By: CA.

Pankaj Garg

1 Quality Control and Engagement Standards

"Marks Distribution of Past Exams"

40
35
30
25
Marks

20
15
10
5
0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 37 32 19 28 34 24 30 19 19 25 24

*From May 2019, Marks are given only for descriptive questions.
1.1 – SQC 1 “Quality Control for Firms that perform Audits & Reviews of Historical Financial Information
and Other Assurance and Related Services Engagements”
Q.1 BSS & Associates is a partnership firm of Chartered Accountants which was established five years
back. The firm was offering only advisory services at the beginning, however, after audit rotation and
advent of GST, firm sees lot of potential in these areas also and started looking for opportunities in
these areas. These services being assurance in nature, the firm required some internal restructuring
and set up some policies and procedures for compliance year on year.
The firm started getting new clients for these new services and is now looking to obtain such
information as it considers 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. Where issues have been identified, and the
firm decides to accept or continue the client relationship or a specific engagement, it has been setting
up a process to document how the issues were resolved.
The firm is now looking to work with only select clients which are in line with the policies of the firm.
The firm understands that the extent of knowledge it will have regarding the integrity of a client will
grow within the context of an ongoing relationship with that client. With regard to the integrity of a
client, you are required to give some examples of the matters to be considered by the firm as per the
requirements of SQC 1. [RTP-May 19]
Or
MB & Associates is a partnership firm of the Chartered Accountants which was established seven
years back. The firm is getting new clients and has also been offered new engagement services with
existing clients. The firm is concerned about obtaining such information as it considers necessary in

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Quality Control and Engagement Standards Chapter 1
the circumstances before accepting an engagement with a new client and acceptance of a new
engagement with an existing client. The firm is looking to work with only select clients to adhere to
the Quality Control Standards. Guide MB & Associates about the matters to be considered with regard
to the integrity of a client, as per the requirements of SQC 1. [Nov. 19 – New Syllabus (4 Marks)]
Ans.: Considerations as to integrity of clients:
As per SQC-1 “Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements”, a firm should obtain such
information as it considers 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. Where issues have been identified, and the firm decides to
accept or continue the client relationship or a specific engagement, it should document how the issues
were resolved.
Considerations as to integrity of clients:
With regard to the integrity of a client, matters that the firm considers include, for example:
1. The identity and business reputation of the client’s principal owners, key management, related
parties and those charged with its governance.
2. The nature of the client’s operations, including its business practices.
3. Information concerning the attitude of the client’s principal owners, key management and those
charged with its governance towards such matters as aggressive interpretation of accounting
standards and the internal control environment.
4. Whether the client is aggressively concerned with maintaining the firm’s fees as low as possible.
5. Indications of an inappropriate limitation in the scope of work.
6. Indications that the client might be involved in money laundering or other criminal activities.
7. The reasons for the proposed appointment of the firm and non-reappointment of the previous firm.
The extent of knowledge a firm will have regarding the integrity of a client will generally grow within
the context of an ongoing relationship with that client.
Q.2 You are an audit senior working for the firm Bohra & Company. You are currently carrying out the
audit of Wisdom Ltd., a manufacturer of waste paper bins. You are unhappy with Wisdom Ltd.’s
inventory valuation policy and have raised the issue several times with the audit manager. He has
dealt with the client for a number of years and does not see what you are making an objection about.
He has refused to meet you on site to discuss those issues.
As the audit manager had dealt with Wisdom Ltd. for so many years, the other partners have decided
to leave the audit of Wisdom Ltd. in his capable hands. Comment on the situation outlined above.
Ans.: Quality Control Issues in an engagement:
• SQC 1 “Quality Control for Firms that perform Audits and Reviews of Historical Financial
Information and Other Assurance and Related Services Engagements” requires a firm to establish
the policies & procedures for dealing/resolving differences of opinion with in engagement team.
• An engagement partner is usually appointed to each audit engagement undertaken by the firm, to
take responsibility for the engagement on behalf of the firm. Assigning the audit to an experienced
audit manager is not sufficient.
• SA 220 “Quality Control for an Audit of Financial Statement”, requires that the audit engagement
partner takes responsibility for settling disputes in accordance with the firm’s policy in respect of
resolution of difference of opinion required by SQC 1.

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• In the present case, partners of the firm have decided to leave the audit in the hands of Audit
manager and no engagement partner has been assigned. The lack of an audit engagement partner
also means that several of the requirements of SA 220, about ensuring that engagements in relation
to independence and directing, supervising and reviewing the audit are not in place.
• Further, the audit manager and senior have conflicting views about the valuation of inventory. This
does not appear to have been handled well, with the manager refusing to discuss the issue with the
senior.
Conclusion: Failure to resolve the difference of opinion is a breach of the firm’s policy under SQC 1. It
indicates that the firm does not have a suitable policy concerning such disputes required by SQC 1.
Q.3 M/s. NK & Co., Chartered Accountants were appointed as Statutory Auditors of Fresh Juice Limited for
the FY 2022-23. The previous year's audit was conducted by M/s LP & Associates. After the audit was
completed and report submitted, it was found that closing balances of last financial year i.e., 2021-22
were incorrectly brought forward. It was found that M/s NK & Co. did not apply any audit procedures
to ensure that correct opening balances have been brought forward to the current period.
Accordingly, a complaint was filed against NK & Co. in relation to this matter.
You are required to inform what policies are required to be implemented by NK & Co. for dealing
with such complaints and allegations as required by Standard on Quality Control (SQC).
[Jan. 21 – New Syllabus (5 Marks), MTP-March 22]
Ans.: Complaints and Allegations:
• As required by SQC-1 “Quality Control for Firms that Perform Audits & Reviews of Historical
Financial Information, and Other Assurance & Related Services Engagements” the firm should
establish policies and procedures designed to provide it with reasonable assurance that it deals
appropriately with:
(a) Complaints and allegations that the work performed by the firm fails to comply with
professional standards and regulatory and legal requirements; and
(b) Allegations of non-compliance with the firm’s system of quality control.
• Complaints and allegations (which do not include those that are clearly frivolous) may originate
from within or outside the firm. They may be made by firm personnel, clients or other third parties.
They may be received by engagement team members or other firm personnel.
• As part of this process, the firm establishes clearly defined channels for firm personnel to raise any
concerns in a manner that enables them to come forward without fear of reprisals.
• The firm investigates such complaints and allegations in accordance with established policies and
procedures. The investigation is supervised by a partner with sufficient and appropriate experience
and authority within the firm but who is not otherwise involved in the engagement, and includes
involving legal counsel as necessary. Small firms and sole practitioners may use the services of a
suitably qualified external person or another firm to carry out the investigation. Complaints,
allegations and the responses to them are documented.
• Where the results of the investigations indicate deficiencies in the design or operation of the firm’s
quality control policies and procedures, or non-compliance with the firm’s system of quality control
by an individual or individuals, the firm shall take appropriate action.
Q.4 J.A.C.K. & Co., a Chartered Accountant firm was appointed as the statutory auditor of Falcon Ltd. after
ensuring the compliance with relevant provisions of the Companies Act, 2013. Mr. Jay was the
engagement partner for the aforesaid audit and prior to commencement of the audit, Mr. Jay had
called for a meeting of the engagement team in order to direct them and assign them their

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responsibilities. At the end of meeting, Mr. Jay assigned review responsibilities to two of the
engagement team members who were the most experienced amongst all, for reviewing the work
performed by the less experienced team members. While reviewing the work performed by the less
experienced members of the engagement team, what shall be the considerations of the reviewers?
[MTP-March 21]
Ans.: Consideration to be given while reviewing the work:
• As per SQC 1, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information and Other Assurance and Related Services Engagements”, review responsibilities are
determined on the basis that more experienced team members, including the engagement partner,
review work performed by less experienced team members.
• While reviewing the work performed by less experienced members of the engagement team, the
reviewers should consider whether:
(i) The work has been performed in accordance with professional standards and regulatory and
legal requirements.
(ii) Significant matters have been raised for further consideration.
(iii) Appropriate consultations have taken place and the resulting conclusions have been
documented and implemented.
(iv) There is a need to revise the nature, timing and extent of work performed.
(v) The work performed supports the conclusions reached and is appropriately documented.
(vi) The evidence obtained is sufficient and appropriate to support the report; and
(vii) The objectives of the engagement procedures have been achieved.
Q.5 HK & Co. Chartered Accountants have been auditors of SAT Ltd (a listed entity) for the last 8 financial
years. CA H, partner of the firm, has been handling the audit assignment very well since the
appointment. The audit work of CA H and her team is reviewed by a senior partner CA K to assure
that audit is performed in accordance with professional standards and regulatory and legal
requirements. CA K was out of India for some personal reasons, so this year CA G has been asked to
review the audit work. In your opinion, what areas CA G should consider at the time of review. List
any four areas and also comment whether firm is complying with Standard on Quality Control or not.
[July 21 – New Syllabus (5 Marks), MTP-Oct. 22]
Ans.: Areas to be considered in review of audit work:
As per SQC 1, review responsibilities are determined on the basis that more experienced engagement
team members, including the engagement partner, review work performed by less experienced team
members.
Reviewers consider whether:
(a) The work has been performed in accordance with professional standards and regulatory and legal
requirements;
(b) Significant matters have been raised for further consideration;
(c) Appropriate consultations have taken place and the resulting conclusions have been documented
and implemented;
(d) There is a need to revise the nature, timing and extent of work performed;
(e) The work performed supports the conclusions reached and is appropriately documented;
(f) The evidence obtained is sufficient and appropriate to support the report; and
(g) The objectives of the engagement procedures have been achieved.

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Compliance with SQC:
The firm should establish policies and procedures:
(i) Setting out criteria for determining the need for safeguards to reduce the familiarity threat to an
acceptable level when using the same senior personnel on an assurance engagement over a long
period of time; and
(ii) For all audits of financial statements of listed entities, requiring the rotation of the engagement
partner after a specified period in compliance with the Code.
The familiarity threat is particularly relevant in the context of financial statement audits of listed
entities. For these audits, the engagement partner should be rotated after a pre-defined period,
normally not more than 7 years.
Conclusion: Firm is not complying with SQC 1 as Engagement Partner H is continuing for more than 7
years.
Q.6 PQR & Associates Chartered Accountants, is partnership having 3 partners CA P, CA Q and CA R. PQR
& Associates are appointed as Statutory Auditors of ABC Limited, a listed entity for the financial year
2022-23 and CA P is appointed as Engagement Partner for the audit of ABC Limited. Before issuing
the Audit Report of ABC Limited, CA P asked CA R to perform Engagement Quality Control Review and
is of the view that his responsibility will be reduced after review by CA R. Whether the contention of
CA P is correct? What are the aspects that need to be considered by CA R while performing
Engagement Quality Control Review for audit of financial statements of ABC Limited?
[May 22 (5 Marks)]
Ans.: Engagement Quality Control Review (EQCR):
As per SQC 1, “Quality Control for Firms that Perform Audit and Reviews of Historical Financial
Information, and other Assurance and Related Services Engagements”, the review does not reduce the
responsibilities of the engagement partner. Hence, contention of CA. P that after engagement quality
control review by CA. R, his responsibility will be reduced, is not correct.
Aspects to be considered while performing EQCR for audit of F.S.:
CA. R needs to consider the following aspect while performing EQCR for audit of F.S. of ABC Ltd.:
(1) The engagement team’s evaluation of the firm’s independence in relation to the specific
engagement.
(2) Significant risks identified during the engagement and the responses to those risks.
(3) Judgments made, particularly with respect to materiality and significant risks.
(4) Whether appropriate consultation has taken place on matters involving differences of opinion or
other difficult or contentious matters, and the conclusions arising from those consultations.
(5) The significance and disposition of corrected and uncorrected misstatements identified during
the engagement.
(6) The matters to be communicated to management and those charged with governance and, where
applicable, other parties such as regulatory bodies.
(7) Whether working papers selected for review reflect the work performed in relation to the
significant judgments and support the conclusions reached.
(8) The appropriateness of the report to be issued.
Q.7 AP & Associates, Chartered Accountants, are Statutory Auditors of XP Limited for the last four years.
XP Limited is engaged in the manufacture and marketing of FMCG Goods in India. During 2022-23, the
Company has diversified and commenced providing software solutions in the area of “e-commerce”
in India as well as in certain European countries. AP & Associates, while carrying out the audit for the

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current financial year, came to know that the company has expanded its operations into a new
segment as well as new geography. AP & Associates does not possess necessary expertise and
infrastructure to carry out the audit of this diversified business activities and accordingly wishes to
withdraw from the engagement and client relationship. Discuss the issues that need to be addressed
before deciding to withdraw. [Nov. 22 (5 Marks)]
Ans.: Issues to be addressed before withdrawing from audit engagement:
As per SQC 1, “Quality Control for Firms that Perform Audit and Reviews of Historical Financial
Information, and other Assurance and Related Services Engagements”, firm should establish the
policies w.r.t. withdrawal from engagement and communication requirements, if circumstances
warrant. Policies and procedures on withdrawal from an engagement or from both the engagement and
the client relationship address issues that include the following:
(a) Discussing with the appropriate level of mngt. & TCWG regarding the appropriate action that the
firm might take based on the relevant facts and circumstances.
(b) If the firm determines that it is appropriate to withdraw, discussing with the appropriate level of
the client’s management and TCWG withdrawal from the engagement or from both the
engagement and the client relationship, and the reasons for the withdrawal.
(c) Considering whether there is a professional, regulatory or legal requirement for the firm to
remain in place, or for the firm to report the withdrawal from the engagement, or from both the
engagement and the client relationship, together with the reasons for the withdrawal, to
regulatory authorities.
(d) Documenting significant issues, consultations, conclusions and the basis for the conclusions.

1.2 - SA 200 “Overall Objectives of the Independent Auditor and Conduct of an Audit in accordance with SA”
Q.8 M/s SG & Co. Chartered Accountants were appointed as Statutory Auditors of XYZ Limited for the F.Y.
2022-23. The company implemented internal controls for prevention and early detection of any
fraudulent activity. Auditors carried out test of controls and found out no major observations. After
the completion of audit, audit report was submitted by the auditors and audited results were issued.
Fraud pertaining to the area of inventory came to light subsequently for the period covered by audit
and auditors were asked to make submission as to why audit failed to identify such fraud. Auditors
submitted that because of inherent limitations of audit, it is not possible to get persuasive evidence of
certain matters like fraud. Do you think auditor made correct statement? Also discuss certain subject
matters or assertions where it is difficult to detect material misstatements due to potential effects of
inherent limitations. [July 21 – New Syllabus (5 Marks)]
Ans.: Inherent Limitations of Audit:
In accordance with SA 200 “Overall Objectives of the Independent Auditor and conduct of an Audit in
accordance with SA”, because of the inherent limitations of an audit, there is an unavoidable risk that
some material misstatements of the financial statements may not be detected, even though the audit is
properly planned and performed in accordance with SAs. Accordingly, the subsequent discovery of a
material misstatement of the financial statements resulting from fraud or error does not by itself
indicate a failure to conduct an audit in accordance with SAs. However, the inherent limitations of an
audit are not a justification for the auditor to be satisfied with less than persuasive audit evidence.
Conclusion: Based on the provisions as stated above, auditor’s submission that because of inherent
limitations of audit, it is not possible to get persuasive evidence of certain matters like fraud does not
seems to be correct.

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Subject matters or assertions where it is difficult to detect material misstatements due to
potential effects of inherent limitations:
(i) Fraud, particularly fraud involving senior management or collusion.
(ii) The existence and completeness of related party relationships and transactions.
(iii) The occurrence of non-compliance with laws and regulations.
(iv) Future events or conditions that may cause an entity to cease to continue as a going concern.
Q.9 Yupee (P) Ltd. got incorporated on 15th May 2022 and Mr. Harsh, the director of Yupee (P) Ltd.
proposed to Kamal & Co. on 24th May 2022, for being appointed as its statutory auditor. Mr. Kamal,
the sole proprietor of Kamal & Co., after checking the compliance with all the statutory requirements,
accepted the said offer and issued an audit engagement letter vide email to Yupee (P) Ltd.
Mr. Harsh found all terms of audit engagement to be proper but in the paragraph relating to auditor’s
responsibly in the engagement letter, as produced below:
“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.”
Certain queries raised in his mind that what does reasonable assurance meant? Which Standard on
Auditing requires the auditor to obtain such reasonable assurance? Is it possible to give absolute
assurance on such financial statements?
Assuming that you are Mr. Kamal, the newly appointed statutory auditor of Yupee (P) Ltd. Please
address to the queries of Mr. Harsh as stated above. [MTP-April 22]
Ans.: Reasonable Assurance:
• As per SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, the auditor is required to obtain reasonable assurance
about whether the financial statements as a whole are free from material misstatement, whether
due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance with an applicable FRF.
• Reasonable assurance is a high level of assurance and is less than absolute assurance. It is obtained
when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk (i.e., the
risk that the auditor expresses an inappropriate opinion when the financial statements are
materially misstated) to an acceptably low level.
• 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:
(a) The nature of financial reporting;
(b) The nature of audit procedures; and
(c) The need for the audit to be conducted within a reasonable period of time and at a reasonable
cost.

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1.3 - SA 210 “Agreeing the Terms of Audit Engagement”
Q.10 Mr. Ram Kapoor, Chartered Accountant, has been appointed as the statutory auditor by XYZ Private
Limited for the audit of their financial statements for the year 2022-23. The company has mentioned
in the audit terms that they will not be able to provide internal audit reports to Mr. Ram during the
course of audit. Further, company also imposed some limitation on scope of Mr. Ram.
What are the preconditions Mr. Ram should ensure before accepting/refusing the proposal? Also
advise, whether Mr. Ram should accept the proposed audit engagement? [RTP-Nov. 19]
Ans.: Preconditions for an audit engagement:
SA 210 “Agreeing the Terms of Engagement” deals with the auditor’s responsibilities in agreeing the
terms of the audit engagement with management. Before accepting/refusing an audit engagement, to
establish whether the preconditions for an audit are present, the auditor shall:
(a) Determine whether the financial reporting framework to be applied in the preparation of the
financial statements is acceptable; and
(b) Obtain the agreement of management that it acknowledges and understands its responsibilities
for followings:
(i) the preparation of the F.S. in accordance with the applicable FRF.
(ii) exercising necessary internal control to enable the preparation of F.S. that are free from
material misstatement, whether due to fraud or error.
(iii) to provide the auditor with:
(a) Access to all relevant information such as records, documentation and other matters;
(b) Additional information that the auditor may request from management for the
purpose of the audit; and
(c) Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.
Further, if management or those charged with governance impose a limitation on the scope of the
auditor’s work in the terms of a proposed audit engagement such that the auditor believes the
limitation will result in the auditor disclaiming an opinion on the financial statements, the auditor
shall not accept such a limited engagement as an audit engagement, unless required by law or
regulation to do so.
In addition, if the preconditions for an audit are not present, the auditor shall discuss the matter with
management. Unless required by law or regulation to do so, the auditor shall not accept the proposed
audit engagement.
Conclusion: In the instant case, Mr. Ram should not accept the appointment as statutory auditor of
XYZ Private Limited due to limitation imposed on his scope of work.
Q.11 AKJ Ltd. is a small-sized 30 years old company having business of manufacturing of pipes. Company
has a plant based out of Dehradun and have their corporate office in Delhi. Recently the company
appointed new firm of Chartered Accountants as their statutory auditors.
The statutory auditors want to enter into an engagement letter with the company in respect of their
services but the management has contended that since the statutory audit is mandated by law,
engagement letter may not be required. Auditors did not agree to this and have shared a format of
engagement letter with the management for their reference before getting that signed. In this
respect management would like to understand that as per SA 210 (auditing standard referred to by
the auditors), if the agreed terms of the engagement shall be recorded in an engagement letter or
other suitable form of written agreement, what should be included in terms of agreed audit
engagement letter? [MTP-April 19; RTP-May 23]

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Ans.: Agreement on Audit Engagement Terms:
SA 210 “Agreeing the Terms of Audit Engagement” deals with the auditor’s responsibilities in agreeing
the terms of the audit engagement with management and, where appropriate, those charged with
governance. Accordingly:
(1) The auditor shall agree the terms of the audit engagement with management or TCWG, as
appropriate.
(2) The agreed terms of the audit engagement shall be recorded in an audit engagement letter or
other suitable form of written agreement and shall include:
(a) The objective and scope of the audit of the F.S.;
(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of the applicable FRF for the preparation of the F.S.; and
(e) Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected
form and content.
(3) If law or regulation prescribes in sufficient detail the terms of the audit engagement referred
above, the auditor need not record them in a written agreement, except for the fact that such law
or regulation applies and that management acknowledges and understands its responsibilities.
Q.12 T & Co., a firm of Chartered Accountants has not revised the terms of engagements and obtained
confirmation from the clients for last 5 years despite changes in business and professional
environment. Please elucidate the circumstances that may warrant the revision in terms of
engagement. [May 13, Nov. 20 – Old Syllabus (4 Marks)]
Ans.: Situations in which new engagement letter is required in case of recurring audit:
• SA 210 “Agreeing the Terms of Engagement” deals with the auditor’s responsibilities in agreeing
the terms of the audit engagement with management. As per SA 210, in case of recurring audits, the
auditor shall assess whether circumstances require revision in terms of the audit engagement and
whether there is a need to remind the entity of the existing terms of the audit engagement.
• The auditor may decide not to send a new audit engagement letter or other written agreement each
period. However, the following factors may make it appropriate to revise the terms of the audit
engagement or to remind the entity of existing terms:
1. Any indication that the entity misunderstands the objective and scope of the audit.
2. Any revised or special terms of the audit engagement.
3. A recent change of senior management.
4. A significant change in ownership.
5. A significant change in nature or size of the entity’s business.
6. A change in legal or regulatory requirements.
7. A change in the financial reporting framework adopted in the preparation of the F.S.
8. A change in other reporting requirements.
Q.13 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.

