revision

Q.9.3 2009 - Nov [1] (viii) Objective

State with reason (in short) whether the following statement is true or false. Mr. X, a Chartered Accountant, is an
employee of M/s M & N Co., a firm of Chartered Accountants of India. The firm is the Auditors of ABC & Co. Ltd.
After auditing the accounts of the Company the Auditor firm allowed Mr. X, their employee, to sign the audit report;
which he did. (2 marks)

Answer:
False:
An employee Chartered Accountant cannot sign the auditor’s report on behalf of the auditing firm. Only a partner in
the firm can sign the audit report in compliance with the provisions of Sec. 145 of the Companies Act, 2013.

Space to write important points for revision

Q.9.4 2013 - Nov [5] (a) Descriptive

What are the general considerations about the duties of an auditor that can be summarized on the basis of legal
decisions taken by Tribunal so far? (5 marks)

Answer:
Duties of a Company Auditor on the basis of legal decisions of the Tribunal of law from time to time.
1. To examine the truthfulness and justification of the Balance Sheet

[Leeds Estate Building and Investment Society Ltd. Vs Shephard]

2. To give clear-cut information with honesty [London and General Bank]
3. To perform the work tactfully, cautiously and carefully. [Kingston Cotton Mill Co. Ltd.]
4. Auditor is a watch dog and not a blood wound [Kingston Cotton Mill Co. Ltd.]
5. To advise the company is not a duty of the auditor [London and General Bank Ltd.]
6. Duties regarding verification [Davar & Son Ltd. Vs M.S. Krishnaswami]
7. Intensive check of doubtful situation [London oil storage Co. Ltd. Vs Sear Has luck & Co.]
8. Report regarding non compliance of Company Act [ICAI vs K.R. Sharma] Space to write important points for
revision
Q.9.5 2015 - Nov [2] (iv) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
The auditor has to report to Central Govt. within 90 days of his knowledge of an offence involving fraud. (2 marks)

Answer:
Incorrect:
The auditor should report to Government within 60 days of his knowledge of offence involving fraud and not 90
days.

Space to write important points for revision

Q.9.6 2016 - May [2] (i) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
The members of XYZ Ltd. preferred a complaint against the auditor stating that he has failed to send the auditor’s
report to them. (2 marks)

Answer:
Incorrect:
It is duty of board of directors to supply a copy of financial statement to the member. The auditor’s report shall
require to be sent to first board of director and not to members.

Space to write important points for revision

Q.9.7 2016 - Nov [4] (a) Descriptive State the services which are not to be rendered by an auditor as per the
provisions of Companies Act, 2013. (6 marks)

Answer:
Auditor not to render certain services: Services to be approved [Sec. 144]

An auditor shall provide to the company Only such other services as are approved by: 1. 2. the Board of Directors
or
the Audit Committee, as the case may be.

Prohibited Services [Sec. 144]

Discontinuation of existing non-audit services [Proviso to Sec. 144]

Meaning of
‘directly and indirectly’
[Explanation to Sec. 144]

An auditor shall not provide any of the following services.

(whether such services are rendered directly or indirectly to the company or its holding company or subsidiary
company):
1. Accounting and book keeping services 2. Internal audit
3. Design and implementation of any financial

information system
4. Actuarial services
5. Investment advisory services
6. Investment banking services
7. Rendering or outsourced financial services
8. Management services
9. Any other kind of services as may be prescribed (No service has been prescribed so far).

An auditor or audit firm who or which has been performing any non-audit services on or before the commencement
of this act shall comply with the provisions of this section before the closure of the first financial year after the date
of such commencement.
For the purposes of this sub-section, the term ‘directly or indirectly’ shall include rendering of services by the
auditor:

In case of auditor ☐ being an individual ☐ ☐

☐☐
☐
In case of auditor ☐ being a firm ☐
☐
☐☐

☐ either himself or
through his relative or
any other person connected or associated with such individual or
through any other entity in which such individual has significant influence or control, or
whose name or trade mark or brand is used by such individual.

either itself or
through any of its partners or
t h r o u g h i t s p a r e n t , subsidiary or associate entity or
through any other entity, in which the firm or any partner of the firm has significant influence or control, or
whose name or trade mark or brand is used by the firm or any of its partners.

Space to write important points for revision

Q.9.8 2010 - May [2] {C} (c) Practical

Comment on the following situation :

C Ltd. declared dividend amounting to` 5 lacs out of Profits for the year ended 31.3.2009. Subsequently, it was
noticed that company had failed to make provisions for Outstanding expenses of ` 7.80 lacs and Closing stock was
also over valued, which was not reported by auditors of the company. Management of C Ltd. held auditors
responsible for this situation. (8 marks)

Answer:
Failure to detect untrue and incorrect financial position of a company :
• In the given question, profit of the company has been inflated by nonprovisioning of outstanding expenses of`7.80
lacs and by overvaluation of closing stock and based on such inflated profit the company has declared and paid
dividend of ` 5.00 lacs.

• Therefore it can be said that dividend has been paid out "inflated profit" and not out of "real profit". If there is
insufficient profit after above adjustment of outstanding expenses and correction of stock valuation and there is no
past reserve, it would amount to payment of dividend out of capital.
• Auditor’s duty is to ascertain whether the Balance Sheet and Profit and Loss A/c of the company show a true and
fair view of the financial position and revenue earning capacity.
• For this purpose he has to exercise proper audit procedure of substantive test (i.e. vouching and verification) and
valuation of various items of Balance Sheet and Profit and Loss a/c.
• The auditor should have checked whether all the outstanding expenses have been provided or not and whether
closing stock has been properly valued as per AS-2. If he was not satisfied, he should have issued a qualified report
or adverse report.
• In this case auditor has failed to do so, he will be guilty of gross negligence in the performance of his duty.
• In the given questions, the facts are similar to the established judgement on "The Leeds Estate Building &
Investment Co. Ltd vs Shepherd (1887)", where, it was held, that it was an auditor’s duty to ascertain that the
accounts, he certifies, are correct and that if he fails in his duty, he is liable for damages for dividends wrongly paid
by the company out of capital.

Space to write important points for revision

10 Reporting Under CARO, 2016
Q.10.1 2016 - Nov [5] (a) Descriptive
Discuss which class of companies are specifically exempt from the applicability of CARO 2016. (6 marks) Answer
:
Non Applicability of CARO 2016:
It shall apply to every company including a foreign company as defined in Clause (42) of Sec. 2 of the Companies
Act, 2013 (18 of 2013) [hereinafter referred to as the Companies Act].
Except:

(i) a banking company as defined in Clause (c) of Sec. 5 of the Banking Regulation Act, 1949 (10 of 1949);

(ii) an insurance company as defined under the Insurance Act, 1938 (4 of 1938);
(iii) a company licensed to operate under Sec. 8 of the Companies Act;
(iv) a One Person Company as defined under clause (62) of Sec. 2 of the Companies Act and a small company as
defined under Clause (85) of Sec. 2 of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding company of a public company, having a paid up
capital and reserves and surplus not more than rupees one crore as on the balance sheet date and which does not
have total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during
the financial year and which does not have a total revenue as disclosed in Scheduled III to the Companies Act, 2013
(including revenue from discontinuing operations) exceeding rupees ten crore during the financial year as per the
financial statements.
Space to write important points for revision

Q.10.2 2018 - May [4] (b) Descriptive State the matters to be included in the auditor’s report as per CARO 2016,
regarding:
(i) Private Placement of Preferential Issues.
(ii) Utilisation of IPO and further public offer. (2 marks each)

Answer:
(i) Private Placement of Preferential Issues:
The Auditor is required to report as per Clause XIV of Para 3 of CARO 2016 as to:
Whether the company has made any preferential allotment or private placement of shares or fully or partly
convertible debentures during the year under review and if so, as to whether the requirement of Section 42 of the
Companies Act, 2013 have been complied with and the amount raised have been used for the purposes for which
funds were raised. If not, provide the details in respect of the amount involved and nature of non-compliance.

(ii) Utilisation of IPO and further public offer:

The Auditor is required to report as per Clause IX of Para 3 of CARO 2016 as to:
Whether moneys raised by way of initial public offer or further public offer (Including debt instruments) and term
loans were applied for the purposes for which those are raised. If not, the details together with delays or default and
subsequent rectification, if any, as may be applicable, be reported.

Space to write important points for revision

Q.10.3 2018 - Nov [4] (b) Descriptive

“The company has raised funds by issuing fully convertible debentures. These funds were raised for the expansion
and diversification of the business. However, the company utilized these funds for repayment of long term loans and
advances.” Advise the auditor regarding reporting requirements under CARO, 2016. (4 marks)

Answer:
Provisions:
As per Clause (xiv) of Paragraph 3 of CARO, 2016, whether the company has made any preferential allotment or
private placement of shares or fully or partly convertible debentures during the year under review and if so, as to
whether the requirement of section 42 of the Companies Act, 2013, have been complied with and the amount raised
have been used for the purposes for which the funds were raised. If not, provide the details in respect of the amount
involved and nature of non-compliance.
Present Case:
In this case, the company has raised funds by issuing fully convertible debentures. These funds were raised for the
expansion and diversification of the business. However, the company utilized these funds for repayment of long
term loans and advance. So, here the reporting required as per para. 3 (xiv) of CARO, 2016. The auditor shall
require to disclose in his audit report details of amount involved along with nature and reason for non compliance
with condition.

Space to write important points for revision

Q.10.4 2019 - May [5] (d) Descriptive

Explain the Reporting requirements the auditor should ensure under CARO 2016 related to fixed assets. (3 marks)
Answer:
As per clause (i) of Paragraph 3 of CARO, 2016, the auditor shall require to report on following requirements
relating to Fixed Assets 1. Whether the company is maintaining proper records showing full

particulars, including quantitative details and situation of fixed assets ; 2. Whether these fixed assets 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:

3. Whether the title deeds of immovable properties are held in the name of the company. If not, provide the details
thereof.
Space to write important points for revision
Q.10.5 2019 - Nov [1] {C} (d) Objective

Examine with reasons whether the following statement is correct or incorrect.

(d) Provision of CARO, 2016 is not applicable to ABC Pvt. Ltd., a

subsidiary of XYZ Ltd. (a public company) having fully paid Capital and Reserves & Surplus of`50 lakhs, Secured
loan from bank of`90 Lakhs and Turnover of ` 5 Crore, for the financial year 2018-19.

(2 marks) Space to write important points for revision

Q.10.6 2019 - Nov [5] (b) Descriptive

M Ltd. has given certain loans to related parties and also has accepted certain deposits. As an auditor, how you
include the above items in paragraph 3 of CARO, 2016 ? (4 marks)

Q.10.7 Practice Descriptive

Throw light on Audit Report under CARO 2016.

Answer:
Audit Report under CARO 2016

In exercise of the powers conferred by sub-sec. (11) of Sec. 143 of the Companies Act, 2013. (18 of 2013) and in
supersession of the Companies (Auditor’s Report) Order, 2015 published in the Gazette of India, Extraordinary, Part
II, Sec. 3, Sub-sec. (ii), vide number S.O. 990 (E), dated the 10th April, 2015, except as respects things done or
omitted to be done before such supersession, the Central Government, after consultation with the, committee
constituted under proviso to sub-sec. (11) of Sec. 143 of the Companies Act, 2013 hereby makes the following
Order,
1. Short title, application and commencement:

(1) This Order may be called the Companies (Auditor’s Report) Order, 2016.
(2) It shall apply to every company including a foreign company as defined in Clause (42) of Sec. 2 of the
Companies Act, 2013 (18 of 2013) [hereinafter referred to as the Companies Act], except: (i) a banking company as
defined in Clause (c) of Sec. 5 of the Banking Regulation Act, 1949 (10 of 1949);
(ii) an insurance company as defined under the Insurance Act, 1938 (4 of 1938);
(iii) a company licensed to operate under Sec. 8 of the Companies Act;
(iv) a One Person Company as defined under Clause (62) of Sec. 2 of the Companies Act and a small company as
defined under Clause (85) of Sec. 2 of the Companies Act; and (v) a private limited company, not being a subsidiary
or holding company of a public company, having a paid up capital and reserves and surplus not more than rupees
one crore as on the balance sheet date and which does not have total borrowings exceeding rupees one crore from
any bank or financial institution at any point of time during the financial year and which does not have a total
revenue as disclosed in Scheduled III to the Companies Act, 2013 (including revenue from discontinuing operations)
exceeding rupees ten crore during the financial year as per the financial statements.

2. Auditor’s report to contain matters specified in Paragraphs 3 and 4: Every report made by the auditor under
Sec. 143 of the Companies Act, 2013 on the accounts of every company audited by him, to which this Order applies,
for the financial years commencing on or after 1st April, 2015, shall in addition, contain the matters specified in
Paragraphs 3 and 4, as may be applicable:
Provided the Order shall not apply to the auditor’s report on consolidated financial statements.

3. Matters to be included in the auditor’s report: The auditor’s report on the accounts of a company to which this
Order applies shall include a statement on the following matters, namely:
(i) (a) whether the company is maintaining proper records showing full

particulars, including quantitative details and situation of PPE; (b) whether these PPE 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 the title deeds of immovable properties are held in the
name of the company. If not, provide the details thereof; (ii) whether physical verification of inventory has been
conducted at reasonable intervals by the management and whether any material discrepancies were noticed and if so,
whether they have been properly dealt with in the books of account;
(iii) whether the company has granted any loans, secured or unsecured to companies, firms, Limited Liability
Partnerships or other parties covered in the register maintained under Sec. 189 of the Companies Act, 2013. If so,
(a) whether the terms and conditions of the grant of such loans are
not prejudicial to the company’s interest;
(b) whether the schedule of repayment of principal and payment of
interest has been stipulated and whether the repayments or
receipts are regular;
(c) if the amount is overdue, state the total amount overdue for
more than ninety days, and whether reasonable steps have
been taken by the company for recovery of the principal and
interest;
(iv) in respect of loans, investments, guarantees, and security whether provisions of Sec. 185 and 186 of the
Companies Act, 2013 have been complied with. If not, provide the details thereof. Space to write important points
for revision

11 Joint Audit
Q.11.1 2008 - May [1] (xi) Objective

State with reason (in short) whether the following statement is True or False:
All the joint auditors are jointly and severally responsible for the work, which is not divided and carried on jointly
by all the joint auditors.

(2 marks) Answer:
True :
As per SA☐ 299 i.e. Responsibility of Joint Auditors, in respect of the audit work divided among the joint
auditors, each joint auditor is responsible only for the work allocated to such joint auditors including proper
execution of the audit procedures.
• On the other hand, all the joint auditors are jointly and severally

responsible all the joint auditors shall be jointly and severally responsible for:
(a) The audit work which is not divided among the joint auditors and is

carried out by all joint auditors;

(b) Decisions taken by all the joint auditors under audit planning in
respect of common audit areas concerning the nature, timing and
extent of the audit procedures to be performed by each of the joint
auditors.
(c) Matters which are brought to the notice of the joint auditors by any
one of them and on which there is an agreement among the joint
auditors;
(d) Examining that the financial statements of the entity comply with the
requirements of the relevant statutes;
(e) Presentation and disclosure of the financial statements as required
by the applicable financial reporting framework;
(f) Ensuring that the audit report complies with the requirements of the
relevant statutes, the applicable Standards on Auditing and the other
relevant pronouncements issued by ICAI.
• In respect of decisions taken by all the joint auditors concerning the nature, timing or extent of the audit procedures
to be performed any of the joint auditors.
• In respect of matters which are bought to the notice of joint auditors by any one of them and on which there is an
agreement among joint auditors
• For examining the financial statements of the entity comply with disclosure requirements of the relevant statue.
• For ensuring that the audit report complies with the requirements of relevant statue.
Space to write important points for revision

Q.11.2 2008 - Nov [8] (Or) (c), 2009 - May [8] (Or) (c) Write short note on the following:
Joint Audit.
OR 2011 - May [6] (a)
Short Note

(5 marks each) Descriptive

Explain the concept of Joint Audit. Discuss its advantages and disadvantages. (8 marks) OR 2014 - Nov [1] {C} (a)
Descriptive Discuss the following:
Advantages and disadvantages of Joint Audit. (5 marks)

Answer:
Joint Audit:
As per SA 299, (Revised) Joint Audit, a joint audit is an audit of financial statements of an entity by two or more
auditors appointed with the objective of issuing the audit report. Such auditors are described as joint auditors. Audit
Plan by Joint Auditors
Prior to the commencement of the audit, the joint auditors shall discuss and develop a joint audit plan. In developing
the joint audit plan, the joint auditors shall:
(a) Identify division of audit areas and common audit areas amongst the

joint auditors that define the scope of the work of each joint auditor; (b) Ascertain the reporting objectives of the
engagement to plan the timing
of the audit and the nature of the communications required; (c) Consider and communicate among all joint auditors
the factors that , in
their professional judgment, are significant in directing the engagement
team’s efforts;
(d) Consider the results of preliminary engagement activities and, where
applicable, whether knowledge gained on other or similar engagements
performed earlier by the respective engagement partner(s) for the entity
is relevant.
(e) Ascertain the nature, timing and extent of resources necessary to
perform the engagement.
Advantages:
1. Pooling and sharing of expertise.
2. Advantage of mutual consultation.
3. Lower work load.
4. Better quality of work performance.
5. Improved service to the client.
6. Displacement of the auditor of the company in a take-over often
obviated.
7. In respect of multinational companies, the work can be spread using the
expertise if the local firms which are in a better position to deal with
detailed work and the local laws and regulations.
8. Lower staff development costs.
9. Lower costs to carry out the work.
10. A sense of healthy competition towards a better performance. Disadvantages:
1. The fees being shared.
2. Psychological problem where firms of different standing are associated
in the joint audit.
3. General superiority or inferiority complexes of some auditors. 4. Problems of coordination of the work.
5. Areas of work of common concern being neglected.
Space to write important points for revision

Q.11.3 2010 - May [6] (b) Descriptive

‘A Joint Auditor is not bound by the views of the majority of the joint auditors regarding matters to be covered in
the report.’ Justify this statement in the light of responsibilities of Joint Auditors under AAS 12.

(5 marks) OR 2012 - May [1] {C} (d) Descriptive

Discuss on the following:

In Joint Audit, “each Joint Auditor is responsible only for the work allocated to him”. (5 marks)

OR 2015 - Nov [4] (a) Descriptive Mention the points/areas in which all the joint auditors are jointly and severally
responsible. (6 marks) OR 2017 - Nov [7] (c) Short Notes Write short notes on the following:
(c) Responsibility of Joint Auditors (4 marks)

Answer:
In respect of audit work divided among the joint auditors, each joint auditor shall be responsible only for the work
allocated to such joint auditor including proper execution of the audit procedures.
All the joint auditors shall be jointly and severally responsible for: 1. the audit work which is not divided among
the joint auditors and is

carried out by all joint auditors;

2. decisions taken by all the joint auditors under audit planning in respect
of common audit areas concerning the nature, timing and extent of the
audit procedures to be performed by each of the joint auditors. 3. matters which are brought to the notice of the joint
auditors by any one
of them and on which there is an agreement among the joint auditors; 4. examining that the financial statements of
the entity comply with the
requirements of the relevant statutes;
5. presentation and disclosure of the financial statements as required by
the applicable financial reporting framework;
6. ensuring that the audit report complies with the requirements of the
relevant statutes, the applicable Standards on Auditing and the other
relevant pronouncements issued by ICAI.
Space to write important points for revision

Q.11.4 2019 - May [1] (d) Objective

Joint auditor is always bound by the views of majority of the joint auditors regarding matters to be covered in report.
(2 marks) Answer:
This statement is Incorrect
A joint auditor is not bound by the views of the majority of the joint auditors regarding matters to be covered in the
report and should express his opinion in a separate report in case of a disagreement.

Space to write important points for revision

Q.11.5 2019 - Nov [4] (b) Descriptive

“Before the commencement of audit, the joint auditors should discuss and develop a joint audit plan.” Discuss the
points to be considered in developing the joint audit plan by the joint auditors. (4 marks)

Q.11.6 2016 - Nov [5] (b) Practical

As one of the Joint auditors of X Ltd. for the immediately preceding three financial years, you have been considered
for ratification by the members in the AGM as the sole auditor, while the said Joint auditors are not reappointed.
Comment. (6 marks)

Answer:
When one of the joint auditors of the previous years is considered for ratification by the members as the sole auditor
for the next year, it is similar to non reappointment of one of the retiring joint auditors. As per Sec. 140(4) of the
Companies Act, 2013, special notice shall be required for a resolution at an annual general meeting appointing as
auditor a person other than retiring auditor or providing expressly that a retiring auditor shall not be reappointed,
except where the retiring auditor has completed a consecutive tenure of five years or, as the case may be, ten years
as provided under subsection (2) of Sec. 139 of the said Act.
Accordingly provisions of the Companies Act, 2013 to be complied with are as under:
1. Ascertain that special notice under Sec. 140(4) of the Companies Act,

2013 was received by the company from such number of members holding not less than one percent of total voting
power or holding shares on which an aggregate sum of not less than five lakh rupees has been paid up on the date of
the notice not earlier than three months but atleast 14 days before the AGM date as per Sec. 115 of the Companies
Act, 2013 read with Rule 23(1) and 23(2) of the Companies (Management and Administration) Rules, 2014.
2. Check whether the said notice has been sent to all the members atleast

7 days before the date of the AGM as per Sec. 115 of the Companies Act, 2013 read with Rule 23(3) of the
Companies (Management and Administration) Rules, 2014.

3. Verify the notice contains an express intention of a member for proposing the resolution for appointing a sole
auditor in place of both the joint auditors who retire at the meeting but are eligible for reappointment.

4. The notice is also sent to the retiring auditor as per Section 140(4)(ii) of the Companies Act, 2013.
5. Verify whether any representation, received from the retiring auditor was sent to the members of the company.
6. Verify from the minutes book whether the representation received from the retiring joint auditor was considered at
the AGM.
Space to write important points for revision

12 Audit of Branch Office Accounts

Q.12.1 2013 - Nov [2] (c) Objective

State with reason (in short) whether the following statement is correct or incorrect.
Branch auditor of a company should give photocopies of his working papers on demand by Company Auditor. (2
marks)

Answer:
Incorrect:
As per SA 230 on “Audit Documentation”, audit documentation is the property of the auditor. He may at his
discretion, make portions of, or extracts from, audit documentation available to clients, provided such disclosure
does not undermine the validity of the work performed, or, in the case of assurance engagements, the independence
of the auditor or of his personnel.
Main auditor does not have right of access to the working papers of the branch auditor. In the case of a company, the
main auditor has to consider the report of the branch auditor and has a right to seek clarification and to visit the
branch but cannot ask for the copy of working papers and therefore, the branch auditor is under no compulsion to
give photocopies of his working papers to the principal auditor of the Company.

Space to write important points for revision

Q.12.2 2017 - Nov [2] (e) Objective State with reasons (in short) whether the following statement is correct or
incorrect:
The Managing Director of a company has shifted company’s books of accounts from Registered office (Mumbai) to
Corporate Office (New Delhi).

(2 marks) Answer:
Incorrect:
Shifting of Books of Account:
As per Sec. 128(1) of the Companies Act, 2013, every company shall keep at its registered office proper books of
accounts. It is permissible, for all or any of the books of accounts to be kept at such place in India as the Board of
Directors may decide but, when a decision in this regard is taken, the company must file within 7 days of such
decision with the registrar of companies a notice in writing giving full address of the other place.

Space to write important points for revision

Q.12.3 2018 - May [1] {C} (j) Objective

Examine with reasons (in short) whether the following statement is correct or incorrect :
(j) Mr. A is a statutory auditor of ABC Ltd. The branch of ABC Ltd. is

audited by Mr. B, another Chartered Accountant. Mr. A requests for the photocopies of the audit documentation of
Mr. B pertaining to the branch audit. (2 marks)

Answer:
Incorrect:
As per SA 230, Audit Documentation and SQCI, Standard on Quality Control, working papers are the property
of the auditor, he should not disclose such working papers of his client to other person without permission of client
or as required by law. So, Mr. A, Statutory auditor of ABC Ltd. cannot request for the photocopies of the audit
documentation of Mr. B, the branch auditor pertaining to branch audit.

Space to write important points for revision

Q.12.4 2013 - May [2] (vii) Practical

Comment on the following:

ABC Ltd. having turnover of` 100 crores during financial year 2011-12, need not get its branch audited whose
turnover is` 1.5 crores during the same year. (2 marks)

Answer:
Branch Audit:
As per Sec. 143 (8) of the Companies Act, 2013 if a company has a branch office, the accounts of that office shall
be audited either by the auditor appointed for the company (herein referred to as the company’s auditor) under this
Act or by any other person qualified for appointment as an auditor of the company under this Act and appointed as
such under Sec. 139, or where the branch office is situated in a country outside India, the accounts of the branch
office shall be audited either by the company’s auditor or by an accountant or by any other person duly qualified to
act as an auditor of the accounts of the branch office in accordance with the laws of that country. Therefore, ABC
Ltd. has to get its branch audited.

13 Cost Audit
Q.13.1 2017 - Nov [2] (c) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
Casual vacancy of a Cost Auditor of a company is filled by shareholders in general meeting within one month. (2
marks)

Answer:
Incorrect:
Any casual vacancy in the office of a Cost Auditor, whether due to resignation, death or removal, shall be filled by
the Board of Directors within 30 days of occurrence of such vacancy and the company shall inform the Central
Government in form CRA-2 within 30 days of such appointment of Cost Auditor.

Space to write important points for revision

Q.13.2 2018 - Nov [5] (b) Descriptive

“Mr. A is offered by ABC Ltd. for appointment as cost auditor and asked to certify certain requirements before such
appointment.” Discuss those requirements with reference to the provisions of the Companies Act, 2013.

(5 marks)

Answer:
Rule 6 of the Companies (Cost Records and Audit) Rules, 2014, requires the companies prescribed under the said
rule to appoint an auditor within 180 days of the commencement of every financial year. However, before such
appointment is made, the written consent of the cost auditor to such appointment and a certificate from him or it
shall be obtained.

The certificate to be obtained from Mr. A shall certify that the: 1. The individual or the firm, as the case may be,
is eligible for appointment and is not disqualified for appointment under the companies Act, 2013, the cost and
works Accountants Act, 1959 and the rules or regulations made thereunder;
2. The individual or the firm, as the case may be, satisfies the criteria provided in section 141 of the Companies Act,
2013 so far as may be applicable;
3. The proposed appointment is within limits laid down by or under the authority of the Companies Act, 2013; and
4. The list of proceedings against the cost auditor or audit firm or any partner of the audit firm pending with respect
to professional matters of conduct, as disclosed in the certificate, is true and correct. Space to write important points
for revision

Q.13.3 2019 - May [1] (h) Objective

Rule 3 of the Companies (Cost Records and Audit) Rule, 2014 provides the classes of companies, engaged in the
production of goods or providing services, having an overall turnover of ` 25 crore or more during the immediately
preceding financial year, required to include cost records in their books of account. (2 marks)

Answer:
This Statement is Incorrect
Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 provides the classes of companies, engaged in the
production of goods or providing services, having an overall turnover from all its products and services of`35 crore
or more during the immediately preceding financial year, required to include cost records in their books of account.

14 Miscellaneous

Auditor’s Duty in case of Casual Vacancy

Q.14.1 2010 - Nov [1] {C} (a) Practical Comment as an auditor on the following situation :
(a) Mr. X, a partner in X & Co., a firm of a Chartered Accountants, died on

31-3-2010 after completing routine audit work of XYZ Company Ltd.. Mr. Y another partner of the firm of
Chartered Accountants signed the financial statements of XYZ Company Ltd., without reviewing the finalization
work done by the assistants. (5 marks)

Answer:
Provisions of SA ☐ 200: The following principles are laid down : 1. When the auditor delegates work to assistants
or uses work performed
by other auditor and experts, he will continue to be responsible for forming and expressing his opinion on the
financial statements.

2. He will be entitled to rely on the work, provided he exercises adequate skill and is not aware of any reason to
believe that he should not have so relied.

3. He should carefully direct, supervise and review the work delegated to assistants.
Aspect review : Following aspects should be reviewed :
(i) Audit programme

(ii) Documentation
(iii) Audit quarter
(iv) Audit procedures
(iv) Audit opinion

Analysis and Conclusion: In the present case, whether Mr. X, the deceased partner had reviewed the work
performed by assistants or not, is not clearly stated. Hence, it shall be the duty of Mr. Y., to review the work
performed by the assistants before expressing an opinion, Mr. Y. should review the working papers carefully, carry
test checks and scrutinize the audit file thoroughly.

MULTIPLE CHOICE QUESTION

1
Eligibility, Qualifications and Disqualifications of an Auditor

1. The provisions relating to eligibility, qualifications and disqualifications of an auditor are governed by _________
of the Companies Act, 2013. (a) Sec 139
(b) Sec 140
(c) Sec 141
(d) Sec 148

2. A person shall be eligible for appointment as an auditor of a company only if he/she is a

(a) Cost Accountant
(b) Chartered Accountant
(c) Internal Accountant
(d) Any of the above

3. When a firm including LLP is appointed as an auditor of a company, (a) every member of the firm is eligible for
signing on behalf of the firm (b) Only partners shall be authorised
(c) Only manager of the firm shall be authorised to act and sign on

behalf of the firm

(d) Only the partners who are Chartered Accountants shall be
authorised to act and sign on behalf of the firm.
4. Disqualification for appointment as an auditor of a company is defines under
(a) Section 141 of the Companies Act, 2013
(b) Rule 10 of the Section 141 of the Companies Act, 2013 (c) Sub section (5) of Section 142 of the Companies Act,
2013 (d) Sub section (3) of Section 141 of the Companies Act, along with
Rule 10 of CAAR - 2014.
5. Under Companies Act, 2013, the term ‘releline’ for appointment of an
auditor, excludes
(a) Father or Mother (including step)
(b) Father/Mother in law
(c) Son’s wife
(d) Daughter’s husband.
6. Can a person appointed as an auditor if his relative is a Director or is in
the employment of the company as a director or key Managerial
personnel.
(a) Yes
(b) No
(c) May or May not depending upon the situation
(d) None of the above
7. Accounting and book keeping services or internal audit conducted by an
auditor is prohibited under _________ of the Companies Act, 2013.
(a) Section 141
(b) Section 143
(c) Section 144
(d) Section 146

2 Appointment of Auditor

8. First auditor of a company, other than a Government Company, shall be appointed by the
(a) Central Government
(b) Board of Directors
(c) Previous Auditor
(d) NCLT

9. Appointment of first auditor, other than a Government Company is governed under ___________ of the
Companies Act, 2013. (a) Section 139 (1)
(b) Section 139 (5)
(c) Section 139 (6)
(d) Section 139 (7)

10. First auditor other than a Government Company shall be appointed by the Board of Director ___________ from
the date of registration of the company.
(a) within 3 days
(b) within 30 days
(c) within 90 days
(d) within 120 days

11. In the case of failure of the Board to appoint the first auditor, then it shall be inform to
(a) TCWG
(b) BOD
(c) Members of the company
(d) Central Government

12. In case of failure of the board to appoint the first auditor, then member of the company shall appoint auditor
within __________. (a) 30 days
(b) 60 days
(c) 90 days
(d) 120 days

13. In case of failure of the board to appoint the first auditor, then member of the company shall appoint auditor at
an
(a) board meeting
(b) general meeting
(c) annual general meeting
(d) extraordinary general meeting.