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Ans.: Acceptance of changes in Terms of Engagement:
• SA 210 “Agreeing the Terms of Engagement” deals with the auditor’s responsibilities in agreeing
the terms of the audit engagement with management. As per SA 210, if prior to completing the
audit engagement, the auditor is requested to change the audit engagement to an engagement that
conveys a lower level of assurance, the auditor shall determine whether there is reasonable
justification for doing so.
• The auditor shall not agree to a change in the terms of the audit engagement where there is no
reasonable justification for doing so.
• If the terms of the audit engagement are changed, the auditor and management shall agree on and
record the new terms of the engagement in an engagement letter or other suitable form of written
agreement.
• If the auditor is unable to agree to a change of the terms of the audit engagement and is not
permitted by management to continue the original audit engagement, the auditor shall:
1. Withdraw from the audit engagement where possible under applicable law or regulation; and
2. Determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as TCWG, owners or regulators.
Q.14 MEA Limited is a listed company having its operation across India. MEA Limited appointed Mr. X, Mr.
Y and Mr. Z, as its joint auditors for the year 2022-23. After making sure that all of them are
qualified to be appointed as statutory auditor, MEA Limited issued engagement letter to all of them.
But Mr. X was not clear on some points, so he requested MEA Limited to slightly change the terms of
his engagement. This change will not impact the ultimate opinion on the financial statement. The
engagement letter contains the details on objective and scope of audit, responsibilities of auditor
and identification of framework applicable. It also contains the reference to expected form and
content of report from all three joint auditors. In your opinion what was the discrepancy in the
Audit engagement letter issued by MEA Limited? [RTP-Nov. 20, MTP-Nov. 21, Sep. 22]
Ans.: Agreement on Audit Engagement Terms:
• As per SA 210, “Agreeing the Terms of Audit Engagements”, the auditor shall agree the terms of
the audit engagement with management or TCWG, as appropriate.
• The agreed terms of the audit engagement shall be recorded in an audit engagement letter or
other suitable form of written agreement and shall include:
(a) The objective and scope of the audit of the F.S.;
(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of the applicable FRF for the preparation of the F.S.; and
(e) Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected
form and content.
• In the present case, MEA Limited appointed Mr. X, Mr. Y and Mr. Z, as its joint auditors for the year
2021-22 and issued engagement letter to all of them. The engagement letter contains the details
on objective and scope of audit, responsibilities of auditor, identification of framework applicable
and reference to expected form and content of report from all three joint auditors.
Conclusion: Engagement letter issued by MEA Ltd. does not specify the responsibilities of
management, whereas as per SA 210, it should also specify responsibilities of management.

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1.4 - SA 220 “Quality Control for an Audit of Financial Statements”
Q.15 During the audit of FMP Ltd, a listed company, Engagement Partner (EP) completed his reviews and
also ensured compliance with independence requirements that apply to the audit engagement. The
engagement files were also reviewed by the Engagement Quality Control Reviewer (EQCR) except
the independence assessment documentation. Engagement Partner was of the view that matters
related to independence assessment are the responsibility of the Engagement Partner and not
Engagement Quality Control Reviewer. Engagement Quality Control Reviewer objected to this and
refused to sign off the documentation. Please advise as per SA 220.
[RTP-May 19, May 22; MTP-Oct. 19]
Ans.: Responsibilities of EP and EQCR in relation to assessment of independence:
• As per SA 220 “Quality control for an Audit of Financial Statements” the engagement partner shall
form a conclusion on compliance with independence requirements that apply to the audit
engagement. In doing so, the engagement partner shall:
(a) Obtain relevant information from the firm and, where applicable, network firms, to identify
and evaluate circumstances and relationships that create threats to independence;
(b) Evaluate information on identified breaches, if any, of the firm’s independence policies and
procedures to determine whether they create a threat to independence for the audit
engagement; and
(c) Take appropriate action to eliminate such threats or reduce them to an acceptable level by
applying safeguards, or, if considered appropriate, to withdraw from the audit engagement,
where withdrawal is permitted by law or regulation. The engagement partner shall promptly
report to the firm any inability to resolve the matter for appropriate action.
• For audits of financial statements of listed entities, the engagement quality control reviewer, on
performing an engagement quality control review, shall also consider among other things, the
engagement team’s evaluation of the firm’s independence in relation to the audit engagement.
Conclusion: View of EP that matters related to independence assessment are the responsibility of the
EP and not EQCR is not correct. The independence assessment documentation should also be given to
EQCR for his review.
Q.16 M/s Sureshchandra & Co. has been appointed as an auditor of SC Ltd. for the financial year 2021-22.
CA Suresh, one of the partners of M/s Sureshchandra & Co., completed entire routine audit work by
29th May, 2022. Unfortunately, on the very next morning, while roving towards office of SC Ltd. to
sign final audit report, he met with a road accident and died. CA Chandra, another partner of M/s
Sureshchandra & Co., therefore, signed the accounts of SC Ltd., without reviewing the work
performed by CA Suresh.
State with reasons whether CA Chandra is right in expressing an opinion on financial statements the
audit of which is performed by another auditor. [MTP-April 18]
Ans.: Review of Work performed by others:
• As per SA 220, “Quality Control for an Audit of Financial Statements”, the engagement partner
shall take responsibility for reviews being performed in accordance with the firm’s review policies
and procedures. Review procedures consists of the considerations, whether:
1. the work has been performed in accordance with professional standards and regulatory and
legal requirements;
2. significant matters have been raised for further consideration;
3. appropriate consultations have taken place and the resulting conclusions have been
documented and implemented;

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4. the work performed supports the conclusions reached and is appropriately documented;
5. the evidence obtained is sufficient and appropriate to support the auditor’s report; and
6. the objectives of the engagement procedures have been achieved.
• When the auditor delegates work to assistants or uses work performed by other auditors/experts
he will continue to be responsible for forming and expressing his opinion on the financial
statements. However, he will be entitled to rely on the work performed by others, provided he
exercises adequate skill and care and is not aware of any reason to believe that he should not have
so relied.
• The auditor should carefully direct, supervise and review work delegated to assistants. He should
obtain reasonable assurance that work performed by other auditors/experts and assistants is
adequate for his purpose.
• In the instant case, Mr. Suresh, a partner of the firm had completed routine audit work and died
before signing audit report. Mr. Chandra another partner of the firm has signed the accounts of SC
Ltd, relying on the work performed by Mr. Suresh.
Conclusion: CA Chandra is allowed to sign the audit report, though, will be responsible for expressing
the opinion. He may rely on the work performed by CA Suresh provided he further exercises adequate
skill and due care and review the work performed by him.
Q.17 OP & Associates are the statutory auditors of BB Ltd. BB Ltd is a listed company and started its
operations 5 years back. The field work during the audit of the financial statements of the company
for the year ended on March 31, 2022 got completed on July 1, 2022. The auditor’s report was dated
July 12, 2022. During the documentation review of the engagement, it was observed that the
engagement quality control review was completed on July 15, 2022. Engagement partner had
completed his reviews in entirety by July 10, 2022. Comment. [MTP-Oct. 18, March 19]
Ans.: Review by Engagement Partner:
• As per SA 220, “Quality Control for an Audit of Financial Statements”, the engagement partner
shall take responsibility for reviews being performed in accordance with the firm’s review policies
and procedures. For audits of financial statements of listed entities, the engagement partner shall:
(a) Determine that an engagement quality control reviewer has been appointed;
(b) Discuss significant matters arising during the audit engagement, including those identified
during the engagement quality control review, with the engagement quality control reviewer;
and
(c) Not date the auditor’s report until the completion of the engagement quality control review.
• Further, SA 700, “Forming an Opinion and Reporting on Financial Statements”, requires the
auditor’s report to be dated not earlier than the date on which the auditor has obtained sufficient
appropriate evidence on which to base the auditor’s opinion on the financial statements.
• In the present case, OP & Associates are the statutory auditors of a listed company which started
its operations 5 years back. The field work during the audit of the financial statements of the
company for the year ended on March 31, 2022 got completed on July 1, 2022. The auditor’s
report was dated July 12, 2022. During the documentation review of the engagement, it was
observed that the engagement quality control review was completed on July 15, 2022.
Conclusion: Signing of auditor’s report i.e. on July 12, 2022 which is before the completion of review
engagement quality control review i.e. July 15, 2022, is not in order.
Q.18 Ace Limited (manufacturer of textile goods) got an order of manufacturing of PPE kits in December
2022. But there was shortage of machinery and manpower to accomplish the ordered requirement
of PPE kits. Ace Limited approached another manufacturing unit Jack Limited for purchase of the

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unit. Jack Limited was interested in the sale of unit, so the deal went through and Ace Limited
acquired ninety five percent shares of Jack Limited. The new management of Jack Limited proposed
and appointed NKB Associates, Chartered Accountants, (already auditors of Ace Limited) as new
auditors of Jack Limited. NKB Associates accepted the assignment without considering information
whether the conclusions reached regarding the acceptance and continuance of client relationships
and audit engagements are appropriate. Comment with respect to appropriate Standard of Auditing
what type of information assists the engagement partner in determining whether the conclusions
reached regarding the acceptance and continuance of client relationships and audit engagements
are appropriate or not? [Dec. 21 – Old Syllabus (5 Marks), MTP-Sep. 22]
Ans.: Information assisting auditor in accepting and continuing of relationship with the client:
• SA 220, “Quality Control for an Audit of F.S.” and SQC 1, “Quality Control for Firms that Perform
Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services
Engagements”, requires the firm to 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.
• Information such as the following assists the engagement partner in determining whether the
conclusions reached regarding the acceptance and continuance of client relationships and audit
engagements are appropriate:
(i) The integrity of the principal owners, key management and TCWG of the entity;
(ii) Whether the engagement team is competent to perform the audit engagement and has the
necessary capabilities, including time and resources.
(iii) Whether the firm and the engagement team can comply with relevant ethical requirements;
and
(iv) Significant matters that have arisen during the current or previous audit engagement, and
their implications for continuing the relationship.

1.5 - SA 230 “AUDIT DOCUMENTATION”

Q.19 Mr. A, a practicing Chartered Accountant, has been appointed as an auditor of True Pvt. Ltd. What
factors would influence the amount of working papers required to be maintained for the purpose of
his audit? [Nov. 15 (5 Marks), RTP-May 20]
Ans.: Factors affecting Form, Content and Extent of Audit Documentation:
SA 230 “Audit Documentation” deals with the auditor’s responsibility to prepare audit documentation
for an audit of financial statements. Accordingly, the various factors that may affect form, content and
extent of audit documentation are following:
(i) The size and complexity of the entity.
(ii) The nature of the audit procedures to be performed.
(iii) The identified risks of material misstatement.
(iv) The significance of the audit evidence obtained.
(v) The nature and extent of exceptions identified.
(vi) 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.
(vii) The audit methodology and tools used.
(viii) Timely preparation of Audit Documentation.

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Q.20 B is the Principal Auditor of ABC Co. Ltd., with 8 branches audited by 8 Branch Auditors. B wanted to
ensure that the works of Branch Auditors were adequate for the purpose of his audit. Hence, he
insisted on Branch Auditors to get familiar with a checklist he prepared for branches and, besides,
required them to share the working papers compiled by them for his review and return. Is principal
auditor within his right in asking for such sharing of working papers?
[May 18 – New Syllabus (5 Marks)]
Ans.: Principal Auditor’s right to review the working papers of branch auditors:
• SA 600 “Using the Work of Another Auditor” guides principal auditor regarding the procedures to
be performed when he is using the work of another auditor. As per SA 600, when principal auditor
plans to use the work of branch auditor, he should consider the professional competence of the
other auditor in the context of specific assignment if the other auditor is not a member of the ICAI.
He should perform procedures to obtain sufficient appropriate audit evidence, that the work of the
other auditor is adequate for the principal auditor's purposes, in the context of the specific
assignment.
• As per SA 230 “Audit Documentation” and SQC 1 “Quality Control for Firms that Perform Audits
and Reviews of Historical Financial Information, and Other Assurance and Related Services
Engagements”, unless otherwise specified by law or regulation, audit documentation is the
property of the auditor. The Principal auditors of an enterprise do not have right of access to the
audit working papers of the branch auditors.
• In the present case, Mr. B requires the branch auditors to share their working papers with him for
the purpose of review.
Conclusion: Considering the requirements of SA 600, SA 230 and SQC 1, principal auditor is not right
in asking for sharing of working papers.
Q.21 You are the team leader of 10 members for an audit of a Multinational Company. All the team
members are concerned about audit documentation in order to provide evidence that the audit
complies with SAs. Hence, the team members wish to document every matter concerned. In your
opinion it is neither necessary nor practicable for the auditor to document every matter considered
or professional judgment made in an audit. Further you feel that it is unnecessary for the auditor to
document separately compliance with matters for which compliance is demonstrated by documents
included within the audit file. Illustrate by giving examples with reference to relevant Standard on
Auditing. [May 22 (5 Marks)]
Ans.: Documentation of Compliance with SAs:
SA 230, “Audit Documentation”, requires that auditor should document evidence that the audit
complies with SAs. However, it is neither necessary nor practicable for the auditor to document every
matter considered, or professional judgment made, in an audit. For example:
• The existence of an adequately documented audit plan demonstrates that the auditor has planned
the audit.
• The existence of a signed engagement letter in the audit file demonstrates that the auditor has
agreed the terms of the audit engagement with management, or where appropriate, those charged
with governance.
• An auditor’s report containing an appropriately qualified opinion demonstrates that the auditor
has complied with the requirement to express a qualified opinion under the circumstances
specified in the SAs.
• In relation to requirements that apply generally throughout the audit, there may be a number of
ways in which compliance with them may be demonstrated within the audit file:

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 For example, there may be no single way in which the auditor’s professional skepticism is
documented. But the audit documentation may nevertheless provide evidence of the auditor’s
exercise of professional skepticism in accordance with SAs. Such evidence may include specific
procedures performed to corroborate management’s responses to the auditor’s inquiries.
 Similarly, that the engagement partner has taken responsibility for the direction, supervision
and performance of the audit in compliance with the SAs may be evidenced in a number of
ways within the audit documentation. This may include documentation of the engagement
partner’s timely involvement in aspects of the audit, such as participation in the team
discussion required by SA 315.

1.6 - SA 240 “The Auditor’s Responsibilities relating to Fraud in an Audit of F.S.”

Q.22 While conducting statutory Audit of ABC Ltd., you come across IOUs amounting to ₹ 2 Crores as
against a cash balance shown in books of ₹ 2.10 Crores. You also observe that despite similar high
balances throughout the year, small amounts of ₹ 50,000 are withdrawn from the bank to meet day-
to-day expenses.
Ans.: Auditor’s duties in case of suspected fraud:
• SA 240 “Auditor’s Responsibilities relating to fraud in an audit of financial statements” requires
that the auditor is responsible for obtaining reasonable assurance that the F.S. taken as a whole
are free from material misstatement, whether caused by fraud or error.
• When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of
professional skepticism throughout the audit.
• The auditor should recognize the possibility that a material misstatement due to fraud could exist.
• When the auditor comes across such circumstances indicating the possible misstatements
resulting from entity’s procedure, the auditor shall evaluate whether such a misstatement is
indicative of fraud.
• In the present case, the circumstances indicate the possibility of fraud and accordingly, the auditor
must investigate further to consider effect on financial statements.
• The Guidance Note on Audit of Cash and Bank balances also mentions that if the entity is
maintaining an unduly large balance of cash, he should carry out surprise verification of cash more
frequently to ascertain whether it agrees. If cash in hand is not in agreement with the book
balance, he should seek explanations and if the same are not satisfactory, he should state this fact
appropriately in his Audit Report.
Q.23 Cloud Ltd. appointed an auditor for the financial year 2022-23. While going through the audit
procedure, the auditor observed that the management has entered into certain transactions which
are irregular in nature and the management is personally benefited from such transactions. Explain
briefly the duties and responsibilities of an auditor in case of material misstatement resulting from
Management Fraud.
Ans.: Auditor’s duties in case of material misstatement resulting from management fraud:
(a) SA 240 “Auditor’s Responsibilities relating to fraud in an audit of financial statements” requires
that the auditor is responsible for obtaining reasonable assurance that the F.S. taken as a whole
are free from material misstatement, whether caused by fraud or error.
(b) Management is in a unique position to perpetrate fraud because of management’s ability to
manipulate accounting records and prepare fraudulent financial statements by overriding
controls.