14. First auditor hold his office till the

(a) extraordinary general meeting held
(b) annual general meeting
(c) conclusion of the first annual general meeting
(d) conclusion of the first extraordinary general meeting
15. A ‘Government Company’ is a company in which not less than 51% of the paid up share capital is held by the
(a) Central Government
(b) State Government

(c) Partly by the Central Government and partly by one or more State Governments.
(d) All the above.

16. First appointment of the first auditor, in case of Government company is governed under _________ of the
Companies Act, 2013. (a) Section 139 (1)
(b) Section 139 (5)
(c) Section 139 (6)
(d) Section 139 (7)

17. Appointment of first auditor in case of Government Company mode by _________.

(a) TCWG
(b) Board of Director’s
(c) Members of the company
(d) C & AG

18. If C & AG fail to appoint first auditor in case of Government Company with in stipulated time period then
(a) Central Government shall appoint such auditor within next 60 days (b) Central Government shall appoint such
auditor within next 30 days (c) Board of Directors of the company shall appoint such auditor within

30 days
(d) Members of the company shall appoint such auditor with in 60 days.

19. If C & AG and BOD fail to appoint first auditor in case of Government Company within their stipulated time
period then
(a) Central Government shall appoint such auditor within next 30 days (b) State Government shall appoint such
auditor within next 30 days (c) Members of the company shall appoint within 30 days at a annual

general meeting
(d) Members of the company shall appoint within 60 days at an extra
ordinary general meeting.
20. __________ of the Companies Act, 2013 provides that every company
shall, at the first annual general meeting appoint an individual or a firm
as an auditor.
(a) Section 139 (1)
(b) Section 139 (5)
(c) Section 139 (6)
(d) Section 139 (7)
21. Auditor appointed at first AGM shall hold office till the conclusion of its
(a) next annual general meeting
(b) third annual general meeting
(c) sixth annual general meeting
(d) None of the above
22. In case of First Auditor, the company shall inform the auditor concerned
of his or its appointment, and also file a notice of such appointment with
the Registrar within ________ of the meeting in which the auditor is
appointed.
(a) 7 days
(b) 15 days
(c) 30 days
(d) 60 days
23. Appointment of Subsequent Auditor of a Government Company defines
under
(a) Section 139 (1)
(b) Section 139 (5)
(c) Section 139 (6)
(d) Section 139 (7)
24. Subsequent Auditor in case of Government Company appointed by C &
AG _________.
(a) within 30 days from the date of registration
(b) within 90 days from the commencement of the year
(c) within 120 days from the commencement of the financial year
(d) within 180 days from the commencement of the financial year 25. Subsequent Auditor appointed by C & AG in
case of Government
Company hold the office till
(a) the next financial year
(b) the next commencement of the annual general meeting
(c) the next conclusion of the annual general meeting
(d) the next conclusion of the extraordinary general meeting 26. Filling of casual vacancy is governed under
_________ of the
companies Act 2013,
(a) Section 139 (5)
(b) Section 139 (6)
(c) Section 139 (7)
(d) Section 139 (8)
27. Any casual vacancy in case of a company other than a company whose
accounts are subject to audit by an auditor appointed by the C & AG of
India, shall be filled by the __________.
(a) Central Government within 30 days
(b) State Government within 60 days
(c) Board of Directors within 30 days
(d) C & AG within 30 days
28. Any casual vacancy in case of a company whose accounts are subject
to audit by the auditor appointed by the C & AG of India, shall be filled
by the ____________.
(a) Central Government within 30 days
(b) State Government within 60 days
(c) Board of Directors within 30 days
(d) C & AG within 30 days
29. When an auditor resigned from the company he shall file within a period
of __________ from the date of resignation, and file a statement in the
prescribed form ________________ indicating the reason of such
resignation.
(a) 15 days, ATD - 3 with company
(b) 30 days, AST - 4 with Registrar
(c) 45 days, ADT - 3 with C & AG
(d) 30 days, ADT - 3 with the company and Registrar
30. When an auditor resigned from an the Government Company (u/s
139(5)], auditor shall file ADT-3 (As per Rule 8 of CAAR) with the fails of
resignation to __________.
(a) Central Government
(b) Board of Director’s
(c) C & AG of India
(d) Registrar of the Companies
31. In the case of resignation of an auditor from the company fail to file ADT3 (as per Rule 8 of CAAR) with the
company and the Registrar within
stiputated period, then auditor shall be punishable with fine which shall
be _________.
(a) Fifty thousand rupees
(b) Less than fifty thousand rupees
(c) Five Lakh rupees
(d) Not less than fifty thousand and it may extend to five lakh rupees. 32. Can an auditor be re-appointed as auditor
in annual general meeting
(a) Yes
(b) No
(c) Partly yes
(d) None of them.
33. A retiring auditor may be re-appointed at an AGM, if:
(a) he is not disqualified for re-appointment
(b) he has not given the company a notice in writing of his unwillingness to be re-appointed.
(c) a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that
he shall not be reappointed.
(d) All of them
34. If at any AGM, no auditor is appointed or re-appointed them
(a) Central Government can appoint an auditor
(b) C & AG can appoint an auditor file the next AGM
(c) BOD can appoint an auditor at extra ordinary general meeting,
(d) The existing auditor shall continue to be the auditor of the company.

3 Provisions Relating to Audit Committee

35. Constitution of Audit committee of a company required under Section __________ of the Companies Act, 2003.
(a) 139 (2)
(b) 141 (3)
(c) 177
(d) 178

36. In addition to listed companies following class of company shall not constitute an Audit Committee:
(a) all public companies with a paid up capital of ten crore rupees or

more
(b) all public companies having turnover of on hundred crore rupees or
more
(c) all public companies, having in aggregate, outstanding loan or
borrowings or debentures or deposits less than fifty crore rupees or
more
(d) All of above
37. Manner and procedure of selection and appointment of an auditor is governed under
(a) Rule 1 of CAAR 2014
(b) Rule 2 of CAAR 2014
(c) Rule 3 of CAAR 2014
(d) Rule 5 of CAAR 2014
38. Appointment of an auditor as per Rule 3 of CAAR 2014, shall be subject to ratification in every annual general
meeting tile the sixth such meeting by way of passing of an ________.
(a) resolution
(b) ordinary resolution
(c) extraordinary resolution
(d) special resolution

4 Auditor’s Remuneration

39. Remuneration of an auditor describe under Section ________ of the Companies Act, 2013.
(a) 135
(b) 141
(c) 142
(d) 177
40. Can Board of Director of a company fix remuneration of the first auditor appointed by them.
(a) Yes
(b) No
(c) May or May not
(d) Absolutely No.

41. Is auditor’s remuneration includes the expenses, if any, incurred by the auditor in connection with the audit and
any facility extended to him. (a) Yes
(b) No
(c) It depends upon the situation
(d) If Central Government permits

42. Remuneration paid to him for any other service rendered by him at the request of the company,
(a) Included in the auditor’s
(b) Does not remuneration, include with the auditor’s remuneration u/s

142 of the Act.

(c) May be include in auditor’s remuneration if BoD approves (d) May be include in auditor’s remuneration if
Central Government

approves.
5 Removal of Auditors

43. Auditor appointed under Section 139 may be removed from his office before the expiry of his term, u/s
described under Section. (a) 139 (5)(i)
(b) 140 (1)
(c) 140 (5)
(d) 140 (2)

44. Auditor can be remove from his office before the expiry of his term only by _______ of the company.
(a) resolution
(b) simple resolution
(c) special resolution
(d) specific resolution

45. Auditor can be remove from his office before the expiry of his term only by a special resolution of the company,
after obtaining __________. (a) the management resolution
(b) the previous approval of BoD.
(c) the approval of the Central Government
(d) the previous approval of the Central Government

46. Application to the Central Government for removal of auditor shall be made in _________.
(a) Form ADT - 1
(b) Form ADT - 2
(c) Form ADT - 2
(d) Form ATD - 3

47. Application to the Central Government for removal of auditor shall made in appropriate form and shall be
accompanied with fees as provided for this purpose under the
(a) CAAR - 2014
(b) Companies Act 2013
(c) Companies (Fees and Penalty) Rules 2014
(d) Companies (Registration offices and Fees) Rules, 2014.

48. Application to the Central Government for removal of auditor shall be made to the Central Government of the
resolution passed by the Board. (a) Within 15 days
(b) Within 30 days
(c) Within 45 days
(d) Within 60 days

49. Removal of an auditor from his office before the expiry of his term, company shall hold the general meeting
within ________ of receipt of approval of the Central Government for passing the special resolution (a) Within 15
days
(b) Within 30 days
(c) Within 45 days
(d) Within 60 days

50. Before taking any action for removal of an auditor before expiry of terms _________.
(a) a notice from BoD should be served to concerned auditor (b) a notice from the Central Government should be
served to

concerned auditor
(c) The auditor concerned shall be given a reasonable opportunity of
being heared.
(d) None of than.

6 Ceiling on Number of Audits

51. Ceiling on number of audits per auditor.

(a) 10
(b) 12
(c) 15
(d) 20
52. Audit firm having five partners, in such case the ceiling will be ______ company
(a) 20
(b) 50
(c) 80
(d) 100
53. If any partner of the firm of Chartered Accountants in practice is also a partner of any other firm of Chartered
Accountants in practice the number of audit assignment by the member will be _______. (a) 20
(b) 40
(c) 60
(d) 80
54. The specified number of tax audit assignments that an auditor, as an individual or as a partner of a firm, can
accept is
(a) 20
(b) 40
(c) 60
(d) 80

7 Powers/Rights of Auditors

55. Statutory auditor has a right of assessing the books of accounts under section _______.
(a) 142(1)
(b) 142(2)
(c) 143(1)
(d) 144(1)

56. Section 143(1) of the Companies Act, provides that the auditor of a company, at all times, shall have a right of
assess to
(a) Books of accounts
(b) Vouchers of the company
(c) Either (a) or (b)
(d) (a) and (b) both
57. Under Section 143(1) auditor of a company has a right to assess the books of accounts
(a) Kept at the registered office
(b) Kept at any other place
(c) Only (a) not (b)
(d) (a) and (b) both places

58. ‘Books of Accounts’ includes all books which have

(a) any bearing
(b) likely to have any bearing on the accounts
(c) the statutory or statistical books
(d) any one of them.

59. Company Auditor cannot audit the branch’s records, is it (a) Correct
(b) Wrong
(c) Partially correct
(d) None

60. Auditor has a right to receive notices and other communications relating to any general meeting and to be heared
at such meeting, relating to the matter of his concern, discusses under Section ______ of the Companies Act, 2013.
(a) 141
(b) 143
(c) 143(1)
(d) 146

61. It is duty of the auditor to attend the general meeting of the company personally statement is
(a) True
(b) Wrong
(c) Partially True
(d) None

62. Unless otherwise exempted it is duty of an auditor to attend any general meeting of the company or through his
(a) Personal secretary
(b) Colleague
(c) Representative
(d) Authorised representative

63. Books of accounts of the company must be kept at the office for audit, describe under Section _______ of the
Companies Act, 2013. (a) 128
(b) 132
(c) 142
(d) 148

64. Auditor has a right to retain such documents which are connected with the work on which
(a) work have not be done
(b) some dispute arises
(c) fees have not been paid
(d) none of them.

8 Duties of Auditors

65. ___________ of the Companies Act, 2013 specifies the duties of an auditor of a company in a comprehensive
manner.
(a) Section 140
(b) Section 141
(c) Section 142
(d) Section 143
66. It is the duty of an auditor to inquire into the matter specially when

(a) Loan and advances made by the company have been shown as deposits.
(b) Personal expenses have been charged to revenue account.
(c) Transactions of the company which are represented nearly by book entries are prejudicial to the interests of the
company.
(d) Any of the above case.
67. Auditor of the company shall sign the auditor’s report or sign or certify
any other document of the company, in accordance with the provisions
of _________.
(a) Section 141(1)
(b) Section 141(2)
(c) Section 141(3)
(d) Section 141(5)
68. Section 141(2) of the Companies Act, 2013 states that where a ________ is appointed as an auditor of a
company, only the partners who are Chartered Accountants shall be authorised to act and sign on behalf of them.
(a) Company
(b) Partnership firm
(c) Limited Liability Partnership Firm
(d) Both (b) and (c)
69. According to __________ of the Companies Act, 2013, every auditor shall comply with the auditing standards.
(a) Section 142(1)
(b) Section 143(6)
(c) Section 143(8)
(d) Section 143(9)
70. According to __________ of the Companies Act, 2013, empower the Central Government to prescribe if needed,
the standard of auditing as recommended by the ICAI, in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority.
(a) Section 143(9)
(b) Section 143(10)
(c) Section 143(11)
(d) Section 143(12)
71. If an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an
offence of fraud, which involves or is expected to involve individually an amount of`1 crore or above, is being or
has been committed in the company by its officers or employees, the auditor shall report the matter to the Central
Government according to.
(a) Section 143(11) of the Companies Act, 2013
(b) Section 143(12) of the Companies Act, 2013
(c) Rule 13 of the Companies (Audit and Auditors) Rules 2014, (d) Both (b) and (c)
72. As per _______ of the Companies Act, 2013 where any of the matters required to be included in the audit report
is answered in the negative or with a qualification, the report shall state the reasons there for. (a) Section 143(1) (b)
Section 143(2) (c) Section 143(3) (d) Section 143(4)

9
Reporting Under Companies (Auditor’s Report) Order, 2016 [CARO 2016]

73. The CARO 2016, is an additional reporting requirement order, applies to every company including a _____ as
defined in clause (42) of Section 2 of the Companies Act, 2013.
(a) Private Limited Company
(b) Limited Liability Partnership
(c) Foreign Company
(d) Dormant Company

74. Exempted class of Companies for reporting under CARO 2016 except. (a) Banking Company
(b) Foreign Company
(c) Insurance Company
(d) One Person Company

75. Unfavourable or Qualified Reporting under CARO 2016 requires (a) to state the reason
(b) no reason to be stated
(c) explanation authentic proof is to be required
(d) none of them

10 Disclosure in the Auditor’s Report

76. Under which circumstances auditor should qualify his report. (a) Accounts have not been prepare on accrual
basis
(b) Proper disclosures regarding change in accounting policies have not

been made
(c) Fundamental accounting assumption of going concern has not been
followed and this fact has not been disclosed in the financial
statements
(d) Any of the above
77. In making a qualification/disclosure in the audit report, the auditor should consider the _________.
(a) Volume of such transaction
(b) Character of the transaction
(c) Materiality of the relevant transaction
(d) Any one of the above

11 Joint Auditor

78. Advantage of Joint Auditor except

(a) Sharing of expertise & lowing workload
(b) Better quality of performance through mutual consultation (c) A sense of healthy competition towards a better
performance (d) Fees being shared among the joint auditors

79. General disadvantages of joint audit except

(a) Displacement of the auditor of the company taken over in a takeover other obviated.
(b) General superiority complexes of some auditors.
(c) Uncertainty about the liability for the work done.
(d) Problems of co-ordination of the work.
80. Responsibility of Joint - Auditors are governed by
(a) SA - 220
(b) SA - 235
(c) SA - 240
(d) SA - 299
81. “All the joint auditors are jointly and severally responsible in respect of the audit work which is not divided
among the joint auditors and is carried out by all of them.” Statement is
(a) True
(b) False
(c) Partially True
(d) None

12 Audit of Branch Office Accounts

82. _______ of Section 143 of the Companies Act, 2013, prescribes the duties and powers of the company’s auditor
with reference to the audit of the branch and branch auditor.
(a) Sub Sections (2)
(b) Sub Section (4)
(c) Sub Section (7)
(d) Sub Section (8)
83. Branch auditor shall submit his report to the company’s auditor and reporting of fraud by the auditor shall also
extend to such branch auditor to the extent it relates to the concerned branch, according to. (a) Section 143 Sub
Section (7) of the Companies Act, 2013 (b) Section 143 Sub Section (8) of the Companies Act, 2013 (c) Rule 10 of
the Companies (Audit and Auditors) Rules, 2014, (d) Rule 12 of the Companies (Audit and Auditors) Rules, 2014,

13 Cost Audit

84. Cost audit is an audit process for __________ the cost of manufacture or production of any article.
(a) Verifying
(b) Valuation of
(c) Accounting
(d) Auditing

85. Cost Audit is covered by Section 148 of the Companies Act, 2013. The Audit conducted under this section shall
be in addition to the audit conducted under ___________.
(a) Section 141
(b) Section 142
(c) Section 143
(d) Section 145

86. The Central Government has notified the _____ which prescribes the classes of companies required to include
cost records in their book of account, applicability of cost audit, maintenance of records etc. (a) Companies Cost
Audit Rules 2014
(b) Companies (Cost Audit Record) Rules 2014
(c) Companies (Cost Audit and Investigation) Rules 2014 (d) Companies (Cost Records and Audit) Rules 2014

87. Every company under Rule 5 of CAAR 2014, all units and branches there of shall, in respect of each of its
financial year, is required to maintain cost records in ______.
(a) Form CAR - 1
(b) Form CRA - 1

88. No person appointed under _____ of the Companies Act, 2013, as an a auditor of the company shall be
appointed for conducting the audit of cost records.
(a) Section 139
(b) Section 141
(c) Section 142
(d) Section 146

89. Rule 6 of the CAAR - 2014 requires the companies prescribed under the said Rules to appoint an Auditor within
_____ of the commencement of every financial year.
(a) 60 days
(b) 90 days
(c) 120 days
(d) 180 days

90. The Cost Auditor appointed as such shall continue in such capacity till the expiry of 180 days from the closure
of the financial year or _______, for the financial year for which he has been appointed.
(a) Till the end of next financial year
(b) Till the submits the cost audit reports
(c) Till the expiry of 240 days
(d) None of the above.

91. The cost auditor may be removed from his office before the expiry of his term, through a after giving a
reasonable opportunity of being heard to the cost auditor and recording the reasons for such removal in writing. (a)
Simple resolution
(b) Special resolution
(c) Board resolution
(d) Central Govt’s order

92. For the appointment of another cost auditor after the removal of existing cost auditor, intimating such
appointment to the Central Government in form of.
(a) Form CRA - 1
(b) Form CAR - 1

93. Any casual vacancy in the of Cost Auditor, whether due to resignation, death or removal, shall be filled ______
within _____ days of occurrence of such vacancy.
(a) Board of Directors, 30
(b) Board of Directors, 60
(c) Central Government, 15
(d) Central Government, 30

94. Submission of Cost Audit Report to the Board of Directors of the company in ______.
(a) Form CRA - 1
(b) Form CRA - 2
(c) Form CRA - 3
(d) Form CRA - 4

95. Submission of Cost Audit Report to the Central Government in ______. (a) Form CRA - 1
(b) Form CRA - 2
(c) Form CRA - 3
(d) Form CRA - 4
96. The provisions of Section 143(12) of the Companies Act, 2013 and the relevant rules on duty to report on fraud
during the performance of audit functions under Section _____ of the Act and these rules. (a) 143(8)
(b) 143(15)
(c) 147
(d) 148
97. Cost Audit Rules shall not be applicable to a company which is covered under Rule 3, and
(a) Which is operating from a special economic zone.
(b) Which is engaged in generation of electricity for captive consumption through Captive Generating plant.
(c) Whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue
(d) Any of above

14 Punishment for Non-Compliance

98. If any of the provisions of Sections 139 to 146 is contravened the company shall be punishable with fine which
shall
(a) not be less than ` 25,000 but may extend to ` 5,00,000 (b) not be less than ` 50,000
(c) not be less than ` 1,00,000
(d) not be less than ` 50,000 but not more than ` 5,00,000.

99. If an auditor of a company contravenes any of the provisions of Section 139, Section 143, Section 144 or Section
145, the auditor shall be punishable with fine which shall.
(a) not be less than ` 25,000 but not more than ` 50,000 (b) not be less than ` 50,000
(c) not be less than ` 1,00,000
(d) not be less than ` 50,000 but not more than ` 5,00,000.

Answer

1. (c) 2. (b) 3. (d) 4. (d) 5. (b) 6. (b) 7. (c) 8. (b) 9. (c) 10. (b) 11. (c) 12. (c) 13. (d) 14. (c) 15. (d) 16. (d) 17. (d) 18.
(c) 19. (d) 20. (a) 21. (c) 22. (b) 23. (b) 24. (d) 25. (c) 26. (d) 27. (c) 28. (d) 29. (d) 30. (c) 31. (d) 32. (a) 33. (d) 34.
(d) 35. (c) 36. (c) 37. (c) 38. (b) 39. (c) 40. (a) 41. (a) 42. (b) 43. (b) 44. (c) 45. (d) 46. (b) 47. (d) 48. (b) 49. (d) 50.
(c) 51. (d) 52. (d) 53. (b) 54. (c) 55. (c) 56. (d) 57. (d) 58. (d) 59. (b) 60. (d) 61. (b) 62. (d) 63. (a) 64. (c) 65. (d) 66.
(d) 67. (b) 68. (d) 69. (d) 70. (b) 71. (d) 72. (d) 73. (c) 74. (b) 75. (a) 76. (d) 77. (c) 78. (d) 79. (a) 80. (d) 81. (a) 82.
(d) 83. (d) 84. (a) 85. (c) 86. (d) 87. (b) 88. (a) 89. (d) 90. (b) 91. (c) 92. (c) 93. (a) 94. (c) 95. (d) 96. (d) 97. (d) 98.
(a) 99. (d)

CHAPTER

11 Audit Report

This Chapter Covers: Study’s Chapter: 11

Chapter Comprises: ☹Forming an Opinion on the Financial StatementsObjective of the Auditor ☹Objectives of the
Auditor as per SA 700 ☹Form of Opinion ☹Auditor’s Report ☹Auditor’s Report Prescribed by Law or Regulation

☹ Modifications to the Opinion in the Independent Auditor’s Report ☹Emphasis of Matter Paragraphs and Other
Matter Paragraphs in the Independent Auditor’s Report ☹Objective of the Auditor as per SA 706 ☹Communicating
Key Audit Matters in the Independent Auditor’s Report ☹Standard on Auditing (SA) 710, “Comparative Information
Corresponding Figures and Comparative Financial Statements”.

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis

Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book.
6.487
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK Repeatedly Asked Questions
4.1
Common Answered Questions
Weightage Analysis Must Try Question
2.1, 6.1
1
Forming an Opinion on the Financial Statements
Q.1.1 2008 - May [4] (b) Descriptive When does an auditor issue unqualified opinion and what does it indicate? (4
marks)

Answer:
An unqualified report or clean audit report is issued when the auditor has no reservation in respect of matters
contained in the financial statements. He is satisfied in all material respects with all the points required to be stated
in his report and states them in affirmative, adding no reservation anywhere in the audit report:
An unqualified Audit Report shall state that:
“The financial statements give a true and fair view of the state of affairs and profit and loss account during the
period.”
A clean report is issued , if, the auditor is satisfied that:
1. The financial information has been prepared using acceptable

accounting policies and they are applied consistently.

2. The financial information complies with relevant regulations and statutory
requirements .
3. There is adequate disclosure of all material matters relevant to the
proper presentation of the financial information, subject to statutory
requirements, where applicable.
Space to write important points for revision

Q.1.2 2018 - Nov [5] (a) Descriptive “An auditor is required to make specific evaluations while forming an opinion
in an audit report.” State them. (5 marks)

Answer:
An auditor is required to make following specific evaluations while forming an opinion in an audit report.
1. The financial statements adequately disclose the significant accounting

policies selected and applied:

2. The accounting policies selected and applied are consistent with the
applicable financial reporting framework and are appropriate: 3. The accounting estimates made by management are
reasonable; 4. The information presented in the financial statements are relevant,
reliable, comparable and understandable;
5. The financial statements provide adequate disclosures to enable the
intended users to understand the effect of material transactions and
events on the information conveyed in the financial statements; and 6. The terminology used in the financial
statements, including the title of
each financial statement, is appropriate.
Space to write important points for revision

2 Auditors Report
Q.2.1 2010 - May [4] (b), RTP Dt. Between

Differentiate between ‘Qualified report’ and ‘Adverse report’. (5 marks) Answer:

Distinction between Qualified report and Adverse report :

Basic Qualified Opinion

1. Effect on A qualified opinion should Materiality be expressed when the auditor concludes that an unqualified
opinion cannot be expressed but that the effect of any disagreement with management is not so material and
pervasive as to require an adverse opinion, or limitation on scope is not so material and pervasive as to require a
disclaimer of opinion.

Adverse Opinion
An adverse opinion should be expressed when the effect of a disagreement is so material and pervasive to the
financial statements that the auditor concludes that a qualification of the report is not adequate, to disclose the
misleading or incomplete nature of the financial statements.

2. True and Fair View

3. Opinion

In qualified report, the auditor’s reservation is generally written as “subject to or except for, we report that the
Balance Sheet shows a true and fair view”.

In the qualified report, the auditor gives an opinion s u b j e c t t o c e r t a i n reservations

In case of adverse report, the auditor states that “the financial statements do not present a true and fair view of the
state of affairs and working results”.

In the case of adverse r e p o r t t h e a u d i t o r concludes that on the basis of his examination he is not satisfied
with the affirmation made in the financial statements.

Space to write important points for revision

Q.2.2 2012 - Nov [3] (b) Descriptive

State any six basic elements of the Auditor’s Report. (6 marks) Answer:
The basic elements of the Auditor's Report are:

1. Title The Auditor's Report should have an appropriate title. i.e as'' Auditor's Report.'' so that it can be easily
distinguished from other reports.

2. Addressee The auditor's report should be appropriately addressed as required by the circumstances of the
engagement and applicable laws and regulations. Ordinarily , the auditor's report is addressed to the authority
appointing the auditor.

3. Opening or Introductory Paragraph

4. Managements Responsibility for the

Financial
Statement

The auditor's report should identify the financial statements of the entity that have been audited, including the date
of and period covered by the financial statements. The report should include a statement that the financial statements
are the responsibility of the entity's management and a statement that the responsibility of the auditor is to express an
opinion on the financial statements based on the audit.

The auditor's report shall include a section with the heading “Management’s [or other appropriate term]
Responsibility for the Financial Statements”. The auditor’s report shall describe management’s responsibility for the
preparation of the financial statements in the manner in which that responsibility is described in the term of the audit
engagement. The description shall include an explanation that management is responsible for the preparation of the
financial statements in accordance with the applicable financial reporting framework; this responsibility includes the
design, implementation and maintenance of internal control relevant to the preparation of financial statements that
are free from material misstatement, whether due to fraud or error.

5. Auditor’s
Responsibility
The auditor’s report shall include a section with the heading “Auditor’s Responsibility”.

The auditor’s report shall state that the responsibility of the auditor is to express an opinion on the financial
statements based on the audit.

The auditor’s report shall state that the audit was conducted in accordance with Standards on Auditing issued by the
Institute of Chartered Accountants of India. The auditor’s report shall also explain that those Standards require that
the auditor comply with ethical requirements and that the auditor plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material misstatement.

6. Auditor’s Opinion
The auditor’s report shall include a section with the heading “Opinion”.

(i) When expressing an unmodified opinion on financial stat e me nts prepared in accordance with a fair presentation
framework, the auditor’s opinion shall, unless otherwise required by law or regulation, use one of the following
phrases, which are regarded as being equivalent:
(a) The financial statements present fairly,

in all material respects, in accordance with [the applicable financial reporting framework]; or

(b) The financial statements give a true and fair view of in accordance with [the a p p l i c a b l e framework]. f i n a
ncialreporting

7. Date of Report
8. Place of Signature 9. Auditor's Signature

(ii) When expressing an unmodified opinion on financial statements prep a r e d in accordance with a compliance
framework, the auditor’s opinion shall be that the financial statements are prepared, in all material respects, in
accordance with [the applicable financial reporting framework].

The date of an auditor's report on the financial statements is the date on which the auditor signs the report expressing
an opinion on the financial statements. The date of report informs the reader that the auditor has considered the
effect on the financial statements and on the report of the events and transactions of which the auditor became aware
and that occurred up to that date. Since the auditor's responsibility is to report on the financial statements as prepared
and presented by management, the auditor should not date the report earlier than the date on which the financial
statements are signed or approved by management.

The report should name specific location, which is ordinarily the city where the audit report is signed.

The report should be signed by the auditor in his personal name. Where the firm is appointed as the auditor, the
report should be signed in the personal name of the auditor and in the name of the audit firm. The partner/proprietor
signing the audit report should also mention the membership number assigned by the I.C.A.I.

Q.2.3 2014 - May [7] (e) Short Notes Write short note on the following:
Introductory Paragraph in the Auditor’s Report. (4 marks)

Answer:
Introductory paragraph in the Auditor’s Report:
The report should identify the financial statements of entity that have been audited, including the date of and period
covered by financial statements. It should include statement that financial statement are responsibility of entity’s
management and a statement that the responsibility of auditor is to express an opinion on financial statement.
An illustration of these matters in an introductory paragraph is: “We have audited the attached balance sheet of
................... (Name) as at 31st March 2014 and also the profit and loss account for the year ended on that date thereto
our responsibility is to express an opinion on these financial statements based on our audit.”

Space to write important points for revision

Q.2.4 2018 - May [1] {C} (h) Objective

Examine with reasons (in short) whether the following statement is correct or incorrect :
(h) The statutory auditor of ABC Ltd. is of the opinion that communicating

key audit matters in the auditor’s report constitutes a substitute for disclosure in the financial statements. (2 marks)
Answer:
Incorrect:
Communicating key audit matters in the auditor’s report is in the context of
the auditor having formed an opinion on the financial statements as a whole.
Communicating key audit matters in the auditor’s report is not a substitute for
disclosures in the financial statements that the applicable financial reporting
framework requires management to make, or that are otherwise necessary
to achieve fair presentation.

Q.2.5 2018 - Nov [1] {C} (h), (j) Objective

Examine with reasons (in short) whether the following statements are correct or incorrect :
(h) Any partner of an LLP, who is appointed as an auditor of a company,

can sign the audit report. (2 marks) (j) An auditor should issue disclaimer of opinion when there is difference of
opinion between him and the management on a particular point. (2 marks)

Answer:
(h) Incorrect :
As per Sec. 141(2) of the Companies Act, 2013, where a firm including a Limited Liability Partnership (LLP) is
appointed as an auditor of a company, only the partners who are chartered Accountants shall be authorised to act and
sign on behalf of the firm.
(j) Incorrect :
The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on
which to base the opinion, and the auditor concludes that the possible effects on the financial statement of
undetected misstatements, if any, could be both material and pervasive.
Space to write important points for revision

Q.2.6 2019 - May [1] (a) Descriptive Where the firm is appointed as an auditor of the entity the audit report is
signed only in the name of audit firm. (2 mark)

Answer:
This Statement is Incorrect
It is clarified that in India, the reports are not issued / signed on in the firm’s name, rather they are issued / signed on
the behalf of the firm by the sole practitioner, proprietor or a partner of the firm, as the case may be, in his individual
name.

Q.2.7 2009 - May [2] (a) Practical

Comment on the following situation:

Sri Limited charged depreciation on its plant and machinery comprised in PPE at rates different from what had been
specified in Schedule II to the Companies Act, 2013. The auditor insisted that the rates of depreciation adopted
should be mentioned in the notes to the account, else, he would make qualification in his audit report. The
Management of the company contended that there is no impact in profits due to its omission to disclose the fact and
hence on considerations of principle of materiality, the auditor is wrong in mentioning this omission in his report by
way of qualification.

(8 marks)

Answer:
1. It is permissible for the business entity to charge depreciation on its assets at rate different from Schedule II rates
provided those rates are higher than the schedule rates based on technical estimation or otherwise allowed under
Sec. 123 of the Act.
2. If the rates adopted are different from the principal rates specified in the schedule, the same need to be disclosed
in the notes to the accounting.
3. If there is a non-disclosure of rates, then it is a violation of AS-1 which requires the accounting policies to be
disclosed in the accounts and also Schedule II requirement which too requires such disclosure.
4. The auditor hence, is right in his approach to qualify the same in his report.
5. The materiality of an item is not always measured in terms of quantitative factors alone.
6. The qualitative factors also effect the judgment of auditors in opining the true and fair view of accounts.
7. The contention of the management that it does not meddle with the profit is not founded.
8. When the management does not correct the situation, the auditor is justified in qualifying his audit report.

3
Auditor’s Report prescribed by Law or Regulation
Q.3.1 2014 - Nov [4] (b) Descriptive State the matters to be specified in the Auditor’s Report in terms of provisions
of Sec. 143(2) of the Companies Act, 2013. (6 marks)

Answer:
According to Sec. 143(2) of the Companies Act, 2013
The auditor shall make a report to the members of the company on the accounts examined by him and on every
financial statements which are required by or under this Act to be laid before the company in general meeting and
the report shall after taking into account the provisions of this Act, the accounting and auditing standards and
matters which are required to be included in the audit report under the provisions of this Act or any rules made
thereunder or under any order made under sub-section (11) and to the best of his information and knowledge, the
said accounts, financial statements give a true and fair view of the state of the company’s affairs as at the end of its
financial year and profit or loss and cash flow for the year and such other matters as may be prescribed.

Space to write important points for revision

4
Modifications to the opinions in the Independent Auditor’s Report
Q.4.1 2008 - Nov [8] (a), 2010 - Nov [5] (c) Short Notes Write short note on the following :
Disclaimer of Opinion. (5, 5 marks)

Answer:
Disclaimer of Opinion: As per SA☐500 on “Audit Evidence”, the auditor must collect sufficient and appropriate
audit evidence, on the basis of which he draws his conclusion to form an opinion, on the financial statements. But, if
the auditor fails to obtain sufficient information to form an overall opinion on the matter contained in the financial
statements, he issues a disclaimer of opinion.
The reasons due to which the auditor is not able to collect the audit evidence are:
1. Scope of audit is restricted,
2. The auditor may not have access to the books of accounts, e.g:

(i) Books of A/c’s of the company seized by IT authorities,

(ii) Sometimes inventory verifications at locations outside the city bound the scope of duties of the auditor.
In such a case, the auditor must state in his audit report that : "He is unable to express an opinion because he
has not been able to obtain sufficient and appropriate audit evidence to form an opinion."

Space to write important points for revision

Q.4.2 2009 - May [1] (xii) Objective

State with reasons (in short) whether the following statement is True or False:
Disclaimer of opinion is issued when an auditor confronts a different stand by management in respect of a material
issue which auditor does not approve of. (2 marks)

Answer:
False :
Disclaimer of opinion is issued when the auditor is unable to frame an opinion in view of certain reasons such as
non-availability of information, non-performance of procedure, lack of clarity in information etc. Where the auditor
is positively in disagreement with management on certain issue he would issue qualified report.

Q.4.3 2009 - Nov [1] (ix) Objective

State with reasons (in short) whether the following statement is true or false.
The Auditor disagreed with the management with regard to the acceptability of the Accounting Policies and the
inadequacy of disclosures in the financial statements and issued a disclaimer. (2 marks)
Answer:
False:
If the auditor disagrees with the management in the matters relating to the acceptability of Accounting policies
selected and inadequacy of the disclosures in the financial statements, he should issue a qualified report or express
an adverse opinion and not a disclaimer.

Space to write important points for revision

Q.4.4 2013 - May [5] (a) Descriptive 2013 - May [5] (a) State the circumstances which could lead to any of the
following in an Auditors Report:

(i) A modification of opinion

(ii) Disclaimer of opinion
(iii) Adverse opinion
(iv) Qualified opinion (4 x 2 = 8 marks)

Answer:
(i) A Modification of Opinion:

The auditor shall modify the opinion in the auditor’s report when: (a) The auditor concludes that, based on the audit
evidence obtained, the financial statements as a whole are not free from material misstatement; or

(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a
whole are free from material misstatement.
(ii) Disclaimer of opinion: As per SA – 500, the auditor must collect

sufficient & appropriate audit evidence, on the basis of which he draws his conclusion to form an opinion, on the
financial statements. But, if the auditor fails to obtain sufficient information to form an overall opinion on the matter
contained in the financial statements, he issues a disclaimer of opinion.
The reasons due to which the auditor is not able to collect the audit evidence are:

(a) Scope of audit is restricted,

(b) The auditor may not have access to the books of accounts, e.g : (a) books of A/c’s of the company seized by IT
authorities, (b) Sometimes inventory verifications at locations outside the city bound the scope of duties of the
auditor.
In such a case, the auditor must state in his audit report that:
"He is unable to express an opinion because he has not been able to
obtain sufficient and appropriate audit evidence to form an opinion." (iii) Adverse Opinion: An adverse audit report
is issued if the auditor is
of the opinion that based on his examination he does not agree with
the affirmation made in the financial statements.
In such case the reservations or objections of the auditor are so
material that he feels that the overall view of the accounts as
presented would be a serious distortion. He must state the reasons for
such a type of report.
(iv) Qualified Opinion: The auditor shall express a qualified opinion
when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or
in the aggregate, are material, but not pervasive, to the financial statements; or
(b) 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.

Q.4.5 2014 - Nov [2] (vii) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
The Auditor shall express an unqualified opinion if the Auditor is unable to obtain sufficient audit evidence
regarding the opening balances.
(2 marks) Answer:
Incorrect:
When auditor is unable to obtain sufficient audit evidence regarding the opening balances he shall express a
qualified opinion.

Space to write important points for revision

Q.4.6 2015 - May [2] (ii) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
The auditor shall not modify the opinion in the auditor’s report. (2 marks)

Answer:
Incorrect:
The auditor can modify the opinion in the auditor’s report if there is material mis-statement in the financial
statements or if he is not able to obtain sufficient and appropriate audit evidences.

Space to write important points for revision

Q.4.7 2016 - Nov [2] (viii) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
An auditor issues unqualified opinion when he concludes that the financial statements give true and fair view. (2
marks)

Answer:
Correct:
An unqualified report or clean audit report is issued when the auditor has no reservation in respect of matters
contained in the financial statements. He is satisfied in all material respects with all the points required to be stated
in his report and states them in affirmative, adding no reservation anywhere in the audit report shall state that.
“The financial statements give a true and fair view of the state of affairs and profit and loss account during the
period.”

Space to write important points for revision

Q.4.8 2017 - May [2] (a) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
If financial statements are misstated, and in the auditor’s judgement such misstatement is material and pervasive, he
should issue a qualified opinion. (2 marks)

Answer:
Incorrect:
As per SA-705, Modifications to the opinion in the independent Auditor’s Report auditor expresses qualified
opinion when he concludes that there is a material misstatement in the financial statement but it is not so pervasive
so as to require an adverse opinion.

Space to write important points for revision

Q.4.9 2017 - Nov [1] {C} (a) Descriptive

Discuss the following:

What are the circumstances that may result in other than an unqualified opinion on the Financial Statements by an
auditor? (5 marks)

Answer:
Circumstances that may result in other than an unqualified opinion: ☐ Limitation on scope: If, after accepting
the engagement, the auditor

becomes aware that management has imposed a limitation on the scope of the audit that the auditor considers likely
to result in the need to express a qualified opinion or to disclaim an opinion on the Financial Statements, the auditor
shall request that management remove the limitation.
If management refuses to remove the limitation, the auditor shall communicate the matter to those charged with
Governance and determine whether it is possible to perform alternative procedures to obtain sufficient appropriate
audit evidence.

If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall determine the
implication as follows: 1. If the auditor concludes that the possible effects on the Financial

Statements of undetected misstatements, if any, could be material but not pervasive, the auditor shall qualify the
opinions; or

2. If the auditor concludes that the possible effects on the Financial Statements of undetected misstatements, if any,
could be both material and pervasive so that a qualification of the opinion would be inadequates to communicate the
gravity of the situation, the auditor shall:
(i) resign from the audit, where practicable and not prohibited by

law or regulation; or
(ii) if resignation from the audit before issuing the auditor’s report is
not practicable or possible, disclaim an opinion on the Financial
Statement.
If the auditor resigns as contemplated by above paragraph, before resigning the auditor shall communicate to
those charged with Governance any matters regarding misstatements identified during the audit that would have
given rise to a modified of the opinion.

☐ Disagreement with management: The auditor may disagree with management about matters such as the
acceptability of accounting policies selected. The method of their application, or the adequacy of disclosures in the
Financial Statement. If such disagreements are material to the Financial Statement, the auditor should express a
qualified or an adverse opinion.

☐ Other considerations relating to the adverse opinion or disclaimer of opinion: When the auditor considers it
necessary to express an adverse opinion or disclaim an opinion on the Financial Statement as a whole, the auditor’s
report shall not also include an unmodified opinion with respect to the same financial reporting framework on a
single Financial Statement or one or more specific elements, accounts or items of a Financial Statement.

Space to write important points for revision

Emphasis of Matter Paragraphs and Other 5 Matter Paragraphs in the Independent Auditor’s Report

Q.5.1 2018 - May [5] (a) Descriptive

Define Emphasis of Matter Paragraph and how it should be disclosed in the Independent Auditor’s Report? (5
marks) Answer:
Emphasis of Matter Paragraph:
A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the
financial statements that, in the auditor’s judgement, is of such importance that it is fundamental to users’
understanding of the financial statements.
Emphasis of Matter Paragraphs in the Independent Auditor’s Report: If the auditor considers it necessary to
draw users’ attention to a matter presented or disclosed in the financial statements that, in the auditor’s judgement, is
of such importance that it is fundamental to users’ understanding of the financial statements, the auditor shall
include an emphasis of Matter Paragraph in the auditor’s report provided : (a) The auditor would not be required to
modify the opinion in accordance

with SA 705 (Revised) as a result of the matter, and

(b) When SA 701 applies, the matter has not been determined to be a key
audit matter to be communicated in the auditor’s report.
Space to write important points for revision

6
Communicating Key Audit Matters in the Independent Auditor’s Report
Q.6.1 RTP Descriptive Explain clearly the purpose of communicating key audit matters.

Answer:
Purpose of Communicating Key Audit Matters
As per SA 701, “Communicating Key Audit Matters in the Auditor’s Report”, the purpose of communicating
key audit matters is to enhance the communicative value of the auditor’s report by providing greater transparency
about the audit that was performed. Communicating key audit matters provides additional information to intended
users of the financial statements to assist them in understanding those matters that, in the auditor’s professional
judgment, were of most significance in the audit of the financial statements of the current period. Communicating
key audit matters may also assist intended users in understanding the entity and areas of significant management
judgment in the audited financial statements.

Space to write important points for revision

SA - 710: Comparative Information 7 Corresponding Figures and Comparative Financial Statement

Q.7.1 2009 - May [1] (vi) Objective

State with reasons (in short) whether the following statement is True or False:
SA ☐710 on 'comparatives' is applicable to corresponding previous years figures and not to comparative Financial
statement. (2 marks)

Answer:
True :
As per SA 710 “Comparatives” with reference to financial statement presentation includes the corresponding
previous year figures and are intended to be read on relation to the amounts and other disclosures relating to the
current period.

Space to write important points for revision

Q.7.2 2010 - May [5] (b) Descriptive

‘The extent of audit procedure performed on corresponding figure is less compared to audit of current period
figures’, reporting. Justify the statement with regard to auditor’s duties for reporting of comparatives under SA 710.
(5 marks)

Answer:
Comparatives :
According to SA 710 on “Comparatives Information Corresponding Figures and Comparative Financial
Statements, the following are the broad principles”
• The auditor should obtain sufficient appropriate audit evidence that the

corresponding figures meet the requirements of the relevant financial reporting framework.

• The auditor should determine whether the comparatives comply, in all material respects, with the financial
reporting framework relevant to the financial statements being audited.
• When the comparatives are presented as corresponding figures, the auditor’s report should not specifically identify
comparatives because the auditor’s opinion is on the current period financial statements as a whole, including the
corresponding figures.
• When the auditor’s report on the prior period, as previously issued, included a qualified opinion, disclaimer of
opinion, or adverse opinion and the matter which gave rise to the modification in the audit report is

(i) unresolved and results in a modification of the auditor’s report regarding the current period figures, the auditor’s
report should also be modified regarding the corresponding figures or

(ii) unresolved, but does not result in a modification of the auditor’s report regarding the current period figures, the
auditor’s report should be modified regarding the corresponding figures.
• When the prior period financial statements are not audited, the
incoming auditor should state in the auditor’s report that the corresponding figures are unaudited.

• In case of material misstatement of prior period detected subsequently, the auditor should examine that appropriate
disclosures have been made, if appropriate disclosures have not been made, the auditor should issue a modified
report on the current report financial modified with respect to the corresponding figures included therein.

Space to write important points for revision

Q.7.3 2019 - Nov [5] (a) Descriptive

When corresponding figures are presented, the auditors’ opinion shall not refer to the corresponding figures. Discuss
the exceptions of the above statement when the prior period financial statements are audited.

(4 marks)
MULTIPLE CHOICE QUESTION
1
Forming an Opinion on the Financial Statements - Objective of the Auditor

1. Main objective of the auditor is

(a) Communicate key Audit matters in the Independent Auditor’s Report (b) Forming an opinion and reporting on
financial statement. (c) To express clearly an appropriate modified opinion (d) All of the above.

2. Management is responsible for

(a) The preparation of the financial statements.
(b) The necessary internal controls
(c) The appointment of the statutory Auditor
(d) (a) and (b)

3. The purpose of an audit is to

(a) Produce error free financial statement
(b) Fulfill the requirements of the companies Act,
(c) Enhance the degree of confidence of intended users of the financial

statements.
(d) Any of the above.

4. The main user of audit report are, except

(a) Shareholders
(b) Management
(c) Members
(d) Any stakeholders of the company.

5. “Forming an Opinion and Reporting on Financial Statements” is describe under

(a) 400
(b) 500
(c) 650
(d) 700

6. In order to form an opinion and conclusion shall take into account. (a) Whether sufficient appropriate audit
evidence has been obtained. (b) Whether uncorrected misstatements are material, individually or in

aggregate
(c) The evaluations
(d) All of the above.

7. Auditor’s evaluation shall include consideration of the ______aspects of the entity’s accounting practices,
including indicators of possible bias in management’s judgements.
(a) Quantitative
(b) Qualitative
(c) Quantitative and Qualitative
(d) Statutory

2 Form of Opinion

8. Auditor shall modify the opinion in the auditor’s report in accordance with (a) SA - 700
(b) SA - 703
(c) SA - 704
(d) SA - 705
9. The auditor shall express an _________when the auditor concludes that the financial statements are prepared, in
all material respects, in accordance with the applicable financial reporting frame work. (a) Modified opinion
(b) Unmodified opinion
(c) Qualified opinion
(d) Adverse opinion

3 Auditor’s Report

10. Auditor’s report is normally addressed to those for whom report is prepared, often either to the shareholders or
__________of the entity whose financial statements are being audited.
(a) Management
(b) Those Charge with governance
(c) Managing Director
(d) None of the above.

11. If the concept of going concern is applicable, the auditor shall report is accordance with_________.
(a) SA - 430
(b) SA - 500
(c) SA - 535
(d) SA - 570

12. In the case of an audit of financial statement of listed entities, the auditor shall communicate key audit matters in
the auditor’s report in accordance with ____________.
(a) SA- 570
(b) SA- 630
(c) SA- 700
(d) SA- 701

13. The auditor shall include a section in his report with a heading “Responsibilities of Management for the
Financial Statement” as explained in __________.
(a) SA- 200
(b) SA- 500
(c) SA- 505
(d) SA- 701

14. _________requires the auditor to agree managements responsibilities is an engagement letter or other suitable
form of written agreements. (a) SA- 200
(b) SA- 210
(c) SA- 230
(d) SA- 701

15. SA- 700 requires the use of specific headings, which are intended to assist in making auditor’s report that refer
to audit’s that have been conducted in accordance with SA’s more recognizable. Which of the following is that
specific heading:
(a) Key audit matters
(b) Basis of opinion
(c) Date
(d) All of the above
16. The opinion section of the auditor’s report shall :
(a) State that the financial statements have been audited (b) Identify the title of each statement comprising the
financial statement (c) Identify the entity whose financial statements have been audited (d) All of the above.

4
Auditor’s Report prescribed by Law or Regulation

17. In order to from the opinion, the auditor shall conclude as to whether the auditor has obtained _________about
whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.
(a) Reasonable assurance
(b) Limited assurance
(c) Absolute assurance
(d) None of the above

18. The auditor shall express __________opinion when the auditor, having obtained sufficient appropriate audit
evidence, concludes that misstatements, individuality or in the aggregate, are both material and pervasive to the
financial statements.
(a) Unqualified
(b) Qualified
(c) Adverse
(d) Disclaimer

19. Which of the following is not a type of modified opinion:

(a) Qualified opinion
(b) Adverse opinion
(c) Disclaimer opinion
(d) None of the above.

20. Communicating key audit matter in the auditor’s report constitutes a substitute for disclosure in the financial
statements.
(a) Correct
(b) Incorrect
(c) Partially correct (d) None of the above

5
Modifications to the opinions in the Independent Auditor’s Report

21. The auditor shall modify the opinion in the auditor’s report when: (a) The auditor concludes that, based on the
audit evidence obtained, the financial statements as a whole are not free from material misstatements

(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a
whole are free from material misstatement.

(c) (a) or (b)

(d) Both (a) and (b)

22. The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements are material,
but not -pervasive, such audit opinion is known as__________.
(a) Un qualified opinion
(b) Qualified opinion
(c) Adverse opinion
(d) Disclaimer of opinion

23. The auditor shall express an _______when the auditor, having obtained sufficient appropriate audit evidence,
concludes that misstatements, individually or in the aggregate, are both material and pervasive. (a) Un qualified
opinion
(b) Qualified opinion
(c) Adverse opinion
(d) Disclaimer of opinion

24. The auditor shall express __________when he is unable to obtain sufficient appropriate audit evidence and he
concludes that the possible effects on the financial statements of undetected misstatements could be both material
and pervasive.
(a) Unqualified opinion
(b) Qualified opinion
(c) Adverse opinion
(d Disclaimer of opinion

Emphasis of Matter Paragraphs and Other 6 Matter Paragraphs in the Independent Auditor’s Report

25. “Emphasis of Matter Paragraphs and Other Matter Paragraphs In The Independent Auditor’s Report” described
under __________. (a) SA - 700
(b) SA - 701
(c) SA - 705
(d) SA - 706

26. If the auditor considers it necessary to draw user’s attention, auditor shall include an Emphasis of matter
paragraph in the auditor’s report provided:
(a) The auditor would not be required to modify the opinion in

accordance with SA 705 (Revised) as a result of the matter (b) When SA - 701 applies, the matter has not been
determined to be
a key audit matter to be communicated in the auditor’s report. (c) (a) or (b)
(d) Both (a) and (b)

7
Communicating Key Audit Matters in the Independent Auditor’s Report

27. “Communicating key Audit Matters in the Auditor’s Report”, describes under
(a) 601
(b) 700
(c) 701
(d) 705

28. AS per SA - 701, the objectives of the auditor are to _______and, having formed an opinion on the financial
statements, communicate those matters by describing them in the auditor’s report.
(a) Determine audit evidence
(b) Determine key audit matters
(c) Conduct audit of relevant areas
(d) Conduct investigation of certain areas

29. Auditor shall determine, from the matters communicated with _______those matters that required significant’
auditor attention in performing the audit.
(a) Management
(b) Those Charge with Government
(c) Central Government
(d) Shareholders

Standard on Auditing - 710: “Comparative 8 Information Corresponding Figures and Comparative Financial
Statements”

30. Comparative Information define as

(a) “ The amount and disclosures including in the financial statements in respect of the financial period in
accordance with the applicable financial system”.
(b) The amounts and disclosures including in the financial statements in respect of one or more prior periods in
accordance with the applicable financial reporting framework”.

(c) The amount and disclosures included in the financial statements in respect of the current financial period in
accordance with the financial reporting framework

(d) None of the above.

31. When auditor’s opinion on prior period financial statements differs from
the opinion the auditor previously expressed, the auditor shall disclose
the substantive reasons for the different opinion in an other matter
paragraph in accordance with __________
(a) SA - 700
(b) SA - 701
(c) SA - 705
(d) SA - 706

Answer

1. (d) 2. (d) 3. (c) 4. (b) 5. (d) 6. (d) 7. (b) 8. (d) 9. (b) 10. (b) 11. (d) 12. (d) 13. (a) 14. (b) 15. (d) 16. (d) 17. (a) 18.
(c) 19. (d) 20. (b) 21. (c) 22. (b) 23. (c) 24. (d) 25. (d) 26. (d) 27. (c) 28. (b) 29. (b) 30. (b) 31. (d)

CHAPTER

12 Audit of Banks

This Chapter Covers: Study’s Chapter: 12

Chapter Comprises: ☹Understanding of Accounting System in Banks ☹Bank Audit Approach ☹Income
Recognition Policy ☹Form and
Content of Financial Statements ☹Audit of Accounts ☹Eligibility,
Qualifications and Disqualifications of Auditor ☹Auditor’s Report
☹Advances ☹Computation of Drawing Power ☹Audit of Revenue Items.

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis

Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book. 6.517
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK Repeatedly Asked Questions
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
7.2
1 Bank Audit Approach
Q.1.1 2019 - May [6] (a) Descriptive

You are appointed as an auditor of Banking Co., and hold discussions with engagement team. List out matters which
you would discuss at the planning stage of an audit to gain better understanding of the bank and its environment. (4
marks)

Answer:
The following matters will be discussed with engagement team at, the planning Stage of an audit to gain
better understanding of the bank and its environment .
– Errors that may be more likely to occur ;
– Errors which have been identified in prior years ;
– Method by which fraud might be perpetrated by bank personnel or others

within particular account balances and/or disclosures :

– Audit responses to Engagement Risk, Pervasive Risk and Specific Risks:
– Need to maintain professional skepticism throughout the audit

engagement;
– Need to alert for information or other conditions that indicates that a
material misstatement may have occurred (e.g., the bank’s application
of accounting policies in the given facts and circumstances). Space to write important points for revision

Q.1.2 2019 - Nov [6] (c) Descriptive

The discussion between members of the engagement team members and the audit engagement partner should be
done on the susceptibility of the bank’s financial statements to material misstatements. Briefly discuss the points
ordinarily included in discussion of the engagement team. (3 marks)

2 Appointment of Auditor
Q.2.1 2019 - May [1] (e) Objective Auditor of a Nationalised bank is to be appointed at the annual general meeting
of the shareholders. (2 marks)

Answer:
This Statement is Incorrect
The auditor of a nationalised bank is to be appointed by the Bank concerning acting through its Board of Directors.
However, approval of the Reserve Bank is required before the appointment is made.

3 Auditor’s Report
Q.3.1 2008 - Nov [6] (a) (i) Descriptive

What do you understand by Long-form Audit Report?

(2 marks) [CA Final - I] Answer:
The long form Audit Report (LFAR) has to be furnished by the auditor of a bank in addition to the audit report as
per the statutory requirement. The matters which the banks require their auditor to deal with in the form of LFAR
have been specified by Reserve Bank of India.
The LFAR is to be submitted before 30th June every year. To ensure timely submission of LFAR proper planning for
completion of LFAR is required. While the format of LFAR does not require an executive summary to be given,
members may consider providing the same to bring out the key observations from the whole document.

Space to write important points for revision

Q.3.2 2011 - Nov [5] (b) Descriptive

As a bank branch auditor, what aspects will be considered while reporting on credit appraisal,
sanctioning/disbursement and documentation in respect of advances in the LFAR ? (5 marks) [CA Final - I]

Answer:
Verification of advances in the Long Form Audit Report (LFAR) The auditor has to comment on various
specific issues as mentioned in the Long Form Audit Report of the bank. While evaluating the efficacy of internal
controls over advances, the auditor should particularly examine those aspects on which he is required to comment in
his LFAR.
Hence, he should examine :
1. Whether the loan applications are complete and in prescribed form; 2. Procedural instructions regarding
grant/renewal/ enhancement of

facilities have been complied with;

3. Sanctions are within delegated authority and disbursements are in accordance with terms of the sanction;
4. Documentation is complete; and supervision is timely, effective and as per prescribed guidelines.
The auditor can gather the requisite evidence by examining relevant documents (such as loan application forms,
supporting documentation, sanctions, security documents, etc.) and by obtaining information and explanations from
the branch management in appropriate cases. The auditors must familiarise themselves with those issues and
guidance relating to the same and should cover the same during the regular course of audit of advances.
Space to write important points for revision

4 Conducting an Audit

Q.4.1 2010 - May [4] (a) Descriptive While auditing the Branch of a Bank you are required to examine Inter
Branch adjustments. Which points require your special attention ?

(6 marks) [CA Final - I] Answer:

Special points to examine Inter Branch adjustments:
The following points require special attention in the examination of Inter Branch transactions.
1. While verifying the closing balance, special attention should be paid to

the origin and validity of old outstanding unmatched entries, particularly debit entries. The auditor may also seek
confirmation of transactions relating to outstanding in appropriate cases.

2. Whether there are any reversal entries indicating the possibility or irregular payments or frauds.
3. Whether the balances include any items in the nature of cash in transit included in this head which remain pending
for more than a reasonable period. This is because such items are not expected to remain outstanding beyond a very
small period during which they are in transit.
4. Whether transactions other than those relating to inter branch transactions have been included in inter branch
accounts. Any unusual items put through inter branch accounts as well as old or large entries outstanding in Inter
branch accounts should be carefully looked into. The auditor should also seek explanations from the Management in
this regard in appropriate cases.
Space to write important points for revision

Q.4.2 2016 - Nov [7] (b) Short Note Write short note on the following :
Requirements of a Risk Management process/system in a bank.
(4 marks) [CA Final - I] Answer:
1. Oversight and involvement in the control process by the those

charged with governance: Those charged with governance (BOD/Chief Executive Officer) should approve written
risk management policies. The policies should be consistent with the bank’s business objectives and strategies,
capital strength, management expertise, regulatory requirements and the types and amounts of risk it regards as
acceptable.

2. Identification, Measurement and monitoring of risks’: Risk that could significantly impact the achievement of
bank’s goals should be identified, measured and monitored against pre-approved limits and criteria.

3. Control activities: A bank should have appropriate controls to manage its risks, including effective segregation
of duties (particularly, between front and back offices), accurate measurement and reporting of positions,
verification and approval of transactions reconciliation of positions and results, setting of limits, reporting and
approval of exceptions, physical security and contingency planning.

4. Monitoring activities: Risk Management models, methodologies and assumptions used to measure and manage
risk should be regularly assessed and updated. This function may be conducted by the independent risk management
unit.

5. Reliable information systems: Banks require reliable information systems that provide adequate financial,
operational and compliance information on a timely and consistent basis. Those charged with governance and
Management require risk management information that is easily understood and that enables them to assess the
changing nature of the bank’s risk profile.

Space to write important points for revision

Q.4.3 2019 - May [6] (Or) (b) Descriptive Mr. Piyush, the Bank Manager develops controls to aid in managing key
business and financial risks. Discuss the various requirements for an effective risk management system in a bank. (4
marks)

Answer:
Management develops controls and uses performance indicators to aid in managing key business and finance risks.
An effective risk management system in the bank as required by Mr. Piyush, the Bank Manager should contain the
following : 1. O v e r s i g h t a n d

involvement in the control process by those charged with governance

2. I d e n t i f i c a t i o n , measurements and monitoring of risks

Those charged with governance (BoD/ Chief Executive Officer) should approve written risk management policies.
The policies should be consistent with the bank’s business objectives and strategies, capital strength, management
expertise, regulatory requirements and the types and amounts of risk it regards as acceptable.

Risks that could significantly impact the achievement of bank’s goals should be identified, measured and monitored
against preapproved limits and criteria.

3. Control Activities
4. Monitoring Activities

5. Reliable
information

systems compliance

consistent governance management understood and that enables them to assess the changing nature of the bank’s
risk profile. A bank should have appropriate controls to manage its risks, including effective segregation of duties
(particularly between front and back offices), accurate measurement and reporting of positions, verifications and
approval of transactions, reconciliation of positions and results, setting the limits, reporting and approval of
exceptions, physical security and contingency planning.

Risk management models, methodologies and assumptions used to measure and manage risk should be regularly
assessed and updated. This function may be conducted by the independent risk management unit.

Banks require reliable information systems that provide adequate financial, operational and information on a timely
and basis. Those charged with and management require risk information that is easily

Space to write important points for revision

5

Q.5.1 2018 - May [6] (c) Answer the following:

Mr. A approaches a bank for financial assistance for his upcoming project. The Bank Branch Manager, after
verifying the proposal is agreeable to financing Mr. A, but asks for the security to be offered to the bank. Discuss the
nature of securities required to be offered to the bank. (5 marks)

Nature of Security

Descriptive Answer:
In this case. Mr. A approaches a bank financial assistance for his upcoming project. This Bank Branch Manager,
after verifying the proposal, is agreeable to financing Mr. A, but asks for the security to be offered to the bank. The
following are the nature of securities required to be offered by Mr. A to the bank.
1. Primary Security :

Primary Security refers to the security offered by the borrower for bank finance or the one against which credit has
been extended by the bank. This security is the principal security for an advance.

2. Collateral Security :
Collateral Security is an additional security. Security can be in any form i.e. tangible or intangible asset, movable or
immovable asset.

Examples of most common types of securities accepted by banks are the following:
☐ Personal Security of Guarantor.
☐ Goods/Stocks/Debtors/Trade Receivables.
☐ Gold Ornaments and Bullion.
☐ Immovable Property.
☐ Plantations (For Agriculture Advances)
☐ Third Party Guarantees
☐ Banker’s General Lien
☐ Life Insurance Policies
☐ Stock Exchange Securities and other Instruments.

Prudential Norms on Income Recognition, 6 Asset Classification and Provisionary pertaining to Advances

Q.6.1 2011 - May [6] (a) Descriptive

"An asset, including a leased asset, becomes non-performing when it ceases to generate income for the Bank."
Define the criteria for classification of non-performing assets. (8 marks) [CA Final - I]

Answer:
Non-Performing Assets
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.
Following are classified as NPA:
1. Term loan whose interest and/or instalment of principal remain overdue

for a period of more than 90 days.