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(c) When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of
professional skepticism throughout the audit.
(d) The auditor should recognize the possibility that a material misstatement due to fraud could
exist, notwithstanding his past experience of the honesty and integrity of the entity’s
management and those charged with governance.
(e) If conditions cause the auditor to believe that a document may not be authentic or that terms in a
document have been modified, the auditor shall investigate further.
(f) Where responses to inquiries of management or TCWG are inconsistent, the auditor shall
investigate the inconsistencies.
(g) Sec. 143(12) of Companies Act, 2013 requires that 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 may be prescribed. For this purpose, Rule 13 of CAAR,
2014 prescribes the amount of ₹ 1 Cr. or more.
(h) Para 3(xi) of CARO, 2020 also requires the company auditor to report whether any fraud by the
company or any fraud on the company by its officers or employees has been noticed or reported
during the year; If yes, the nature and the amount involved is to be indicated.
Q.24 M/s Honest Ltd. has entered into a transaction on 5th March, 2022, near year-end, whereby it has
agreed to pay ₹ 5 lakhs per month to Mr. Y as annual retainership fee for “engineering consultation”.
No amount was actually paid, but ₹ 60 lakhs are provided in books of account as on March 31, 2022.
Your inquiry elicits a response that need-based consultation was obtained round the year, but there
is no documentary or other evidence of receipt of the service. As the auditor of M/s Honest Limited,
what would be your approach? [Nov. 13 (5 Marks), RTP-Nov. 18]
Ans.: Auditor’s duties in case of suspected fraud:
• As per SA 240 on “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements”, fraud can be committed by management by various means including therein
recording of fictitious journal entries, particularly close to the end of an accounting period, to
manipulate operating results or achieve other objectives.
• In the given case, Honest Ltd. has entered into an agreement with Mr. Y at year-end, for
engineering consultation. It also provides ₹ 60 lakhs in the books of account, however, no
documentary or other evidence of receipt of such service is available. It appears that company has
passed fictitious journal entries, near year-end, to manipulate the operating results.
• SA 240 further provides that if, as a result of a misstatement resulting from fraud or suspected
fraud, the auditor encounters exceptional circumstances that bring into question the auditor’s
ability to continue performing the audit, the auditor shall:
(1) Determine the professional and legal responsibilities applicable in the circumstances,
including whether there is a requirement for the auditor to report to the person or persons
who made the audit appointment or, in some cases, to regulatory authorities;
(2) Consider whether it is appropriate to withdraw from the engagement, where withdrawal
from the engagement is legally permitted.
• Further, Sec. 143(12) of the Companies Act, 2013 read with Rule 13 of Companies (Audit &
Auditor’s) Rules, 2014 requires that if an auditor of a company, in the course of the performance
of his duties as auditor, has 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 immediately

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report the matter to the audit committee within 2 days of his knowledge (as amount involved is
less than ₹ 1 Cr.) mentioning the following:
(i) Nature of Fraud with description;
(ii) Approximate amount involved; and
(iii) Parties involved etc.
• Para 3(xi) of CARO, 2020 also requires the company auditor to report whether any fraud by the
company or any fraud on the company by its officers or employees has been noticed or reported
during the year; If yes, the nature and the amount involved is to be indicated.
Q.25 Comment on the following: On 15th March, 2022, the directors of Phony Ltd. instructed their
accountant to enter purchases amounting ₹ 1.02 Crores from a company incorporated dated 11th
March, 2022. However, no amount was actually paid and ₹ 1.02 Crores was provided in the books of
account as purchases for the year ending on 31st March, 2022.
On inspection, no documentary or other evidence of such purchases was found. As the auditor of
Phony Ltd., what would be your approach regarding reporting of such bogus purchases?
[MTP-May 20]
Ans.: Auditor’s duties in case of suspected fraud:
• As per SA 240 on “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements”, fraud can be committed by management by various means including therein
recording of fictitious journal entries, particularly close to the end of an accounting period, to
manipulate operating results or achieve other objectives.
• In the given case, directors of Phony Ltd. instructed their accountant to enter purchases
amounting ₹ 1.02 Crores from a company incorporated dated 11th March, 2022. However, no
amount was actually paid and ₹ 1.02 Crores was provided in the books of account as purchases for
the year ending on 31st March, 2022. On inspection, no documentary or other evidence of such
purchases was found. It appears that company has passed fictitious journal entries, near year-end,
to manipulate the operating results.
• SA 240 further provides that if, as a result of a misstatement resulting from fraud or suspected
fraud, the auditor encounters exceptional circumstances that bring into question the auditor’s
ability to continue performing the audit, the auditor shall:
(1) Determine the professional and legal responsibilities applicable in the circumstances,
including whether there is a requirement for the auditor to report to the person or persons
who made the audit appointment or, in some cases, to regulatory authorities;
(2) Consider whether it is appropriate to withdraw from the engagement, where withdrawal
from the engagement is legally permitted.
• Further, Sec. 143(12) of the Companies Act, 2013 read with Rule 13 of Companies (Audit &
Auditor’s) Rules, 2014 requires that 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 or
is expected to involve individually an amount of ₹ 1 Cr. or above, is being or has been committed
against the company by its officers or employees, the auditor shall report the matter to the C.G.
• Para 3(xi) of CARO, 2020 also requires the company auditor to report whether any fraud by the
company or any fraud on the company by its officers or employees has been noticed or reported
during the year; If yes, the nature and the amount involved is to be indicated.
Q.26 In the course of audit of Quick Ltd, you suspect that the management has made misstatements in the
financial statements intentionally to deceive the users and to succumb to pressures to meet market
expectations.

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Elucidate how the fraudulent financial reporting may be accomplished and also discuss the
techniques of committing fraud by management overriding controls.
[Nov. 20 – New Syllabus (5 Marks), MTP-Oct. 21]
Ans.: Ways to accomplish Fraudulent Financial Reporting:
SA 240, “The Auditor’s responsibilities relating to Fraud in an Audit of Financial Statements”,
discusses how fraudulent financial reporting may be accomplished and also discusses techniques of
committing fraud by management overriding controls. Accordingly, fraudulent financial reporting
may be accomplished by the following:
(i) Manipulation, falsification (including forgery), or alteration of accounting records or supporting
documentation from which the financial statements are prepared.
(ii) Misrepresentation in or intentional omission from, the financial statements of events,
transactions or other significant information.
(iii) Intentional misapplication of accounting principles relating to amounts, classification, manner of
presentation, or disclosure.
Fraudulent financial reporting often involves management override of controls that otherwise may
appear to be operating effectively. Fraud can be committed by management overriding controls using
such techniques as:
(i) Recording fictitious journal entries, particularly close to the end of an accounting period, to
manipulate operating results or achieve other objectives.
(ii) Inappropriately adjusting assumptions and changing judgments used to estimate account
balances.
(iii) Omitting, advancing or delaying recognition in the financial statements of events and
transactions that have occurred during the reporting period.
(iv) Concealing, or not disclosing, facts that could affect the amounts recorded in the financial
statements.
(v) Engaging in complex transactions that are structured to misrepresent the financial position or
financial performance of the entity.
(vi) Altering records and terms related to significant and unusual transactions.
Q.27 M/s Kumar & Co., Chartered Accountants were appointed as statutory auditors of PC limited for the
financial year 2022-23. During the course of audit, one of the partners CA Kumar observed that
there is misappropriation of assets in the form of theft of entity's inventory and is perpetrated by
employees in relatively small and immaterial amounts. CA Kumar is concerned with the existence of
certain circumstances for increasing the susceptibility of assets to misappropriation.
Guide CA Kumar with respect to Risk factors related to misstatements arising from
misappropriation of assets with reference to relevant Standard on Auditing.
[Dec. 21 – New Syllabus (5 Marks); MTP-March 23]
Ans.: Risk Factors relating to misstatements arising from misappropriation of Assets:
As per SA 240, “The Auditor’s Responsibilities Relating to Fraud in an audit of Financial Statements”,
misappropriation of assets involves the theft of entity’s assets and is often perpetrated by employees
in relatively small and immaterial amounts. However, it can also involve management who are
usually more able to disguise or conceal misappropriations in ways that are difficult to detect.
Misappropriation of assets can be accomplished in a variety of ways including stealing physical assets
or intellectual property (for example, stealing inventory for personal use or for sale, stealing scrap for
resale, colluding with a competitor by disclosing technological data in return for payment).

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Risk factors that relate to misstatements arising from misappropriation of assets are also classified
according to the three conditions generally present when fraud exists: incentives/pressures,
opportunities, and attitudes/rationalization.
(a) Incentives/Pressures
Personal financial obligations may create pressure on management or employees with access to
cash or other assets susceptible to theft to misappropriate those assets.
Adverse relationships between the entity and employees with access to cash or other assets
susceptible to theft may motivate those employees to misappropriate those assets. For example,
adverse relationships may be created by the following:
(i) Known or anticipated future employee layoffs.
(ii) Recent or anticipated changes to employee compensation or benefit plans.
(iii) Promotions, compensation, or other rewards inconsistent with expectations.
(b) Opportunities:
Certain characteristics or circumstances may increase the susceptibility of assets to
misappropriation. For example, opportunities to misappropriate assets increase when there are
the following:
(i) Large amounts of cash on hand or processed.
(ii) Inventory items that are small in size, of high value, or in high demand.
(iii) Easily convertible assets, such as bearer bonds, diamonds, or computer chips.
(iv) Fixed assets which are small in size, marketable, or lacking observable identification of
ownership.
Inadequate internal control over assets may increase the susceptibility of misappropriation of
those assets. For example, misappropriation of assets may occur because there is the following:
(1) Inadequate segregation of duties or independent checks.
(2) Inadequate oversight of senior management expenditures, such as travel and other
reimbursements.
(3) Inadequate management oversight of employees responsible for assets, for example,
inadequate supervision or monitoring of remote locations.
(4) Inadequate job applicant screening of employees with access to assets.
(5) Inadequate record keeping with respect to assets.
(6) Inadequate system of authorization and approval of transactions (for example, in
purchasing).
(7) Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
(8) Lack of complete and timely reconciliations of assets.
(9) Lack of timely and appropriate documentation of transactions, for example, credits for
merchandise returns.
(10) Lack of mandatory vacations for employees performing key control functions.
(11) Inadequate management understanding of information technology, which enables
information technology employees to perpetrate a misappropriation.
(12) Inadequate access controls over automated records, including controls over and review of
computer systems event logs.
(c) Attitudes/Rationalizations:
(i) Disregard for the need for monitoring or reducing risks related to misappropriations of
assets.
(ii) Disregard for internal control over misappropriation of assets by overriding existing
controls or by failing to take appropriate remedial action on known deficiencies in internal
control.

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(iii) Behaviour indicating displeasure or dissatisfaction with the entity or its treatment of the
employee.
(iv) Changes in behaviour or lifestyle that may indicate assets have been misappropriated.
(v) Tolerance of petty theft.
Q.28 Arihant Limited was engaged in the business of owning and managing hotels and resorts, selling
tourism packages and performing airline bookings for corporate and individuals. It appointed
Upadhyay & Co. as its statutory auditor for the financial year 2022-23. While planning the audit, the
audit team decided that the risk of improper revenue recognition from hotel business should not be
treated as a fraud risk. This conclusion was based on the assessment of earlier years, wherein no
fraud was identified in revenue recorded from such business. While testing the internal financial
controls over the process of revenue recognition, it was identified that the controls are not properly
designed to mitigate the risk of fraud and risk of improper revenue recognition. As a result, the
audit team decided to perform additional substantive testing. However, the audit team still were to
the conclusion that there is no risk of fraud in revenue recognition. During the course of substantive
testing, it was identified that the management did not account for revenue received from corporate
hotel bookings amounting to ₹ 35 crore. These amounts were partially received in the company’s
bank accounts and partially received in the CFO’s personal account. The amounts received in the
bank account of the company were disclosed as advances received against the future bookings.
In the light of above scenario, kindly guide the statutory auditors with respect to their responsibility
relating to fraud in an audit of a financial statement. [RTP-Nov. 22]
Ans.: Auditor’s responsibility relating to fraud in an audit of F.S.:
• As per SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements” and SA 315, “Identifying and Assessing the Risks of Material Misstatement Through
Understanding the Entity and Its Environment”, auditor shall identify and assess the risks of
material misstatement (RMM) due to fraud at the financial statement level, and at the assertion
level for classes of transactions, account balances and disclosures.
• When identifying and assessing the RMM due to fraud, the auditor shall, based on a presumption
that there are risks of fraud in revenue recognition, evaluate which types of revenue, revenue
transactions or assertions give rise to such risks.
• In accordance with SA 240 and SA 330, auditor shall determine overall responses to address the
assessed RMM due to fraud at the F.S. level and assertion level. The presumption that there are
risks of fraud in revenue recognition may be rebutted. For example, the auditor may conclude that
there is no RMM due to fraud relating to revenue recognition in the case where there is a single
type of simple revenue transaction, for example, leasehold revenue from a single unit rental
property. However, when there is a complex revenue structure or when there is lack of controls on
revenue recognition, then there is a high probability of fraud risk in revenue recognition.
• Obtaining an understanding of the entity and its environment, including the entity’s internal
control is a continuous, dynamic process of gathering, updating and analysing information
throughout the audit. In the current scenario, the company was earning revenue from multiple
streams. Also, it was identified that the controls are not properly designed to mitigate the risk of
fraud and risk of improper revenue recognition. During the year it was identified that the
management did not account for revenue from corporate hotel bookings amounting to ₹ 35 crore.
These amounts were partially received in the company’s bank accounts and partially received in
the CFO’s personal account. The amounts received in the bank account of the company were
disclosed as advances received against future bookings.

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• Therefore, the auditor while performing the risk assessment procedures should consider the
complexity and nature of the revenue for determining the fraud risks in revenue recognition. Also,
there were no adequate controls addressing the risk of improper revenue recognition or fraud
risk, the audit team rebutted the fraud risk. Moreover, the audit team should have recognised
fraud risk by identifying the deficiencies of internal control over the revenue recognition process
and should have treated the risk of improper revenue recognition as a significant risk.
• Also, as per Sec. 143(12) of the Companies Act, 2013, the auditor is required to report all the
frauds identified during the course of the audit involving amounts above ₹ 1 crore within the
prescribed time frame to the C.G.

1.7 - SA 250 “Considerations of Laws and Regulations in an Audit of Financial Statements”

Q.29 As a statutory auditor of a company, comment on the following: While verifying the employee
records in a company, it was found that a major portion of the labour employed was child labour. On
questioning the management, the auditor was told that it was outside his scope of the financial audit
to look into the compliance with other laws. [RTP-May 18, MTP-May 20, April 21, March 23]
Ans.: Auditor’s Responsibility for consideration of other Laws:
• SA 250 “Consideration of laws and regulations in an Audit of Financial statements” requires the
auditor to obtain sufficient appropriate audit evidence regarding the compliance with the
provisions of those laws and regulations generally recognized to have a direct impact on the
determination of material amounts and disclosures in the financial statements including tax and
labour laws.
• For the other laws, the auditor’s responsibility is limited to undertake specified audit procedures
to help identify non-compliance with those laws and regulations that may have a material effect
on the financial statements.
• Non–compliance with other laws and regulations may result in fine, litigation or other
consequences for the entity, the costs of which may need to be provided for.
• In the instant case, major portion of the labour employed was child labour.
Conclusion: Auditor should ensure the disclosure of above fact and provision of the cost of fines,
litigation or other consequences. In case auditor concludes that non-compliance may have a material
effect on financial statements and has not been adequately reflected in the financial statements,
auditor shall express a qualified or adverse opinion as per requirements of SA 705.
Q.30 PQ Limited, a listed entity, is in the business of manufacturing of specialty chemicals. The company
has appointed CA Jazz as CFO of the company. CA Jazz is concerned about compliance with the
provisions of laws and regulations that determine the reported amounts and disclosure in financial
statements of PQ Limited. Accordingly, CA Jazz wants to implement such policies and procedures
that can assist him in the prevention and detection of non-compliance with laws and regulations.
Help CA Jazz by citing examples of such policies and procedures. [Nov. 20 – New Syllabus (5 Marks)]
Ans.: Management Responsibility for compliance with laws and regulation:
SA 250 “Consideration of Laws and Regulations in an audit of Financial Statements” states that it is
the responsibility of management, with the oversight of TCWG, to ensure that the entity’s operations
are conducted in accordance with the provisions of laws and regulations.
For this purpose, management may apply the following procedures:
1. Monitoring legal requirements and ensuring that operating procedures are designed to meet these
requirements.

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2. Instituting and operating appropriate systems of internal control.
3. Developing, publicising and following a code of conduct.
4. Ensuring employees are properly trained and understand the code of conduct.
5. Monitoring compliance with the code of conduct and acting appropriately to discipline employees
who fail to comply with it.
6. Engaging legal advisors to assist in monitoring legal requirements.
7. Maintaining a register of significant laws and regulations with which the entity has to comply
within its particular industry and a record of complaints.
Q.31 As an Auditor of TRP Ltd., you are suspicious that there might be non-compliance with laws and
regulations to which the company is subject to. Indicate the possible areas or aspects where you
may have to look out for forming an opinion as to whether your suspicion has some based to further
inquire. [May 18 – New Syllabus (4 Marks), MTP-Oct. 21]
Or
During the course of Audit of POP Ltd., you as an auditor while performing the audit procedures
become aware of the existence of certain instances which seem to be an indication of non-
compliance with Laws and Regulations. List out any five such instances identified by you as an
auditor, suggestive of non-compliance with Laws and Regulations. [Jan. 21 – Old Syllabus (5 Marks)]
Or
You are appointed as an auditor of BHK Ltd., a company engaged in export of agricultural
equipment. During the course of audit, your audit team informed you regarding non-deduction of
TDS on huge payments made to legal counsel of BHK Ltd. You want to alert your team on the
possibility of non-compliance with Laws and Regulations by BHK Ltd. Help your audit team in
identifying any other indications of non-compliance with Laws and Regulations particularly related
to payments made by the company. [Dec. 21 – Old Syllabus (5 Marks); MTP-April 23]
Ans.: Indicators to be considered for verifying compliance with laws and regulations:
SA 250 “Consideration of Laws and Regulations in an audit of Financial Statements” deals with the
auditor’s responsibilities to consider laws and regulations when performing an audit.
To verify the compliance of laws and regulations, auditor is required to consider the following
indicators:
1. Investigation by regulatory organisations, Government departments or payment of fines,
additional taxes or penalties.
2. Payments for unspecified services or loans to consultants related parties or employees.
3. Sales commission or agent’s fees that appear excessive in relation to those ordinarily paid by the
entity or in its industry or to the services actually received.
4. Purchases at prices significantly above or below market price.
5. Unusual payments in cash.
6. Unusual payments towards legal and retainership fees.
7. Unusual transactions with companies registered in tax havens.
8. Payments for goods or services made other than to the country from which the goods or services
originated.
9. Payments without proper exchange control documentation.
10. Existence of an information system which fails to provide an adequate audit trail.
11. Unauthorised transactions or improperly recorded transactions.
12. Adverse media comment.

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Q.32 CA Abhinanadan is an auditor of KM Private Limited. During the course of audit, CA Abhinanadan
becomes aware of information concerning an instance of non-compliance or suspected non-
compliance with laws and regulations. Being a senior partner of CA. Abhinanadan, guide him
regarding audit procedures to be followed when non-compliance is identified or suspected.
[RTP-May 22]
Ans.: Audit Procedures When Non-Compliance is Identified or Suspected:
• As per SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”, if the
auditor becomes aware of information concerning an instance of non-compliance or suspected non-
compliance with laws and regulations, the auditor shall obtain:
(i) An understanding of the nature of the act and the circumstances in which it has occurred; and
(ii) Further information to evaluate the possible effect on the financial statements.
• If the auditor suspects there may be non-compliance, the auditor shall discuss the matter with
management and, where appropriate, those charged with governance. If management or, as
appropriate, those charged with governance do not provide sufficient information that supports
that the entity is in compliance with laws and regulations and, in the auditor’s judgment, the effect
of the suspected non-compliance may be material to the financial statements, the auditor shall
consider the need to obtain legal advice.
• If sufficient information about suspected non-compliance cannot be obtained, the auditor shall
evaluate the effect of the lack of sufficient appropriate audit evidence on the auditor’s opinion.
• The auditor shall evaluate the implications of non-compliance in relation to other aspects of the
audit, including the auditor’s risk assessment and the reliability of written representations, and take
appropriate action.