2. OD/CC in respect of which the account remains “out of order”.
3. Bills purchased and discounted which remains overdue for a period of more than 90 days.
4. The instalments of principal or interest thereon remain overdue for two crop seasons for short duration crops.
5. The instalment of principal or interest thereon remains overdue for one crop season for long duration crops.
6. The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitization
transaction undertaken in terms of guidelines on securitization dated 1st February, 2006.
7. In respect of derivative transactions, the overdue receivables representing positive mark to Market value of a
derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

Q.6.2 2013 - May [4] (a) Descriptive In course of audit of Good Samaritan Bank as at 31st March 13 you observed
the following:
In a particular account there was no recovery in the past 18 months. The bank has not applied the NPA norms as
well as income recognition norms to this particular account. When queried the bank management replied that this
account was guaranteed by the Central Government and hence these norms were not applicable. The bank has not
invoked the guarantee. Please respond. Would your answer be different if the advance is guaranteed by a State
Government? (5 marks) [CA Final - I]

Answer:
If a government guaranteed advance becomes NPA, then for the purpose of income recognition, interest on such
advances should not be taken to income unless interest is realized. Credit facility backed by Central Government
Guarantee, though overdue, can be treated as NPA only when the Central Government repudiates its guarantee.
In the present case the bank has not revoked the guarantee, therefore the question of repudiation does not arise.
Hence the bank is correct to the extent of not applying the NPA norms for provisioning purpose. But this exemption
is not available in respect of income recognition norms. Hence the income to the extent not recovered should be
reversed.
This exception is not applicable for State Government Guarantee advances, where advances is to be considered NPA
if its remains overdue for more than 90 days.

Space to write important points for revision

Q.6.3 2014 - May [5] (a) Descriptive Shy & Co, had been allotted the branch audit of a nationalized bank for the
year ended 31st March, 2014. In the audit planning, the partner of Shy & Co. observed that the allotted branches are
predominantly based in rural areas and major portion of the advances were for agricultural purpose. He needs your
assistance in incorporating the criteria prescribed for determination of NPA norms in respect of agricultural advance,
in audit plan. (5 marks) [CA Final - I]

Answer:
NPA Norms in respect of Agricultural Advance:
A loan granted for short duration crops will be treated as Non Performing Asset, if the instalment of principal or
interest thereon remains overdue for two crop seasons and a loan granted for long duration crops will be treated as
NPA, if the instalment of principal or interest thereon remains overdue for one crop season.

As per the guidelines, “long duration” crops would be crops with crop season longer than one year and crops, which
are not “long duration” crops would be treated as “short duration” crops. The crop season for each crop, which
means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers’
Committee in each State. Depending upon the duration of crops raised by an agriculturist, the above NPA norms
would also be made applicable to agricultural term loans availed of by him. The above norms should be made
applicable to all direct agricultural advances as listed in the Master Circular on Lending to Priority Sectors. In
respect of all other agricultural loans, identification of NPAs would be done on the same basis as non-agricultural
advances, which, at present, is the 90 days delinquency norm.

If natural calamities impair the repaying capacity of agricultural borrowers, banks may decide on their own as a
relief measure conversion of the short-term production loan into a term loan or re-schedulement of the repayment
period; and the sanctioning of fresh short-term loan, subject to guidelines issued by RBI.

Space to write important points for revision

Q.6.4 2015 - May [3] (c) Descriptive
During the bank audit AB & Co. a new Chartered Accountant firm, observed the sale/purchase of NPAs. Please help
them by narrating the aspects, relating to sale/purchase of NPAs, to be considered.

(4 marks) [CA Final - I]

Answer:
An asset is a non performing asset in the book of a bank only if it has remained a non-performing asset for at least
two years in the books of the selling bank.
A non- performing financial asset should be held by the purchasing bank in its books at least for a period of 15
months before it is sold to other banks. Banks should, while selling NPAs, Work out the net present value of the
estimated cash flows associated with the realisable value of the available securities net of the cost of realisation. The
sale price should generally not be lower than the net present value arrived at in the manner described above.
Aspects to be considered relating to purchase/sale of Non-Performing Assets are:
1. A non-performing asset in the books of a bank is eligible for sale to other

banks only if it has remained a nonperforming asset for at least two years in the books of the selling bank.

2. Any purchase/sale of non-performing financial assets should be conducted in accordance with the policy
approved by the Board.
3. NPAs can be sold to other banks only on cash basis.
4. The entire sale consideration should be received upfront and the asset can be taken out of the books of the selling
bank only on receipt of the entire sale consideration.
5. A non-performing financial asset should be held by the purchasing bank in its books at least for a period of 15
months before it is sold to other banks. Banks should not sell such assets back to the bank, which had sold the
NPFA.
6. Banks should, while selling NPAs, work out the net present value of the estimated cash flows associated with the
realisable value of the available securities net of the cost of realisation. The sale price should generally not be lower
than the net present value so arrived.

Q.6.5 2016 - May [7] (b) Short Notes

Write short note on the following:

Exceptions to the General Rule of treating advances as Non performing Assets. (4 marks) [CA Final - I]

Answer:
Following are exceptions to the General Rule of treating advances as Non-performing Assets:
1. Temporary Deficiencies: Non availability of current drawing power due

to non receipt of latest stock statement.

2. Natural Calamities: Where in wake of natural calamities, short term
agricultural loans are converted into term loans or there is rescheduling
of repayment period or fresh short term loans are sanctioned. 3. Facility Backed by Central Government
Guarantees: Credit facilities
backed by guarantee of the Central Government though overdue should
be treated as NPA only when govt. repudiates its guarantee when
invoked.
4. Advances to “on lending” arrangements are also exempted under
this category.
Space to write important points for revision

Q.6.6 2018 - Nov [1] {C} (e) Objective

Examine with reason (in short) whether the following statement is correct or incorrect :
Banks recognize income on Non-Performing Assets on accrual basis.

(2 marks)
Answer:
Incorrect :
Income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it
is actually received.

Q.6.7 2019 - Nov [6] (a) Descriptive

“There is no difference in provisioning of NPA as regards to categories of NPA, whether the debt is secured or
unsecured.” Critically evaluate the statement on the basis of provisioning norms of NPA of nationalised bank.

(4 marks)
Q.6.8 2018 - Nov [6] (e) Practical

Answer the following:

“Ramjilal & Co. had been allotted the branch audit of a nationalized bank for the year ended 31st March, 2018. In
the audit planning, the partner of Ramjilal & Co., observed that the allotted branches are predominantly based in
rural areas and major portion of the advances were for agricultural purpose.”
Now he needs your assistance on the following points so as to incorporate them in the audit plan:

(i) for determination of NPA norms for agricultural advances (ii) for accounts where there is erosion in the value of
security/ frauds committed by the borrowers. (5 marks) Answer:
(i) NPA Norms for agricultural advances in audit plan:

!A loan granted for short duration crops will be treated as Non Performing Asset, if the instalment of principal or
interest thereon remains overdue for two crop seasons and a loan grantee for long duration crops will be treated as
NPA, if the instalment of principal or interest thereon remains overdue for one crop season.

!As per guidelines, “long duration” crops would be crops with crop season longer than one year and crops, which
are not “long duration” crops would be treated as “Short duration” crops. The crop season for each crop, which
means the period up to harvesting of the crops raised, would be as determined by the state level Bankers’ Committee
in each state. Depending upon the duration of crops raised by an agriculturist, the above NPA norms would also be
made applicable to agricultural term loans availed of by him.

!The above norms should be made applicable to all direct agricultural advances as listed in the Master Circular on
Lending to Priority Sectors. In respect of all other agricultural loans, identification of NPAs would be done on the
same basis as nonagricultural advances, which, at present, is the 90 days delinquency norm.

!If natural calamities impair the repaying capacity of agricultural borrowers, banks may decide on their own as a
relief measure conversion of the short - term production loan into a term loan or re - schedulement of the repayment
period; and the sanctioning of fresh short - term loan, subject to guidelines issued by RBI.

(ii) Erosion in value of Securities / Frauds Committed by Borrowers in audit plan:

! In respect of accounts where there are potential threats for

recovery on account of erosion in the value of security or non availability of security and existence of other factors
such as frauds committed by borrowers, such accounts need to go through the stages of asset classification. In such
cases, the asset should be straightaway classified as doubtful or loss asset, as appropriate, Further,
(i) Erosion is the value of securities by more than 50% of the

value assessed by the bank or accepted by RBI inspection team at the time of last inspection, as the case may be,
would be considered as “significant”, requiring the asset to be classified as doubtful straightaway and provided for
adequately.

(ii) The relisable value of security as assessed by banks/approved valuers / RBI is less than 10% of the outstanding
in the borrowal accounts, the existence of the security should be ignored and the asset should be classified as loss
asset. In such cases the asset should either be written off or fully provided for.

7 Audit of Advances
Q.7.1 2013 - May [4] (a) Descriptive

In course of audit of Good Samaritan Bank as at 31st March 13 you observed the following:
The bank’s advance portfolio comprised of significant loans against Life Insurance Policies. Write suitable audit
program to verify these advances.

(3 marks) [CA Final - I] Answer:

The audit programme to verify advances against Life Insurance Policies is as under:
1. The auditor should inspect the policies and see whether they are

assigned to the bank and whether such assignment has been registered with the insurer.

2. The auditor should also examine whether premium has been paid on the policies and whether they are in force.
3. Certificate regarding surrender value obtained from the insurer should be examined.
4. The auditor should particularly see that if such surrender value is subject to payment of certain premium, the
amount of such premium has been deducted from the surrender value.
Space to write important points for revision

8 Audit of Revenue Items: Income

Q.8.1 2010 - Nov [7] (b) Short Notes Write short note on:
Reversal of Income under Bank Audit. (4 marks) [CA Final - I]

Answer:
Reversal of Income under Bank Audit
If any advance, including bills purchased and discounted, becomes Non-Performing Assets as at the close of any
year, the entire interest accrued and credited to income account in the past periods, should be reversed or provided
for if the same is not realised. This will apply to Government guaranteed accounts also.

In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current
period and should be reversed or provided for with respect to past periods, if uncollected.

Further, in case of banks which have wrongly recognised income in the past should reverse the interest if it was
recognised as income during the current year or make a provision for an equivalent amount if it was recognised as
income in the previous year(s).

Space to write important points for revision

Q.8.2 2013 - Nov [4] (b) Descriptive

While doing the audit of a nationalized bank, your Audit Assistant informed you that there are a lot of irregularities
in Telegraphic Transfers and Demand Drafts. What guidance would be give to the Audit Assistant?

(4 marks) [CA Final - I] Answer:

In respect of Telegraphic Transfers and Demand Drafts, the audit

assistant would be given the following guidance —

1. The signatures on a demand draft should be checked by an officer with the Signature Book.
2. The bank should have a reliable private code known only to responsible officers of its branches, coding and
decoding of telegrams should be done only by such officers.
3. All the T. Ts and D. Ds sold by a branch should be immediately confirmed by the advices to the branches
concerned.
4. If the paying branch does not receive proper confirmation of any T.T. or D.D. from the issuing branch or does not
receive credit in its account with that branch, it should take immediate steps to ascertain the reasons. Space to write
important points for revision

9 Miscellaneous

Internal Control System in the Area of Credit Card Q.9.1 2009 - Nov [4] (a)
Answer the following :

Descriptive
How will you evaluate the Internal Control system in the area of Credit Card operations of a Bank? (5 marks) [CA
Final - I]

Answer:
Evaluation of Internal Control System in the area of Credit Card Operations in a bank:
1. There should be effective screening of applications with reasonably good

credit assessments.
2. There should be strict control over storage and issue of cards.
3. There should be a system whereby a merchant confirms the status of unutilised limit of a credit-card holder from
the bank before accepting the settlement in case the amount to be settled exceeds a specified percentage of the total
limit of the card holder.
4. There should be system of prompt reporting by the merchants of all settlements accepted by them through credit
cards.
5. Reimbursement to merchants should be made only after verification of the validity of merchant’s acceptance of
cards.
6. All the reimbursements (gross of commission) should be immediately charged to the customer’s account.
7. There should be a system to ensure that statements are sent regularly and promptly to the customer.
8. There should be a system of monitoring and follow-up of customers’ payments.
9. Items overdue beyond a reasonable period should be identified and attended to carefully. Credit should be stopped
by informing the merchants through periodic bulletins, as early as possible, to avoid increased losses.
10. There should be a system of periodic review of credit card holder’s accounts. On this basis, the limits of
customers may be revised, if necessary. The review should also include determination of doubtful amounts and the
provisioning in respect thereof.
Space to write important points for revision

Claims Against Banks not Acknowledged as Debt

Q.9.2 2010 - May [4] (b) Dt. Between

How do you examine claims against the Bank not acknowledged as debts? (4 marks) [CA Final - I] Answer:
Examination of claims against the Bank not acknowledged as debts The auditor should examine the
correspondence with lawyers, workmen’s/officer’s unions. The auditor should also review the minutes of the
meeting of the Board of directors/committees of the Board, contracts, agreements and arrangements, list of pending
legal cases and correspondence relating to taxes, duties etc, to identify claims against the bank. The auditor should
ascertain from the management the status of claims outstanding as at the end of previous year. A review of
subsequent events would also provide evidence about completeness and valuation of claims.

Space to write important points for revision

relevant evidence, for example claimants, workers/officers and
MULTIPLE CHOICE QUESTION
1
Introduction and Understanding of Accounting System in Bank

1. Important function of Reserve Bank of India except

(a) Issuance of currency
(b) Acting as banker to commercial and other types of banks. (c) Regulation of currency
(d) Contributing the Cash Reserve Ratio

2. Which type of audit report, generally issued:

(a) Tax Audit Report as per Income Tax Act 1961,
(b) Statutory Audit Report as per SA 700/ 705/706,
(c) Long Form Audit Report, as per the requirement of RBI, (d) All of the above.

3. Banks are generally divided into _________ broad categorised on the level of computerisation.
(a) 2
(b) 3
(c) 4
(d) 5

2 Bank Audit Approach

4. ________ should be based on the nature and thrust of operations, nature of adverse features, level of compliances
and audit risk. (a) Audit
(b) Audit Plan
(c) Audit Report
(d) Audit Control

5. Bank has its own

(a) Audit System
(b) Internal Control System
(c) Internal procedures
(d) Any of the above

6. The __________ should hold discussions to gain better understanding of the bank and its environment, including
internal control, and also to assess the potential for material misstatements of the financial statement.
(a) Audit Team
(b) Internal Audit Team
(c) Investigation Team
(d) Engagement Team

3 Income Recognition Policy

7. Policy of income recognition should be objective and based on record of recovery rather than on any __________.
(a) consideration
(b) special objective
(c) monetary consideration
(d) subjective consideration.

8. Income from non-performing assets ________ on accrual basis but is booked as income only when it is actually
received.
(a) Valuate
(b) Evaluate
(c) Recognised
(d) Not - recognised

4 Form and Content of Financial Statement

9. Section 29(1) and (2) of the Banking Regulation Act 1949, applicable to (a) All Nationalised Bank
(b) State Bank of India
(c) Regional Rural Bank
(d) All of the above

10. Every banking company needs to comply with the disclosure requirements under the various Accounting
Standards, as specified under _______ of the Companies Act 2013.
(a) Section 130
(b) Section 133
(c) Section 170
(d) Section 197

5 Audit of Accounts
11. __________ requires that the balance sheet and profit and loss account of a banking company should be audited
duly qualified person. (a) Section 30
(b) Section 30(1)
(c) Section 30(2)
(d) Section 30(5)

6
Appointment, Remuneration and Power of Auditor

12. Auditors of the SBI are to be appointed by ___________. (a) Shareholder

(b) Board of Director

13. The auditor of a banking company is to be appointed ___________, with the previous approval of the RBI.
(a) by the Shareholder at AGM
(b) by the Board of Director
(c) C and AG
(d) Central Government

14. Auditor of a nationalised bank is to be appointed by Board of Director, with the previous approval of
__________.
(a) RBI
(b) C and AG
(c) Central Government
(d) None of the above.

15. Remuneration of an auditor of nationalised bank and State Bank of India is to be fixed by ________.
(a) Board of Director at AGM
(b) Reserve Bank of India
(c) Central Government
(d) RBI in Consultation with the Central Government.

16. Auditor of any type of bank has the same power as those of a company auditor in the matter to access to the
books accounts, documents and vouchers.
(a) True
(b) False
(c) Partically True
(d) None of the above

7 Auditor’s Report

17. In case of nationalised bank, the auditor is required to make a report to the
(a) Shareholders
(b) Board of director’s

18. In case of State bank of India, the auditor is required to make, a report to the
(a) Shareholders
(b) Board of Directors
(c) C and AG
(d) Central Government

19. Reporting requirements relating to the Companies (Auditor’s Report) Order, 2016 is also applicable in Banking
company audit. (a) True
(b) False
(c) Partially True
(d) None of the above

20. Long Form Audit Report is to be submitted __________ every year. (a) After 31st March
(b) Between 31st March and 30th June
(c) After 30th June
(d) Before 30th June

21. Auditor should consider the provisions of SA – 250 i.e.

(a) “The Auditor’s Responsibilition Relating to Fraud in an Audit of

Financial Statements”.
(b) “Consideration of Laws and Regulations in an Audit of Financial
Statements”.
(c) “Consideration of Accounting Standards in Audit of Financial
Statements”.
(d) “Consideration of Standards of Auditing in Audit of Financial
Statements”.
22. “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements” define as per.
(a) SA – 200
(b) SA – 220
23. SA – 250 “Consideration of Laws and Regulations in an audit of
Financial Statements” explains that the duty of confidentiality is overridden by _________.
(a) Statute
(b) Law or by Courts,
(c) Either (a) or (b)
(d) Both (a) and (b)

8 Conducting An Audit

24. The RBI has advice that the banks, before appointing their statutory central/circle/branch auditors, should obtain
a ___________. (a) Planning Statements
(b) Declaration of indebtedness
(c) Initial Engagements
(d) Initial Engagements

25. SA – 300 “Planning an Audit of Financial Statements” requires that the auditor shall undertake the activities (s)
prior to starting an initial audit. (a) Establish understanding of terms of engagement as per SA – 210

“Agreeing the Terms of Audit Engagements”.

(b) Performing procedures required by SA – 220, “Quality Control for
Audit Work” regarding the acceptance of the client relationship and
the specific audit engagement
(c) Identifying and Assessing the risk of material misstatements. (d) Both (a) and (b)
26. “Initial Audit Engagements – Opening Balances” is defies under. (a) SA – 300
(b) SA – 510
27. A Chartered Accountant in practice cannot accept position as auditor
previously held by another Chartered Accountant without first
communicating with him in writing, is define under
(a) Section 141(1) of the Companies Act 2013
(b) Clause (11) of CAAR – 2014
(c) Clause 3 of Companies Audit Report Rule
(d) Clause (8) of Part 1 of First Schedule to the Chartered Accountants Act, 1994.
28. An understanding of the bank and its environment, including its internal
control, enables the auditor:
(a) To develop an audit plan so as to determine the operating effectiveness of the controls, and to address the
specific risks.
(b) To identify and assess risk
(c) Either (a) or (b)
(d) Both (a) and (b)
29. An effective risk management system in a bank generally requires the:
(a) Oversight and involvement in the control process by those charged with governance.
(b) Identification, measurement and monitoring of risks
(c) Control and monitoring activities.
(d) All of the above.
30. The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements defines under
(a) SA – 240
(b) SA – 250
(c) SA – 500
(d) SA – 510
31. RBI has required that all commercial banks shall put in place a board
approved __________ to suit their individual requirements which would
integrate into their risk management systems.
(a) Stress testing framework
(b) Stress management framework
(c) Stress reduction framework
(d) None of the above

9 Advances

32. Advances comprises of funded amounts except

(a) Cash Credit, Overdraft, Demand Loan
(b) Legal Tender Money
(c) Adverse balances in Deposit Accounts
(d) Bills Discounted and Purchased.

33. ___________ refers to the security offered by the borrower for bank finance or the one against which credit has
been extended by the bank. This security is the principal security for an advance.
(a) Primary Security
(b) Secondary Security
(c) Collateral Security
(d) None of the above

34. _________ is an additional security. Security can be in any form i.e. tangible or intangible assets, movable or
immovable assets (a) Primary security
(b) Secondary Security
(c) Collateral Security
(d) None of the above

35. On the basis of nature of the item concerned, creation of security may take the form of a __________.
(a) mortgage and pledge
(b) hypothecation
(c) assignment or lien
(d) Any of the above

36. A non-performing asset (NPA) is a loan or an advance where: (a) the account remains “out of order” in respect
of an Overdraft/Cash

Credit.
(b) the bill remains overdue for a period of more than 90 days in the
case of bills purchased and discounted
(c) interest and/or installment of principal remain overdue for a period
of more than 90 days in respect of a term loan.
(d) Any of the above case
37. Any amount due to the bank under any credit facility is ________, if it is
not paid on the due date fixed by the bank.
(a) Set–off
(b) Overdraft
(c) Overdue
(d) Out of order
38. Advance against Term Deposits, NSCs eligible for surrender, KVP/IVP
and life policilies need not be treated as NPA,
(a) provided such securities are pledged
(b) provided adequate margin is available in the accounts.
(c) provided there is inadequate securities against it.
(d) None of the above
39. Which is/are an/the NPA norms (s) would apply to agricultural advances:
(a) A loan granted for long duration crops will be treated as NPA, if the installment of principal or interest thereon
remains overdue for one crop season.
(b) A loan granted for short duration crops will be treated as NPA, if the installment of principal or interest thereon
remains overdue for two crop seasons.
(c) Either (a) or (b)
(d) Both (a) and (b)

10 Audit of Advances

40. In carrying out audit of advances, in case of bank, the auditor is primarily concerned with obtaining evidence
about the __________. (a) Appropriate provision towards advances have been made as per the

RBI norms and Accounting Standards.

(b) There is no unrecorded advances
(c) Advances represent amount due to the bank
(d) All of the above
41. The auditor should examine all large advances while other advances

may be examined on a sampling basis, under the method of: (a) Substantive Procedures
(b) Compliance Procedures
(c) Sampling Procedures
(d) Analytical Procedures

Answer

1. (d) 2. (d) 3. (b) 4. (b) 5. (b) 6. (d) 7. (d) 8. (d) 9. (d) 10. (b) 11. (b) 12. (c) 13. (b) 14. (a) 15. (d) 16. (a) 17. (d) 18.
(d) 19. (b) 20. (d) 21. (b) 22. (c) 23. (d) 24. (b) 25. (d) 26. (b) 27. (d) 28. (d) 29. (d) 30. (a) 31. (a) 32. (b) 33. (a) 34.
(c) 35. (d) 36. (d) 37. (c) 38. (b) 39. (d) 40. (d) 41. (a)

CHAPTER

13
Government Audit and Audit of Local Bodies

This Chapter Covers: Study’s Chapter: 13 (Para 1 & 2)

Chapter Comprises: ☹Government Audit ☹Legal Framework and Comptroller & Auditor General ☹Expenditure
Audit ☹Audit of Receipts ☹Audit of Stores and Inventories ☹Audit of Commercial Accounts ☹Reporting Procedures
☹Audit of Local Bodies ☹Financial Administration ☹Objective of Audit of Local Bodies ☹Audit Programme for
local Bodies.

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis

Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Objective Short Notes
Legend
Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book. 6.547
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1

16
Instant
Revision (in hours)

Next After day 7 days i.e.... i.e. on

........... ........... Day 2 Day 8 4.00 3.12

. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need.
........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

Q UICK LOOK Repeatedly Asked Questions

2.1.1, 2.2.1
. . . . . . . Weightage Analysis

Common Answered Questions

1.3.2, 1.3.3, 1.4.1, Must Try Question
1.3.2, 1.3.3, 1.4.1 2.1.1, 2.2.3
1 Government Audit
1.1 Legal Frame Work and C& AG
Q.1.1.1 2009 - Nov [1] (vi) Objective

State with reasons (in short) whether the following statement is true or false.
Comptroller and Auditor General of India can be removed by the Prime Minister of India on the recommendation of
his Council of Ministers.

(2 marks)

Answer:
False:
The Comptroller and Auditor General of India cannot be removed by the Prime Minister of India himself or on the
recommendation of his Council of Ministers. He can be removed on the ground of proven misbehaviour or
incapacity, when each House of Parliament decides to do so by majority of not less than 2/3 of the members of the
house present and voting.
Space to write important points for revision
1.2 C & AG’s - Duties and Powers
Q.1.2.1 2012 - Nov [3] (a), RTP Descriptive

What are the duties of Comptroller and Auditor General? (10 marks) Answer:
The main duties of C & AG within the framework of the constitution
of India may be as follows
1. Compilation and Submission of Accounts of
Union and
States
2. Rendering
Assistance in Accounts
Maintenance

3. Auditing and Reporting

The C & AG should compile the accounts pertaining to annual receipts and disbursements of the Union or State or
Union Territory and submit these to the President or Governor or Administrator.

The C & AG should provide such information to the Union or State as they may require from time to time and
render such assistance for preparing annual financial statements as they reasonably ask for.

The C & AG should audit and report on : (i) All the expenditures from Consolidate Fund of India/State/Union
Territory having a Legislative Assembly and to determine whether the monies disbursed were legally

4. Auditing
Receipts and Expenditure

5. Auditing Grants or Loans

available for and applicable to the purpose and service for which they are applied and whether the expenditures
comply with the authority governing it.

(ii) All the transactions of Union or State pertaining to Contingency Funds and Public Accounts.

(iii) All the trading, manufacturing, Profit & Loss Accounts and Balance Sheets and other subsidiary accounts kept
in any department of a Union or State.

The C & AG should audit and report on all the receipts and expenditure of any body or authority substantially
financed by Consolidated Fund of India or State or Union Territory. For such purpose, a body or authority shall be
treated as substantially financed if the amount of grant or loan in year is :

(i) More than ` 25 lakhs

(ii) More than 75% of the total expenditure of that body or authority.
This applies to the grant or loan of any specific purpose, provided from the Consolidate Fund of India or State or
Union Territory, to any body or authority other than a Foreign State or International Organisation. The C & AG
should examine in detail the procedures by which the approving authority satisfies itself the fulfillment of the
conditions of providing such grants or loans.

6. Auditing Receipt of Union or

State

7. Auditing Stores and Inventory

8. Auditing
Government Companies and Corporation Accounts
The C & AG should audit all the receipts payable into the Consolidated Funds of India or State or Union Territory.
He may satisfy himself that the rules and procedures have been designed to make an effective check on the
assessment, collection and proper allocation of revenue and are duly being observed.

The C & AG should be authorised to audit and report on the stores and stock accounts kept in any office or
department of the Union or State. The C & AG should exercise such powers and duties according to the provisions
of Companies Act, 2013, pertaining to Government Companies and Corporations.

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Q.1.2.2 2014 - Nov [7] (a) Short Notes

Write short note on the Power of Comptroller and Auditor General of India in performance of duties. (4 marks)
Answer:
Power of CAG under Sec. 143 of Companies Act, 2013
☐ As per Sec. 143(5)

In the case of a Government Company or any other company owned or controlled, directly or indirectly, by the
Central Government, or by any State Government or Government, or partly by the Central Government and partly
by one or more State Government, the comptroller and Auditor-General of India shall appoint the auditor under sub-
section (5) or sub-section (7) of Sec.139 and direct such auditor the manner in which the accounts of the company
are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the
Comptroller and Auditor-General of India which, among other things, include the directions, if any, issued by the
Comptroller and Auditor-General of India, the action taken thereon and its impact on the accounts and financial
statement of the company.

☐ As per Sec. 143(6)

The Comptroller and Auditor-General of India shall within sixty days from the date of receipt of the audit report
under sub-Sec. (5) have a right to: (a) conduct a supplementary audit of the financial statement of the

company by such person or persons as he may authorise in this behalf; and for the purposes of such audit, require
information or additional information to be furnished to any person or persons, so authorised, on such matters, by
such person or persons, and in such form, as the Comptroller and Auditor-General of India may direct; and

(b) comment upon or supplement such audit report:

Provided that any comments given by the Comptroller and AuditorGeneral of India upon, or supplement to , the
audit report shall be sent by the company to every person entitled to copies of audited financial statements under
sub-Sec. (1) of Sec. 136 and also be placed before the annual general meeting of the company at the same time and
in the same manner as the audit report.

☐ As per Sec. 143(7)

Without prejudice to the provisions of this Chapter, the Comptroller and Auditor-General of India may, in case of
any company covered under sub-Sec. (5) or sub-Sec. (7) of Sec. 139, if he considers necessary, by an order, cause
test audit to be conducted of the accounts of such company and the provisions of Sec. 19A of the Comptroller and
AuditorGeneral’s (Duties, Powers and Conditions of Service) Act, 1971 (56 of 1971), shall apply to the report of
such test audit.

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Q.1.2.3 2019 - May [1] (c) Objective

Bhartiya Gas Ltd. a Government Company, the Comptroller and AuditorGeneral of India shall, in respect of a
financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a
period of 180 days from the end of the financial year, who shall hold office till the end of the next Financial Year. (2
marks)

Answer:
This Statement is Incorrect :
In case of Bhartiya Gas Ltd. a Government Company, the Comptroller and Auditor – General of India, shall in
respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies within a
period of 180 days from the commencement of the financial year, who shall hold office till the conclusion of the
annual general meeting, [Sec. - 139 (5), of the Companies Act, 2013].

Space to write important points for revision

Q.1.2.4 2019 - May [6] (d) Descriptive

Discuss the power of C & AG in Government audit. (3 marks) Answer:

Power of C & AG in Government Audit :

1. To inspect any office of accounts under the control of the Union or a State Government including office
responsible for the creation of the initial or subsidiary accounts.
2. To require that any accounts, books, papers and other documents which deal with or are otherwise relevant to the
transactions under audit, be sent to specified places.
3. To put such questions or make such observations as he may consider necessary to the person in charge of the
office and to call for such information as he may require for the preparation of any account or report which is his
duty to prepare.
4. In carrying out the audit, the C & AG has the power to dispense with any part of detailed audit of any accounts or
class of transactions and to apply such limited checks in relation to such accounts or transactions as he may
determine.
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1.3 Expenditure Audit

Q.1.3.1 2008 - May [8] (b) Short Notes

Write short note on Audit against Rules and Orders. (5 marks) Answer:
The auditor has to ensure that the expenditure incurred complies with the relevant provisions of the legal enactment
and is according to the financial rules and regulations framed by the competent authority.
Rules and Orders: The rules, regulations and orders against which regularity audit is conducted mainly fall under
the following categories: 1. Expenditure from consolidated fund and the contingency fund of India or

State.
2. Presentation of claims against Government, withdrawing money from the
consolidated fund, Contingency fund and Public Accounts of India/State,
and in general the financial rules prescribing the detailed procedure to
be followed by Government servants in dealing with Government
transactions; and
3. Rules and Orders regulating the conditions of service, Pay and
Allowances and pensions of Government servants.
It is the function of the executive Government to frame rules, regulations and orders, which are to be observed by its
subordinate authorities. The function of Audit is to carry out examination of various rules, regulations and orders
issued by the executive Authorities to see that :
1. They are not inconsistent with any provisions of the Constitution or any
laws made thereunder ;
2. They are consistent with the essential requirements of audit & accounts
as determined by the C & AG;
3. They do not come in conflict with the orders of, or rules made by any
higher authority; and
4. In case they have not been separately approved by competent authority,
the issuing authority possesses the necessary rule making power.
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Q.1.3.2 2011 - May [7] (d) Short Notes Write short note on Audit of expenditure in Government audit. (4 marks)
OR 2013 - Nov [7] (d) Short Notes

Write short note on Basic standards set for audit of government expenditure. (4 marks)
Answer:
Audit of Government Expenditure:
Audit of expenditure of government organisation or department is conducted by the Comptroller and Auditor
General (C & AG) of India. It is a major constituent of the government audit. The basic standards established for
expenditure audit are to confirm that there is provision for funds authorised by the competent authority setting the
limits within which expenditure can be incurred. These standards are as follows:
1. Audit against Rules and Order: The expenditure incurred complies

with the relevant provisions of the law and according to the Financial Rules and Regulation constructed by the
competent authority. Such audit is known as Audit against Rules and Orders.