1.8 - SA 260 “Communication with Those Charged with Governance”

Q.33 Whilst the Audit team has identified few matters, they need your advice to conclude on the same.
Engagement Partner have asked them to review the Board minutes and other secretarial/
regulatory records based on which the following additional matters were brought to the attention of
the Partner:
(i) The long-term borrowings from the parent company has no written terms and neither the
interest nor the principal has been repaid so far.
(ii) Certain computers were received from the parent company free of cost, the value of which is
₹ 0.23 lakhs & no accounting or disclosure of the same has been made in the notes to accounts.
(iii) An amount of ₹ 3.25 Lakhs per month is paid to M/s WE CARE Associates, a partnership firm,
which is a 'related party' in accordance with the provisions of the Companies Act, 2013 for the
marketing services rendered by them. Based on an independent assessment, the consideration
paid is higher than the arm's length pricing by ₹ 0.25 lakh per month. Whilst the transaction
was accounted in the financial statements based on the amounts' paid, no separate disclosure
of this related party transaction has been made in the notes to accounts forming part of the
financial statements highlighting the same as a 'related party' transaction.
Audit Manager has reported that she had asked certain information relating to another ‘related
party’ transaction (amounting to approx. ₹ 47 lakhs) but the CFO refused to provide the same since
the same is perceived to be confidential and cannot be shared with the Auditors.
You are required to advise about items to be reported to those charged with governance, where
applicable, based on your audit findings in the given situation. [MTP-Oct. 20]

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Ans.: Reporting to TCWG:
• SA 260 “Communication with Those charged with Governance” deals with auditor’s
responsibilities to communicate with TCWG in an audit of financial statements. As per SA 550,
Related Parties, communicating significant matters arising during the audit in connection with the
entity’s related parties helps the auditor to establish a common understanding with those charged
with governance of the nature and resolution of these matters. The auditor is also required to
ensure the compliance of Ind AS 24/AS 18 Related Party Disclosures.
• In view of above in the given scenario, the auditor is required to prepare a brief summary of
various items to be reported to TCWG in accordance with SA 260:
(i) Receipt of long-term borrowing (on no agreed terms and repayment of interest and
principal) and free of cost computers from the Parent Company need separate disclosure in
financial statements as per Ind AS 24/AS 18.
(ii) In respect of one of related party transaction amounting ₹ 3.25 lakhs per month, it is noticed
that ₹ 0.25 lakh per month exceeds the arm’s length price, which has not been disclosed
highlighting the same as related party transactions as per Ind- AS 24/AS 18.
(iii) Refusal by CFO of the company to provide the details of related party transaction amounting
to ₹ 47 lakhs on the ground that same is perceived to be confidential and cannot be shared
with auditors, is not in order, as denying for the related party details of ₹ 47 lakhs is imposing
limitation of scope of auditor in view of SA 705.
• The auditor would also need to assess his reporting requirements under clause (xiii) of Paragraph
3 of CARO, 2020 with respect to related party transactions that whether all transactions with the
related parties are in compliance with sections 177 and 188 of Companies Act, 2013 where
applicable and the details have been disclosed in the Financial Statements etc., as required by the
applicable Accounting Standards.
Q.34 M/s Manidhari & Associates have been appointed as an auditor of JIN Limited, a multinational
company dealing in spare parts. During the course of audit, CA Manidhari is facing many problems
including the problem of not getting the desired information from the management. Accordingly, he
decided to communicate with TCWG about significant difficulties encountered during the audit. CA
Manidhari seeks your guidance on matters which can be considered as significant difficulties as per
SA 260. [RTP-May 22]
Ans.: Significant Difficulties encountered during audit:
As per SA 260, “Communication with Those Charged with Governance”, significant difficulties
encountered during the audit may include such matters as:
(i) Significant delays by management, the unavailability of entity personnel, or an unwillingness by
management to provide information necessary for the auditor to perform the auditor’s
procedures.
(ii) An unreasonably brief time within which to complete the audit.
(iii) Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
(iv) The unavailability of expected information.
(v) Restrictions imposed on the auditor by management.
(vi) Management’s unwillingness to make or extend its assessment of the entity’s ability to continue
as a going concern when requested.
In some circumstances, such difficulties may constitute a scope limitation that leads to a modification
of the auditor’s opinion as per SA 705 (Revised), Modifications to the Opinion in the Independent
Auditor’s Report.

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1.9 - SA 265 “Communicating Deficiencies in Internal Control to Those Charged with Governance”
Q.35 Auditors are required to obtain an understanding of internal control relevant to the audit when
identifying and assessing its effectiveness and risk of material misstatement. During the course of
audit of ABC Ltd., you observed that significant deficiency exists in the internal control system and
you want to ascertain the same. Elucidate the various indicators of significant deficiencies which
will help you in assessing the efficiency of internal control system of the organisation.
[Jan. 21 – New Syllabus (5 Marks)]
Ans.: Indicators of significant deficiencies:
As per SA 265, “Communicating Deficiencies in Internal Control to Those Charged with Governance
and Management”, Indicators of significant deficiencies in internal control include, for example:
(i) Evidence of ineffective aspects of the control environment, such as:
(a) Indications that significant transactions in which management is financially interested are
not being appropriately scrutinised by those charged with governance.
(b) Identification of management fraud, whether or not material, that was not prevented by the
entity’s internal control.
(c) Management’s failure to implement appropriate remedial action on significant deficiencies
previously communicated.
(ii) Absence of a risk assessment process within the entity where such a process would ordinarily be
expected to have been established.
(iii) Evidence of an ineffective entity risk assessment process, such as management’s failure to
identify a risk of material misstatement that the auditor would expect the entity’s risk
assessment process to have identified.
(iv) Evidence of an ineffective response to identified significant risks (e.g., absence of controls over
such a risk).
(v) Misstatements detected by the auditor’s procedures that were not prevented, or detected and
corrected, by the entity’s internal control.
(vi) Disclosure of a material misstatement due to error or fraud as prior period items in the current
year’s Statement of Profit and Loss.
(vii) Evidence of management’s inability to oversee the preparation of the financial statements.
Q.36 CA N has been appointed as an auditor of TRP Ltd. While conducting the audit he has identified some
deficiencies in the Internal control. He needs to determine whether a deficiency or combination of
deficiencies in internal control constitutes a “significant deficiency” and has to communicate them in
writing to those charged with Governance and management on a timely basis. Guide CA N with some
examples of matters to be considered while determining “significant deficiency” in internal control
with reference to relevant SA. [Nov. 20 – New Syllabus (5 Marks)]
Or
During the course of the audit of Tirthankara Limited, CA. Shreyansh Manager in the audit team
identified that there is significant risk in lease transactions due to complex cross -border sale and
lease back arrangements. This significant risk or risk of material misstatement was not identified in
management's risk assessment process. Upon various inquiries with Management regarding their
risk assessment process, it was identified and concluded by the audit team that the management's
risk assessment process is not effective to identify all the significant risks.
CA. Shreyansh decided that this in combination with other potential deficiencies in internal control
constitutes significant deficiencies in internal control and hence, is required to be communicated to

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those charged with governance. However, the engagement partner had a different view regarding
the audit of Tirthankara Limited. According to him, the only matter that is identified and poses
significant deficiencies due to their magnitude is only required to be communicated. Matters of
potential misstatements that are not actual misstatements cannot be termed as significant
deficiencies.
You are required to guide CA. Shreyansh with respect to examples of matters that the auditor may
consider in determining whether a deficiency or combination of deficiencies in internal control
constitutes a significant deficiency. [MTP-Oct. 22]
Ans.: Matters to be considered while determining significant deficiency:
• SA 265 “Communicating Deficiencies in Internal Control to Those Charged with Governance and
Management” defines the term significant deficiency in internal control as a deficiency or
combination of deficiencies in internal control that, in the auditor’s professional judgment, is of
sufficient importance to merit the attention of those charged with governance.
• Examples of matters that the auditor may consider in determining whether a deficiency or
combination of deficiencies in internal control constitutes a significant deficiency include:
(1) The likelihood of the deficiencies leading to material misstatements in the financial
statements in the future.
(2) The susceptibility to loss or fraud of the related asset or liability.
(3) The subjectivity and complexity of determining estimated amounts, such as fair value
accounting estimates.
(4) The financial statement amounts exposed to the deficiencies.
(5) The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies.
(6) The importance of the controls to the financial reporting process; for example:
• General monitoring controls (such as oversight of management).
• Controls over the prevention and detection of fraud.
• Controls over the selection and application of significant accounting policies.
• Controls over significant transactions with related parties.
• Controls over significant transactions outside the entity’s normal course of business.
• Controls over the period-end financial reporting process (such as controls over non-
recurring journal entries).
(7) The cause and frequency of the exceptions detected as a result of the deficiencies in the
controls.
(8) The interaction of the deficiency with other deficiencies in internal control.

1.10 - SA 299 “Joint Audit of Financial Statements”

Q.37 KRP Ltd., at its annual general meeting, appointed Mr. X, Mr. Y and Mr. Z as joint auditors to conduct
auditing for the financial year 2022-23. For the valuation of gratuity scheme of the company, Mr. X,
Mr. Y and Mr. Z wanted to refer their own known Actuaries. Due to difference of opinion, all the joint
auditors consulted their respective Actuaries. Subsequently, major difference was found in the
actuary reports. However, Mr. X agreed to Mr. Y’s actuary report, though, Mr. Z did not. Mr. X
contends that Mr. Y’s actuary report shall be considered in audit report due to majority of votes.
Now, Mr. Z is in dilemma.

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You are required to briefly explain the responsibilities of auditors when they are jointly and
severally responsible in respect of audit conducted by them and also guide Mr. Z in such situation.
[RTP – Nov. 18]
Ans.: Responsibilities of Joint auditors:
SA 299 “Joint Audit of Financial Statements” lays down the principles for effective conduct of joint
audit to achieve the overall objectives of the auditor as laid down in SA 200.
Accordingly, 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:
(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 NTE 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 F.S. of the entity comply with the requirements of the relevant statutes;
(e) presentation and disclosure of the F.S. as required by the applicable FRF;
(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.
It shall be the responsibility of each joint auditor to determine the NTE of audit procedures to be
applied in relation to the areas of work allocated to said joint auditor.
It is the individual responsibility of each joint auditor to study and evaluate the prevailing system of
internal control and assessment of risk relating to the areas of work allocated to said joint auditor.
Reporting Responsibilities in case of differences of opinion:
• Joint auditors are required to issue common audit report.
• However, in case of any disagreement among joint auditors with regard to the opinion or any
matters to be covered by the audit report, they shall express their opinion in a separate audit
report.
• A joint auditor is not bound by the views of the majority of the joint auditors regarding the opinion
or matters to be covered in the audit report and shall express opinion formed by the said joint
auditor in separate audit report in case of disagreement.
• In case of separate reports, the audit report(s) issued by the joint auditor(s) shall make a
reference to the separate audit report(s) issued by the other joint auditor(s). Such reference shall
be made under the heading “Other Matter Paragraph” as per SA 706.
In the present case, Mr. Z does not agree with the opinion of Mr. X and Mr. Y, therefore he needs to
issue a separate report.

Q.38 Your firm is one of the Joint Auditors of FMP Ltd. Under what circumstances joint auditors are
jointly liable for the work in relation to audit of financial statements? Is there any restriction on a
joint auditor to communicate a dissenting note differing from the majority opinion of the other joint
auditors in the audit report issued under section 143 of the Companies Act, 2013?
[Nov. 18-Old Syllabus (5 Marks)]

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Ans.: Circumstance in which joint auditors are jointly liable: Refer Answer of Q. No. 37
Restrictions as to communication of dissenting note:
• SA 299 requires the Joint auditors to issue common audit report. However, in case of any
disagreement among joint auditors with regard to the opinion or any matters to be covered by the
audit report, they shall express their opinion in a separate audit report.
• A joint auditor is not bound by the views of the majority of the joint auditors regarding the opinion
or matters to be covered in the audit report and shall express opinion formed by the said joint
auditor in separate audit report in case of disagreement.
• In case of separate reports, the audit report(s) issued by the joint auditor(s) shall make a
reference to the separate audit report(s) issued by the other joint auditor(s). Such reference shall
be made under the heading “Other Matter Paragraph” as per SA 706.
Q.39 NMN & Co., LLP and ABC & Associates, LLP are the joint statutory auditors of BHS Ltd. BHS Ltd. is a
listed company and has been in existence for the last 50 years. Since beginning this company was
audited by MQS & Associates but due to audit rotation, the company had to bring in new auditors.
Considering the size of the company, two auditors were appointed as joint auditors. Since the
company is new to these auditors and the concept of joint auditors to whom audit work has been
divided, management had a discussion and understood that each joint auditor is responsible only
for the work allocated to him, whether or not he has prepared a separate report on the work
performed by him. Advise. [MTP-April 19]
Ans.: Reporting in case of Joint Auditors:
• SA 299 “Joint Audit of Financial Statements” lays down the principles for effective conduct of joint
audit to achieve the overall objectives of the auditor as laid down in SA 200.
• SA 299 requires the Joint auditors to issue common audit report. However, in case of any
disagreement among joint auditors with regard to the opinion or any matters to be covered by the
audit report, they shall express their opinion in a separate audit report.
• A joint auditor is not bound by the views of the majority of the joint auditors regarding the opinion
or matters to be covered in the audit report and shall express opinion formed by the said joint
auditor in separate audit report in case of disagreement.
• In case of separate reports, the audit report(s) issued by the joint auditor(s) shall make a
reference to the separate audit report(s) issued by the other joint auditor(s). Such reference shall
be made under the heading “Other Matter Paragraph” as per SA 706.
Review of work by other joint auditor:
• Each joint auditor is entitled to assume that the other joint auditors have carried out their part of
the audit work and the work has actually been performed in accordance with the SAs.
• It is not necessary for a joint auditor to review the work performed by other joint auditors or
perform any tests in order to ascertain whether the work has actually been performed in such a
manner.
• Each joint auditor is entitled to assume that the other joint auditors have brought to said joint
auditor’s notice any departure from applicable FRF or significant observations that are relevant to
their responsibilities noticed in the course of the audit.
• Before finalizing audit report, the joint auditors shall discuss and communicate with each other
their respective conclusions that would form the content of the audit report.

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Q40 Dice Ltd. appointed two CA firms MN & Associates and PQ & Co. as joint auditors for conducting audit
for the year ended on 31st March, 2023. In the course of audit, it has been observed that there is a
major understatement in the value of inventory. The inventory valuation work was looked after by
MN & Associates but there was no documentation for the division of the work between the joint
auditors. Comment on the above situation with regard to responsibilities among joint auditors.
[May 19 – New Syllabus (5 Marks)]
Ans.: Responsibilities of Joint Auditor:
• As per SA 299 “Joint Audit of Financial Statements” where joint auditors are appointed, they
should, by mutual discussion, divide the work among themselves.
• After identification and allocation of work among the joint auditors, the work allocation document
shall be signed by all the joint auditors and the same shall be communicated to TCWG of the entity.
Documentation of allocation of work helps in avoiding any dispute or confusion which may arise
among the joint auditors regarding the scope of work to be carried out by them. Further, the
communication of allocation of work to the entity helps in avoiding any dispute or confusion
which may arise between the entity and the joint auditors.
• In respect of audit work divided among the joint auditors, each joint auditor is responsible only
for the work allocated to him, whether or not he has prepared a separate report on the work
performed by him.
• However, for the work not divided, all the joint auditors are jointly and severally responsible.
• In the present case, though the revenue aspects (inventory valuation work) were looked after by
MN & Associates, but as there is no documentation for division of the work between them, both
the joint auditors will be held responsible for it.
Conclusion: Both Joint auditors are jointly and severally responsible.
Note: Conclusion given in suggested answer of ICAI is different stating that MN & Associates will
be held responsible as inventory valuation work was looked after by them. Further, there is a
violation of SA 299 as the division of work has not been documented.
Author’s view: As the work is not documented, responsibility will be joint and several.
Q.41 Excellent Bank Ltd. is a Public Limited Company. The said Bank has various branches all over India.
The Bank appoints 3 Joint Auditors for the financial year ending on 31/03/2022. All the 3 Joint
Auditors divide the work with mutual consent. Verification of Consolidation, however, remained
undivided. All branches and zones were divided amongst the 3 Joint Auditors. During audit of zones,
CA Z, one of the joint auditors expressed a concern about internal control in one of the large
corporate branches situated in his zone. The irregularity was not reported in the final accounts as
the other 2 Joint Auditors were not in favour of reporting and decision of not reporting the same was
taken on the basis of majority. Subsequently, fraud has been detected in the said branch which was
audited by CA Z.
The Bank seeks your advice about the responsibility of the 3 Joint Auditors in the above situation.
[Nov. 19 – Old Syllabus (5 Marks)]
Ans.: Responsibilities of Joint auditors:
SA 299 “Joint Audit of Financial Statements” lays down the principles for effective conduct of joint
audit to achieve the overall objectives of the auditor as laid down in SA 200. As per SA 299, where
joint auditors are appointed, they should, by mutual discussion, divide the work among themselves.

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Accordingly, 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. On the other hand, 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) 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.
In the present case, all the 3 Joint Auditors divide the work with mutual consent, except for the
verification of consolidation, which remained undivided. Hence, in accordance with SA 299, all the
joint auditors are responsible for the same.
Reporting Responsibilities in case of differences of opinion:
• Joint auditors are required to issue common audit report.
• However, in case of any disagreement among joint auditors with regard to the opinion or any
matters to be covered by the audit report, they shall express their opinion in a separate audit
report.
• A joint auditor is not bound by the views of the majority of the joint auditors regarding the opinion
or matters to be covered in the audit report and shall express opinion formed by the said joint
auditor in separate audit report in case of disagreement.
• In case of separate reports, the audit report(s) issued by the joint auditor(s) shall make a
reference to the separate audit report(s) issued by the other joint auditor(s). Such reference shall
be made under the heading “Other Matter Paragraph” as per SA 706.
In the present case, CA Z, one of the joint auditors expressed a concern about internal control in one
of the large corporate branches situated in his zone. The irregularity was not reported in the final
accounts as the other 2 Joint Auditors were not in favour of reporting and decision of not reporting
the same was taken on the basis of majority. Subsequently, fraud has been detected in the said branch
which was audited by CA Z.
Conclusion: Mr. Z was required to issue a separate report. He was not bound by the views of other
joint auditors. Mr. Z will be held responsible for non-reporting of the matter.
Note: Alternatively, it may be concluded that all the 3 joint auditors will be held responsible
for the fraud detected in the branch audited by CA Z, as decision for not reporting the
irregularity observed was taken on majority basis.

1.11 - SA 300 “Planning an Audit of Financial Statements”

Q.42 Write short note on: Contents of an Audit Plan. [RTP-Nov. 20]
Ans.: Contents of an Audit Plan:
SA 300 “Planning an Audit of Financial Statements” requires that the auditor shall establish an overall
audit strategy that sets the scope, timing and direction of the audit, and that guides the development
of the audit plan. The audit plan shall include a description of:
• The nature, timing and extent of planned risk assessment procedures, as determined under SA
315.
• The nature, timing and extent of planned further audit procedures at the assertion level, as
determined under SA 330.
• Other planned audit procedures that are required to be carried out so that the engagement
complies with SAs.

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The audit plan is more detailed than the overall audit strategy that includes the NTE of audit
procedures to be performed by ET members. Planning for these audit procedures takes place over the
course of the audit as the audit plan for the engagement develops. For example, planning of the
auditor's RAP occurs early in the audit process. However, planning the NTE of specific further audit
procedures depends on the outcome of those RAPs. In addition, the auditor may begin the execution
of further audit procedures for some classes of transactions, account balances and disclosures before
planning all remaining further audit procedures.
Q.43 AB & Associates, a chartered accountant firm, was appointed auditors of KEY Company Ltd. for the
financial year ended on 31st March 2023. Being the first year of audit, the audit firm AB &
Associates, as per its system of quality control, involve senior partner of the firm to review the
overall audit strategy prepared by the team members. What additional matters would be considered
in initial audit engagement by the senior partner in establishing the overall audit strategy and
audit plan of KEY Company Ltd.? [Dec. 21 – Old Syllabus (5 Marks)]
Ans.: Additional matters to be considered in initial audit engagement:
As per SA 300 “Planning and Audit of Financial Statements” purpose and objective of planning the
audit are the same whether the audit is an initial or recurring engagement. However, for an initial
audit, the auditor may need to expand the planning activities because the auditor does not ordinarily
have the previous experience with the entity.
For initial audits, additional matters the auditor may consider in establishing the overall audit
strategy and audit plan includes the following:
• Unless prohibited by law or regulation, arrangements to be made with the predecessor auditor,
for example, to review his working papers.
• Any major issues (including the application of accounting principles or of auditing and reporting
standards) discussed with management in connection with the initial selection as auditor, the
communication of these matters to TCWG and how these matters affect the overall audit strategy
and audit plan.
• The audit procedures necessary to obtain SAAE regarding opening balances as prescribed by SA
510 “Initial Engagements–Opening Balances”.
• Other procedures required by the firm’s system of quality control for initial audit engagements
(for example, review of overall audit strategy by senior partner prior to commencing significant
audit procedures or to review reports prior to their issuance).

1.12 - SA 315 “Identifying and Assessing the Risk of Material Misstatements through Understanding the
Entity and its Environment”
Q.44 Enumerate the specific risks that Information Technology (IT) systems can pose to an entity’s
internal control. [Nov. 17 (5 Marks)]
Ans.: Risk to Internal Control imposed by IT System:
As per SA 315 “Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and its Environment”, IT system also poses specific risks to an entity’s Internal Control.
These risks are:
(a) Reliance on systems or programs that are inaccurately processing data, processing inaccurate
data or both.

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(b) Unauthorised access to data that may result in destruction of data or improper changes to data,
including the recording of unauthorized or non-existent transactions, or inaccurate recording of
transactions. Particular risk may arise when multiple users access a common database.
(c) The possibility of IT personnel gaining access beyond those necessary to perform their assigned
duties thereby breaking down segregation of duties.
(d) Unauthorised changes to data in Master files.
(e) Unauthorised changes to systems or programs.
(f) Failure to make necessary changes to systems or programs.
(g) Inappropriate manual intervention.
(h) Potential loss of data or inability to access data as required.
Q.45 In the course of audit of PB Ltd., You observe that there is a likelihood of misstatement in the
account balances and disclosures in the financial statements. What should be your considerations as
an auditor for “Assessing the Risk of Material Misstatements”? [Nov. 18-Old Syllabus (4 Marks)]
Ans.: Considerations for assessing the Risk of Material Misstatements:
• SA 315 “Identifying and Assessing Risk of Material Misstatements through Understanding the
Entity and its Environment” requires the auditor to identify and assess the risks of material
misstatement, whether due to fraud or error, at the financial statement and assertion levels.
• As per SA 315, the auditor shall identify and assess the risks of material misstatement at:
(a) the financial statement level; and
(b) the assertion level for classes of transactions, account balances, and disclosures;
to provide a basis for designing and performing further audit procedures.
• For this purpose, the auditor shall:
(a) Identify risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls that relate to the risks, and by considering the
classes of transactions, account balances, and disclosures in the financial statements;
(b) Assess the identified risks, and evaluate whether they relate more pervasively to the financial
statements as a whole and potentially affect many assertions;
(c) Relate the identified risks to what can go wrong at the assertion level, taking account of
relevant controls that the auditor intends to test; and
(d) Consider the likelihood of misstatement, including the possibility of multiple misstatements,
and whether the potential misstatement is of a magnitude that could result in a material
misstatement.
Q.46 The identified risks are assessed by auditor as to its significance on account of its likely impact, by
way of material misstatement appearing in financial statements or by affecting internal control
system. What may be the points of indication that may direct the Auditor to judge that the risks
identified may be significant? [Nov. 18-New Syllabus (4 Marks)]
Or
You are engaged by M/s Real Ltd. as an internal auditor for the financial year 2022-23. While
applying risk assessment procedures of inquiring from management and various analytical
procedures, you have identified some risks which in your opinion may lead to material
misstatement at the financial level and assertion level. Which factors as an auditor will you consider
while exercising judgment as to whether such risks are significant risks or not?
[Jan. 21 – New Syllabus (5 Marks)]

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Ans.: Points of indication that direct the Auditor to judge that the risks identified may be significant:
• SA 315 “Identifying and Assessing Risk of Material Misstatements through Understanding the
Entity and its Environment” requires the auditor to identify and assess the risks of material
misstatement, whether due to fraud or error, at the financial statement and assertion levels.
• As part of the risk assessment, the auditor shall determine whether any of the risks identified are,
in the auditor’s judgment, a significant risk. In exercising this judgment, the auditor shall exclude
the effects of identified controls related to the risk.
• In exercising judgment as to which risks are significant risks, the auditor shall consider at least 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 environment, 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; and
(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.
Q.47 The Entity’s Risk Assessment Process includes how management identifies business risks relevant
to the preparation of financial statements in accordance with the entity’s applicable financial
reporting framework, estimates their significance, assesses the likelihood of occurrence and decides
upon actions to respond to and manage them and the results thereof. Elucidate the circumstances in
which risks can arise or change. [Nov. 19 – New Syllabus; Nov. 20 – Old Syllabus (5 Marks)]
Ans.: Circumstances of Entity’s Risk Assessment Process Component under which risk may arise:
As per SA 315 “Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and its Environment” the entity’s risk assessment process forms the basis for how
management determines the risks to be managed. If that process is appropriate to the circumstances,
including the nature, size and complexity of the entity, it assists the auditor in identifying RMM. Risk
can arise or change due to below mentioned circumstances:
1. Changes in operating environment: Changes in the regulatory or operating environment can
result in changes in competitive pressures and significantly different risks.
2. New personnel: New personnel may have a different focus on or understanding of internal
control.
3. New or revamped information systems: Significant and rapid changes in information systems
can change the risk relating to internal control.
4. Rapid growth. Significant and rapid expansion of operations can strain controls and increase the
risk of a breakdown in controls.
5. New technology: Incorporating new technologies into production processes or information
systems may change the risk associated with internal control.
6. New business models, products, or activities: Entering into business areas or transactions with
which an entity has little experience may introduce new risks associated with internal control.
7. Corporate restructurings: Restructurings may be accompanied by staff reductions and changes
in supervision and segregation of duties that may change the risk associated with internal control.

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8. Expanded foreign operations: The expansion or acquisition of foreign operations carries new
and often unique risks that may affect internal control, for example, additional or changed risks
from foreign currency transactions.
9. New accounting pronouncements: Adoption of new accounting principles or changing
accounting principles may affect risks in preparing financial statements.
Q.48 ABC Limited which deals with consumer products has extensively automated all its operations
including the accounting operations. The automation involves ERP, Robotic process automation,
Analytics etc.
You are required to audit the entity duly considering the inherent and control risk for material
financial statement assertions. Elucidate the key areas that you will focus on for identifying risks
including the deficiencies. [Nov. 20 – Old Syllabus (4 Marks)]
Ans.: Risk Assessment in Automated Environment:
SA 315 “Identifying and Assessing the Risks of Material Misstatement through Understanding the
Entity and its Environment”, requires the auditor to make an assessment of inherent and control risk
for material financial statement assertions. In an automated environment, auditor should look into
below mentioned area for risk identification:
(i) Program Development and maintenance.
(ii) System software support.
(iii) Operations including processing of data.
(iv) Physical security.
(v) Control over access to specialized utility program.

1.13 - SA 320 “Materiality in Planning and Performing an Audit”

Q.49 Y & Co., Chartered Accountants have come across in the course of audit of a company that certain
machinery had been imported for production of new product. Although the auditors have applied
the concept of materiality for the financial statements as a whole, they now want to re-evaluate the
materiality concept for this transaction involving foreign exchange. Give your views in this regard.
[May 18 – New Syllabus (5 Marks)]
Ans.: Re-evaluation of the Materiality Concept:
• SA 320 “Materiality in Planning and Performing an Audit”, requires the auditor to determine
materiality for the financial statement as a whole, while establishing the overall audit strategy.
• If, in the specific circumstances of the entity, there is one or more particular classes of
transactions, account balances or disclosures for which misstatements of lesser amounts than the
materiality for the financial statements as a whole could reasonably be expected to influence the
economic decisions of users taken on the basis of the financial statements, the auditor shall also
determine the materiality level or levels to be applied to those particular classes of transactions,
account balances or disclosures.
• The auditor shall revise materiality for the financial statements as a whole and if applicable the
materiality levels for particular classes of transactions, account balances or disclosures, in the
event of becoming aware of information during the audit that would have caused the auditor to
have determined a different amount (or amounts) initially.
• If the auditor concludes a lower materiality for the same, then he should consider the fact that
whether it is necessary to revise performance materiality and whether the nature, timing and
extent of the further audit procedures remain appropriate.

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• In the instant case, auditor has applied the concept of materiality for the financial statements as a
whole. But he wants to re-evaluate the materiality concept, on the basis of additional information
of significant contractual arrangements which draws attention to a particular aspect of the
company’s business.
Conclusion: Auditor can re-evaluate the materiality concepts after considering the necessity of such
revision.
Q.50 You are being appointed as the auditor of X Ltd. for the first time. You want to determine the
materiality level and for that you have applied percentage to choose benchmark as a starting point
in determining materiality for the financial statements as a whole. What are the factors that may
affect the identification of materiality while auditing? [Nov. 20 – Old Syllabus (5 Marks)]
Or
CA. B was appointed as the auditor of SRT Limited for the financial year 2022-23. During the course
of planning for the audit, CA. B intends to apply the concept of materiality for the financial
statements as a whole. Please guide him with respect to the factors that may affect the identification
of an appropriate benchmark for this purpose.
What benchmark should be adopted by CA. B, if SRT Limited is engaged in:
(i) the manufacture and sale of air conditioners, and is having regular profits.
(ii) the construction of large infrastructure projects and incurred losses in the previous two
financial years, due to pandemic. [Nov. 22 (5 Marks)]
Ans.: Use of benchmark in determining Materiality:
SA 320 “Materiality in Planning and Performing an Audit” prescribes the use of Benchmarks in
Determining Materiality for the Financial Statements as a Whole. Accordingly determining materiality
involves the exercise of professional judgment. A percentage is often applied to a chosen benchmark
as a starting point in determining materiality for the financial statements as a whole.
Factors that may affect the identification of an appropriate benchmark includes the following:
(i) The elements of the financial statements (for example, assets, liabilities, equity, revenue,
expenses);
(ii) Whether there are items on which the attention of the users of the particular entity’s financial
statements tends to be focused (for example, for the purpose of evaluating financial performance
users may tend to focus on profit, revenue or net assets);
(iii) 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;
(iv) The entity’s ownership structure and the way it is financed (for example, if an entity is financed
solely by debt rather than equity, users may put more emphasis on assets, and claims on them,
than on the entity’s earnings); and
(v) The relative volatility of the benchmark.
Examples of Benchmark: Examples of benchmarks that may be appropriate, depending on the
circumstances of the entity, include categories of reported income such as profit before tax, total
revenue, gross profit and total expenses, total equity or net asset value. Profit before tax from
continuing operations is often used for profit-oriented entities. When profit before tax from
continuing operations is volatile, other benchmarks may be more appropriate, such as gross profit or
total revenues. Based on this, following conclusions may be drawn:
(i) If SRT is engaged in the manufacture and sale of air conditioners, and is having regular profits,
profit before tax may be used as benchmark.

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(ii) If SRT is engaged in the construction of large infrastructure projects and incurred losses in the
previous two financial years, due to pandemic, gross profit or total revenue may be used as
benchmark.
Alternatively, auditor may consider the criteria relevant for audit of the entities doing public
utility programs/projects, Total cost or net cost (expenses less revenues or expenditure less
receipts) may be appropriate benchmarks for that particular program/project activity. Where an
entity has custody of the assets, assets may be an appropriate benchmark.

1.14 - SA 330 “Auditor’s Responses to Assessed Risks”

Q.51 In the course of audit of Z Ltd., its auditor wants to rely on audit evidence obtained in previous audit
in respect of effectiveness of internal controls instead of re-testing the same during the current
audit. As an advisor to the auditor kindly caution him about the factors that may warrant a re-test of
controls. [RTP-Nov. 18, May 22; MTP-Oct.19]
Ans.: Factors warranting re-test of controls:
As per SA 330 on “The Auditor’s Responses to Assessed Risks”, if the auditor plans to use audit
evidence from a previous audit about the operating effectiveness of specific controls, he shall
establish the continuing relevance of that evidence by obtaining audit evidence about whether
significant changes in those controls have occurred subsequent to the previous audit.
The auditor’s decision on whether to rely on audit evidence obtained in previous audits for control is
a matter of professional judgment.
Factors that may warrant a re-test of controls are:
1. A deficient control environment.
2. Deficient monitoring of controls.
3. A significant manual element to the relevant controls.
4. Personnel changes that significantly affect the application of the control.
5. Changing circumstances that indicate the need for changes in the control.
6. Deficient general IT-controls.
Q.52 While formulating the audit plan and responding to the risks of material misstatement identified
and assessed in related party transaction and relationships, Ms. K the engagement manager of the
audit team of ABC Limited, decided to rely upon the internal controls placed for identification and
disclosure of related party relationships and transactions in accordance with the applicable
financial reporting framework. You are requested to guide Ms. K regarding the necessity to test the
controls to obtain sufficient and appropriate audit evidence. Also guide, whether Ms. K can use the
audit evidence obtained, regarding operative effectiveness of control on identification and
disclosure of related party relationships and transactions, in the interim period. [RTP-Nov. 21]
Ans.: Performing Tests of Controls:
• In accordance with SA 550, “Related Parties”, the auditor should design and performs further
audit procedures to obtain sufficient appropriate audit evidence about the assessed risks of
material misstatement associated with related party relationships and transactions.
• As per SA 330, “The Auditor’s Responses to Assessed Risks”, the auditor shall design and perform
tests of controls to obtain sufficient appropriate audit evidence as to the operating effectiveness of
relevant controls when:
(a) The auditor’s assessment of risks of material misstatement at the assertion level includes an

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expectation that the controls are operating effectively (i.e., the auditor intends to rely on the
operating effectiveness of controls in determining the nature, timing and extent of
substantive procedures); or
(b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at the
assertion level.
• In designing and performing tests of controls, the auditor shall obtain more persuasive audit
evidence the greater the reliance the auditor places on the effectiveness of a control. Moreover, the
auditor shall test controls for the particular time, or throughout the period, for which the auditor
intends to rely on those controls, subject to when the auditor obtains audit evidence about the
operating effectiveness of controls during an interim period, and the timing of test of controls over
significant risks, in order to provide an appropriate basis for the auditor’s intended reliance.
Using audit evidence obtained during an interim period:
When the auditor obtains audit evidence about the operating effectiveness of controls during an
interim period, the auditor shall:
(a) Obtain audit evidence about significant changes to those controls subsequent to the interim
period; and
(b) Determine the additional audit evidence to be obtained for the remaining period.
Conclusion: Ms. K shall design and perform tests of controls to obtain sufficient appropriate audit
evidence as to the operating effectiveness of relevant controls as she intends to rely on the operating
effectiveness of controls in determining the nature, timing and extent of substantive procedures.
Further, she is also required to obtain the audit evidence about significant changes to those controls
subsequent to the interim period along with the additional audit evidence to be obtained for the
remaining period in accordance with the requirements of Standards on Auditing as discussed above.
Q.53 Mr. Agarwal, in the course of audit of PQ Limited, wants to perform external confirmation
procedures to obtain audit evidence. Guide Mr. Agarwal, listing out the factors that may assist him in
determining whether external confirmation procedures are to be performed as substantive audit
procedures. [Dec. 21 – New Syllabus (5 Marks)]
Ans.: Factors that may assist in determining use of external confirmations as substantive audit
procedures:
As per SA 330 “Responses to Assessed Risks” factors that may assist the auditor in determining
whether external confirmation procedures are to be External Confirmations performed as
substantive audit procedures include:
1. The confirming party’s knowledge of the subject matter: Responses may be more reliable if
provided by a person at the confirming party who has the requisite knowledge about the
information being confirmed.
2. The ability or willingness of the intended confirming party to respond: For example, the
confirming party:
• may not accept responsibility for responding to a confirmation request;
• may consider responding too costly or time consuming;
• may have concerns about the potential legal liability resulting from responding;
• may account for transactions in different currencies; or
• may operate in an environment where responding to confirmation requests is not a significant
aspect of day-to-day operations.

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In such situations, confirming parties may not respond, may respond in a casual manner or may
attempt to restrict the reliance placed on the response.
3. The objectivity of the intended confirming party: If the confirming party is a related party of
the entity, responses to confirmation requests may be less reliable.