2. Audit of Sanctions: There is either special or general sanction allowed by the competent authority authorising the
expenditure. Such an audit is known as audit of sanctions.

3. Audit against Provisions for Funds: There is provision for funds out of which expenditure is incurred and also it
is authorised by the competent authority. Such audit is known as audit against provision for funds.

4. Proprietary Audit: The expenditure has been incurred with due regards to the broad and general principles of the
financial propriety. Such audit is known as propriety audit.

5. Performance Audit: Various programmes, schemes and projects in which huge financial expenditures have been
incurred or being run economically and are yielding results expected from them. Such audit is known as
performance audit.

The propriety audit and performance audit suggest completely, a different approach, adopted by the C & AG as
against the regulatory audit.

In propriety audit the C & AG brings out the cases of avoidable, improper or unfruitful expenditure even though the
expenditure has been incurred in compliance with the existing rules and regulations.

Performance audit goes even a step ahead and has a quite comprehensive approach as it includes 3 Es. i.e.
efficiency, economy and effectiveness.

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Q.1.3.3 2011 - Nov [5] (b) Descriptive What are the focus points in doing propriety audits by C & AG as regards
government expenditure ? (8 marks) OR 2016 - Nov [1] {C} (c) Descriptive Discuss the Audit against the propriety
seeks to ensure that expenditure confirms to certain principles. (5 marks)

Answer:
Propriety Audit:
Propriety audit is concerned with a close examination of executive decisions, which have bearing on the financial
position, and the profit and loss situation of the company regarding especially the public interest and commonly
accepted practices and standards of conduct. While performing a propriety audit, the auditor should examine
whether the propriety standards have been maintained in making payments incurring expenditure or entering into a
transaction. In propriety audit, the auditor tries to bring out the cases of avoidable, improper and unfruitful
expenditure even though the expenditure has been incurred in compliance with the existing rules and regulations. It
is difficult to frame any precise rules and regulations for regulating the course of audit against propriety. Such
purpose of audit depends upon its acceptance on its appeal made to the common sense and straight logic of the
auditors and whose financial transaction subject to propriety audit. However, audit code lays down some general
principle which have been recognised for long as Financial Propriety Standards.
Audit against propriety endeavor to ensure that the expenditure comply to the principle as stated below :
1. The expenditure must not be prima facie more than except in the

occasions demanded. Each and every public officer is expected to maintain the same alertness with respect to the
expenditure incurred from public amounts as a person of ordinary prudence would do with respect to the expenditure
of his own amount.
2. No authority should use its powers of approving expenditure to pass an order which will be directly or indirectly
to its own advantage.
3. Public amounts should not be used in the favour of a particular person or section of the community until and
unless :
(i) The expenditure amount involved is insignificant, or (ii) A claim for the amount could be enforced in the
Tribunal of law, or (iii) The expenditure is in pursuance of a recognised policy or custom, and
(iv) The allowances amount such as travelling allowances, provided to meet expenditure of a particular type, should
be regulated that the allowances are not wholly the sources of profit to the recipients. It may be expressed that the
executive departments are responsible for enforcing economy in public expenditure. The function of auditor is to
bring into the notice of the proper authorities, the wastage in public administration and the case of avoidable,
improper and unfruitful expenditure.

The main focus of Propriety Audit is to identity cases of improper, avoidable or infructuous expenditure even
though the expenditure has been incurred in conformity with the existing rules and regulations. This will ensure a
reasonably high standard of public financial morality when Auditors look into the wisdom, faithfulness and
economy, faithfulness and economy of transactions.

Space to write important points for revision

Q.1.3.4 2017 - Nov [7 (a) Short Notes Write short note on Propriety audit. (4 marks)

Answer:
Propriety Audit:
Propriety audit is concerned with a close examination of executive decisions, which have bearing on the financial
position, and the profit and loss situation of the company regarding especially the public interest and commonly
accepted practices and standards of conduct. While performing a propriety audit, the auditor should examine
whether the propriety standards have been maintained in making payments incurring expenditure or entering into a
transaction. In propriety audit, the auditor tries to bring out the cases of avoidable, improper and unfruitful
expenditure even though the expenditure has been incurred in compliance with the existing rules and regulations. It
is difficult to frame any precise rules and regulations for regulating the course of audit against propriety. Such
purpose of audit depends upon its acceptance on its appeal made to the common sense and straight logic of the
auditors and whose financial transaction subject to propriety audit. However, audit code lays down some general
principle which have been recognised for long as Financial Propriety Standards.
Audit against propriety endeavor to ensure that the expenditure comply to the principle as stated below :
1. The expenditure must not be prima facie more than except in the

occasions demanded. Each and every public officer is expected to maintain the same alertness with respect to the
expenditure incurred from public amounts as a person of ordinary prudence would do with respect to the expenditure
of his own amount.
2. No authority should use its powers of approving expenditure to pass an

order which will be directly or indirectly to its own advantage. 3. Public amounts should not be used in the favour of
a particular person
or section of the community until and unless :
(i) The expenditure amount involved is insignificant, or (ii) A claim for the amount could be enforced in the
Tribunal of law, or
(iii) The expenditure is in pursuance of a recognised policy or custom, and
(iv) The allowances amount such as travelling allowances, provided to meet expenditure of a particular type, should
be regulated that the allowances are not wholly the sources of profit to the recipients.
It may be expressed that the executive departments are responsible for enforcing economy in public expenditure.
The function of auditor is to bring into the notice of the proper authorities, the wastage in public administration and
the case of avoidable, improper and unfruitful expenditure.
The main focus of Propriety Audit is to identity cases of improper, avoidable or infructuous expenditure even
though the expenditure has been incurred in conformity with the existing rules and regulations. This will ensure a
reasonably high standard of public financial morality when Auditors look into the wisdom, faithfulness and
economy, faithfulness and economy of transactions.
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Q.1.3.5 2018 - Nov [6] (d) Descriptive Answer the following:
Write basic standards set for Expenditure Audit of Government. (5 marks)

Answer:
The basic Standards set for Expenditure Audit of Government are: 1. That the expenditure incurred conforms to
the relevant provisions of the

statutory enactment and in accordance with the Financial Rules and Regulations framed by the Competent authority.
Such as audit is called as the audit against ‘rules and orders.’

2. That there is sanction, either special or general, accorded by competent authority authorising the expenditure.
Such an audit is called as the audit of sanctions.

3. That there is a provision of funds out of which expenditure can be incurred and the same has been authorised by
competent authority. Such an audit is called as audit against provision of funds.

4. That the expenditure is incurred with the due regard to broad and general principles of financial propriety. Such
an audit is also called as propriety audit.

5. That the various programmes, schemes and projects where large financial expenditure has been incurred are being
run economically and are yielding results expected of them. Such an audit is termed as the performance audit.

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1.4 Audit of Commercial Accounts
Q.1.4.1 2007- Nov [8] (a) Short Notes Write short note on Power of CAG Under Sec. 143 in relation to audit of
Government Company. (5 marks) OR 2009 - Nov [8] (c), RTP Short Notes Write short note Powers of C & A.G. in
connection with the performance of his duties. (5 marks)

Answer:
Power of CAG under Sec. 143 of Companies Act, 2013
☐ As per Sec. 143(5)

In the case of a Government Company or any other company owned or controlled, directly or indirectly, by the
Central Government, or by any State Government or Government, or partly by the Central Government and partly
by one or more State Government, the comptroller and Auditor-General of India shall appoint the auditor under sub-
section (5) or sub-section (7) of Sec.139 and direct such auditor the manner in which the accounts of the company
are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the
Comptroller and Auditor-General of India which, among other things, include the directions, if any, issued by the
Comptroller and Auditor-General of India, the action taken thereon and its impact on the accounts and financial
statement of the company.

☐ As per Sec. 143(6)

The C & AG of India shall within sixty days from the date of receipt of the audit report under sub-Sec. (5) have a
right to:
(a) conduct a supplementary audit of the financial statement of the

company by such person or persons as he may authorise in this behalf; and for the purposes of such audit, require
information or additional information to be furnished to any person or persons, so authorised, on such matters, by
such person or persons, and in such form, as the C & AG of India may direct; and

(b) comment upon or supplement such audit report:

Provided that any comments given by the C & AG of India upon, or supplement to , the audit report shall be sent by
the company to every person entitled to copies of audited financial statements under sub-Sec. (1) of Sec. 136 and
also be placed before the annual general meeting of the company at the same time and in the same manner as the
audit report.

☐ As per Sec. 143(7)

Without prejudice to the provisions of this Chapter, the C & AG of India may, in case of any company covered
under sub-Sec. (5) or sub-Sec. (7) of Sec. 139, if he considers necessary, by an order, cause test audit to be
conducted of the accounts of such company and the provisions of Sec. 19A of the Comptroller and Auditor-
General’s (Duties, Powers and Conditions of Service) Act, 1971 (56 of 1971), shall apply to the report of such test
audit.

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Q.1.4.2 2015 - May [2] (i) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
C & AG orders to conduct test audit of the accounts of a Government company. (2 marks)

Answer:
Correct:
C & AG can order to conduct test audit of the accounts of a government company and as C & AG conduct the audit
of government company.

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2 Audit of Local Bodies
2.1 Objective of Audit of Local Bodies
Q.2.1.1 2015 - May [6] (c), 2017 - May [5] (a) Descriptive State the important objectives of local body’s audit. (4
marks each)
OR 2018 - May [6] (d) Descriptive Answer the following:
State the objectives of audit of Local Bodies. (5 marks)

Answer:
Objective of Audit of Local Bodies: The external control of municipal expenditure is exercised by the State
Governments through the appointment of auditors to examine municipal accounts. The municipal corporations of
Delhi, Mumbai and a few others have powers to appoint their own auditors for regular external audit. The important
objectives of audit are:

(i) Reporting on the fairness of the content and presentation of financial statements;

(ii) Reporting upon the strengths and weaknesses of systems of financial control;
(iii) Reporting on the adherence to legal and/or administrative requirements;
(iv) Reporting upon whether value is being fully received on money spent; and
(v) Detection and prevention of error, fraud and misuse of resources. Space to write important points for revision

2.2 Audit programme for Local Bodies

Q.2.2.1 2010 - May [5] (a), 2016 - May [5] (b), RTP Descriptive

Draft an audit programme for conducting audit of accounts of a Local Body. (5, 6 marks) Answer:
Local Bodies
A municipality can be defined as a unit of local self-government in an urban area. By the term ‘local self-
government’ is ordinarily understood the administration of a locality – a village, a town, a city or any other area
smaller than a state – by a body representing the local inhabitants, possessing fairly large autonomy, raising at least a
part of its revenue through local taxation and spending its income on services which are regarded as local and
therefore, distinct from state and central services.
Municipal government in India covers five distinct types of urban local authorities, viz., the municipal corporations,
the municipal councils, the notified area committees, the town area committees and the cantonment committees.
Audit of local bodies

1. Appointment
2. Scope
3. Objectives
4. Compliance
5. Authenticity
The Local Fund Audit Wing of the State Government is generally in charge of the audit of municipal accounts.
Sometimes bigger municipal corporation e.g. Delhi, Mumbai etc. have power to appoint their own auditors for
regular external audit. So the auditor should ensure authenticity of his appointment. The auditor should check that
the different schemes, programmes and projects, where large financial expenditure has been incurred, are running
economically and getting the expected results. The auditor while auditing the local bodies should report on the
fairness of the contents and presentation of financial statements, the strengths and weaknesses of system of financial
control, the adherence to legal and/or administrative requirements; upon whether value is being fully received on
money spent. His objective should be, to detect errors and fraud and misuse of resources.

The auditor should ensure that the expenditure incurred conforms to the relevant provisions of the law and is in
accordance with the financial rules and regulations framed by the competent authority.

The Auditor should ensure that all types of sanctions, either special or general, accorded by the competent authority.
6. Authorisation The Auditor should ensure that there is a provision of

funds and the expenditure is incurred from the provision and the same has been authorized by the competent
authority.

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Q.2.2.2 2014 - May [5] (b) Descriptive

State the background of “Local Bodies”. Draft an audit programme for audit of local bodies. (8 marks) Answer:
As per Sec. 2(45) of the Companies Act, 2013, government company means any company in which not less than
51% of the paid up share capital is held by the Central Government or by any State Government or Governments or
partly by the Central Government any partly by one or more State Governments and includes a company which is a
subsidiary of a Government Company.
Audit Programme for Audit of Local Body:
Please refer 2010 - May [5] (a) on page no. 563

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MULTIPLE CHOICE QUESTION
1 Government Audit

1. Government audit serves as a ________ for public accounting of government funds.

(a) mechanism
(b) process
(c) auditing
(d) (a) or (b) above

2. The function of Government Audit is discharged by the independent statutory authority of the _________ through
the agency of the Indian Audit and Accounts Department.
(a) Central Government Audit Committee
(b) Central Accounts and Audit Committee
(c) Comptroller and Auditor General
(d) None of the above.

3. The C & AG, in the discharge of his functions, watches that the various authorities act in regard to financial
matters in accordance with the ___________, and conform to the rules or orders made there under. (a) Government
Rules
(b) Constitution
(c) Law made by Parliament
(d) (b) and (c)

4. Who makes a provision regarding the appointment, salary and duties and powers of the C & AG.
(a) Parliament
(b) Constitution
(c) President of India
(d) Supreme Court

5. Comptroller and Auditor General is appointed by the

(a) Constitution of India
(b) President of India
(c) Parliament of India
(d) Chief Justice of the Supreme Court

6. _________ of the Constitution provides that the accounts of the Union and of the States shall be kept in such form
as the president may on the advice of the C & AG prescribe.
(a) Article 149
(b) Article 150
(c) Article 151
(d) Article 155

7. Reports of the C & AG relating to the accounts of the Union/State shall be submitted to the President/Governor
who shall cause them to be laid before House of Parliament/State Legislature according to ________ of the
Constitution.
(a) Article 149
(b) Article 150
(c) Article 151
(d) Article 158

8. Which is not a duties of C & AG?

(a) Audit of Government Companies and Corporations
(b) Compile and Submit Accounts
(c) Preparation of Government Accounts
(d) Audit of Grants or Loan

9. C & AG has not inspect any office of accounts under the control of the Union or a State Government.
Is the statement is: __________
(a) True
(b) False
(c) Partly True
(d) None

10. According to ________, the auditors try to bring out cases of improper, avoidable, or infructuous expenditure
even though the expenditure has been incurred in conformity with the existing rules and regulation. (a) Performance
Audit
(b) Propriety Audit
(c) Audit of Sanction
(d) Audit against Rules and Orders.

11. ___________ is an appraisal of the performance of programmes, schemes, projects with reference to the overall
targeted objectives as well as efficiency of the means adopted for the attainment of the objectives.
(a) Effectiveness Audit
(b) Performance Audit
(c) Propriety Audit
(d) Social Audit

2 Audit of Local Bodies

12. Local bodies may receive different types of revenue grants from the state administration except
(a) General purpose grant
(b) Specific purpose grant
(c) Public Grant
(d) Statutory and Compensatory grants
3
Audit of Non-Governmental Organisations (NGO’S)

13. Non-Governmental Organisations are generally incorporated as societies under the Societies Registration Act,
1860 or __________. (a) Trust under the Indian Trust Act, 1882
(b) Incorporated as a company under Section 8 of the Companies Act,

2013
(c) Under any other law corresponding to these law enforced in any part
of India
(d) Any of the above
14. NGO’s registered under the Companies Act, 2013 must maintain their books of account under the ________ as
required by the provisions of Section 128 of the Act.
(a) Cash basis
(b) Accrual basis
(c) Hybrid basis
(d) Either (a) or (b) basis
15. The NGOs which are not registered under the Companies Act, 2013 are maintain their accounts _________.
(a) Cash basis
(b) Accrual basis
(c) Hybrid basis
(d) Either (a) or (b) basis
16. Donations and Grants received in the nature of ________ are in the
nature of capital receipts and shown as liabilities in the Balance Sheet.
(a) Government’s Contribution
(b) Doner’s Contribution
(c) Promoter’s Contribution
(d) Financing
17. A contribution made towards the capital or corpus of an NGO is known
as _________.
(a) Capital Fund
(b) Corpus Capital
(c) Corpus Investment
(d) Corpus Contribution
18. NGO receive contributions in Liquid form Statement is
(a) True
(b) False
(c) Partly True
(d) None
19. The auditors of NGO registered under Section 8 of the Companies Act,
2013 are appointed by the _________.
(a) Shareholders
(b) Management
(c) Members of the company
(d) State Government/Central Government

4 Audit of Sole Trader

20. Audit of Sole Trader is mandatory Statement is (a) True

(b) False
(c) Partly True
(d) None

21. Who determines the scope of the audit as well as the conditions under which it will be carried out in case of a
audit of a sole proprietary firm. (a) Sole Proprietor
(b) Management of the Sole Proprietary firm
(c) Members of the BOD
(d) None of the above

5 Audit of Firm

22. The auditor to a firm is usually appointed by the partners ________. (a) Any one of the partner
(b) On the basis of a decision taken by them
(c) According to the provision of partnership agreement (d) Either (b) or (c)

23. In case of partnership audit is it required to compliance of accounting standard issued by the institute
(a) Yes
(b) No
(c) Partly Yes
(d) None of the above

24. Accounts of every LLP shall be audited in accordance with _______. (a) Rule 22 of the Partnership Act,
(b) Rule 22 of LLP, Rules 2009,
(c) Rule 23 of LLP, Rules 2009,
(d) Rule 24 of LLP, Rules 2009,

25. As per Rule 24 of LLP Rules 2009, specifies the exemption of Audit of Accounts of LLP when
(a) Turnover of LLP does not exceed Rupees Forty Lakh in any financial

year.
(b) Contribution does not exceed Rupees Five Lakhs.
(c) Both (a) and (b)
(d) Either (a) or (b)
26. Every LLP is required to file annual return in ________ with ROC within

_________ of closer of financial year.

(a) Form 10 , 30 days
(b) Form 10 , 60 days
(c) Form 11 , 30 days
(d) Form 11 , 60 days

27. Annual Return of an LLP will be available for public inspection on payment of prescribed fees to Registrar.
Statement is ___________. (a) True
(b) False
(c) partly True
(d) None

28. In case of LLP, documents or information will be available for inspection by any person.
(a) Incorporation document
(b) Name of partners and changes, if any, made therein (c) Statement of Account and Solvency, and Annual Return
(d) Any of the above

29. The fees for such inspection of an LLP is __________ and fees for certified copy or extract of any document u/s
36 shall be _________. (a) ` 50, ` 5 per Page
(b) ` 50, ` 10 per Page
(c) ` 100, ` 5 per Page
(d) ` 100, ` 10 per Page

30. In case of LLP auditor may be appointed by the partner _________.

(a) At any time for the first financial year but before the end of first financial year
(b) At least thirty days prior 15 the end of each subsequent year after first financial year.
(c) To fill the casual vacancy caused by removal of auditor
(d) Any of the above
6 Audit of Charitable Institution 31. In the case of an audit of a charitable institution regarding Grunts:

(a) Vouching the account received with the relevant correspondence, receipts and minute books
(b) Obtaining a certificate from a responsible official showing the amount of grants received.
(c) Both (a) and (b) both
(d) Eighter (a) or (b)

7
Audit of Hire Purchase and Leasing Companies

32. Person who obtains or has obtained possession of goods from an owner under the hire-purchase agreement, is
known as _________. (a) Hire
(b) Hirer
(c) Hiree
(d) None

33. In a lease agreement, _________ acquires the right to use an asset for an agreed period of time in consideration
of payment of rent to another party called _________.
(a) Buyer, Seller
(b) Lessor, Lessee
(c) Lessee, Lessor
(d) None of the above

34. When under the lease agreement, the legal ownership of the asset remains with the lessee lessor, (the leasing
company), but in substance, all the risks and rewards of ownership of the asset are transferred to the lessee, is called
________.
(a) Operating Lease
(b) Financing Lease
(c) H.P. Leasing
(d) None of the above

35. __________ is an arrangement where in return for rent, the lessor allows the lessee to use the asset for a certain
period.
(a) Operating Lease
(b) Financing Lease
(c) HP Leasing
(d) None of the above

8 Audit of Co-operative Societies

36. ___________, contains the fundamental law regarding the formation and working of the Co-operative Societies
in India and is applicable in many states with or without amendments.
(a) Societies Act, 1872
(b) Co-operative Act, 1872
(c) Co-operative Act, 1872
(d) Co-operative Act, 1912

37. Qualification required for an auditor of Co-operative Societies. (a) Chartered Accountant within the meaning of
the Chartered

Accountant Act, 1949

(b) Person holding diploma in Co-operative accounts under State Co
operative Acts,
(c) Person who has served as an auditor in the Co-operative
department of a government to act as an auditor.
(d) Any one of the above.
38. According to Section 33 of the Central Act, a prescribed percentage of the profits should be transferred to
Reserve Fund, before ______. (a) deceleration of profit
(b) distribution of net income
(c) Publication of gross and net income
(d) distribution as dividends or bonus to members.
39. State Acts allowes a society may use their Reserve Fund in ______. (a) Invest as per provision of the Act
(b) Use for some public purposes likely to promote the object of the
society.
(c) In the business of a society as working capital
(d) In any case of the above.
40. Multi-State Co-operative Societies Act, 2002 come into force from
(a) April, 2002
(b) July, 2002
(c) August, 2002
(d) November, 2002
41. Multi-State Co-operative Societies, 2002 applies to Co-operative
Societies whose objects are:
(a) multi product operations
(b) multi service providing operation
(c) multi district operation
(d) multi state operation.
42. Multi State Co-operative Society can utilised their fund for any political
purpose. Statement is _______.
(a) True
(b) False
(c) Partly True
(d) None

Answer

1. (d) 2. (c) 3. (d) 4. (b) 5. (b) 6. (b) 7. (c) 8. (c) 9. (b) 10. (b) 11. (a) 12. (c) 13. (d) 14. (b) 15. (d) 16. (c) 17. (d) 18.
(b) 19. (c) 20. (b) 21. (a) 22. (d) 23. (a) 24. (d) 25. (d) 26. (d) 27. (a) 28. (d) 29. (a) 30. (d) 31. (c) 32. (b) 33. (c) 34.
(b) 35. (a) 36. (d) 37. (d) 38. (d) 39. (d) 40. (c) 41. (d) 42. (b)

CHAPTER

14 Audit of NGO

This Chapter Covers: Study’s Chapter: 13 (Para 3)

Chapter Comprises: ☹Audit of Non-Governmental Organisations (NGO’s ☹Background ☹Sources and
Applications of Funds ☹Provisions Relating to Audit.
THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Objective Short Notes
Legend
Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book.
6.575
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK Repeatedly Asked Questions
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
1.2
1 Provisions Relating to Auditing
Q.1.1 2007 - Nov [6] (a) Descriptive

State any five special points which you, as an auditor, would look into while examining the income and collection of
fund by an NGO engaged in providing relief work for flood victims. (5 marks)

Answer:
S. Aspects to be No. verified Receipt of Donations
Verification
1. Internal Control Ensure that the internal control system exists

particular l y r e f e r r i n g t h e division of responsibilities with respect to authorised collection of donation,

custody of receipt books and safe custody of money.

2. Receipt Books Custody

Ensure that unused receipt books are returned and are verified physically including checking of number of receipt
books and numbering sequence therein.

3. Receipt of Cheque

Ensure that receipt book has a carbon copy for duplicate receipt and signed by a responsible official and also all
details pertaining to the date of cheque, bank’s name, date, amount etc. should be clearly indicated.

4. Reconciliation of Bank Statement

Ensure reconciliation of bank statement with reference to all cash deposits referring to the date, amount and also
receipt book,

5. Receipt of Cash Ensure that registers of cash donations have been vouched extensively.
6. Contributions from Abroad
Any contribution made from abroad should comply with the applicable laws and regulations.
Remittance of Donation S. Aspects to be No. Verified 1. Mode of
Remittance
2. Confirmation of Receipt of
Remittance

3. Identity
4. Procedure of Direct Confirmation
5. Use of Donation
6. Selecting system for NGO
Verification

All remittances are sent through A/c Payee Cheque. Remittance made through Demand Draft should also be
scrutinized thoroughly with reference to recipient.
All remittances should have been supported by receipts and acknowledgments.

The recipient NGO is a genuine entity. The address, 80 G Registration No., etc. should be verified.
Ensure that confirmation letters have been sent to those entities to whom donation have been paid.
Ensure that donation has been used for the purpose required i.e. to provide relief to Tsunami victims.
Ensure the system for selecting NGO to whom donations have been sent.

Space to write important points for revision

Q.1.2 2010 - Nov [5] (b), RTP Descriptive What important points should an auditor keep in mind while checking
receipt of income of a Non-Governmental Organization (N.G.O)? (4 marks)
Answer:
Audit of income:

(i) Contributions and grants for projects and programmes: Check:

(a) agreement with donor and grant letter - to ensure that money

received has been accounted for.

(b) that all foreign contribution receipts - are deposited under Foreign
Contribution (regulation)Act 1976.
(ii) Receipt from fund raising programme:
Verify:
(a) the internal control system,
(b) who is the person responsible for the collection of funds, (c) mode of payment,
(d) collections are counted and deposited in the bank daily. (iii) Membership fees:
(a) Check
☐ the fees received with the membership register,
☐ that proper classification is made between,
☐ entrance fees,
☐ annual fees,
☐ life membership fees.
(b) Reconcile the fees received and fees to be received during the
year.
(iv) Subscriptions:
(i) Check or compare
(a) subscription register with receipt issued.
(b) receipt issued with subscription rate schedule.
(ii) Reconcile - subscription received with printing and despatch of
corresponding magazines circulars periodicals
(v) Interests and Dividends:
Check interest received and receivable with investments held during the year.
Space to write important points for revision

Q.1.3 2013 - May [6] (b), RTP Descriptive

What are the points on which an auditor should concentrate while planning audit of an N.G.O? (8 marks) Answer:
Special points for planning of Audit:
1. The auditor must obtain knowledge about the client’s activities, recent

amendments, etc.
2. The constitutional form and organisational structure of the NGO should
be carefully studied and reviewed.
3. Decisions taken by the board, committee, managing body etc. can be
evaluated by an analysis of the respective minute books. 4. Study and verify the applicability of the accounting
system, procedure,
internal control and internal check.
5. Materiality levels should be determined.
6. Nature and timing of the various audit report and other communications
must be set.
7. The expert’s opinion and his report can be involved.
8. The previous year audit report should be thoroughly studied. Audit Programme: The sequential order of assets,
liabilities, incomes and expenditure must be maintained to see that no material item gets omitted. 1. Corpus fund:
(i) Vouch it with reference to letter from donors.
(ii) Tally the interest income with the investment register and physical investment in hand.
2. Reserves:
(i) Vouch Transfer of amount from projects/ programmes with donor letters and board resolutions.
(ii) Transfer of gross value of asset from capital reserve to general reserve and adjustment during the years.
3. Ear-marked funds:
Check – requirements of donor institutions, board resolutions of NGO,
– rules and regulations of the schemes of ear-marked funds.

4. Project / Agency balances:

Vouch – the disbursement and expenditure as per agreement with donor for each of the balances.

5. Loans: Vouch - with loan agreement,

– receipt - counter foil issued.
6. Fixed assets (PPE):
(i) Vouch - acquisition /sale/disposal/depreciation.
(ii) Verify - its approval by appropriate authority
(iii) Check - donor’s letter or agreement for grant, and the title for immovable property.
7. Investments:
(i) Check-the investment register and
- the investments physically;
to ensure that the name of the NGO is included in it. (ii) Verify approval of appropriate authority.
(iii) Refer bank account - for the principal and interest amount of the investment.
8. Cash in hand:
(i) Verify, at the year end, physically, the cash in hand and the imprest balance.
(ii) Check that it tallies with the books of account.
9. Bank balance:
(i) Check the bank reconciliation statement (BRS)
(ii) Ascertain details for:
☐ old outstanding balances,
☐ unadjusted amounts
10. Stock in hand:
Verify and obtain certificate from management for its quantities and valuation.
11. Programme/Project expense:
(i) Verify the agreement with the donor or contributor for the particular project or programme in order to find out the
condition. (ii) If it involves contracts-then:
– check its conditions and,
– ensure that income tax is deducted, deposited and return filed.
12. Establishment expenses:
(i) Verify that the PF, Life insurance premium, ESI and their administrative charges are deducted, contributed and
deposited in the prescribed time.
(ii) Verify the office and other administrative expenses like postage, stationery, travelling etc.
Space to write important points for revision

Q.1.4 2017 - May [2] (h) Objective

State with reasons (in short) whether the following statement is correct or incorrect:
NGOs registered under the Companies Act, 2013 can maintain their books on either accrual or cash basis. (2 marks)

Answer:
Incorrect: For NGO’s registered u/s 8 of the Companies Act, 2013, maintenance of books under the accrual basis
is compulsory.

Space to write important points for revision

CHAPTER

15 Miscellaneous Audit

This Chapter Covers: Study’s Chapter: 13 (Para 4 to 12)

Chapter Comprises: ☹Audit of Sole Trader ☹Audit of Firm ☹Audit of Charitable Institution ☹Audit of Educational
Institutions (School, College or University) ☹Audit of Hospital ☹Audit of Club ☹Audit of Cinema

☹Audit of Hire Purchase and Leasing Companies ☹Audit of Hotels.

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book. 6.583
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90
2.20 1.35 1.35
QUICK LOOK Repeatedly Asked Questions
2.1, 4.1, 5.2, 6.1
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
2.1, 9.1
1 Audit of Sole Traders
Q.1.1 Practice Question Practical

What are the advantages of Audit to sole traders?

Answer:

Advantages of Audit to Sole Trader

Audit of sole traders account has the following advantages :

1. Moral Check It act as a moral check on the employees from committing defalcations.
2. Tax Liability Audited statements of accounts are helpful in setting liability for taxes.

3. Credit Negotiation Financers and Bankers use audited financial statement in evaluating the credit worthiness of
individuals in negotiating loan. It is also useful for determining the purchase consideration for a business.

4. Trade Dispute
Statement

Audited statements are also useful for setting trade disputes for higher wages or bonus as well as claims in respect of
damages suffered by property due to some other calamity.

5. Control Over
Inefficiency

It also helps in the detection of wastages and losses and shows the different ways by which these might be checked
especially those that occur due to the absence or inadequacy of internal checks or internal control measures.

6. Arbitration Audited financial statements are useful in settling disputes by arbitration.

7. Appraisal Audit reviews the existence and operations of various controls in the organisation and reports
inadequacies, weakness etc. in them. The trader can take suitable action based on the reports.