1.15 - SA 402 “Audit Considerations in an Entity using Service Organisation”

Q.54 Durafone Mobile Co. Ltd. have pan India presence and market leader in mobile operation. It has
outsourced all its revenue operation including accounting functions to Set Solutions (P.) Ltd. As an
Auditor of the mobile company, enumerate the factors to be taken into consideration related to its
financial reporting. [May 18 – Old Syllabus (5 Marks)]
Ans.: Factors to be taken into consideration related to financial reporting in case of user entities
using services of Service Organisation:
• SA 402 “Audit Considerations relating to an Entity Using a Service Organisation” deals with the
user auditor’s responsibility to obtain sufficient appropriate audit evidence when a user entity
uses the services of one or more service organisations.
• Services provided by a service organisation are relevant to the audit of a user entity’s financial
statements when those services, and the controls over them, are part of the user entity’s
information system, including related business processes, relevant to financial reporting.
• Although most controls at the service organisation are likely to relate to financial reporting, there
may be other controls that may also be relevant to the audit, such as controls over the
safeguarding of assets.
• A service organisation’s services are part of a user entity’s information system, including related
business processes, relevant to financial reporting if these services affect any of the following:
(a) The classes of transactions in the user entity’s operations that are significant to the user
entity’s financial statements;
(b) The procedures, within both information technology (IT) and manual systems, by which the
user entity’s transactions are initiated, recorded, processed, corrected as necessary,
transferred to the general ledger and reported in the financial statements;
(c) The related accounting records, either in electronic or manual form, supporting information
and specific accounts in the user entity’s financial statements that are used to initiate, record,
process and report the user entity’s transactions; this includes the correction of incorrect
information and how information is transferred to the general ledger;
(d) How the user entity’s information system captures events and conditions, other than
transactions, that are significant to the financial statements;
(e) The financial reporting process used to prepare the user entity’s financial statements,
including significant accounting estimates and disclosures; and
(f) Controls surrounding journal entries, including non-standard journal entries used to record
non-recurring, unusual transactions or adjustments.
Q.55 G Ltd. is a mobile phone operating company. Barring the marketing function, it had outsourced the
entire operations like maintenance of mobile infrastructure, customer billing, payroll, accounting
functions, etc. Assist the auditor of G Ltd. as to how he can obtain an understanding of how G Ltd.
uses the services of the outsourced agency in its operations.
[MTP-Oct. 18, RTP-Nov. 18, MTP-Oct. 19]

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Ans.: Matters of which understanding is required by user auditor w.r.t. services of a services
organisation:
A client may use a service organisation such as one that executes transactions and maintains related
accounts or records transactions and processes related data. If a client uses a service organisation,
certain policies, procedures and records maintained by the service organisation might be relevant to
the audit of the financial statements of the client. Consequently, the auditor would consider the
nature and extent of activities undertaken by service organisations so as to determine whether those
activities are relevant to the audit and, if so, to assess their effect on audit risk.
SA 402 on “Audit Considerations relating to an Entity Using a Service Organisation” deals with the
user auditor’s responsibility to obtain sufficient appropriate audit evidence when a user entity uses
the services of one or more service organisations. Accordingly, the user auditor is required to obtain
an understanding of how user entity uses the services of a service organisation in the user entity
operation, including:
1. Nature of service provided by the service organisation and the significance of those services to the
user entity.
2. The nature and materiality of the transactions processed or financial reporting processes affected
by service organisations.
3. The degree of interaction between activities of service organisations and those of the user entity.
4. The nature of relationship between user entity and the service organisation.
Q.56 ENN Limited is availing the services of APP Private Limited for its payroll operations. Payroll cost
accounts for 65% of total cost for ENN Limited. APP Limited has provided the type 2 report as
specified under SA 402 for its description, design and operating effectiveness of control.
APP Private Limited has also outsourced a material part of payroll operation M/s SMP & Associates
in such a way that M/s SMP & Associates is sub-service organisation to ENN Limited. The Type 2
report which was provided by APP Private Limited was based on carve-out method as specified
under SA 402.
CA Raman while reviewing the unmodified audit report drafted by his assistant found that, a
reference has been made to the work done by the service auditor. CA Raman hence asked his
assistant to remove such reference and modify report accordingly.
Comment whether CA Raman is correct in removing the reference of the work done by service
auditor? [RTP-Nov. 20; MTP-April 21, Sep. 22]
Ans.: Reporting by the User Auditor:
• As per SA 402, “Audit Considerations Relating to an Entity Using a Service Organisation”, the user
auditor shall modify the opinion in the user auditor’s report in accordance with SA 705,
“Modifications to the Opinion in the Independent Auditor’s Report”, if he is unable to obtain
sufficient appropriate audit evidence regarding the services provided by the service organisation
relevant to the audit of the user entity’s financial statements.
• The User Auditor shall not refer to report of Service auditor unless required by Laws &
Regulations.
• If such reference is required by laws or regulations, the user auditor’s report shall indicate that
the reference does not diminish the user auditor’s responsibility for the audit opinion.
• In the given case, CA Raman while reviewing the unmodified audit report drafted by his assistant
found that, a reference has been made to the work done by the service auditor. CA Raman hence
asked his assistant to remove such reference and modify report accordingly.

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Conclusion: Contention of CA Raman in removing reference of the work done by service auditor is in
order as in case of unmodified audit report, user auditor cannot refer to the work done by service
auditor.
Q.57 In the course of audit of Tech Limited you observed that processing of accounting data was given to a
third party on account of certain considerations like cost reduction, own computer working to full
capacity. Tech Limited used a service organisation to record transactions and process related data.
As an auditor, what would be your considerations regarding the nature and extent of activities
undertaken by service organisation so as to determine whether those activities are relevant to the
audit and, if so, to assess their effect on audit risk. Discuss with reference to relevant Standard on
Auditing. [Dec. 21 – New Syllabus (5 Marks), MTP-March 23]
Ans.: Considerations regarding the nature and extent of activities undertaken by service
organisation:
As per SA 402 “Audit Considerations relating to an Entity using a Service Organisation”, when
obtaining an understanding of the user entity in accordance with SA 315, the user auditor shall obtain
an understanding of how a user entity uses the services of a service organisation in the user entity’s
operations, including:
(i) The nature of the services provided by the service organisation and the significance of those
services to the user entity, including the effect thereof on the user entity’s internal control;
(ii) The nature and materiality of the transactions processed or accounts or financial reporting
processes affected by the service organisation;
(iii) The degree of interaction between the activities of the service organisation and those of the user
entity; and
(iv) The nature of the relationship between the user entity and the service organisation, including
the relevant contractual terms for the activities undertaken by the service organisation.
Based on above, the auditor will assess the effect on the audit risk and take necessary steps while
conducting the audit.

1.16 - SA 450 “Evaluation of Misstatements identified during the Audit”

Q.58 In audit plan for T Ltd., as the audit partner you want to highlight the sources of misstatements,
arising from other than fraud, to your audit team and caution them. Identify the sources of
misstatements. [RTP-Nov. 18, May 22]
Ans.: Sources of Misstatements:
SA 450 “Evaluation of Misstatements identified during the Audit”, defines the term misstatement as a
difference between the amounts, classification, presentation, or disclosure of a reported financial
statement item and the amount, classification, presentation, or disclosure that is required for the item
to be in accordance with the applicable financial reporting framework. Accordingly, misstatement
may cause due to following:
(i) An inaccuracy in gathering or processing data from which the financial statements are prepared;
(ii) An omission of an amount or disclosure;
(iii) An incorrect accounting estimate arising from overlooking, or clear misinterpretation of facts;
and
(iv) Judgments of management concerning accounting estimates that the auditor considers
unreasonable or the selection and application of accounting policies that the auditor considers
inappropriate.

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1.17 - SA 500 “Audit Evidence”
Q.59 The auditor of SS Ltd. accepted the gratuity liability valuation based on the certificate issued by a
qualified actuary. However, the auditor noticed that the retirement age adopted is 65 years as
against the existing retirement age of 60 years. The company is considering a proposal to increase
the retirement age. Comment. [Nov. 11 (5 Marks), MTP-April 18]
Ans.: Using the work of Management Expert as an audit evidence:
• SA 500 (Revised), “Audit Evidence” states that the auditor has to evaluate the work of
management expert, say, actuary, before adopting the same.
• The work of management expert is required to be evaluated in terms of following:
(i) Relevance and reasonableness of that expert findings and conclusion;
(ii) Relevance and reasonableness of assumptions and methods used; and
(iii) Relevance, completeness and accuracy of source data.
• There is no doubt that appropriateness, reasonableness of assumptions and methods used are
the responsibility of the expert, but the auditor has to determine whether they are reasonable
based on the auditor’s knowledge of the client’s business and result of his audit procedures.
• In the instant case, a qualified actuary has issued a certificate for gratuity liability valuation, for
which retirement age adopted is 65 years against the existing retirement age of 60 years;
however, the company is considering a proposal to increase the retirement age.
Conclusion: In view of provisions of SA 500 as discussed above, the assumption made by actuary has
no relevance and reasonableness as presently retiring age is of 60 years. Hence the auditor is
required to bring out the facts to the notice of management and advice the modification accordingly.
In case of failure of compliance of the same the auditor may qualify the report.
Q.60 Gap Ltd. possesses some investment for which there is no ready market and to assess its fair market
value it hires an expert, the result of which it can use in preparing its financial statement. Being an
Auditor of the Company, state the matters which may affect the nature, timing and extent of audit
procedure to be adopted by you in the instant case. [May 18 – Old Syllabus (5 Marks)]
Ans.: Matters affecting NTE of Audit procedures in case of information being produced using work of
management expert:
As per SA 500 “Audit Evidence” if any information is prepared by the entity using the work of
management expert and auditor has to consider that information as audit evidence, he is required to
evaluate the competence, capability and objectivity of that expert. Matters which may affect nature,
timing and extent of audit procedures in such a case are:
1. The nature and complexity of the matter to which the management’s expert relates.
2. The risks of material misstatement in the matter.
3. The availability of alternative sources of audit evidence.
4. The nature, scope and objectives of the management’s expert’s work.
5. Whether the management’s expert is employed by the entity, or is a party engaged by it to provide
relevant services.
6. The extent to which management can exercise control or influence over the work of the
management’s expert.
7. Whether the management’s expert is subject to technical performance standards or other
professional or industry requirements.

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8. The nature and extent of any controls within the entity over the management’s expert’s work.
9. The auditor’s knowledge and experience of the management’s expert’s field of expertise.
10. The auditor’s previous experience of the work of that expert.
Q.61 CA Needle had been appointed as an auditor of M/s Fabric Ltd. In the course of audit, it had been
observed that inventory including work-in-process had been valued by management by using
experts hired by them. Analyse relevant factors to decide as to whether or not to accept the findings
from the work of management expert in valuation of inventories.
[May 18 – New Syllabus (5 Marks), MTP-Oct. 20]
Or
PDJ Ltd. has engaged an actuary to ascertain actuarial valuation of defined benefit obligations viz.
Gratuity and Leave Encashment liabilities. As an auditor of PDJ Ltd. you would like to use the report
of the actuary as audit evidence. How would you evaluate the work of the actuary?
[Jan. 21 – Old syllabus (5 Marks)]
Ans.: Evaluating the work of Management Expert:
As per SA 500 “Audit Evidence” when information to be used as audit evidence has been prepared
using the work of a management’s expert, the auditor shall perform the following:
(i) Evaluate the competence, capabilities and objectivity of that expert:
For this purpose, auditor may consider his qualification, membership of a professional body or
industrial association license to practice etc.
(ii) Obtain an understanding of the work of that expert:
It may include areas of specialty, applicable professional standards and other legal requirements.
(iii) Evaluate the appropriateness of that expert’s work:
With respect to following:
(a) Relevance and reasonableness of that expert findings and conclusion;
(b) Relevance and reasonableness of assumptions and methods used; and
(c) Relevance, completeness and accuracy of source data.
Q.62 During the course of audit of a Limited company, the statutory auditors collected written
representations from the Management. The audit was finalized in addition to other audit
procedures but, without making any inquiries, as the statutory auditors were short of time. In the
light of this information, state the importance of inquiry as one of the methods of collecting Audit
Evidence. [July 21 – Old Syllabus (4 Marks)]
Ans.: Inquiry:
• As per SA 500 “Audit Evidence”, inquiry is one of the methods to obtain audit evidences.
• Inquiry consists of seeking information of knowledgeable persons, financial and non-financial,
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.
• Responses to inquiries may provide the auditor with information not previously possessed or
with corroborative audit evidence. Alternatively, responses might provide information that differs
significantly from other information that the auditor has obtained, for example, information
regarding the possibility of management override of controls. In some cases, responses to
inquiries provide a basis for the auditor to modify or perform additional audit procedures.

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• 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.

1.18 - SA 501 “Audit Evidence – Specific Considerations for Selected Items”

Q.63 LMN Ltd. supplies navy uniforms across the country. The company has 4 warehouses at different
locations throughout the India and 5 warehouses at the borders. The major stocks are generally
supplied from the borders. LMN Ltd. appointed M/s OPQ & Co. to conduct its audit for the financial
year 2022-23. Mr. O, partner of M/s OPQ & Co., attended all the physical inventory counting
conducted throughout the India but could not attend the same at borders due to some unavoidable
reason.
You are required to advise M/s OPQ & Co.:
(a) How sufficient appropriate audit evidence regarding the existence and condition of inventory
may be obtained?
(b) How an auditor is supposed to deal when attendance at physical inventory counting is
impracticable? [RTP-May 18, May 21]
Or
Crush Ltd. is a dealer in fast moving consumer goods. The Company has warehouses throughout the
country where the stocks are stored. The Auditor of the Company normally conduct physical
verification of stocks along with the Management at the end of the financial year. However, the
Auditor could not be physically present during stock-tacking at two places on account of certain
disturbances in the region.
In light of the above facts:
(i) How sufficient appropriate audit evidence regarding the condition and existence of inventory
may be obtained?
(ii) How an Auditor is supposed to deal when attendance at physical inventory counting is
impracticable? [May 18 – Old Syllabus (5 Marks)]
Ans.: Auditor’s duties to obtain evidences regarding existence and condition of inventory:
SA 501 “Audit Evidence – Specific Considerations for Specific Items”, requires from the auditor that
when inventory is material to the financial statements, he shall obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory by attendance at physical inventory
counting, unless impracticable, to:
(i) Evaluate management’s instructions and procedures for recording and controlling the results of
the entity’s physical inventory counting;
(ii) Observe the performance of management’s count procedures;
(iii) Inspect the inventory; and
(iv) Perform test counts.

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Attendance at physical inventory counting involves:
1. Inspecting the inventory to ascertain its existence and evaluate its condition, and performing
test counts;
2. Observing compliance with management’s instructions and the performance of procedures for
recording and controlling the results of the physical inventory count; and
3. Obtaining audit evidence as to the reliability of management’s count procedures.
Auditor’s procedures in case of impractical situations:
• Perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding
existence and condition of inventory.
• Alternative Audit Procedure may include inspection of documentation of the subsequent sale of
specific inventory items acquired/purchased prior to physical inventory counting.
• If it is not possible to do so, modify the opinion in the auditor’s report in accordance with SA 705.
Q.64 Your firm has been appointed as the statutory auditors of GBM Private Limited for the financial year
2022-23. While verification of company’s inventories as on 31st March 2023, you found that the
significant amount of inventories belonging to the company are held by other parties. However, the
company has kept all the records of the inventories maintained by other parties. What is your duty
as an auditor in order to ensure that third parties are not such with whom the stock should not be
held and the stock as disclosed in company’s records actually belongs to them?

Ans.: Inventory under the Custody and Control of a Third Party:

As per SA 501, “Audit Evidence – Specific Considerations for Selected Items” when inventory under
the custody and control of a third party is material to the financial statements, the auditor shall obtain
sufficient appropriate audit evidence regarding the existence and condition of that inventory by
performing one or both of the following:
(i) Request confirmation from the third party as to the quantities and condition of inventory held
on behalf of the entity.
(ii) Perform inspection or other audit procedures appropriate in the circumstances, for example
where information is obtained that raises doubt about the integrity and objectivity of the third
party, the auditor may consider it appropriate to perform other audit procedures instead of, or
in addition to, confirmation with the third party. Examples of other audit procedures include:
• Attending, or arranging for another auditor to attend, the third party’s physical counting of
inventory, if practicable.
• Obtaining another auditor’s report, or a service auditor’s report, on the adequacy of the third
party’s internal control for ensuring that inventory is properly counted and adequately
safeguarded.
• Inspecting documentation regarding inventory held by third parties, for example, warehouse
receipts.
• Requesting confirmation from other parties when inventory has been pledged as collateral.
Q.65 You are the auditor of Easy Communications Ltd. for the year 2022–23. The inventory as at the end
of the year i.e. 31.3.23 was ₹ 2.25 Crores. Due to unavoidable circumstances, you could not be
present at the time of annual physical verification. Under the above circumstances how would you
ensure that the physical verification conducted by the management was in order?
[Nov. 08 (5 Marks), RTP-May 20]

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Ans.: Auditor’s procedures w.r.t. inventory count procedures:
• SA 501 “Audit Evidence – Specific Considerations for Specific Items”, requires from the auditor
that when inventory is material to the financial statements, he shall obtain sufficient appropriate
audit evidence regarding the existence and condition of inventory by attendance at physical
inventory counting, unless impracticable, to:
(i) Evaluate management’s instructions and procedures for recording and controlling the results
of the entity’s physical inventory counting;
(ii) Observe the performance of management’s count procedures;
(iii) Inspect the inventory; and
(iv) Perform test counts.
• SA 501 further provides that if the auditor is unable to be present at the physical inventory count
on the date planned due to unforeseen circumstances, the auditor should take or observe some
physical counts on an alternative date and perform audit procedures on intervening transactions
to assess whether the changes in inventory between the date of physical count and the period end
date are correctly recorded.
• The auditor would also verify the procedure adopted and treatment given for the discrepancies
noticed during the physical count. The auditor would also ensure that appropriate cut off
procedures were followed by the management.
• The auditor may also seek management’s written representation on (a) the completeness of
information provided regarding the inventory, and (b) assurance with regard to adherence to laid
down procedures for physical inventory count.
Q.66 Moon Ltd. is a dealer in electronic appliances. The Company has a centralised warehouse at the
outskirts of Mumbai. The Auditors of the company M/s JK Associates normally attend the physical
verification of stocks carried out by the Management at the end of the financial year. However, on
account of certain disturbances in the region, the physical inventory counting could not be carried
out at the year end. The stock taking is decided to be done by management at some other date
subsequently, after a month.
In light of the above facts: Enumerate the audit procedures to be considered by M/s JK Associates, if
physical inventory counting is conducted at a date other than the date of the financial statements
with reference to the relevant Standard on Auditing. [Nov. 20 – New Syllabus (5 Marks)]
Ans.: Audit Procedures to be carried out if physical inventory counting is conducting at a date other
than the date of financial statements:
SA 501 “Audit Evidence – Specific Considerations for Specific Items”, requires from the auditor that
when inventory is material to the financial statements, he shall obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory by attendance at physical inventory
counting, unless impracticable, to:
(i) Evaluate management’s instructions and procedures for recording and controlling the results
of the entity’s physical inventory counting;
(ii) Observe the performance of management’s count procedures;
(iii) Inspect the inventory; and
(iv) Perform test counts.
If physical inventory counting is conducted at a date other than the date of the financial statements,
the auditor shall, in addition to the procedures as specified above, perform audit procedures to obtain
audit evidence about whether changes in inventory between the count date and the date of the
financial statements are properly recorded.

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Relevant matters for consideration when designing audit procedures to obtain audit evidence about
whether changes in inventory amounts between the count date and the final inventory records are
properly recorded include:
1. Whether the perpetual inventory records are properly adjusted.
2. Reliability of the entity’s perpetual inventory records.
3. Reasons for significant differences between the information obtained during the physical count
and the perpetual inventory records.
Q.67 GHK Associates, Chartered Accountants, conducting the audit of PBS Ltd., a listed company for the
year ended on 31.03.2023 is concerned with the presentation and disclosure of segment
information included in Company's Annual Report. GHK Associates want to ensure that methods
adopted by management for determining segment information have resulted in disclosure in
accordance with the applicable financial reporting framework. Guide GHK Associates with
‘Examples of Matters’ that may be relevant when obtaining an understanding of the methods used by
the management with reference to the relevant SA. [Jan. 21 – New Syllabus (5 Marks)]
Ans.: Examples of Matters relevant in obtaining an understanding of the methods used by the
management for determining segment information:
• As per SA 501, “Audit Evidence - Specific Consideration for Selected Items”, the auditor shall
obtain sufficient appropriate audit evidence regarding the presentation and disclosure of segment
information in accordance with the applicable financial reporting framework by obtaining an
understanding of the methods used by management in determining segment information, and
evaluating whether such methods are likely to result in disclosure in accordance with the
applicable FRF.
• Example of matters that may be relevant when obtaining an understanding of the methods used
by management in determining segment information and whether such methods are likely to
result in disclosure in accordance with the applicable financial reporting framework include:
(1) Sales, transfers and charges between segments, and elimination of intersegment amounts.
(2) Comparisons with budgets and other expected results, for example, operating profits as a
percentage of sales.
(3) The allocation of assets and costs among segments.
(4) Consistency with prior periods, and the adequacy of the disclosures with respect to
inconsistencies.
Q.68 The Engagement Partner of the audit team of High Inventory Limited assessed that the inventory is
material with respect to the audit of the financial statement for the current period. Upon inquiring
with the management, the Engagement Partner identified that the management will be performing
an annual physical inventory count at all the warehouses where the entity stores and maintains its
inventory. Moreover, management confirmed in its written representation that they will be
performing a 100% physical count of inventory for the current period.
As a result, the engagement Partner decided not to perform any physical count of inventory as it will
be a duplication of the work. Moreover, he decided that the written representation from
management stating “the inventory exists and is in appropriate physical condition” will be sufficient
and appropriate with respect to audit evidence to conclude that the inventory balance in the
financial statement is free from any material misstatement.
In the light of SA 501, evaluate whether the decision taken by the Engagement Partner is
appropriate or not. [MTP-Oct. 22]

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Ans.: Auditor’s duties to obtain evidences regarding existence and condition of inventory:
SA 501 “Audit Evidence – Specific Considerations for Specific Items”, requires from the auditor that
when inventory is material to the financial statements, he shall obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory by attendance at physical inventory
counting, unless impracticable, to:
(i) Evaluate management’s instructions and procedures for recording and controlling the results of
the entity’s physical inventory counting;
(ii) Observe the performance of management’s count procedures;
(iii) Inspect the inventory; and
(iv) Perform test counts.
Attendance at physical inventory counting involves:
(1) Inspecting the inventory to ascertain its existence and evaluate its condition, and performing
test counts;
(2) Observing compliance with management’s instructions and the performance of procedures for
recording and controlling the results of the physical inventory count; and
(3) Obtaining audit evidence as to the reliability of management’s count procedures.
Hence in the given case, the approach of Engagement Partner is not appropriate as when inventory is
material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory. This should be done by performing various audit
procedures which also includes attending physical count, observing the count, inspecting the
inventory and reperforming physical counts.