8. Assistance to
Government

Government may require audited and certified statements before it gives assistance or issues a license for a
particular trade.

Space to write important points for revision

Q.1.2 Practice Question Practical Enumerate the salient features of audit of sole traders Accounts.

Answer:
The Salient Features of Audit of Sole Trader accounts
1. A sole trader is under no legal obligation to get his accounts audited

except under Income Tax Act 1961 but it is only subject to the satisfaction of certain conditions such as tax audit u/s
44AB. Some sole trader, get their financial statement audited due to regulatory requirements, such as stock brokers
or on a specific instructions of the bank for approval of loans etc. otherwise it is not compulsory.

2. The scope of audit and the conditions under which it is carried out can be determined by the sole trader himself.
3. A sole trader may decide for a partial audit i.e. the audit would be carried out in respect of only a part of the books
of accounts.
4. In order to prevent mis-understanding a written letter of appointment should be obtained by the sole-trader. The
letter must define clearly the scope of audit work.
Space to write important points for revision

2 Audit of Firms
Q.2.1 2013 - May [6] (a), 2016 - May [5] (a) Descriptive Mention important points which auditors will consider
while conducting audit of accounts of a partnership firm. (8, 6 marks)

Answer:
The special points to be looked into auditing the books of a Partnership Firm may be as follows :

S. Areas to be No. covered 1. Appointment Letter

Auditor's Duty

Ensure that the appointment letter, signed by a partner, duly authorised, clearly specifies the nature and scope of
audit considered by the partners particularly the limitation, if any, under which the auditor functions.

4. Agreement
5. Books of Accounts
6. Interest
7. Provision for Tax

2. P a r t n e r s h i p Inspect the partnership deed duly signed by all the Deed partners and its registration with the
Registrar of Firms. Also determine from the partnership deed, the capital contribution, profit sharing ratio, interest
on capital, powers and responsibilities of the partners etc.

3. Minutes Book Peruse the minutes book, if any, maintained to record the policy decision undertaken by the
partners especially the minutes pertaining to authorisation of extraordinary and capital expenditure, raising of loans,
purchase of assets, extraordinary contracts entered into and other matter which are not routine in nature.

Verify whether the business in which the partnership is involved is authorised by the partnership agreement, or by
any extension or modification of that agreed to subsequently.

Investigate whether the books of account are reasonable and considered adequate pertaining to the nature of
partnership business.

Verify whether the interest of non partner has suffered unreasonably by an activity involved in the partnership which
it was not authorised to do under partnership deed or by violating any pervasion in the partnership agreement.

Ensure that a provision for tax of the firm payable by the partnership has been made in the accounts prior to arrival
at the amount of profit divisible among the partners. Also check various requirements of the legislation applicable to
the partnership firm such as Sec. 44 (AB) of the Income tax Act, 1961 have been complied with.
8. Profit Sharing Verify that the profits or losses are distributed

among the partners in the profit sharing ratio as agreed.

Space to write important points for revision
Q.2.2 2015 - May [6] (a) Descriptive What are the advantages of the audit of the accounts of a partnership firm? (6
marks)

Answer:
On broad considerations, the advantages of audit of accounts of a partnership could be stated as follows :

1. Account Settlement
2. Retirement or Death
3. Tax Liability

Audited accounts provide a convenient and reliable means of setting accounts between the partners and thereby the
possibility of occurrence of a dispute among them is mitigated. On this consideration, it is usually provided in and
accepted by the partners shall be binding upon them unless some manifest error is brought to light within a specified
period subsequent to the accounts having been signed.

On the retirement or death of a partner, audited accounts, which have been accepted by the partners constitute a
reliable evidence for computing the amounts due to the retiring partner or to the representative of the deceased
partner in respect of his share of capital, profits and goodwill.

The accounts of a partnership, which have been audited, are generally accepted by the Income Tax Department as
the basis for computing the assessable income of the partners and also for the settlement of their liability in respect
of Wealth Tax.

4. Reliable
5. Admission of New Partner
6. Moral Check on Partners

Audited statement of accounts are relied upon by the banks when advancing loans, as well as by prospective
purchasers of the business, as evidence of the profitability of the concern and its financial position.

Audited statements of account can be helpful in the negotiations to admit a person as a partner, especially when they
are available for a number of past years.

An audit is an effective safeguard against any undue advantage being taken by a working partner or partners
especially in the case of those partners who are not actively associated with the working of the firm.

7. Sale of Business Audited Accounts can be relied upon by Banks when advancing loans, as well as by prospective
customers. Space to write important points for revision
Q.2.3 2019 - May [1] (f) Objective

The accounts of every LLP shall be audited in accordance with rule 24 of LLP Rules 2009. (2 marks) Answer:
This Statement is Correct
The accounts of every LLP shall be audited in accordance with Rule 24 of LLP Rules, 2009.

Q.2.4 2019 - Nov [6] (d) Descriptive There are certain points which are required to consider specially in the audit
of accounts of a partnership. Discuss any three points briefly. (3 marks)
3 Audit of Charitable Institutions
Q.3.1 2017 - May [3] (b) Descriptive

How will you vouch/verify the following Investments income in the case of charitable institutions (4 marks)
Answer:
Investment income is case of charitable institutions:
1. Verify whether purchase and sale of any investments have been properly

authorised.
2. Verify Banker’s certificate for the lodgement of all securities on the last
day of accounting year.
3. Affirm strongly the amount received with the interest and dividend,
counterfoils and computation of interest on securities for sale or purchase
of investment. Ensure that appropriate dividend is received, also
compare the dividend received with the investment list to confirm that
dividend has been received with respect to all investment. 4. Ensure that appropriate dividend is received, also
compare the dividend
received with the investment list to confirm that dividend has been
received with respect to all investment.
Space to write important points for revision

Q.3.2 2019 - Nov [6] (b) Descriptive In the case of audit of a charitable institution, what attentions should be paid
by auditor regarding audit of expenditure items ? (4 marks)
Q.3.3 2017 - May [5] (c) Practical
National Collage, an institution managed by a trust, has received a grant of 2.40 crore from Government nodal
agencies for funding a project of research on rural health systems in India. Draft an audit programme for auditing
this fund in the accounts of the collage. (6 marks)

Answer:
Audit of Grant Aspect
Grant Receipt Auditor’s Duties

Examine the letter sanctioning the Grant, and note the following aspects:
☐ Purposes and conditions relating to the use of

moneys.
☐ Any express restrictions/prohibitions on the use of
the moneys for certain purposes.
☐ Manner of investment of grant amounts. ☐ Reporting requirements, if any, to the Government
Nodal Agencies.

Minutes Book
Expense Audit

☐ Peruse the minutes of the meetings of the Managing Committee or Governing Body, nothing the resolutions
relating to the use of Grant.

☐ Ensure that the decisions taken have been duly complied with, e.g. operation of bank accounts, sanctioning of
expenditure, etc.

☐ Examine the Receipts and Payments A/c of the Fund, and see whether the expenditure conform to the specified
purpose only, i.e. Research on Rural Health Systems in India.

☐ Test-check a few expenditure entries, along with the supporting documents, to ensure genuineness of the claim
and payments.

☐ Ensure that the relatives/friends of the members of the Managing Committee, are not the beneficiaries of the
expenditure.
Asset ☐ Where the Grant has been utilised in the creation of Verification any asset, verify the same using the
general

considerations in relation to PPE.

☐ Verify the Investments of the Fund as on the
Balance Sheet date.
☐ Obtain certificate from Bank towards confirmation of
Bank Balance on the B/S date.
Space to write important points for revision

Q.3.3 Practice Question Practical

What are the important matters requiring the attention of the auditor in the audit of a charitable institution?
Answer:
Charitable Institution
The important matters requiring the attention of the auditor in the audit of a Charitable Institution may be as follows
:

S. Areas to be No. Covered

1. Formation

2. Functions Auditor's Duty

Determine the formation of charitable institution and note down the financial powers of the executives and
managing committee. Investigate the relevant bye-laws or trust deed for determining the powers and duties of the
Managing Committee or Board of trustees
Investigate the functions being carried on by the institution and verify whether they are within the permitted objects
of the institution.
Scrutinise the minutes book of the Managing Committee regarding various financial decisions constituting the
decision on sale or purchase of investment, acquisition or disposal of fixed assets (PPE), donation receipts,
endowment, etc.

3. Funds

4. S u b s c r i p tions and Donations

5. Legacies
6. Grants

7. Income
from
Investment

Note the specific conditions attached to the funds operated by the trust.
Confirm whether the objectives in operating each fund are fulfilled.

Determine the changes if any, with regards to annual or life membership subscription for during the year. Determine
that there is sufficient internal control over the issue of official receipts, custody of receipt books not used, printing
of receipt books, etc.
Investigate the internal check system regarding the money received from box collection, flag days, etc. Ensure
proper control system over collections and also ensure that they have been properly accounted. Verify the total
subscription and donation received with the figures published in the issued reports of Charitable Institutions.

Verify the amount received with the agreement in this regard and other available information.

Verify the amount received with the relevant correspondence receipts and minute books and gain a certificate from
the responsible official indicating the amount of grant received.

Affirm strongly the amount received with the interest and dividend, counterfoils and computation of interest on
securities for sale or purchase of investment. Ensure that appropriate dividend is received, also compare the dividend
received with the investment list to confirm that dividend has been received with respect to all investment.

8. Rents
9. Specific Functions
10. Income Tax Refunds

Inspect the rent roll and tenancy agreements with respect to rent amount and due date. Also, affirm strongly the rent
receipts with rent roll, cash book and counterfoils of receipt book.

Affirm strongly the gross receipts and payments in respect to any specific function and confirm that the proceeds of
all tickets issued are accounted for after making allowance for return.

Verify the refund of TDS on dividend or interest from the Income Tax Authorities as Charitable Institutions are
provided exemption from income tax.

Space to write important points for revision

4 Audit of Educational Institutions
Q.4.1 2012 - May [5] (a), 2014 - Nov [6] (a) Descriptive Mention the eight important points which an auditor will
consider while conducting the audit of educational institutions. (8 marks each) Answer:
Educational Institution can be verified as follows
S. Areas to be No. Covered 1. Constitution Auditor's Duty
Examine the Trust Deed or Regulations and determine the constitution of the organisation. Also note down the
provisions affecting accounts, contained in the Regulations.

2. Minutes Book Carefully examine the minutes of the Managing

Committee's or Governing Body's meetings, noting down the resolutions affecting the accounts. Confirm that the
decisions undertaken are duly complied with, for operation of Bank accounts, approval of expenditure.

3. F e e s O b t a i n e d from Students
(i)
(ii)
(iii)
(iv)
(v)

(vi) Verify the names entered into the Student's Fees Register for each term or month, alongwith the class, Registers
showing the student’s name on roll and testing the amount of fees charged. Check that the system of internal check
ensures proper increase in demand against students.
Verify the fees received by the comparison of counterfoils of receipts provided with the entries in the Cash Book.
Mark out the collections in the Fees Register to ensure that the revenue earned from such source has been duly
accounted for.
Determine whether the fees paid in advance is duly considered under the approval of proper authority.
Check the admission fees with admission slips duly signed by the College Principal and ensure that the amount is
credited to a Capital Fund or Separate Account decided by the Managing Committee. Verify whether the fines for
late payment, absence, etc. have been either collected or foregone under proper authority.

4. Other Incomes
5. Expenditures
6. Taxation

(vii) Determine whether hostel dues were recovered before the closure of the students accounts and refund of their
deposited caution money.

(viii) Report to the Managing committee, old huge areas on account of fees, dormitory rents, etc. if any.

(i) Check the rental income earned from landed property with Rent Receipts and Agreements.

(ii) Affirm the income from endowments and legacies and also the dividend and interest from investment and verify
the securities with respect to investment held.

(iii) Verify any local authority or government grant with the grant memo. If any expenses have been disallowed for
the grant purpose, determine the reasons for it.

(i) Determine the operation of internal control system over the various heads of expenditure.

(ii) Affirm the various items of expenditure, noting down the abnormal or heavy items, if any. Get the appropriate
explanations for noteworthy items of expenditure.

(i) Verify that tax exemptions under the Income Tax Act are enjoyed by the institution.

(ii) In case of TDS from rents, interest etc. check whether the refund claim has been made.

7. Accounting Adjustments
8. Financial Information
9. Certificates

(iii) Investigate that the conditions subject to which exemption has been granted, have been followed or complied
with.
(i) Verify the fixed assets (PPE) and ensure that sufficient depreciation has been provided.

(ii) Verify the capital fund and other liabilities.

(iii) Ensure that caution money and other deposits paid by students during admission are shown as liability in B/S
and not transferred to revenue, unless and until they are not refundable.

(iv) Note that the investments which represent endowment fund for prizes have been kept separate and any income
in excess of such prizes is accumulated and invested alongwith the corpus.

(iv) Confirm that separate accounts statement have been prepared with regards to Scholarship Fund, Games Fund,
Staff Provident Fund, Hostel Fund, etc.

Verify whether the form and manner of presenting financial information comply with the Accounting Standards and
applicable legal requirements.

Get the appropriate representation of management and certificates with respect to various aspects covered during the
audit course.

5 Audit of Hospitals
Q.5.1 2008 - Nov [6] (a) Descriptive

What steps would you take in to consideration in Auditing the receipts from patients of a Hospital ? (6 marks)
Answer:
An auditor should take the following steps in Auditing the receipts from patients of a hospital.
1. Ascertain the legal status of the hospital.
2. Examine the minutes book of meetings of Board of Trustee/Governing

body/ BOB/ Managing Committee.

3. Obtain a list of books of account and that of other registers and records
relevant for the checking of receipts from patients.
4. Examine the previous audit reports and note the qualifications and other
observations related to receipts from patients.
5. Vouch the register of patients and bills issued to them.
6. Examine the internal check system regarding the receipts (whether they
are in cash or cheque). Examine whether the OPD slips/ admission slips
issued to patients are pre numbered and are properly accounted. 7. Check a sample of bills where concessional
treatment is given by
sending out confirmations and request as per SA☐ 505 (old AAS☐ 30)
to large companies and government departments whose employees are
treated free of cost and employer is billed directly by the hospital. 8. Calculate occupancy ratio of man days, cost of
various tests and income
realized therefrom for comparing them with the preceding years trends
and ratios.

Q.5.2 2011 - May [5] (a), 2012 - Nov [5] (a), Descriptive 2014 - May [6] (b), RTP
Mention any 8 special points which you as an auditor would look into while auditing the books of accounts of
Hospital (8 marks each) Answer:
Audit of Hospital Can be verified as follows
S. Areas to be No. covered 1. Internal Check
2. Income from Services
3. Collection of Cash Auditor's Duty

(i) Investigate the internal check with regards to issues and receipts of stores, lines, apparatus, clothing, instruments,
etc.

(ii) Confirm that the purchase is made appropriately and is recorded in the Stock Register and the issue is made only
against an appropriate authorisation.

(i) Investigate the Bill Register of patients and also the copies of bills issued to them.

(ii) Test check some of the bills with the attendance records of the patients to see that the bills are correctly prepared.

(iii) Verify that the bills are issued to all the patients who have paid any amount according to the rules of the
hospital.

(iv) Get satisfactory explanations of the unbilled and consessional billing cases, if applicable.

(i) Verify collection of cash from Cash Book alongwith receipt counterfoils and other evidences such as copies of
patient's bills, dividend warrants, rent bills, etc.

(ii) Carry unexpected cash verification at all cash handling locations on the same day.
4. Grants and Donations

(iii) Verify whether there is an existence of procedure for deposit of all cash collections on the same day and also
that the procedures have been followed.

(i) Verify whether the receipts of grants, if any, are duly accounted for.

(ii) Determine that the legacies and donations received for specific purpose are so applied.

(iii) Confirm that appropriate between Revenue and classification Capital with
5. Income from Investment
6. Purchases and Expenses

respect to various grants have been made. (i) Analyse the Property and Investment
Registers to check that collections of
income have been made through rent from
properties, dividend and interest on
securities, etc.
(ii) Verify whether the dues collectible are
properly followed up with the concerned
parties.
(i) Affirm strongly the purchases and
expenses
explanations
a n d g e t s a t i s f a c t o r y for non-recurring and abnormal items, prevailing if any. (ii) Verify whether
appointment of staff and their salary incrementation have been appropriated and authorised by the
Trustees/Managing Committee.
(iii) Verify whether the Capital Expenditure is incurred only if the Trustees/Managing Committee has sanctioned it
priority. (iv) Make comparison of the total value of various items of income and expenditure

7. Stock-in-Trade
8. Registers
9. Balance Sheet Items

10. Compliance with Accounting Standards

11. Management Representation and Certificate

with the budgeted amount for them. Pursue the variance reports submitted to the management.

(i) Get the closing inventories of assets, stocks and stores, physically examines.

(ii) Make comparison of their total value with the particular ledger balances.
(iii) Verify whether income tax liability is properly ascertained and provided for.
(iv) If the institution is eligible for exempting the income tax, verify whether refund to TDS is properly claimed.
(i) Examine the bonds shares, Scrips and Title Deeds of Properties and make comparison of their particulars with
that of Property and Investment Registers.
(i) Verify the fixed assets (PPE) and confirm that sufficient depreciation has been provided for.
(ii) Examine in detail the accounts of sundry creditors for goods, auditors for services and also analyse if there are
any abnormal movements verify Share Capital, Reserves and surplus, Secured Loans and Unsecured Loans.

Verify whether the form and way of presenting financial information comply to the Accounting Sta n d a r d s a n d
a p p l i c a b l e s t a t u t o r y requirements.

Get proper management representation and certificates with respect to various aspects covered during the audit
course.

Space to write important points for revision

Q.5.3 2019 - Nov [6] (Or) (b) Descriptive You have been appointed auditor of M/s. Divine Children Hospital.
Discuss any four important points that would attract your attention while audit. (4 marks)
6 Audit of Clubs
Q.6.1 2010 - Nov [5] (a), 2011 - Nov [5] (a) Descriptive Mention briefly important points which an auditor will
consider while conducting the audit of a club? (8 marks each) Answer:
The steps involved in the audit of a Club are:

S. Areas to be
No. Covered
1. Formation (i)

(ii)
2. Members (i) Entrance Fees
3. Subscription of (i) Members
(ii)
Auditor's Duty

Investigate the formation of club and powers of the governing body. Study the relevant rules or bye-laws pertaining
to preparation and finalisation of accounts.
Inspect the minutes book of the Governing Body and ensure whether the powers have been appropriately exercised.

Affirm strongly the receipts on account of entrance fees with the application of members, counterfoils issued and
minutes of the Managing Committee.

Affirm strongly the subscription of members with the counterfoils of receipts issued to members.
Mark out the receipts of selected periods to the Members Register.

4. Services
Charges from Members

5. Purchases

(iii) Reconcile the total amount of subscription due with the amount collected and outstanding.
(iv) Check the total of various columns of Members Register and tally them across.
(v) Check the Members Register to determine the dues areas and examine whether necessary steps have been taken
for their r e c o v e r y . T h e amount considered irrecoverable, if any, must be written off.
(vi) Confirm that arrears of subscription for the previous year are brought over correctly and arrears for the year
under audit and advance subscription received is correctly adjusted. (i) Verify the internal check system with regards
to members being charged for☐
(a) Foodstuffs and drinks provided, (b) Fees chargeable for specific services rendered e.g. billiards, tennis, etc.
(ii) Mark out the debits for a selected period from subsidiary register maintained with respect to supplies and
services to members to ensure that the accounts of members have been debited by the amounts recoverable from
them.
(i) Affirm strongly the purchase of sports items, furniture, crockery, etc. and mark out their entries into particular
stock registers.
(ii) Also affirm strongly the purchase of foodstuff and drinks, etc. and test their sale price in order to ensure that
normal rates of profit have been earned on their sale.
(iii) Carry physical verification of closing stock on unsold provision and stores and check the valuation of that.

6. Investment
7. General

(iv) Check the stock of furniture, sports material and other assets physically with particular, stock registers or
inventories prepared at the year-end.

(i) Investigate the share scrips and bonds with respect to investments. Check their current value for disclosure in
final accounts and also determine the arrangement for their safe custody are satisfactory.

(ii) Check the accrual of income therefrom and provision of income tax thereon.

(i) Verify the fixed assets (PPE) and confirm that sufficient depreciation is provided. Examine in detail the accounts
of Sundry Creditors for goods, Creditors for services and analyse if there are any abnormal movements.

(ii) Verify whether the form and way of presenting the financial information comply with Accounting Standards and
applicable statutory requirements.

(iii) Get proper management representation and certificates with respect to various aspects covered during audit
course.

Space to write important points for revision

7 Audit of Cinema
Q.7.1 2011 - May [5] (b) Descriptive Mention any 8 special points which you as an auditor would look into while
auditing the books of accounts of : Cinema (8 marks)

Answer:
The special points to be considered while conducting the audit of a Cinema Hall are:

S. Areas to be No. covered

1. Internal
Control
System

2. Cash
Collection
3. Free Pass
4. Entertainment Tax
5. Advertisement Slides
6. Expenditure Verification Auditor's Duties

(i) Verify that adequate and proper internal control system and procedures have been designed and fulfilled i.e. with
regards to tickets for entrance in hall to be pre-printed for each show and class and serially numbered and bound into
books having separate series for advance booking issued and are under the charge of a responsible official.

(i) Reconcile the statement of tickets sold with the collection of cash at the end of the show referring to the
counterfoils collected at the entrance to the hall.

(i) Verify that appropriate authority prevails for Free Passes.

(i) Verify the entertainment tax collected with the total tickets issued for each class.

(i) Vouch other income from advertisement slides referring the relevant registers and agreements.
(ii) Cross verify the advertisement income based on the Slides Register and shots exhibited kept at cinema.

(i) To verify that the expenditure incurred on advertisement and repairs and maintenance are not capitalised

7. Advance to Distributors
8. Restaurant

(ii) Check that appropriate depreciation on fixed assets (PPE) has been charged with regards to the useful life of the
assets having respective reference to the asset of hotel industry.

(iii) Affirm strongly the expenditure incurred on film hired with relevant bills of distributors with reference to
agreements.

(i) Inspect the unadjusted balance out of the advances paid to the distributor against the film hire contracts to check
that they are good and recoverable.

(ii) Check whether adequate provision is made with respect to irrecoverable advances. (iii) Verify whether all
advances in respect to film already running are fully adjusted.

(i) If the restaurants are run by the cinema, its accounts must be investigated covering the purchase and sale of
drinks, etc. and confirm that the closing stock of these items have been duly considered.

(ii) If the restaurant is let out, enquire into the arrangement for collection of share in the restaurant income which
may either be a fixed sum or fixed percentage of the takings.

Space to write important points for revision

8
Audit of Hire Purchase and Leasing Companies
Q.8.1 2013 - Nov [6] (a) Descriptive What procedure may be adopted by an auditor, while auditing leasing
transactions entered into by the leasing company? (8 marks)

Answer:
The consideration to be kept in mind while conducting audit of the leasing transaction of a Leasing Company
is as follows :

S. Areas to be No. covered

1. Relevant
Introductory Arrangements Auditors Duty

(i) Note down the relevant provisions of the Companies Act, 2013 or any other governing legislation applicable to
the company, and study the impact of the directions, if any issued by the relevant authority such as RBI.

(ii) Note down the relevant provisions of Memorandum of Association and Articles of Association.

(iii) Obtain list of books of accounts, registers, memoranda records and accounting policies adopted by the company.

(iv) Examine the Minutes of Board Meeting and note the delegation of powers to execute lease agreements, sanction
for various agreements, authorisation for purchasing certain assets, etc.

2. Internal Control
3. Lease
Agreements
Examine the existence and operation of internal control procedures on the following aspect :

(i) Determination of credit analysis of the lease such as lessees ability to meet the commitment under lease, past
credit records, capital strength, availability of collateral security, etc.
(ii) Executions of documents for lease transactions.
(iii) Receipts and accounting of lease transactions.
(iv) Sanction for incurring expenditure and purchase of assets under lease agreements.
Examine the clauses of the lease agreement with reference to the following points :
(i) Description of the lessor, lease, equipment and location of installing the equipment (the stipulation that
equipment would not be displaced from the location described except for repairs. For identification, the lessor may
also need plates or markings to be connected with the equipment.)
(ii) Note the amount of lease tenure, payment date, late charges, deposits or advances, etc.
(iii) Stipulation to terminate agreement i.e. whether the equipment should be returned to the lessor and the cost
should be borne by the lease.
(iv) Stipulation regarding subletting right i.e. whether the agreement prohibits the lease from assigning or subletting
equipment and authorises the lessor to do so.

4. Substantive Procedure

(v) Nature of lease agreement as to whether it is an operating lease or finance lease and accounting treatment in
either case.

Test check some of the lease agreements with reference to following aspects:

(i) Terms and conditions of the form of lease proposal submitted the leases with request to lessor to provide the
equipment on lease.

(ii) Contents of invoice and its custody aspects as lease is a long term contract.
(iii) Acceptance letter obtained from the lessee showing that the equipment is received in order and is also accepted
by the lessee.
(iv) Resolution of the board authorising a respective director for the execution of lease agreement.
(v) Copies of insurance policies on various assets obtained by the lessor for his records.
(vi) List of clients from whom the lease rents are overdue, reconciliation statement and balance confirmation.
(vii) Sufficient amount of provision for bad and doubtful debts referring to the recovery of payments, litigation's,
subsequent realisations etc.
(viii) Proper accounting treatments if the assets have been given on lease or repossessed.

Space to write important points for revision

Q.8.2 2019 - May [6] (b) Descriptive

Define the different types of lease agreements as per Accounting Standard/Ind-AS. (4 marks) Answer:
As per AS -19/ Ind - AS 17, lease agreements could be of 2 types: i.e.
1. Finance Lease 2. Operating Lease

1. Finance Lease ☐

☐ An agreement or arrangement with the following attributes qualifies as a Finance Lease: The lease agreement
transfers ownership of the asset to the lessee at the end of the lease term :

(i) The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair
value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the
option will be exercised;

(ii) The lease term is for the major part of the economic life of the asset even if title not transferred;

(iii) At the inception of the lease, the present value of the minimum lease payments amounts to at least substantially
all of the fair value of the leased asset ; and

(iv) The leased assets are of such a specialized nature that only the lessee can use them without major modifications.

2. Operating Lease An arrangement that does not transfer Substantially all the risks and rewards incidental to
ownership qualifies as an operating lease. In other words, an operating lease is a lease arrangement “other than
finance lease”.

9 Audit of Hotels

Q.9.1 2009 - Nov [5] (a), RTP Descriptive What are the six important points that will attract your attention in the
case of audit of a Hotel ? (5 marks)

Answer:
The following matters deserve the auditor's attention in the audit of a Hotel:

Aspects 1. Internal Control (i)

(ii)
(iii)
Auditor's Duties

Verify the Room rent receipts, Collection from the guest register.
Sometimes, daily occupancy reports and exit reports are prepared. In such case test check a few reports with the
guest register and with the individual guest's bill to ensure proper billing.
See whether standard room rates have been charged in different guests bills. In case there are variation, get the
satisfactory explanation and sanction for the same.

2. Internal ControlRestaurant, Billing and Sales.

All Sales points in a hotel make both cash and credit sales. The auditor must see the internal control system as
regards.

(i) Procedure for billing customers for room services and sundry services.
(ii) Procedure for issue of provisions and commodities.
(iii) Safe custody of edibles wines, linen etc. He should :
• Perform the compliance test to ensure the internal control system operates effectively.

3. Internal ControlStocks
4. Casual Labour

• Reconcile the total sales reported with the total of the bills issued by the sale point.
• Check the numerical control system to ensure that all bills are included in the total.
• Verify a few restaurant bills by reference to KOT's (Kitchen Order Tickets) or basic records.
• Trace the cash elements of sales in the cash book and the credit sales in total and detail to the guests bills.

(i) Examine the documentation procedure in respect of stock since hotel stock are readily (a) portable & (b) saleable.

(ii) Perform compliance tests to ensure that all such documentation is accurately processed.

(iii) Ensure that movements of provision & goods in or out of the stores take place only after proper authorisation
and recording.

(iv) Supervise the physical stock taking and test checking pricing calculations. (v) Verify the basis of valuation
adopted for stocks.
Generally the hotels employ casual labour to a very large extent. Hence the auditor should:

(i) Examine the wage payment registers and attendance records to see whether any manipulation has been made.

(ii) Verify whether adequate records, as needed by law, wherever applicable, have been maintained.

5. Commission Payments
6. Fixed Assets (PPE)
7. Statutory Compliance
8. Analytical Review
(i) Verify that the amounts due are recovered from agents as per the term of credit allowed.

(ii) Check the commission, if any, paid to agents by reference to the agreement.
(i) Obtain a schedule of fixed assets (PPE) a n d v e r i f y w h e t h e r a d e q u a t e depreciation has been provided
at the prescribed rates.
(ii) Verify whether the capitalisation and depreciation policies have been followed properly or not.
(iii) Conduct physical inspection of fixed assets (PPE) and get management certificates for periodic inspections. (iv)
Examine the method of recording the assets.

(i) Note the provisions, rules and regulations of various laws governing the operation of hotels.

(ii) Verify whether the conditions of licence for running the hotel have been complied with.

(iii) Check whether all the foreign exchange transactions have been properly entered into any appropriately reported.

(i) Compare the expenses and receipts with the figures of the previous year.
(ii) Work out the occupancy rate and compare it with similar other hotels. 9. General (i) Examine the customer's
ledger on a sample basis but in depth to see that all charges basis but in depth to see that all charges that should be
made to the customers are actually made.
(ii) Check whether income renewable but not yet billed has been accounted.
(iii) See whether provision for replacement of current assets are made. (iv) Verify the share capitals, reserves and
surplus, secured and unsecured loan.
(v) Obtain the appropriate management representation and certification respect of the various aspects covered during
the course of audit.
Space to write important points for revision

CHAPTER

16 Audit of Co-operative Societies

This Chapter Covers: Study’s Chapter: 13 (Para 13)

Chapter Comprises: ☹Audit of Co-Operative Societies ☹Audit as per Section 17 of the Co-operative Societies
☹Special Features of CoOperative Audit ☹Rights and Duties of Co-Operative Auditors ☹Form of Audit Report
☹Audit, Inquiry and Inspection of Multi-State CoOperative Societies.

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis

Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book.
6.615
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK Repeatedly Asked Questions
1.1, 3.2
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
2.1 2.2, 3.3
1
Audit as per Sec. 17 of the Co-operative Societies Act, 1912
Q.1.1 2013 - May [7] (a), 2016 - Nov [7] (a), RTP Short Notes Write short note on the following:
Restrictions on investments of funds of a central co-operative society. (4 marks) [CA Final - I]

Answer :
Restrictions on Investment of funds of a Central Cooperative Society: According to Sec. 32 of the Central Act, a
Central Cooperative Society may invest its funds only in any one or more of the following:
1. In the Central or State Co-operative Bank.
2. In any of the securities specified in Section 20 of the Indian Trusts Act,

1882.
3. In the shares, securities, bonds or debentures of any other society with
limited liability.
4. In any Co-operative Bank, other than a Central or State Co-operative
Bank, as approved by the Registrar on specified terms and conditions. 5. In any other moneys permitted by the
Central or State Government. The principal provision relating to the investments of funds of a co-operative society,
the Central as well as State Acts does not mention anything about the investment of reserve fund outside the
business specifically.
Space to write important points for revision

Q.1.2 2014 - Nov [7] (b) Short Notes Write short note on the following:
Restriction on shareholding in a Co-operative Society

(4 marks) [CA Final - I] Answer:

As per Sec. 5 of Co-operative Society Act,1912, no member, other than

a Registered society shall:

1. Hold more than such portion of the share capital subject to a maximum of twenty percent, as prescribed by the
rules, or
2. Have or claim any interest in the share of the society exceeding`1,000.

Q.1.3 2018 - May [6] (b) Practical

Answer the following:

(b) Mr. M, has served as an auditor in the Co-Operative Department of a Government, is appointed as a statutory
auditor by a Co-Operative Society that has receipts over`3 crores during the financial year. He is not a Chartered
Accountant. Mr. D, Chartered Accountant is appointed to conduct tax audit of the society under section 44AB of the
Income Tax Act, 1961. Comment. (5 marks) Answer:
☐ As per Sec. 17 of the Co-operative Societies Act, 1912, Apart from a Chartered Accountant within the meaning
of the Chartered Accountants Act, 1949, persons holding a government diploma in Co-operative accounts or in Co-
operation and accountancy and also a person who has served as an auditor in the Co-operative department of a
government can act as an auditor.
☐ In this case, Mr. M, who is not a Chartered Accountant, has served as an auditor in the Co-operative Department
of a Government, is appointed as a statutory auditor by a Co-operative Society has receipts over` 3 crore during the
financial year. So in light of above provisions, the appointment of Mr. M as statutory auditor of a Co-operative
Society is valid in law.
☐ As per Section - 44 AB of the Income Tax Act, 1961 any business entity whose gross receipts or turnover
exceeds` 1crore (AY 2017-18) shall require to get its accounts audited by a Chartered Accountant or a firm of
Chartered Accountants. Here, Co-operative Society has gross receipts of` 3 crore which exceeds` 1 crore and it also
appoint Mr. D, a CA as auditor so this appointment is also valid.

2 Special Features of Co-operative Audit

Q.2.1 2009 - May [6] (a) Descriptive Answer the following:
List the special features involved in the audit of a Co-operative Society.

(8 marks) [CA Final - I] OR 2010 - Nov [5] (a) Descriptive

“Examination of overdue debts, audit classification of society, and reporting the infringement of provisions of the
Act are the special features of audit of a co-operative society.” Do you agree ?

(6 marks) [CA Final - I] Answer:

Special Features of Co-operative Societies Audit:

1. Examination of Overdue debts

2. Overdue Interest
3. Certification of Bad Debts

Overdue debts have to be classified as overdue from six months to 5 years and more than 5 years. The auditor
should check the adequacy of provision made on such debts. The auditor should see whether proper action for
recovery has been initiated and the position regarding case in this respect.

Overdue Interest is interest Accrued or accruing in respect of which the principle sum is overdue. Such interest
should be excluded from interest outstanding and interest accrued while calculating profits.

A Co-operative society can write off its debts as bad only if it is certified by its auditor or authorised by the
management committee.

4. Valuation of Assets and Liabilities

5. Adherence to Co-operative Principles

6. Observations of the Provisions of the Acts and Rules

7. Verification of M e m b e r ’ s Register and examination of their pass book

8. Special Report to the Registrar

9. Audit Classification of the Society

10. Discussion of the draft Audit R e p o r t w i t h M a n a g i n g Committee

No special rules are mentioned in the Act. Hence valuation of assets and liabilities are done as per the general
principles of accounting and auditing.
It involves ascertaining in general, to what extent has the society attained its objectives. The principles of propriety
audit should be followed for the purpose.

An auditor of the Co-operative Society should point out the infringements if any, with the provisions of Co-
operative Societies Act and Rules and bye-laws.

The auditor should verify the entries in members pass book regarding loan given and its repayments as well as
confirmation of balances.

In case the auditor notices serious irregularities in the working of society, he may report the same to the Registrar.

After conduct of the audit, the auditor has to award a class to the society as per the criteria laid down by the
registrar. It may be noted that if the management of the Society is not satisfied about the award of the audit class, it
may appeal to the Registrar.

The audit report should never be finalised without discussion with the managing committee. Minor irregularities
may be got settled and rectified.

Q.2.2 2009 - Nov [5] (c), RTP Descriptive

Answer the following:

Under what circumstances, an auditor is required to submit a special report to the registrar of Co-operative Societies
? (4 marks) [CA Final - I]

Answer :
Special Report by Auditor to Registrar of Co-operative Societies: Under the following circumstances, an auditor
has to issue special report to the Registrar of Co-operative Societies (This report should be in addition to the regular
report):
1. (i) Any member of the managing committee is involved in personal

profit making by using the properties or assets of the society, resulting into the loss to the society.

(ii) Frauds are detected from the society’s transactions. 2. There is mismanagement in the society and the principles
of co
operative are not maintained by the management.
3. In the respect of audit of Urban Co-operative Banks, disproportionate
advances to vested interest groups. Such as relative of management
and deliberate negligence about the recovery thereof. Cases of reckless
advancing, where the management is negligent about taking adequate
security and proper safeguards for judging the credit worthiness of the
party.
Space to write important points for revision

3
Audit, Inquiry and Inspection of Multi-State Co-operative Societies
Q.3.1 2011 - May [6] (c) Descriptive State the requirements regarding the maintenance of books of accounts with
respect to a multi-state co-operative society.

Answer :
According to the Multi-State Co-operative Society Rules, 2002 every multi state co-operative society shall
keep books of accounts related to: 1. all sum of money received and expended and the matters in respect of

which the receipt and expenditure took place.

2. all sales and purchases of goods.
3. the assets and liabilities of the society.
4. in the case of Multi-State Co-operative Society engaged in production, processing and manufacturing particulars
relating to utilization of materials or labour or other term of cost as may be specified in the bye laws of such a
society.
The following books of accounts may be maintained:
1. Cash book Maintained to record particulars regarding cash receipts and expenses under suitable heads, with clear
distinction between capital and revenue items of receipts and expenses.

2. Stock register To maintain detailed information as regards receipts,

3. Register of a s s e t s a n d investments

4. Register of fixed deposits

5. Register of sureties

issues and balances of stock-in-trade, date-wise. In a producers co-operative society, perpetual inventory records
may be maintained based on an appropriate costing method.

To contain detailed particulars regarding the various immovable and movable assets belonging to the society, such
as, types of assets, location, date of acquisition, cost, depreciation provided, and so on.

Register of fixed deposits may be maintained giving details as regards the dates of acceptance, maturity, interest
accrual, repayment, etc.

Register of Sureties will give particulars about the number of borrowers in respect of which a member has stood
surety, and show whether it is within the overall limit of surety-ship that may be given by a member as prescribed by
the bye-laws.

6. Register of Loan
disbursement and recovery

In the case of a co-operative credit society, this Register will provide particulars regarding loans sanctioned by the
society, the dates of disbursement and recovery.

Space to write important points for revision

Q.3.2 2013 - Nov [7] (d), 2015 - Nov [7] (c) Short Notes

Write short note on the following:

Aspects to be covered in the books of accounts to be maintained by a multi-state co-operative society. (4 marks)
[CA Final - I]

Answer:
Aspects to be covered in the Books of Accounts to be maintained by a Multi-state Co-operative Society as per
Multi State Co-operative Society Rules, 2002.
1. All sum of money received and expended and matters in respect of

receipt and expenditure take place.

2. All sale and purchase of goods.
3. The assets and liabilities.
4. In the case of a Multi-state co-operative society engaged in production, processing and manufacturing in the
utilization of materials and labour or other items of cost as may be specified in the bye-laws of such a society.
Space to write important points for revision

Q.3.3 2016 - Nov [4] (d) Descriptive Under which circumstances can the Central Government appoint the special
auditor of a Multi State Cooperative Society?

Answer:
Appointment of Special Auditor of a Multi State Co-operative Society: Power of Central Government to
direct special audit in certain cases: As per the Multi-State Co-operative Societies Act, 2002, where the Central
Government is of the opinion:
1. that the affairs of any Multi-State Co-operative Society are not being
managed in accordance with self-help and mutual did and co-operative principles or Prudent Commercial Practices
or with sound business principles; or

2. that any Multi-State Co-operative 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

3. that the financial position of any Multi-State Co-operative Society in such as to endanger its solvency.
The Central Government may at any time by order direct that a special audit
of the Multi-State co-operative society’s accounts for such period or periods
as may be specified in the order, shall be conducted and appoint either a
Chartered Accountant or the Multi-State co-operative society’s auditor
himself to conduct the special audit. However, Central Government shall
order for special audit only if that Government or the State Government
either by itself or both hold fifty-one percent or more of the paid-up share
capital in such Multi-State co-operative society.
Space to write important points for revision

Q.3.4 2018 - Nov [6] (b) Descriptive

Answer the following:

Briefly explain the provisions for qualification and appointment of Auditors under the Multi-State Co-operative
Societies Act, 2002. (5 marks)

Answer:
Qualification of Auditors:
Sec. 72 of the Multi-State Co-operative Societies Act, 2002 states that a person who is a Chartered Accountant
within the meaning of the chartered Accountants Act, 1949 can only be appointed as auditor of Multi-state
Cooperative Society.

However, the following persons are not eligible for appointment as auditors of a Multi - state co-operative
society:
1. A body corporate
2. An officer or employee of the Multi- state co-operative society. 3. A person who is a member or who is in the
employment, of an officer or

employee of the Multi-State Co-operative Society.

4. A person who is indebted to the Multi -State co-operative Society or who
has given any guarantee or provided any security in connection with the
indebtedness of any third person to the Multi-State Co-operative Society
for an amount exceeding one thousand rupees.
If an auditor becomes subject, after his appointment, to any, of the disqualifications specified above, he shall be
deemed to have vacated his office as such.
Appointment of Auditors:
• Section 70 of the Multi-State Co-operative Societies Act, 2002 provides
that the first auditor or auditors of a Multi-State Co-operative Society
shall be appointed by the board within one month of the date of
registration of society and the auditor or auditors so appointed shall hold
office until the conclusion of the first annual general meeting. If the board
fails to exercise its powers under this sub-section, the Multi-State Cooperative Society in the general meeting may
appoint the first auditor or
auditors.
• The subsequent auditor or auditors are appointed by Multi-State Cooperative Society, at each annual general
meeting. The auditor or
auditors so appointed shall hold office from the conclusion of that
meeting until the conclusion of the next annual general meeting.
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Q.3.5 2019 - May [6] (c) Practical

Central Govt. hold 55% of the paid up share Capital in Kisan Credit Cooperative Society, which is incurring huge
losses. Advise when the Central Government can direct Special Audit under Section 77 of the Multi State Co-
operative Society Act. (3 marks)

Answer:
As per Section 77 the Multi–State Co-operative Societies Act, 2002, the Central Government can direct
special audit where the Central Government is of the opinion:
1. That the affairs of any Multi-State Co-operative Society are not being

managed in accordance with self-help and mutual deed and co-operative principles or prudent commercial practices
or with sound business principles: or

2. That any Multi State Co-operative 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

3. That the financial position of any Multi-State co-operative Society is such as to endanger its solvency.
CHAPTER

17 SA and Guidance Notes

This Chapter Covers: SA: and Guidance Notes

Chapter Comprises:☹ SA, AS and Guidance Notes issued by ICAI.
THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book.
6.627
TIMEMANAGER
Time

1. Budgeted
2. Actual

3. Variance (1-2)

First Indepth
learning

i.e.....
............ Day 1 16

Instant
Revision (in hours)

Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8

4.00 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need. ........... .............. ............
Day 30 Day 60 Day 90

2.20 1.35 1.35

QUICK LOOK Repeatedly Asked Questions
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
8.2 8.2, 11.1
1 AS - 1: Disclosure of Accounting Policies
Q.1.1 2016 - May [7] (d) Short Notes

Write short note on the following:

Changes in accounting policies. (4 marks) Answer:
As per AS - 1, Disclosure of Accounting Policies,
All significant accounting policies adopted in the preparation and presentation of financial statements should be
disclosed.
The disclosure of the significant accounting policies as such should form part of the financial statements and the
significant accounting policies should normally be disclosed in one place.
Any change in the accounting policies which has a material effect in the current period or which is reasonably
expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies
which has a material effect in the current period, the amount by which any item in the financial statements is
affected by such change should also be disclosed to the extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fact should be indicated.

Space to write important points for revision

2 AS - 10: Property Plant & Equipment
Q.2.1 2009 - Nov [5] (b) Descriptive State the informations to be disclosed in the financial statements according to
the requirements of AS-10. [Modified] (5 marks)

Answer:
As per AS-10, Property, Plant and Equipment,
The financial statements should disclose, for each class of property, plant and equipment:
(a) the measurement bases (i.e., cost model or revaluation model) used for

determining the gross carrying amount;

(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used. In case the useful lives

or the depreciation rates used are different from those specified in the statute governing the enterprise, it should
make a specific mention of that fact;

(d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at
the beginning and end of the period; and

(e) a reconciliation of the carrying amount at the beginning and end of the period showing:

(i) additions;
(ii) assets retired from active use and held for disposal; (iii) acquisitions through business combinations;
(iv) increases or decreases resulting from revaluations under

paragraphs 34, 42 and recognised or reversed accordance with AS 28; 43 and from impairment losses

directly in revaluation surplus in

(v) impairment losses recognised in the statement of profit and loss in accordance with AS 28;

(vi) impairment losses reversed in the statement of profit and loss in accordance with AS 28;
(vii) depreciation;
(viii) the net exchange differences arising on the translation of the

financial statements of a non-integral foreign operation in accordance with AS 11, The Effects of Changes in
Foreign Exchange Rates; and

(ix) other changes.

The financial statements should also disclose:
(a) the existence and amounts of restrictions on title, and property, plant and

equipment pledged as security for liabilities;

(b) the amount of expenditure recognised in the carrying amount of an item
of property, plant and equipment in the course of its construction; (c) the amount of contractual commitments for the
acquisition of property,
plant and equipment;
(d) if it is not disclosed separately on the face of the statement of profit and
loss, the amount of compensation from third parties for items of property,
plant and equipment that were impaired, lost or given up that is included
in the statement of profit and loss; and
(e) the amount of assets retired from active use and held for disposal.
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3 AS - 12: Accounting for Government Grant

Q.3.1 2009 - May [1] (viii) Objective

State with reasons (in short) whether the following statement is True or False:
When Government grants are received in the form of assets such as Land, plant and equipments etc., free of cost,
then, such assets should be entered in the books of accounts at nominal value. (2 marks)

Answer:
True:
As per AS 12 “Accounting for Government Grants” when Government grants in the form of non-monetary assets
such as land, plant and equipments etc. are received free of costs then such assets should be entered in the books of
account at nominal value.

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Q. 3.2 2008 - Nov [2] (c) Practical

As an Auditor how would you react to the following situations/ comments? The Central Government sanctioned` 20
lakh as Grant to a Hospital for the purchase of certain equipments and paid` 10 lakh as advance. The hospital took`
10 lakh as income in the Profit and Loss account for the year. (6 marks)

Answer:
AS-12: Accounting for government grants regards two methods of presentation of grants related to specific fixed
assets (PPE) in financial statements as acceptable alternatives:
1. Under first alternative, the grant is shown in the Balance Sheet as a

deduction from the gross value of a machinery. The grant is recognised in P&L a/c over the useful life of a
depreciable asset by way of a reduced depreciation charges.
2. Under second alternative, it can be treated as deferred income which

should be recognised in P&L A/c over useful life of asset in proportion in which depreciation on machinery will be
charged. The deferred income pending its apportionment to P&L a/c should be disclosed in Balance Sheet with a
suitable description e.g. Deferred Government Grants.
Present Case:
In the given case, Hospital received`50 lacs as grant towards part cost of specific machinery and paid ` 10 lacs as
advance.

The Hospital has credited the said sum as income in its Profit and Loss account which is incorrect.
As the treatment is not in accordance with Accounting Standard, so company is advised to rectify as per provision
given above. Space to write important points for revision
Q.3.3 2010 - Nov [1] {C} (c) Practical

Comment as a auditor on the following situations :

M.N.P. Company Ltd. purchased a machinery for` 1.00 crore. The State Government granted the company a subsidy
of` 40 lakhs to meet partial cost of machinery. The company credited the subsidy received from the State
Government to its Profit and Loss Account for the year ended March 31, 2010. (5 marks)

Answer:
Accounting treatment for Government Grants
As per AS - 12 “Accounting for Government Grants”, accounting treatment of any grants or subsidy depends on
nature of grants or receipts. Grants related to specific PPE are government grants whose primary condition is that an
enterprise qualifying for them should purchase, construct or otherwise acquire such assets.
Following are two methods of presentation of grants related to specific fixed assets (PPE) in financial statements as
acceptable alternatives. (i) Under the first alternative the grant is shown in the balance sheet as

a deduction from the gross value of the machinery. The grant is recognized in profit and loss accounts over the
useful life of the depreciation life of asset by way of a reduced depreciation charge.

(ii) Under second alternative, it is treated as a deferred income which should be recognized in profit and loss account
over useful life of asset in proportion in which depreciation will be changed on machinery. Deferred income pending
its apportionment to profit and loss A/c should be disclosed in the balance sheet with a suitable description i.e.
Deferred Government Grant.

Conclusion:
In the instant case, MNP Company Ltd. received a subsidy from government worth` 40 lakhs towards meeting
partial cost of machinery. The company credited the same to its profit and loss account.
Accounting treatment of grant received towards partial cost of machinery is not correct. The auditor should advise
company to correct the above accounting treatments of grant, otherwise it is duty of the auditor to qualify his report
bringing out the qualification impact clearly.

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SA - 200: “Overall Objectives of the Indepen4 dent Auditor and the Conduct of an Audit in Accordance with
Standards on Auditing”

Q.4.1 2014 - May [4] (c) Descriptive

Discuss with reference to SAs:

The auditor is responsible for maintaining an attitude of professional skepticism throughout the audit. Do you agree
with the statement?

(6 marks)

Answer:
Agree:
As per SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance
with Standards on Auditing”. Professional skepticism is an attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to error or fraud and a critical assessment of audit
evidence.
Professional Skepticism is necessary to the Critical Assessment of audit evidence as although auditor is not having
any legal duty to detect frauds & errors still he has moral duty towards it. This includes questioning contradictory
audit evidences and relying on documents and responses to other information obtained from management and those
charged with governance (TCWG). It also includes consideration of the sufficiency and appropriateness of audit
evidence obtained.

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Q.4.2 2016 - Nov [2] (iv) Objective
State with reasons (in short) whether the following statement is correct or incorrect:
It is necessary for the auditor to maintain professional skepticism throughout the audit. (2 marks)

Answer:
Correct:
Professional skepticism through out facilitates the exercise of professional judgement and enhances the quality of
audit and effectiveness of audit procedure. As per SA 200, “Overall Objectives of the Independent Auditor and
the Conduct of an Audit in Accordance with Standards on Auditing”. Professional skepticism is an attitude that
includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or
fraud and a critical assessment of audit evidence.

Space to write important points for revision

Q.4.3 2018 - Nov [1] {C} (a), (f) Objective

Examine with reasons (in short) whether the following statements are correct or incorrect :
(a) Judgmental matters are transactions that are unusual due to either its

size or nature and that therefore occur infrequently. (2 marks)

(f) Management of the organization is solely responsible for the compliance of auditing standards while preparing
financial statements. (2 marks) Answer:

(a) Incorrect :
Non - routine transactions are transactions that are unusual, due to either size or nature, and that therefore occur
infrequently. Judgmental matters may include the development of accounting estimates for which there is significant
measurement uncertainty.

(f) Incorrect :
Management of the organisation is responsible for the compliance of accounting standards while preparing financial
statements.

Space to write important points for revision

Q.4.4 2018 - Nov [2] (c) Descriptive

Discuss the following:

“Professional judgement is essential to the proper conduct of an audit.” Discuss. (5 marks)

Answer:
Professional judgement is essential to the proper conduct of an audit. This is because interpretation of relevant
ethical requirements and the SAs and the informed decisions required throughout the audit cannot be made without
the application of relevant knowledge and experience to the facts and circumstances.

Professional judgement is necessary in particular regarding decisions about:

☐ Materiality and audit risk.
☐ The nature, timing and extent of audit procedures used to meet the

requirements of the SAs and gather audit evidence.

☐ Evaluating whether sufficient appropriate audit evidence has been
obtained, and whether more needs to be done to achieve the objectives
of the SAs and thereby, the overall objectives of the auditor. ☐ The evaluation of management’s judgements in
applying the entity’s
applicable financial reporting framework.
☐ The drawing of conclusions based on the audit evidence obtained, for
example, assessing the reasonableness of the estimates made by
management in preparing the financial statements.
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5
SA - 220: Quality Control for an Audit of Financial Statements
Q.5.1 2015 - May [1] {C} (d) Descriptive

Discuss the following:

Mention any four information which assists the auditor in accepting and continuing of relationship with the client as
per SA 220. (5 marks)

Answer:
Information which assist the Auditor in accepting and continuing of relationship with Client:
As per SA 220, “Quality Control for an Audit of Financial Statements” the auditor should obtain information
considered necessary in the circumstances before accepting an engagement with a new client, when deciding
whether to continue an existing engagement and when considering acceptance of a new engagement with an existing
client.

The following information would assist the auditor in accepting and continuing of relationship with the client:
1. The integrity of the principal owners, key management and those

charged with governance of the entity;

2. Whether the engagement team is competent to perform the audit
engagement and has the necessary capabilities, including time and
resources;
3. Whether the firm and the engagement team can comply with relevant
ethical requirements; and
4. Significant matters that have arisen during the current or previous audit
engagement, and their implications for continuing the relationship.
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Q.5.2 2019 - Nov [2] (c) Descriptive

The engagement partner shall take the responsibility for the overall quality on each audit engagement to which that
partner is assigned. Discuss with reference to SA 220 “Quality Control for an audit of financial statement”.

(3 marks)

SA - 250: “Consideration of Laws and 6 Regulations in an Audit of Financial Statements”

Q.6.1 2011 - May [1] {C} (c) Descriptive Comment on the following in relation to SAs:
(c) “Management is responsible for compliance with laws and regulations.” (5 marks)

Answer:
Management’s responsibility for compliance with laws and regulations :
• According to SA 250 on “Consideration of Laws and Regulations in

an Audit of Financial Statements” , it is management’s responsibility, to ensure that the entity’s operations are
conducted in accordance with the provisions of laws and regulations.

• Laws and regulations may affect an entity’s financial statements in different ways for example, most directly ; they
may affect specific disclosures required of the entity in the financial statements.
• The following are the procedures an entity may implement to assist in the prevention and detection of non-
compliance with laws and regulations :

1. Monitoring legal requirements and ensuring that operating procedures are designed to meet these requirements.
2. Maintaining a register of significant laws and regulations with which the entity has to comply within its particular
industry and a record of complaints.
3. Instituting and operating appropriate systems of internal control.
4. Monitoring compliance with the code of conduct and acting appropriately to discipline employees who fail to
comply with it.
5. Engaging legal advisors to assist in monitoring legal requirements.
6. Developing, publicising and following a code of conduct.
7. Ensuring employees are properly trained and understand the code of conduct.
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Q.6.2 2018 - May [2] (c) Descriptive Principal aspects to be considered by an auditor while conducting an audit of
final statements of accounts. (5 marks)

Answer:
The principal aspects to be covered in an audit concerning final statements of accounts are the following:

(i) An examination of the system of accounting and internal control to as creation whether it is appropriate for the
business and helps in properly recording all transactions.

(ii) Reviewing the system and procedures to find out whether they are adequate and comprehensive and incidentally
whether material inadequacies and weaknesses exist to allow frauds and errors going unnoticed.

(iii) Checking of the arithmetical accuracy of the books of account by the verification of postings, balances etc.
(iv) Verification of the authenticity and validity of transaction entered into by making an examination of the entries
in the books of accounts with the relevant supporting documents.
(v) Ascertaining that a proper distinction has been made between items of capital and of revenue nature and that the
amounts of various items of income and expenditure adjusted in the accounts corresponding to the accounting
period.
(vi) Comparison of the balance sheet and profit and loss account or other statements with the underlying record in
order to see that they are in accordance therewith .
(vii) Verification of the title, existence and value of the assets appearing in the balance sheet.
Assertions about account balances at the period end : (a) Existence
Assets, liabilities and equity interests exist;
(b) Rights and Obligations
The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
(c) Completeness
All assets, liabilities and equity interests that should have been recorded have been recorded.

(d) Valuation and Allocation

Assets, liabilities and equity interests are included in the financial statements at appropriate amounts and any
resulting valuation or allocation adjustments are appropriately recorded.

(viii) Verification of the liabilities stated in the balance sheet. (ix) Checking the result shown by the profit and loss
and to see whether the results shown are true and fair.
(x) where audit is of a corporate body, confirming that the statutory requirements have been complied with.

(xi) Reporting to the appropriate person/ body whether the statements of account examined do reveal a true and fair
view of the state of affairs and of the profit and loss of the organisation.

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7
SA - 320: “Materiality in planning and performing an audit”
Q.7.1 2015 - Nov [1] {C} (a) Descriptive

Discuss the following:

With reference to SA 320 indicate the factors which may affect the identification of an appropriate bench mark in
determining materiality for the financial statement as a whole. (5 marks)

Answer:
SA 320 “Materiality in planning and performing an audit” establishes standards on the concept of materiality
and the relationship with audit risk while conducting an audit. The concept of materiality states that the significant
and material item should be disclosed at one place in the financial statements. For this purpose materiality means
those item which may affect the judgement of the users of the financial statements of the client so that such item
should be disclosed at one place.

Following are the factors which may affect the identification of appropriate bench mark in determining
materiality for the financial statements as a whole:
1. Item of materiality may be determined individually or in aggregate. 2. The materiality depends on the regulatory
or legal considerations. 3. Materiality is not often reckoned with respect to quantitative details

above. It has qualitative dimensions as well.

4. Even significant items in terms of quality may be material in special
circumstances.
5. Sometimes the materiality of an item in terms of quality is described in
law itself, for e.g. Schedule (VI) requires disclosure of items of
expenditures which are in excess of one percent of` 500, whichever is
less.
6. An item whose impact is insignificant at present, but in future it may be
significant, may be material item.
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8 SA - 505: External Confirmations

Q.8.1 2010 - Nov [4] (a) Short Note Write short note on the following :
Reliability of external confirmations. (4 marks)

Answer:
Reliability of External Confirmation:
As per SA 505 “External Confirmation”, the reliability of external confirmations depends among other factors,
upon the application of appropriate procedures by the auditor in designing the external confirmation request,
performing the external confirmation procedures, and evaluating the results of the external confirmation procedures.

The Factors that affect the reliability of confirmations include: (i) The character of respondents,

(ii) Any restrictions included in the response or imposed by the management, and
(iii) The control which the auditor exercises over confirmation request and responses.
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Q.8.2 2011 - Nov [3] (a) Descriptive Explain the process of external confirmation. Give some examples where
external confirmation can be used as audit evidence. (8 marks) OR 2016 - Nov [6] (c) Descriptive

Discuss external confirmation procedure as per SA-505. (4 marks) Answer:

External Confirmation:
As per SA 505 (Revised), on external conformation it is the process of obtaining and evaluating through a direct
communication from a 3rd party in response to a request for information about a particular item affecting assertion
made by the management in the financial statements. External Confirmation Procedures:
The auditor shall maintain control over external conformation request including the following:

(i) To determine the information to be confirmed.

(ii) To select the appropriate 3rd party who shall confirm the information. (iii) To design the confirming request
(iv) To determine that requests are properly addressed and contain return

information for responses to be sent directly to the auditor. (v) To send the requests including follow up requests
when applicable to
the confirming party.
(vi) To select the items for which confirmations are needed.

Areas/Examples where external confirmation can be used as audit evidence are:

☐ Bank balances and other information relevant to banking relationships. ☐ Accounts receivable balances and
terms.
☐ Accounts payable balances and terms.
☐ Inventories held by third parties at bonded warehouses for processing

or on consignment.
☐ Property title deeds held by lawyers or financiers for safe custody or as
security.
☐ Investment held for safeguard by third party or purchased from stock
brokers but not delivered at B/S date.
☐ Amounts due to lenders, including relevant terms of repayment and
restrictive covenants.
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Q.8.3 2012 - Nov [4] (a) Descriptive

What are the factors that are to be considered while designing a confirmation request? (8 marks) Answer:
As per SA - 505 “External Confirmations”, the design of a confirmation request may directly affect the
confirmation response rate and the reliability and the nature of the audit evidence obtained from responses. The
following factors should be considered while designing a confirmation request:
1. The assertions being addressed.
2. Specific identified risks of material misstatement, including fraud risks. 3. The layout and presentation of the
confirmation request. 4. Prior experience on the audit or similar engagements.
5. The method of communication
6. Management’s authorisation to the confirming parties to respond to the

auditor. Confirming parties may only be willing to respond to a confirmation request containing management’s
authorisation. 7. The ability of the confirming party to provide the requested information.
Q.8.4 2018 - Nov [1] {C} (d) Objective

Examine with reason (in short) whether the following statement is correct or incorrect :
Audit evidence obtained from external confirmation is always reliable.

(2 marks) Answer:
Incorrect :

Audit evidence obtained from external confirmation could affect its reliability. For e.g., information obtained from
an independent external sources may not be reliable if the source is not knowledgeable, or a management’s expert
may lack objectivity.

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9
SA - 510: “Initial Audit Engagements Opening Balances”
Q.9.1 2012 - May [7] (b) Write short note on the following: Initial Engagements
OR 2017 - May [1] {C} (b) Discuss the following:
Short Note
(4 marks) Descriptive

Discuss with reference to SA 510, “Initial Audit Engagements - Opening Balances”, the procedures the auditor
should undertake in respect of opening balances for a new audit engagement. (5 marks)

Answer:
Initial Engagements
Initial Engagement refers to the appointment of an auditor for the first time by the client. However his books may
have been audited for the previous year by another (retiring) auditor or they may be unaudited.

As per SA ☐ 510 ‘Initial Audit Engagement - Opening Balances’, Opening balances means those account
balances which exist at the beginning of the period. Opening balances are the closing balances of the preceding
period brought forward to the current period and reflect the effect of:
1. Transactions and other events of preceding periods.
2. Accounting policies applied in the preceding period.
3. For initial audit engagements, the auditor should obtain sufficient

appropriate audit evidence that

(a) Closing balances of preceding period have been correctly brought forward to the current period.
(b) Opening balances do not contain mis-statements that materially affect the financial statement for the current
period.
(c) Appropriate accounting policies are consistently applied.
When the financial statements for the preceding period were audited by the another auditor, the current auditor may
be able to obtain sufficient appropriate audit evidence regarding opening balances by perusing the copies of the
audited financial statements. Ordinarily, the current auditor can place reliance on the closing balances contained in
the financial statements for the preceding period, except when during the performance of audit procedures for the
current period the possibility of misstatements in opening balances is indicated. General principles governing
verification of assets require that the auditor should confirm that assets have been correctly valued as on the balance
sheet date. The contention of the management that the inventory has not undergone any change cannot be accepted,
it forms part of normal duties of auditor to ensure that the figures on which he is expressing opinion are correct and
properly valued. Moreover, it is also quite likely that the inventory lying as it is might have deteriorated and the
same need to be examined. The auditor is advised not to exclude the audit of closing inventory from his audit
programme.
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Q.9.2 2018 - Nov [1] {C} (c) Objective

Examine with reason (in short) whether the following statement is correct or incorrect :
An auditor is not concerned with consistency of accounting policies relating to opening balances. (2 marks)

Answer:
Incorrect :
The auditor shall obtain sufficient appropriate audit evidence about whether the accounting policies reflected in the
opening balances have been consistently applied in the current period’s financial statements, and whether changes in
the accounting policies have been properly accounted for and adequately presented and disclosed in accordance with
the applicable financial reporting framework.