1.19 - SA 505 “External Confirmation”

Q.69 Never Permit Limited refused to allow you to get direct confirmation of the outstanding balances of
trade receivables. You want to ensure on grounds of materiality that atleast outstanding above a
threshold limit needs to be confirmed and reconciliation is to be carried out before finalising the
audit. If the company does not relent, how will you respond? [May 18 – New Syllabus (4 Marks)]
Ans.: Management refusal to allow auditor to send confirmation request:
• SA 505, “External Confirmations”, establishes standards on the auditor’s use of external
confirmation as a means of obtaining audit evidence. It requires that the auditor should employ
external confirmation procedures in consultation with the management.
• The auditor may come across certain situations in which the management may request him not
to seek external confirmation from certain parties because of some reasons, for example, due to
a dispute with the particular creditor or debtor.
• If the management refuses to allow the auditor to send a confirmation request, the auditor shall:
a. Inquire as to Management’s reasons for the refusal, and seek audit evidence as to their
validity and reasonableness;
b. Evaluate the implications of management’s refusal on the auditor’s assessment of the
relevant risks of material misstatement, including the risk of fraud, and on the nature, timing
and extent of other audit procedures, and
c. Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
• If the auditor concludes that management’s refusal to allow the auditor to send a confirmation
request is unreasonable or the auditor is unable to obtain relevant and reliable audit evidence

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from alternative audit procedures, the auditor shall communicate with TCWG and also
determine its implication for the audit and his opinion.
Q.70 M/s ABC & Co., LLP are appointed auditors of Sharp Company Ltd. for the year ended on 31st
March, 2023. As part of the audit process, they want to use confirmation procedures as audit
evidence during the course of audit. In view of the fact that positive confirmations are not
responded favourably, the firm also intends to use negative confirmation requests. What are the
factors to be considered for the same? [May 19 – Old Syllabus (7 Marks)]
Ans.: Use of negative confirmations:
• As per SA 505, “External Confirmation”, Negative Confirmation is a request that the confirming
party respond directly to the auditor only if the confirming party disagrees with the information
provided in the request.
• Negative confirmations provide less persuasive audit evidence than positive confirmations.
Accordingly, the auditor shall use negative confirmation requests as the sole substantive audit
procedure only when all of the following conditions are present:
(a) Low Risk of material misstatement and auditor has obtained sufficient appropriate audit
evidence regarding the operating effectiveness of controls.
(b) The population comprises a large number of small, homogeneous, account balances or
transactions.
(c) A very low exception rate is expected.
(d) The auditor is not aware of circumstances or conditions that would cause recipients of
negative confirmation requests to disregard such requests.
Factors to be considered while designing confirmation requests:
As per SA 505 “External Confirmations” factors to consider when designing confirmation requests
include:
(i) Assertion being addressed.
(ii) Specific identified RMM.
(iii) Layout & presentation of request.
(iv) Prior experience on the audit of similar engagements.
(v) Method of communication.
(vi) Management authorisation/encouragement to Confirming Party to respond to auditor.
(vii) Ability of Confirming Party to provide/confirm requested information.
Q.71 Your firm has been appointed as the statutory auditors of AGM Private Ltd. for the financial year
2022-23. While verification of company’s trade receivables as on 31st March 2023, accountant of
AGM Ltd. has requested you, not to send balance confirmations to a particular group of trade
receivables since the said balances are under dispute and the matter is pending in the Court. As a
Statutory Auditor, how would you deal in this situation? [RTP-May 20]
Ans.: Management refusal to allow auditor to send confirmation request:
• SA 505, “External Confirmations”, establishes standards on the auditor’s use of external
confirmation as a means of obtaining audit evidence. It requires that the auditor should employ
external confirmation procedures in consultation with the management.
• The auditor may come across certain situations in which the management may request him not
to seek external confirmation from certain parties because of some reasons, for example, due to
a dispute with the particular creditor or debtor.

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• If the management refuses to allow the auditor to send a confirmation request, the auditor shall:
(a) Inquire as to Management’s reasons for the refusal, and seek audit evidence as to their
validity and reasonableness;
(b) Evaluate the implications of management’s refusal on the auditor’s assessment of the
relevant risks of material misstatement, including the risk of fraud, and on the nature,
timing and extent of other audit procedures; and
(c) Perform alternative audit procedures designed to obtain relevant and reliable audit
evidence.
• If the auditor concludes that management’s refusal to allow the auditor to send a confirmation
request is unreasonable or the auditor is unable to obtain relevant and reliable audit evidence
from alternative audit procedures, the auditor shall communicate with TCWG and also
determine its implication for the audit and his opinion.
Q.72 During the audit of Star Ltd., a company engaged in the production of paper, the auditor received
certain confirmation for the balances of trade payables outstanding in the balance sheet through
external confirmation by “Negative Confirmation Request”. In the list of trade payables, there are
number of small balances except one which is an old outstanding of ₹ 20 lakhs for which no
confirmation was received. Comment with respect to Standards of Auditing relating to the
confirmation process and how to deal the non-receipt of confirmation. [Nov. 22 (5 Marks)]
Ans.: Response to Negative Confirmation Request:
• As per SA 505, “External Confirmation”, Negative Confirmation is a request that the confirming
party respond directly to the auditor only if the confirming party disagrees with the information
provided in the request.
• Negative confirmations provide less persuasive audit evidence than positive confirmations. In
case of negative confirmation request, confirming parties may be more likely to respond
indicating their disagreement with a confirmation request when the information in the request
is not in their favour, and less likely to respond otherwise.
• Failure of confirming party to respond to a negative confirmation request provides significantly
less persuasive audit evidence than does a response to a positive confirmation request.
• In the instant case, the auditor sent the negative confirmation requesting the trade payables
having outstanding balances in the balance sheet while doing audit of Star Ltd. One of the old
outstanding of ₹ 20 lakhs has not sent the confirmation on the credit balance.
• Non-response for negative confirmation request does not means that there is some
misstatement as negative confirmation request itself is to respond to the auditor only if the
confirming party disagrees with the information provided in the request.
• In the present case, considering the materiality of the account balance, the auditor may examine
subsequent cash disbursements or correspondence from third parties, and other records, such
as goods received notes.

1.20 - SA 510 “Initial Audit Engagements – Opening Balances”

Q.73 In an initial audit engagement, the auditor will have to satisfy about the sufficiency and
appropriateness of ‘Opening balances’ to ensure that they are free from misstatements, which may
materially affect the current financial statements. Lay down the audit procedure, you will follow,
when financial statements are audited for the first time.
If, after performing the procedure, you are not satisfied about the correctness of ‘Opening
Balances’, what approach you will adopt in drafting your audit report? [MTP-April 18, Oct. 19]

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Ans.: Audit procedures for verification of opening balances in case of initial audit engagement:
As per SA 510 “Initial Audit Engagements-Opening Balances”, the objective of the Auditor while
conducting an initial audit engagement with respect to opening balances is to obtain sufficient
appropriate audit evidence so that the:
(i) opening balances of the preceding period have been correctly brought forward to the current
period;
(ii) opening balances do not contain any misstatement that materially affect the current period’s
financial statements; and
(iii) appropriate accounting policies reflected in the opening balances have been consistently
applied in the current period’s financial statements, or changes thereto are properly accounted
for and adequately presented and disclosed in accordance with the applicable financial
reporting framework.
When the audit of financial statements is being conducted for the first time, the auditor has to
perform auditing procedures to obtain sufficient appropriate audit evidence. Since opening balances
represent effect of transaction and events of the preceding period and accounting policies applied in
the preceding period, the auditor need to obtain evidence having regard to nature of opening
balances, materiality of the opening balances and accounting policies.
Since it will not be possible for auditor to perform certain procedures, e.g., observing physical
verification of inventories, etc. the auditor may obtain confirmation, etc. and perform suitable
procedures in respect of fixed assets, investments, etc. The auditor can also obtain management
representation with regards to the opening balances.
Considerations while drafting Report:
If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening
balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate.
Further, If the auditor concludes that the opening balances contain a misstatement that materially
affects the current period’s financial statements, and the effect of the misstatement is not properly
accounted for or not adequately presented or disclosed, the auditor shall express a qualified opinion
or an adverse opinion in accordance with SA 705.
Q.74 CA Jack, a recently qualified practicing Chartered Accountant got his first audit assignment of
Futura (P.) Ltd. for the financial year 2022-23. He obtained all the relevant appropriate audit
evidence for the items related to Statement of Profit and Loss. However, while auditing the Balance
Sheet items, CA Jack left out obtaining appropriate audit evidence, say, confirmations, from the
outstanding Accounts Receivable amounting ₹ 100 lakhs, continued as it is from the last year, on
the affirmation of the management that there is no receipts and further credits during the year. CA
Jack, therefore, excluded from the audit programme, the audit of accounts receivable on the
understanding that it pertains to the preceding year which was already audited by predecessor
auditor. Comment. [MTP-Oct.18, May 20]
Ans.: Audit procedures for verification of opening balances in case of initial audit engagement:
As per SA 510 “Initial Audit Engagements - Opening Balances”, the objective of the Auditor while
conducting an initial audit engagement with respect to opening balances is to obtain sufficient
appropriate audit evidence so that the:
(i) opening balances of the preceding period have been correctly brought forward to the current
period;

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(ii) opening balances do not contain any misstatement that materially affect the current period’s
financial statements; and
(iii) appropriate accounting policies reflected in the opening balances have been consistently
applied in the current period’s financial statements, or changes thereto are properly accounted
for and adequately presented and disclosed in accordance with the applicable financial
reporting framework.
If the prior period’s financial statements were audited by a predecessor auditor, the auditor may be
able to obtain sufficient appropriate audit evidence regarding the opening balances by perusing the
copies of the audited financial statements including the other relevant documents relating to the
prior period financial statements such as supporting schedules to 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.
In the given case, the management of Futura (P.) Ltd. has restrained CA Jack, its auditor, from
obtaining appropriate audit evidence for balances of Accounts Receivable outstanding as it is from
the preceding year. CA Jack, on believing that the preceding year balances have already been
audited and on the statement of the management that there are no receipts and credits during the
current year, therefore excluded the verification of Accounts Receivable from his audit programme.
Conclusion: CA Jack was required to obtain from the management a written representation (as
covered by SA 580) for their views and expressions; and to perform appropriate procedures on
closing balances of Accounts Receivable to ensure its appropriateness. In the present case, CA Jack
will be held guilty for professional misconduct for not exercising due diligence in the conduct of his
professional duties as per the Code of Ethics.
Q.75 You have been appointed as statutory auditor of M/s Moon Ltd. for the financial year 2022-23. As
the auditor of the company, you want to ensure that closing balances of previous year have been
correctly brought forward as opening balances in the current year. State the audit procedures for
the same to ensure that there is no misstatement. [Nov. 19 – Old Syllabus (5 Marks)]
Or
Mr. X has been appointed as an auditor of M/s ABC Ltd., Mr. X wants to be satisfied about the
sufficiency and appropriateness of ‘Opening Balances’ to ensure that they are free from
misstatements. Lay down the audit procedure, Mr. X should follow, in the initial audit engagement
of M/s ABC Ltd. Also suggest the approach to be followed regarding mention in the audit report if
Mr. X is not satisfied about the correctness of ‘Opening Balances’?
[Nov. 19 – New Syllabus (4 Marks)]
Ans.: Audit procedures for verification of opening balances in case of initial audit engagement:
SA 510 “Initial Audit Engagements - Opening Balances”, deals with the auditor’s responsibilities
relating to verification of opening balances in case of initial audit engagements. Accordingly, auditor
shall obtain sufficient appropriate audit evidence about whether the opening balances contain
misstatements that materially affect the current period’s F.S. by:
(a) Determining whether the prior period’s closing balances have been correctly brought forward
to the current period or, when appropriate, any adjustments have been disclosed as prior
period items in the current year’s Statement of Profit and Loss;
(b) Determining whether the opening balances reflect the application of appropriate accounting
policies; and

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(c) Performing one or more of the following:
(i) Where the prior year F.S. were audited, perusing the copies of the audited F.S. including
the other relevant documents relating to the prior period F.S.;
(ii) Evaluating whether audit procedures performed in the current period provide evidence
relevant to the opening balances; or
(iii) Performing specific audit procedures to obtain evidence regarding the opening balances.
Approach to be followed while drafting Report:
If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening
balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate.
Further, If the auditor concludes that the opening balances contain a misstatement that materially
affects the current period’s financial statements, and the effect of the misstatement is not properly
accounted for or not adequately presented or disclosed, the auditor shall express a qualified opinion
or an adverse opinion in accordance with SA 705.
Q.76 In an initial audit engagement, the auditor will have to satisfy about the sufficiency and
appropriateness of ‘Opening Balances’ to ensure that they are free from misstatements, which may
materially affect the current financial statements. Lay down the audit procedure, you will follow in
cases (i) when the financial statements are audited for the preceding period by another auditor;
and (ii) when financial statements are audited for the first time.
If, after performing the procedure, you are not satisfied about the correctness of ‘Opening
Balances’; what approach you will adopt in drafting your audit report in two situations mentioned
in (i) above? [RTP-May 21]
Ans.: Audit Procedure for verification of opening balances in case of initial audit engagements:
SA 510 “Initial Audit Engagements – Opening Balances” deals with the auditor’s responsibilities
relating to the opening balances in case of initial audit engagements.
(I) Audit procedure if F.S. Audited by another Auditor:
• If the prior period’s F.S. were audited by a predecessor auditor, the auditor may be able to
obtain sufficient appropriate audit evidence regarding the opening balances by perusing
the copies of the audited financial statements including the other relevant documents
relating to the prior period F.S. such as supporting schedules to 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.
(II) Audit procedures if F.S. are audited for the First Time:
• When the audit of F.S. is being conducted for the first time, the auditor has to perform
auditing procedures to obtain sufficient appropriate audit evidence.
• Opening balances represent effect of transaction and events of the preceding period and
accounting policies applied in the preceding period, the auditor need to obtain evidence
having regard to nature of opening balances, materiality of the opening balances and
accounting policies.
• Since it will not be possible for auditor to perform certain procedures, e.g., observing
physical verification of inventories, etc. the auditor may obtain confirmation, etc. and
perform suitable procedures in respect of fixed assets, investments, etc. The auditor can
also obtain management representation with regards to the opening balances.

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Considerations while Drafting Audit Report:
If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening
balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate.
Further, If the auditor concludes that the opening balances contain a misstatement that materially
affects the current period’s financial statements, and the effect of the misstatement is not properly
accounted for or not adequately presented or disclosed, the auditor shall express a qualified opinion
or an adverse opinion.

1.21 - SA 520 “Analytical Procedures”

Q.77 In audit of DEF Limited, the auditor had made use of certain analytical procedures with regard to
certain key data in the statement of profit and loss. The results obtained showed inconsistencies
with other relevant information. State the course of action that the Auditor should take to ensure
that the risk of Material misstatement would be contained to a low level fixed as per materiality
level. [Nov. 18-New Syllabus (4 Marks)]
Ans.: Investigating Results of Analytical Procedures:
• SA 520 “Analytical Procedures” deals with the auditor’s use of analytical procedures as
substantive procedures and as procedures near the end of the audit that assist the auditor when
forming an overall conclusion on the financial statements.
• As per SA 520, if analytical procedures performed in accordance with this SA 520 identify
fluctuations or relationships that are inconsistent with other relevant information or that differ
from expected values by a significant amount, the auditor shall investigate such differences by:
(a) Inquiring of management and obtaining appropriate audit evidence relevant to
management’s responses; and
(b) Performing other audit procedures as necessary in the circumstances.
• Audit evidence relevant to management’s responses may be obtained by evaluating those
responses taking into account the auditor’s understanding of the entity and its environment, and
with other audit evidence obtained during the course of the audit.
• Need to perform other audit procedures may arise when, for example, management is unable to
provide an explanation, or the explanation, together with the audit evidence obtained relevant to
management’s response, is not considered adequate.
Q.78 You have been appointed as an auditor of M/s Excellent Hotels Ltd. As a senior partner, you want to
use analytical procedures in respect of room rentals as well as payroll expenses. Discuss.
[May 19 – Old Syllabus (7 Marks)]
Ans.: Applying analytical procedures as substantive procedures:
• SA 520 “Analytical Procedures” deals with the auditor’s use of analytical procedures as
substantive procedures and as procedures near the end of the audit that assist the auditor when
forming an overall conclusion on the financial statements.
• Accordingly, in some cases, predictive model may be effective as an analytical procedure.
• In case of Payroll cost - Where an entity has a known number of employees at fixed rates of pay
throughout the period, it may be possible for the auditor to use this data to estimate the total
payroll costs for the period with a high degree of accuracy, thereby providing audit evidence for
a significant item in the financial statements and reducing the need to perform tests of details on
the payroll.

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• In case of Room Rental Income of Hotel, different types of analytical procedures provide
different levels of assurance. Analytical procedures involving the prediction of total rental
income in case of hotel taking the room tariff rates, the number of rooms and vacancy rates into
consideration, can provide persuasive evidence and may eliminate the need for further
verification by means of tests of details, provided the elements are appropriately verified.