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10 SA - 550: Related Parties
Q.10.1 2016 - May [1] {C} (a) Descriptive

Discuss the following:

With reference to SA - 550, “Identification of significant related party transaction outside the entity’s normal course
of business”. (5 marks)

Answer:
As per SA 550, the auditor shall require to take in account some important areas which are as follows for required
identification of significant Related Party transaction outside the entity’s normal course of business. ☐ The auditor
shall require to inspect the underlying contracts or

agreements, if any, and evaluate whether:

(a) The business rationale (or lack thereof) of the transactions suggests that they may have been entered into to
engage in fraudulent financial reporting or to conceal misappropriation of assets,
(b) The terms of the transactions are consistent with management’s explanations and
(c) The transaction have been appropriately accounted for and disclosed in accordance with the applicable Financial
Reporting Framework and.
☐ The auditor shall require to obtain audit evidence that the transactions
have been appropriately authorised and approved.
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Q.10.2 2019 - Nov [1] {C} (c) Objective

Examine with reasons whether the following statements are correct or incorrect.
(c) All entities that are under common control by a state (i.e., national,

regional or local government) are considered related party. (2 marks)

11 SA - 560: Subsequent Events
Q.11.1 2009 - May [6] (a) Descriptive

A Limited Company has filed a suit against debtor from whom ` 25 lakhs are receivable. A judgement is received
from Tribunal in favour of the company after the date of Balance Sheet. Discuss auditors' duty in this regard. (6
marks)

Answer :
Auditor’s duty regarding A Ltd. are as follows:
1. Subsequent events means events occurred after balance sheet date but

before the date of audit report.

2. In case of audit of components, such as branch or division the
subsequent events are events after the balance sheet date and before
the date of audit report of that component.
3. The subsequent events, according to AS 4 (Revised) and as reproduced
in SA 560 are of two types -
(a) those which provide further evidence of conditions that existed at the balance sheet date and
(b) those which are indicative of conditions that arose subsequent to the balance sheet date.
4. Depending upon the type of subsequent events, the auditor should
decide on adjustment of accounts based on evidential value gathered for
conditions that existed as on the date of balance sheet date or
disclosure of the conditions that arose subsequent to the date of balance
sheet.
5. The auditor should perform audit procedures to identify the subsequent
events that are relevant for adjustment/disclosure. These procedures
would include reading minutes of Board subsequent to accounting
period, contacting lawyers for knowing progress of pending Cases,
inquiry with the company management, scrutinizing subsequent interim
accounts etc.
6. The auditor should perform these procedures as near as practicable to
the date of his audit report.
7. If the management does not account for the subsequent events in the
financial statements where they are to be accounted, the auditor should
appropriately comment in his audit report by a qualification or disclaimer.
Space to write important points for revision

Q.11.2 2012 - May [5] (b) Descriptive

Explain the meaning of term “Subsequent Events” as used in the SA 560. Should all types of subsequent events be
considered by the auditor in his attest functions? (8 marks)

Answer:
Subsequent Events
According to SA - 560 "Subsequent Events" subsequent event are those significant events that occur between the
Balance Sheet date and the date of auditor's report. For auditing a part such as branch or division of an organization,
subsequent events may also be defined as those significant events which occurred up to the date of auditor' report of
that past. Therefore, subsequent events can be called as those events, which occur after the balance sheet date till the
auditor signs the audit report.

Space to write important points for revision

Q.11.3 2014 - Nov [1] {C} (d) Descriptive

Discuss the following:

Enquiry from Management is helpful for Auditor to evaluate subsequent events. Discuss specific enquiries in
reference of SA 560, which might have effect on the financial statements. (5 marks)

Answer:
The auditor has no obligation to perform any audit procedures regarding the financial statements after the date of
auditor’s report. However when, after the date of the Auditor’s Report but before the date the financial statements
are issued, a fact becomes known that had it been known at the date of the Auditor’s Report, may have caused the
auditor to amend the report, he shall: 1. Discuss the matter with management and those charged with

governance.
2. Determine whether the financial statements need amendment.
3. Inquire how management intends to address the matter in the financial statements.
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12 SA - 570: Going Concern

Q.12.1 2009 - Nov [1] (xi) Objective

State with reasons (in short) whether the following statement is true or false.
A Company which has been unable to negotiate borrowings from its bankers claims that it will be able to continue
as a ‘going concern’.

(2 marks)

Answer:
False:
In the case of the company which has not been able to negotiate its borrowings with its bankers, there will be a
substantial doubt in its ability to continue as a going concern without such financial support.
Alternative Answer True: If the company is not able to negotiate borrowings from its bankers for reasons like
delay/failure in the submission of adequate documents/ information or for other reasons other than the company’s
financial status then the statement is true.

Space to write important points for revision

Q.12.2 2010 - Nov [4] (e) Short Note

Write short note on the following:

Procedures to be performed by the auditor in expressing opinion on ‘going concern’ assumption. (4 marks)

Answer:
Procedures to be performed by the auditor in expressing opinion on 'going concern' assumption:
According to SA 570, “Going Concern”, the auditor should follow the following procedure while expressing an
opinion on going concern assumption :
• Analyse and discuss cash flow, profit and other relevant forecasts with

management.
• Analyse and discuss the entity's latest available interim financial
statements.
• Review events after the balance sheet date for items affecting the
entity's ability to continue as a going concern.
• Review the terms of debentures and loan agreements and determine
whether any have been breached.
• Review the status of matters under litigation and claims.
• Consider the entity's position concerning unfilled customer orders.
• Read minutes of the meetings of shareholders, the board of directors
and important committees for reference to financing difficulties.
• Confirm the existence, legality and enforceability of arrangements to
provide or maintain financial support with related and third parties and
assess the financial ability of such parties to provide additional funds.
Space to write important points for revision

Q.12.3 2012 - May [4] (a) Descriptive

Explain “Going Concern” assumption with reference to SA. State some financial events or conditions that may cast
doubt about going concern assumption. (8 marks)

Answer:
Going Concern- SA 570 (Revised)
As per the going concern assumption, an organisation is viewed as continuing in business for the foreseeable future.
General purpose financial statements are prepared on a going concern basis, unless management either intends to
liquidate the entity or to cease operations, or has no realistic alternative but to do so. Special purpose financial
statements may or may not be prepared in accordance with a financial reporting framework for which the going
concern basis is relevant. When the use of the going concern assumption is appropriate, assets and liabilities are
recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course
of business.
Appropriateness of Going Concern Assumptions
According to "Going Concern", when the financial statements are prepared, the auditor must consider the
appropriateness of the going concerns.

Report of an auditor is not a guarantee to the future viability of the entity, it establishes or forms only the credibility
of financial statement. A business entity continuing as a going concern for the near future, generally around one year
after the B/S date is considered or used for the preparation of the financial statement in the absence of any other
information related to it.

Space to write important points for revision

Q.12.4 2014 - May [4] (b) Descriptive

Discuss with reference to SAs:

“Operating Conditions” that may cast doubt about going concern assumption. (5 marks)

Answer:
As per SA - 570 “Going concern” in some enterprise for e.g., those where the funding arrangements are guaranteed
by the central government going concern risks may arise, but aren’t limited to, situations where such type of entries
operate on a for-profit basis, where government support may be reduced or withdrawn, or in the case of privations,
events or condition that may cast significant doubt on an entity’s ability to continue as a going concern may include
situations where such type of entity lacks funding for continued existence or when policy decision are made that
affect services provided by such an entity. However, the auditor should consider the risk that the going concern
assumption may no longer be appropriate. Operating:
— Management intentions to liquidate the entity or to cease operations. — Loss of key management without
replacement.
— Loss of major market, key customer, franchise, license or principal

supplier.
— Labour difficulties.
— Shortages of important supplies.
— Emergence of a highly successful competitor.

13 SA - 580: Written Representations

Q.13.1 2014 - May [4] (a) Descriptive Discuss with reference to SAs:
What do you mean by “Written Representations”? As an auditor, how you will deal if management does not provide
requested written representations? (5 marks)
Answer:
As per SA-580, “Written Representation”, management representation is the last way of getting audit evidence
when no other internal or external evidences are available in the circumstances. But if an auditor blindly relies upon
management representation without caring to know whether internal or external evidences are available or not then
auditor will be held guilty of negligence of his professional duties. We can also say that management representation
can’t be treated as substitute of any other audit evidences. Moreover, physical verification of the assets and putting
the values inside the financial statement is absolute responsibility of management and auditor’s responsibility is to
satisfy himself about existence, ownership and valuation of such assets by applying additional auditor procedures.
If Management will not provide written representation then auditor may qualify his audit report.
Requested Written Representations not provided by Management: If management does not provide one or more
of the requested written representations,
1. the auditor shall discuss the matter with management;
2. re-evaluate the integrity of management and evaluate the effect that this

may have on the reliability of representations (oral or written) and audit evidence in general; and

3. take appropriate actions, including determining the possible effect on the opinion in the auditor’s report.
The auditor shall disclaim an opinion on the financial statements if
management does not provide the written representations.
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14 SA - 610: Using the Work of Internal Auditors

Q.14.1 2014 - Nov [5] (a) Descriptive

Discuss with reference to SAs:

“The degree of reliance that a Statutory Auditor can place on the work of the Internal Auditor is a matter of
individual judgement”. (8 marks)

Answer:
As per SA☐610, Using the Work of Internal Auditors, the following points, explain the inter-relationship
between the statutory and internal auditor. 1. Review by Internal Auditor : The areas covered by an internal
auditor

are:
(i) review of accounting system and internal control,
(ii) examination of financial and operating information for the benefit of

management,
(iii) examination of the economy, efficiency and effectiveness of
operations,
(iv) reviews of controls including non-financial controls of tangible
assets of the company.
2. Scope of Internal Audit : The scope of internal audit is determined by the management. Its primary objectives
differs from that of the external auditor who is appointed to report independently on financial information. But, the
means of achieving their respective objectives are similar and thus much of the work of the internal auditor may be
useful to the external auditor in determining the nature, timing and extent of the procedures.
3. Review of Internal Audit by Statutory Auditor
☐ The function of an internal auditor is an integral part of the system of internal control. It is statutory requirement
too as per Sec 138 of the Companies Act, 2013 where the Audit Committee of the company or the Board shall, in
consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting
the internal audit.
☐ However, it is obligatory for a statutory auditor to examine the scope and effectiveness of the work carried out by
the internal auditor. ☐ For this he should examine the Internal Audit Department of the organisation, the strength of
the internal audit staff, their qualification and their powers. Afterwards the procedures should be studied; also the
scope of the audit examination carried out should be ascertained on referring to audit programmes, reports
submitted, points raised in audit and how these had been dealt with subsequently. ☐ The extent of independence
exhibited by the internal auditor in the discharge of his duties and his status in the organisation are important factors
for determining the effectiveness of his audit. In a large business, it has been increasingly recognised that, if their
functions and those of statutory auditors could be integrated, it might not be necessary for the statutory auditors to
go over the same facts and figures as have been previously examined by a competent and trustworthy internal audit
staff. But so far, the practice of audit being conducted jointly by the internal auditors is of great assistance to
statutory auditors.
☐ If the statutory auditor is satisfied on an examination of the work of the internal auditor, that the internal audit has
been efficient and effective, he often decides to curtail his audit programme by dispensing with some of the detailed
checking already carried out by the Internal Audit Department after or without testing the work already done. He, at
times, also decides to entrust certain items of work to the internal auditor.
☐ Given below are items of audit work in regard to which the statutory auditor accepts the checking that has
already been carried out by the internal auditor;
(i) Verification of the system of internal control;
(ii) Verification of assets, e.g., inventory in trade, fixed assets
(PPE), book debts, etc; and
(iii) Verification of amounts provided for expenses as well as
amounts adjusted as prepaid expenses.
☐ It must however be mentioned that the area of co-operation between the statutory and the internal auditor is
limited by the fact that the statutory auditor and the internal auditor owe their allegiance to separate authorities, the
shareholders in one case and the management in the other.
☐ Therefore, the former is not protected against the liability for negligence which may arise in such a case.

Responsibility of External Auditor:

1. Inspite of the existence of internal audit function, the statutory auditor’s responsibility is absolute.
2. Any reliance he places upon the work performed by the internal auditors is part of his audit approach. It does not
reduce his duty to exercise sufficient professional care and skill before the pronounces an audit opinion.
3. Therefore, an auditor cannot ignore checking of the areas already checked by the internal auditors.
Space to write important points for revision

15 SRS - 4410
Q.15.1 2016 - Nov [7] (c) Short Note

Write short note on the following:

Compilation engagement (4 marks) Answer:
Compilation Engagements:
The purpose of SRS 4410, engagement to compile Financial Statements, is to establish standards on professional
responsibilities of an accountant when an engagement to compile financial statements or other financial information
is undertaken and the form and content of the report to be issued in connection with such a compilation so that the
association of the name of the accountant with such financial statements or financial information is not misconstrued
by a user of those statements or information as having been audited by him.
The objective of a compilation engagement is for an accountant to use accounting expertise, as opposed to auditing
expertise, to collect, classify and summarise financial information. This ordinarily entails reducing detailed data to a
manageable and understandable form without the requirement to test the assertions underlying that information.

General Principles of a Compilation Engagement:

The accountant should comply with the “Code of Ethics” issued by the Institute of Chartered Accountants of India.
The ethical principles governing the accountant’s professional responsibilities for this type of engagement are as
follows:
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
(d) Confidentiality;
(e) Professional conduct; and
(f) Technical standards.

Space to write important points for revision

May - 2019
CA Inter Gr. II Paper - 6 (New Syllabus)
Auditing and Assurance

1. The question paper comprises two parts, Part I and Part II. 2. Part I comprises Multiple Choice Questions
(MCQs).
1. Question paper comprises 6 questions. Answer Question No. 1 which is compulsory and any 4 out of the
remaining 5 questions.

PART - II
1. Examine with reasons whether the following statements are correct or incorrect. (Answer any seven out of eight)
(a) Where the firm is appointed as an auditor of the entity the audit

report is signed only in the name of audit firm.

(b) Satisfactory Control environment is not an absolute deterrent to
fraud.
(c) Bhartiya Gas Ltd. a Government Company, the Comptroller and
Auditor-General of India shall, in respect of a financial year, appoint
an auditor duly qualified to be appointed as an auditor of companies
under this Act, within a period of 180 days from the end of the
financial year, who shall hold office till the end of the next Financial
Year.
(d) Joint auditor is always bound by the views of majority of the joint
auditors regarding matters to be covered in report.
(e) Auditor of a Nationalised bank is to be appointed at the annual
general meeting of the shareholders.
(f) The accounts of every LLP shall be audited in accordance with rule
24 of LLP Rules 2009.
(g) Positive Confirmation request is a request where the confirming party
respond only if it disagrees with the information provided in the
request.
(h) Rule 3 of the Companies (Cost Records and Audit) Rule, 2014
provides the classes of companies, engaged in the production of
goods or providing services, having an overall turnover of`25 crore
or more during the immediately preceding financial year, required to
include cost records in their books of account. (7×2 =14 marks)

6.658
2. (a) “Sampling risk can lead to erroneous conclusions”. Justify.

(4 marks) (b) List out the points that should be kept in mind by the auditor for the purpose of constructing an audit
programme. (3 marks) (c) CA Raj, an engagement partner wants to take decision, regarding acceptance and
continuance of an audit engagement. Which informations, he should obtain before accepting an engagement?

(3 marks) (d) Describe how the process of establishing the overall audit strategy assists the auditor in marshalling
his human resources. (4 marks) 3. (a) “P India” Ltd. is a manufacturer of various sports products. The company is
having several cases of litigation pending in courts. The auditor wanted to identify litigation and claims, which may
give rise to risk of material misstatements. Suggest the audit procedures in the given case. (4 marks) (b) Which are
specific risks to the company’s internal control having IT environment? (4 marks) (c) “Independence of mind and
independence in appearance are interlinked perspectives of Independence of auditors.” Explain.

(3 marks) (d) “Completion Memorandum” is helpful as part of the audit documentation. Explain. (3 marks) 4. (a)
You are an auditor of PQR Ltd. which has spent ` 10 lakhs on Research activities of the product during period under
audit. Board of Directors want to recognize it as an internally generated intangible assets. Advise and discuss the
conditions necessary to be fulfilled to recognize the intangible assets in the financial statements.

(4 marks) (b) While auditing purchases which types of analytical procedures will be performed by the auditor to
obtain audit evidence as to overall reasonableness of purchase quantity and price. (4 marks) (c) While reviewing
Employee benefits expenses of a company, how you as an auditor you will evaluate its hiring, appraisal and
retirement process? (3 marks) (d) The securities premium account may only be applied by the company towards the
issue of unissued shares of the company to the members of the company as fully paid bonus shares, Comment. (3
marks) 5. (a) Board of Directors of “XYZ Ltd.” found the auditors of the Company acted in a fraudulent manner,
and decided to remove the auditors in board’s meeting. Comment on the action of Board of Directors and describe
correct procedure to be followed for removal of auditors before expiry of their term. (4 marks) (b) Auditors have
right to attend only those general meetings at which the accounts audited by them are to be discussed. Comment.

(4 marks) (c) Though legally auditor may exercise right of Lien in case of companies, it is mostly impracticable for
legal and practicable constraints. Do you agree? (3 marks) (d) Explain the Reporting requirements the auditor should
ensure under CARO 2016 related to fixed assets. (3 marks) 6. (a) You are appointed as an auditor of Banking Co.,
and hold discussions with engagement team. List out matters which you would discuss at the planning stage of an
audit to gain better understanding of the bank and its environment. (4 marks) (b) Define the different types of lease
agreements as per Accounting Standard/Ind-AS. (4 marks) OR

6A. (b) Mr. Piyush, the Bank Manager develops controls to aid in managing key business and financial risks.
Discuss the various requirements for an effective risk management system in a bank. (4 marks)

(c) Central Govt. hold 55% of the paid up share Capital in Kisan Credit Co-operative Society, which is incurring
huge losses. Advise when the Central Government can direct Special Audit under Section 77 of the Multi State Co-
operative Society Act. (3 marks)

(d) Discuss the power of C & AG in Government audit. (3 marks)

November - 2019
CA Inter Gr. II Paper - 6 (New Syllabus) Auditing and Assurance

1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Multiple Choice Questions (MCQs.)
3. Question paper comprises 6 questions. Answer Question No. 1 which is compulsory and any 4 out of the
remaining 5 questions.

1. Examine with reasons whether the following statements are correct or incorrect. (Answer any seven out of eight)
(a) The auditor’s reporting on internal financial control will be applicable

with respect to interim financial statements.

(b) Under a properly framed audit programme by the auditor, the danger
is significantly less and audit can proceed systematically. (c) All entities that are under common control by a state
(i.e., national,
regional or local government) are considered related party. (d) Provision of CARO, 2016 is not applicable to ABC
Pvt. Ltd., a
subsidiary of XYZ Ltd. (a public company) having fully paid Capital
and Reserves & Surplus of` 50 lakhs, Secured loan from bank of
`90 Lakhs and Turnover of`5 Crore, for the financial year 2018-19. (e) CA. K has resigned as auditor, after 2 months
from appointment of
a NML Ltd. He needs to file ADT-3 with the Registrar within 60 days
from the date of resignation.
(f) The non-statistical sampling in criticized on the grounds that it is
neither objective nor scientific.
(g) The auditor’s substantive procedure at the assertion level means
substantive analytical procedures only.
(h) For an auditor the Risk assessment procedure provides sufficient
appropriate audit evidence to base the audit opinion. (14 marks) 2. (a) The auditor shall plan and perform an audit
with professional
skepticism recognizing that circumstances may exist that cause the
financial statement to be materially misstated. Discuss any four
example of professional skepticism. (4 marks) (b) In establishing overall audit strategy, the auditor shall ascertain
the
reporting objectives of the engagement to plan the timing of the
audit and the nature of the communications required. Elucidate
those cases by which auditor can ascertain the reporting objectives
of the engagement. (4 marks) (c) The engagement partner shall take the responsibility for the overall
quality on each audit engagement to which that partner is assigned.
Discuss with reference to SA 220 “Quality Control for an audit of
financial statement”. (3 marks) (d) The auditors responsibility include reporting on Internal Financial
Controls over Financial Reporting which include and understanding
IT environment of the company and relevant risks and control.
Mention any three situation where IT will be relevant to an audit. (3 marks) 3. (a) Discuss the Various points which
auditor needs to consider in
determining whether it is appropriate to use audit evidence about
operating effectiveness of controls obtained in previous audit, and
if so, the length of the time period that may elapsed before retesting. (4 marks) (b) Validity and consequence of issue
of shares at discount, check with
respect to the provisions of the Companies Act, 2013. (4 marks) (c) Explain the disclosure requirements of IND AS
compliant Schedule
III to Companies Act, 2013 for each component of “Other Equity.” (3 marks) (d) Discuss the audit procedure to be
considered by an auditor while
performing analytical procedure to obtain audit evidence as to
overall reasonableness of purchase quantity and price. (3 marks) 4. (a) Discuss the points to be considered by auditor
for the purpose of
constructing an audit programme. (4 marks) (b) “Before the commencement of audit, the joint auditors should
discuss and develop a joint audit plan.” Discuss the points to be
considered in developing the joint audit plan by the joint auditors. (4 marks) (c) Board of Directors of MN Ltd.
wants to appoint CA B, a practicing
Chartered Accountant, as an internal auditor of the company as they
believe that they could not appoint any other person as an internal
auditor other than practicing chartered accountant.
Examine the correctness of the statement of Board of Directors of
MN Ltd. with respect to provision of Companies Act, 2013. (3 marks) (d) CA A, auditor of ABC Ltd. wants to
design substantive analytical
procedure and for that he wants to check whether the data is reliable
or not. Mention the relevant points which he has to consider whether
data is reliable for purpose of designing the substantive analytical
procedures. (3 marks) 5. (a) When corresponding figures are presented, the auditors’ opinion
shall not refer to the corresponding figures. Discuss the exceptions
of the above statement when the prior period financial statements
are audited. (4 marks) (b) M Ltd. has given certain loans to related parties and also has
accepted certain deposits. As an auditor, how you include the above
items in paragraph 3 of CARO, 2016 ? (4 marks) (c) Briefly explain the policies and procedures of assembling the
final
audit file on a timely basis after the date of auditor’s report under
SQC-1. (3 marks) (d) “Inadequate internal control over assets may increase the
susceptibility of misappropriation of those assets.” State any three
example of such occurrence of misappropriation of such assets. (3 marks) 6. (a) “There is no difference in
provisioning of NPA as regards to
categories of NPA, whether the debt is secured or unsecured.”
Critically evaluate the statement on the basis of provisioning norms
of NPA of nationalised bank. (4 marks) (b) In the case of audit of a charitable institution, what attentions should
be paid by auditor regarding audit of expenditure items ? (4 marks)

(Or)
(b) You have been appointed auditor of M/s. Divine Children Hospital. Discuss any four important points that would
attract your attention while audit. (4 marks)

(c) The discussion between members of the engagement team members and the audit engagement partner should be
done on the susceptibility of the bank’s financial statements to material misstatements. Briefly discuss the points
ordinarily included in discussion of the engagement team. (3 marks)

(d) There are certain points which are required to consider specially in the audit of accounts of a partnership. Discuss
any three points briefly. (3 marks)

Test Series
CA Inter Gr. II Paper- 6 (New Syllabus)
Auditing and Assurance

Question No. 1 is compulsory.

Candidates are also required to answer any four questions from the remaining five questions.

1. (a) Audit ensure that the entries in the books are:

(a) adequately supported by sufficient documents
(b) adequately supported by sufficient evidence
(c) adequately supported by vouchers
(d) adequately supported by sufficient and appropriate evidence.

(1 mark) (b) Audit should be organised to cover adequately ___________ of the enterprise relevant to the financial
statements being audited. (a) some aspects
(b) only financial aspects
(c) non financial aspects
(d) all aspects. (1 mark)

(c) International Federation of Accountants (IFAC) was set up in ___________.

(a) 1970
(b) 1977
(c) 1987
(d) 1997 (1 mark)

(d) In case of recurring audit of a firm by the same auditor: (a) requires fresh letter of engagement
(b) requires revised letter of engagement
(c) does not requires any letter of engagement
(d) does not requires any letter of engagement until and unless

there is any type of change

(1 mark)

6.665 (e) ___________ may be defined as the information used by the auditor in arriving at the conclusions on
which the auditor’s opinion is based. (a) Audit Plan
(b) Audit Programme
(c) Audit Evidence
(d) Audit System. (1 mark)

(f) Audit documentation regarding materiality include:

(a) Materiality for the financial statements as a whole and any revision there on.
(b) Performance materiality
(c) Materiality level or levels for particular classes of transactions, account balance or disclosures.
(d) All of them. (1 mark) (g) ______________ consists of checking the mathematical accuracy
of documents or records.
(a) Observation
(b) External Confirmation
(c) Recalculation
(d) Re-performance. (1 mark) (h) A Person or other entity that has control or significant influence,
directly or indirectly through one or more intermediaries, over the
reporting entity, is known as:
(a) Associates
(b) Co-owner
(c) Third Party
(d) Related Party. (1 mark) (i) Testing of internal control is done on the __________ basis.
(a) Comprehensive
(b) Continuous
(c) Selective
(d) None (1 mark)
(j) Every listed company shall appoint an internal auditor under the companies Act 2013, under __________.
(a) Section 130
(b) Section 132
(c) Section 135
(d) Section 138 (1 mark)
(k) The objective and scope of internal audit functions typically include assurance and consulting actives designed to
evaluate and improve the effectiveness of the entity’s __________.
(a) governance process
(b) risk management
(c) internal control
(d) all of them (1 mark)
(l) As per SA - 240 “The Auditor’s Responsibilities Relating to Fraud in the Audit of Financial statements”, the
primary responsibility for the prevention and detection of fraud rests with:
(a) Auditor
(b) Management
(c) Those charged with governance
(d) Both TCWG and Management (1 mark)
(m) If, as a result of a misstatement resulting from fraud, the auditor encounters exceptional circumstances that bring
into question his ability to continue performing the audit, he shall:
(a) Ask the management for his withdrawal
(b) Withdraw from the engagement immediately
(c) Report to audit team regarding withdrawal
(d) Determine the professional and legal responsibilities applicable in the circumstances (1 mark)
(n) Understanding of a company’s IT environment that is obtained should be documented as per:
(a) SA - 200
(b) SA - 210
(c) SA - 215
(d) SA - 230 (1 mark)
(o) Sampling in which sample size selection and evaluation results in a conclusion in monetary amount.
(a) Stratified Sampling
(b) Interval Sampling
(c) Haphazard Sampling
(d) Monetary Unit Sampling (1 mark)
(p) Non-Sampling risk can be measured mathematically. This statement is:
(a) True
(b) False
(c) Partly True
(d) None (1 mark)
(q) When inherent risk is higher, auditor may design tests of details to address the ________.
(a) Lower inherent risk
(b) moderate inherent risk
(c) higher inherent risk
(d) Any of the above (1 mark)
(r) _________ establishes requirements and provides guidance in determining the audit procedures to be performed
on the information to be used for substantive analytical procedures:
(a) SA - 300
(b) SA - 320
(c) SA - 500
(d) SA - 700 (1 mark)
(s) Under ___________ “entity has the right to ownership or use of the recognised assets, and the liabilities
recognised in the financial statements represent the obligations of the entity.”
(a) Existence
(b) Completeness
(c) Valuation
(d) Rights and Obligations. (1 mark)
(t) As per Section 2(8) of the Companies Act, 2013, “Capital as is authorised by the memorandum of a company to
be the maximum amount of share capital of the company.” is called ________. (a) Authorised Capital
(b) Nominal Capital
(c) Issued Capital
(d) Authorised Capital or Nominal Capital (1 mark) 2. (a) R.K. & Company are the auditors of PQR Company Ltd.
The Managing Director of the Company demands copies of the working papers from the auditors. Are the auditors
bound to oblige the Managing Director? (5 marks)
(b) Mr. A was appointed statutory auditor of P Ltd., but he was not able to gather the sufficient audit evidences.
Discuss how he should proceed to gather more audit evidences. (5 marks)
(c) Write short note on the Assertion about balance at the end of the reporting period. (5 marks)
(d) How would you assess the reliability of Internal control system in computerised information system ? (5 marks)
3. (a) Auditor’s reporting on internal financial controls is a requirement specified in the Act and, therefore, will
apply only in case of reporting on financial statements prepared under the Act and reported under Section 143.
Explain stating clearly the auditor’s responsibility for reporting on internal financial controls over financial
reporting. (5 marks)
(b) Is detection of fraud and error duty of an auditor? (5 marks)
(c) Why are computer assisted audit techniques (CAAT) needed in a Computer Information Systems (CIS)
environment and how it helps the auditor in obtaining and evaluating audit evidences ? (5 marks)
(d) With reference to SA - 530, meaning of audit sampling and requirements relating to sample design, sample size
and selection of items for testing. (5 marks) 4. (a) What are the factors that determine the extent of reliance that the
auditor places on results of analytical procedures? Explain with reference to SA-520 on “Analytical procedures”. (10
marks)
(b) State the analytical review procedures normally carried out in the audit of inventories. (6 marks)
(c) Mr. X, a shareholder of the company pointed out that : The goodwill in the Balance Sheet of the company has
appeared on same figure during the past three years. (4 marks) 5. (a) Is there any statutory necessity to make
disclosure of depreciation in company’s accounts? (5 marks)
(b) Explain, what are the factors to be considered while “Vouching of travelling expenses”? (5 marks)
(c) Board of Directors of “XYZ Ltd.” found the auditors of the Company acted in a fraudulent manner, and decided
to remove the auditors in board’s meeting. Comment on the action of Board of Directors and describe correct
procedure to be followed for removal of auditors before expiry of their term. (5 marks)
(d) “Ramjilal & Co. had been allotted the branch audit of a nationalized bank for the year ended 31stMarch, 2018. In
the audit planning, the partner of Ramjilal & Co., observed that the allotted branches are predominantly based in
rural areas and major portion of the advances were for agricultural purpose.”
Now he needs your assistance on the following points so as to incorporate them in the audit plan:
(i) for determination of NPA norms for agricultural advances (ii) for accounts where there is erosion in the value of
security/ frauds committed by the borrowers. (5 marks)

OR

(a) State the background of “Local Bodies”. Draft an audit programme for audit of local bodies. (8 marks)
(b) Mention the eight important points which an auditor will consider while conducting the audit of educational
institutions. (8 marks)
(c) Principal aspects to be considered by an auditor while conducting an audit of final statements of accounts. (4
marks)
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