1.22 - SA 530 “Audit Sampling”

Q.79 In the course of your audit assignment of Indraprastha Ltd., you want to guide your audit assistants
in selecting sample items in such a way that sample can be expected to be representative of the
population and all items have an opportunity of being selected. Guide your assistants with
principal methods of collecting samples. [May 18 – Old Syllabus (4 Marks)]
Ans.: Principal Methods of Selection of Samples:
As per SA 530 “Audit Sampling” principal methods of selection of samples are:
1. Random selection: This method of sampling ensures that all items within a population stand an
equal chance of selection by the use of random number tables or random number generators.
The sampling units could be physical items, such as sales invoices or monetary units.
2. Systematic selection: The number of sampling units in the population is divided by the sample
size to give a sampling interval, for example 50, and having determined a starting point within
the first 50, each 50th sampling unit thereafter is selected.
3. Monetary unit sampling: It is a type of value-weighted selection in which sample size, selection
and evaluation results in a conclusion in monetary amounts.
4. Haphazard selection: Samples are selected without following a structured technique. Although
no structured technique is used, the auditor would nonetheless avoid any conscious bias or
predictability. Haphazard selection is not appropriate when using statistical sampling.
5. Block selection: It involves selection of a block(s) of contiguous items from within the
population. Block selection cannot ordinarily be used in audit sampling because most
populations are structured such that items in a sequence can be expected to have similar
characteristics to each other, but different characteristics from items elsewhere in the
population.
Q.80 Chintamani Ltd. appoints Chintan & Mani as statutory auditors for the financial year 2022-23.
Chintan & Mani seem to have different opinions on Audit approach to be adopted for audit of
Chintamani Ltd. Mani is of the opinion that 100% checking is not required and they can rely on
Audit Sampling techniques in order to provide them a reasonable basis on which they can draw
conclusions about the entire population.
Chintan is concerned that whether the use of audit sampling has provided a reasonable basis for
conclusions about the population that has been tested.
You are required to guide Chintan about his role if audit sampling has not provided a reasonable
basis for conclusions about the population that has been tested in accordance with SA 530.
[RTP-Nov. 22]
Ans.: Evaluating Results of Audit Sampling:
As per SA 530, “Audit Sampling”, the auditor shall evaluate:
(a) The results of the sample; and
(b) Whether the use of audit sampling has provided a reasonable basis for conclusions about the
population that has been tested.

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If the auditor concludes that audit sampling has not provided a reasonable basis for conclusions
about the population that has been tested, the auditor may:
(I) Request management to investigate misstatements that have been identified and the potential
for further misstatements and to make any necessary adjustments; or
(II) Tailor the nature, timing and extent of those further audit procedures to best achieve the
required assurance. For example, in the case of tests of controls, the auditor might extend the
sample size, test an alternative control or modify related substantive procedures.
Q. While conducting audit of PC Ltd., CA. T decided to use sampling technique to test the trade
80A receivables at the planning stage. He directed his team members to divide the whole population of
trade receivables balances to be tested in a few separate groups called 'strata'. He directed to treat
each stratum as if it was a separate population and divided the trade receivables balances of PC
Ltd. for the Financial Year 2022-23 into groups on the basis of personal judgment as follows:
SI No. Particulars
1 (a) Balances in excess of ₹ 50,00,000;
2 (b) Balances in the range of ₹ 40,00,001 to ₹ 50,00,000;
3 (c) Balances in the range of ₹ 30,00,001 to ₹ 40,00,000;
4 (d) Balances in the range of ₹ 20,00,001 to ₹ 30,00,000;
5 (e) Balances in the range of ₹ 10,00,001 to ₹ 20,00,000;
6 (f) Balances ₹ 10,00,000 and below
From the above mentioned groups, CA. T directed to pick up different percentage of items for
examination from each of the group. One of the team members, Mr. Neel, wants to use some other
technique of sampling for the above purpose as the concept of stratification is not clear to him. You
are required to explain the concept of stratification and its uses to Mr. Neel. [May 23 (5 Marks)]
Ans.: Concept of Stratification:
• As per SA 530 “Audit Sampling”, the objective of the auditor when using audit sampling is to
provide a reasonable basis for the auditor to draw conclusions about the population from which
the sample is selected. Accordingly, in considering the characteristics of the population from
which the sample will be drawn, the auditor may determine that stratification or value-weighted
selection is appropriate.
• SA 530 “Audit Sampling” defines the term stratification as “the process of dividing a population
into sub-populations, each of which is a group of sampling units which have similar
characteristics (often monetary value)”. Every such group so divided is called strata. Each
stratum is treated as if it were a separate population and proportionate items are selected from
each of the stratum.
Various uses of stratification in accordance with SA 530 are:
(i) Audit efficiency may be improved if the auditor stratifies a population by dividing it into
discrete sub-populations which have an identifying characteristic. The objective of
stratification is to reduce the variability of items within each stratum and therefore allow
sample size to be reduced without increasing sampling risk.
(ii) When performing tests of details, the population is often stratified by monetary value. This
allows greater audit effort to be directed to the larger value items, as these items may contain
the greatest potential misstatement in terms of overstatement.
(iii) The results of audit procedures applied to a sample of items within a stratum can only be
projected to the items that make up that stratum. To draw a conclusion on the entire

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population, the auditor will need to consider the risk of material misstatement in relation to
whatever other strata make up the entire population.
(iv) If a class of transactions or account balance has been divided into strata, the misstatement is
projected for each stratum separately. Projected misstatements for each stratum are then
combined when considering the possible effect of misstatements on the total class of
transactions or account balance.

1.23 - SA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related
Disclosures”

Q.81 A Pvt. Ltd. is engaged in the business of real estate. The auditor of the company requested the
information from the management to review the outcome of accounting estimates (like estimated
costs considered for percentage completion etc.) included in the prior period financial statements
and their subsequent re-estimation for the purpose of the current period.
The management has refused the information to the auditor saying that the review of prior period
information should not be done by the auditor. Please advise. [RTP-May 19, MTP-Nov. 21]

Ans.: Review of outcome of Accounting Estimates:

• SA 540 “Auditing Accounting Estimates, including Fair Value Accounting Estimates and Related
Disclosures” requires the auditor to review the outcome of accounting estimates included in
the prior period financial statements, or, where applicable, their subsequent re-estimation for
the purpose of the current period.
• The nature and extent of the auditor’s review takes account of the nature of the accounting
estimates, and whether the information obtained from the review would be relevant to
identifying and assessing risks of material misstatement of accounting estimates made in the
current period financial statements.
• However, the review is not intended to call into question the judgments made in the prior
periods that were based on information available at that time.
• The outcome of an accounting estimate will often differ from the accounting estimate
recognised in the prior period financial statements. By performing risk assessment procedures
to identify and understand the reasons for such differences, the auditor may obtain:
(a) Information regarding the effectiveness of management’s prior period estimation process,
from which the auditor can judge the likely effectiveness of management’s current
process.
(b) Audit evidence that is pertinent to the re-estimation, in the current period, of prior period
accounting estimates.
(c) Audit evidence of matters, such as estimation uncertainty, that may be required to be
disclosed in the financial statements.
• The review of prior period accounting estimates may also assist the auditor, in the current
period, in identifying circumstances or conditions that increase the susceptibility of accounting
estimates to, or indicate the presence of, possible management bias. The auditor’s professional
skepticism assists in identifying such circumstances or conditions and in determining the
nature, timing and extent of further audit procedures.

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Q.82 During the audit of Data Solutions Ltd., a listed company, your audit manager observed that several
estimates are made by the Company. He seeks your guidance to know areas of accounting
estimates that may give rise to lower level of risk of material misstatement. Guide him with
examples. [Nov. 19 – Old Syllabus (5 Marks)]
Ans.: Areas of accounting estimates that may give rise to lower level of risk of material
misstatement:
SA 540 “Auditing Accounting Estimates, including Fair Value Accounting Estimates and Related
Disclosures” defines an accounting estimate as “an approximation of a monetary amount in the
absence of a precise means of measurement”. This term is used for an amount measured at fair
value where there is estimation uncertainty. The degree of estimation uncertainty affects the risks
of material misstatement of accounting estimates.
Some accounting estimates involve relatively low estimation uncertainty and may give rise to lower
risks of material misstatements, for example:
(a) Accounting estimates arising in entities that engage in business activities that are not complex.
(b) Accounting estimates that are frequently made and updated because they relate to routine
transactions.
(c) Accounting estimates derived from data that is readily available, such as published interest
rate data or exchange-traded prices of securities. Such data may be referred to as “observable”
in the context of a fair value accounting estimate.
(d) Fair value accounting estimates where the method of measurement prescribed by the
applicable financial reporting framework is simple and applied easily to the asset or liability
requiring measurement at fair value.
(e) Fair value accounting estimates where the model used to measure the accounting estimate is
well-known or generally accepted, provided that the assumptions or inputs to the model are
observable.
Q.83 Mr. L while conducting the audit of ABC Ltd., observed that a substantial amount is recognized in
respect of obsolescence of inventory and warranty obligation in the financial statements. Mr. L
wants to obtain written representation from the management to determine whether the
assumptions and estimates used are reasonable.
Guide Mr. L with reference to the relevant Standard on Auditing. [Nov. 19–New Syllabus (5 Marks)]
Ans.: Written Representations as to Accounting Estimates:
• SA 540 “Auditing Accounting Estimates, including Fair Value Accounting Estimates and Related
Disclosures” requires the auditor to obtain written representations from the management and,
where appropriate, those charged with governance whether they believe significant
assumptions used in making accounting estimates are reasonable.
• SA 580 “Written Representations” discusses the use of written representations. Depending on
the nature, materiality and extent of estimation uncertainty, written representations about
accounting estimates recognised or disclosed in the financial statements may include
representations:
(a) About the appropriateness of the measurement processes, including related assumptions
and models, used by management in determining accounting estimates in the context of the
applicable FRF, and the consistency in application of the processes.
(b) That the assumptions appropriately reflect management’s intent and ability to carry out
specific courses of action on behalf of the entity, where relevant to the accounting estimates
and disclosures.

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(c) That disclosure related to accounting estimates are complete and appropriate under the
applicable FRF.
(d) That no subsequent event requires adjustment to the accounting estimates and disclosures
included in the financial statements.
Q.84 M/s. HK & Co. was appointed as an auditor of GSB Limited, a company operating its business in
telecom sector. As per spectrum allocation agreement with Government, GSB Limited is required to
pay certain percentage of its annual revenue as license fee. GSB Limited paid the license fee on its
core business for the last two years. At the end of third year, the communication was received from
Government that it needs to pay agreed percentage on its total revenues and not only on core
business revenues. Matter was disputed and went to court of law. On prudence basis, GSB Limited
made a provision on estimated business in its books of account of agreed percentage on non-core
business receipts also. The amount of provision was of such huge amount that the GSB Limited's
profit and loss account for that quarter reflected loss due to that provision. How you as an auditor
can evaluate this accounting estimate which involves significant risk and what if Management has
not addressed the effects of estimation uncertainty on provision made?
[Jan. 21 – New Syllabus (4 Marks); MTP-March 22, April 23]
Ans.: Evaluation of Accounting Estimates which involves significant Risks:
• As per SA 540 “Auditing Accounting Estimates including Fair Value Accounting Estimates and
Related Disclosures” for accounting estimates that give rise to significant risks in addition to
other procedures to meet the requirements of SA 330, the auditor shall evaluate the following:
(a) How management has considered alternative assumptions or outcomes, and why it has
rejected them, or how management has otherwise addressed estimation uncertainty in
making the accounting estimate.
(b) Whether the significant assumptions used by management are reasonable.
(c) Where relevant to the reasonableness of the significant assumptions used by management
or the appropriate application of the applicable financial reporting framework,
management’s intent to carry out specific courses of action and its ability to do so.
• If, in the auditor’s judgment, management has not adequately addressed the effects of estimation
uncertainty on the accounting estimates that give rise to significant risks, the auditor shall, if
considered necessary, develop a range with which to evaluate the reasonableness of the
accounting estimate.
Q.85 While auditing Z Ltd., you observe certain material financial statement assertions have been based
on estimates made by the management. As the auditor how do you minimize the risk of material
misstatements? [May 11 (6 Marks), MTP-April 21]
Ans.: Evaluation of financial statement assertions based on management estimates:
As per SA 540 “Auditing Accounting Estimates, including Fair Value Accounting Estimates” auditor
shall obtain an understanding of the following in order to identify and assess the risks of material
misstatement for accounting estimates:
(a) The requirements of the applicable FRF relevant to accounting estimates.
(b) How management identifies those transactions, events and conditions that may give rise to
the need for accounting estimates.
In obtaining this understanding, the auditor shall make inquiries of management about
changes in circumstances that may give rise to new, or the need to revise existing accounting
estimates.

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(c) The estimation making process adopted by the management including:
(i) The method, including where applicable the model used in making the accounting
estimates.
(ii) Relevant controls.
(iii) Whether management has used an expert.
(iv) Assumptions underlying the accounting estimates.
(v) Whether there has been or ought to have been a change from the prior period in the
methods for making the accounting estimates, and if so why.
(vi) Whether and if so, how the management has assessed the effect of estimation uncertainty.
The auditor shall review the outcome of accounting estimates included in the prior period
financial statements.
Q.86 Assumptions are integral components of accounting estimates. State the matters that the auditor
may consider in obtaining an understanding of the assumptions underlying the accounting
estimates with reference to relevant SAs. [Dec. 21 – Old Syllabus (5 Marks)]
Ans.: Matters that the auditor may consider in obtaining an understanding of the assumptions:
SA 540 “Auditing Accounting Estimates including Fair Value Accounting Estimates and Related
Disclosures” deals with the auditor’s responsibilities regarding accounting estimates, including fair
value accounting estimates, and related disclosures in an audit of financial statements.
Assumptions are integral components of accounting estimates. In accordance with SA 540, matters
that the auditor may consider in obtaining an understanding of the assumptions underlying the
accounting estimates include, for example:
(1) The nature of the assumptions, including which of the assumptions are likely to be significant
assumptions.
(2) How management assesses whether the assumptions are relevant and complete (that is, that
all relevant variables have been taken into account).
(3) Where applicable, how management determines that the assumptions used are internally
consistent.
(4) Whether the assumptions relate to matters within the control of management (for example,
assumptions about the maintenance programs that may affect the estimation of an asset’s
useful life), and how they conform to the entity’s business plans and the external environment,
or to matters that are outside its control (for example, assumptions about interest rates,
mortality rates, potential judicial or regulatory actions, or the variability and the timing of
future cash flows).
(5) The nature and extent of documentation, if any, supporting the assumptions.
Assumptions may be made or identified by an expert to assist management in making the
accounting estimates. Such assumptions, when used by management, become management’s
assumptions.
Q.87 CA Harry is appointed as a Statutory Auditor of Delist Limited for the financial year 2022-23. M/s
Delist Limited is a listed entity at National Stock Exchange and the financial statements are to be
drawn up in compliance with Ind AS. M/s Delist Limited made certain fair value accounting
estimates on complex financial instruments which are not traded in an active and open market. CA
Harry is concerned with identification and assessment of the risks of material misstatement for
accounting estimates. Guide him with regard to the estimation making process adopted by
management with reference to the relevant Standard on Auditing. [May 22 (4 Marks)]

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Ans.: Estimation making process adopted by management w.r.t. accounting estimates:
As per SA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures”, in order to provide a basis for the identification and assessment of the risks of
material misstatements for accounting estimate, auditor shall obtain understating of the estimation
making process adopted by the management including:
(1) The method, including where applicable the model, used in making the accounting estimates.
(2) Relevant controls.
(3) Whether management has used an expert?
(4) The assumption underlying the accounting estimates.
(5) Whether there has been or ought to have been a change from the prior period in the methods for
making the accounting estimates, and if so, why; and
(6) Whether and, if so, how the management has assessed the effect of estimation uncertainty.
Q. BETA Ltd is engaged in the Construction business since year 2001. The auditor understands that a
87A thorough construction estimate is vital to the viability of any construction business and requested
the information related to financing and operating estimated costs from the management to review
the outcome of accounting estimates included in the prior period financial statements and their
subsequent re-estimation for the purpose of current period.
The management refused to provide the information to the auditor as it believed that the
judgments and estimates made in the prior periods were based on the information available at that
time, and the review of the prior period information should not be done by the auditor in the
current financial year. With reference to the relevant SA, comment on whether the contention of
management is correct or not. [May 23 (5 Marks)]
Ans.: Review of outcome of Accounting Estimates: Refer Answer of Q. No. 81
Q. M/s ABC Limited is engaged in the business of construction of infrastructure and housing projects.
87B While preparing the financial statements for the year ended 31.03.2023 management has made
various accounting estimates and confirmed to the auditor that all necessary accounting estimates
have been recognized, measured and disclosed in the financial statements are in accordance with
the applicable financial reporting framework. The auditor during the course of audit observed
some changed circumstances giving rise to the need for an accounting estimate. Inquiries of same
were sought from the management. Can you list down some circumstances, change of which will
result in inquiries from the management? [May 23 (4 Marks)]
Ans.: Inquiries of management about changes in circumstances:
As per SA 540 “Auditing Accounting Estimates, including Fair Value Accounting Estimates and
Related Disclosures”, the auditor’s understanding of the entity and its environment obtained during
the performance of risk assessment procedures, together with other audit evidence obtained during
the course of the audit, assist the auditor in identifying circumstances, or changes in circumstances,
that may give rise to the need for an accounting estimate.
Inquiries of management about changes in circumstances may include, for example, inquiries about
whether:
(i) The entity has engaged in new types of transactions that may give rise to accounting
estimates.
(ii) Terms of transactions that gave rise to accounting estimates have changed.
(iii) Accounting policies relating to accounting estimates have changed, as a result of changes to
the requirements of the applicable financial reporting framework or otherwise.

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(iv) Regulatory or other changes outside the control of management have occurred that may
require management to revise, or make new, accounting estimates.
(v) New conditions or events have occurred that may give rise to the need for new or revised
accounting estimates.

1.24 - SA 550 “Related Parties”

Q.88 In the course of audit of Q Ltd., its statutory auditor wants to be sure of the adequacy of related
party disclosures? Kindly guide the auditor in identifying the possible source of related party
information. [MTP-Oct.18]
Or
JY & Co. is appointed as auditor of Breeze Ltd. JY & Co. seeks your guidance for reviewing the
records and documentation of the company regarding ‘related party transactions in the normal
course of business’. Describe the steps to be followed. [MTP-March 19]
Or
The financial statements of Beta Ltd. have been prepared by the Management with due disclosures
for related parties and transactions with them. However, as the auditor of the company, you are not
sure of the reliability of the said disclosures. Mention the documents and records that may be
helpful in gathering information about related party relationships and transactions.
[Nov. 19 – Old Syllabus (5 Marks)]
Ans.: Possible sources of related Party Information:
• As per SA 550 “Related Parties” the auditor shall remain alert, when inspecting records or
documents with respect to arrangements or information indicating the existence of related party
relationships or transactions, not previously identified or disclosed to the auditor.
• During the audit, the auditor may inspect records or documents that may provide information
about related party relationships and transactions, for example:
1. Entity income tax returns.
2. Information supplied by the entity to regulatory authorities.
3. Shareholder registers to identify the entity’s principal shareholders.
4. Statements of conflicts of interest from management and TCWG.
5. Records of the entity’s investments and those of its pension plans.
6. Contracts and agreements with key management or TCWG.
7. Significant contracts and agreements not in the entity’s ordinary course of business.
8. Specific invoices and correspondence from the entity’s professional advisors.
9. Life insurance policies acquired by the entity.
10. Significant contracts re-negotiated by the entity during the period.
11. Internal auditors’ reports.
12. Documents associated with the entity’s filings with a securities regulator (for example,
prospectuses).
• Auditor should also obtain further information on significant transactions outside the entity’s
normal course of business. It enables him to evaluate whether fraud risk factors, if any, are
present.
• In addition, the auditor needs to be alert for transactions which appear unusual in the
circumstances and which may indicate the existence of previously unidentified related parties.

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For example: Complex equity transactions such as corporate restructurings or acquisitions,
transactions with offshore entities in jurisdictions with weak corporate laws, the leasing of
premises etc.
• Finally, the auditor should also obtain a written representation from the management
concerning the completeness of information provided regarding the identification of related
parties.
Q.89 Mr. X, while conducting audit of PQR Ltd., comes across certain transactions which according to
him are significant transactions with related parties and identified to be outside the entity's
normal course of business. Guide Mr. X with examples of such transactions and to understand the
nature of significant transactions outside the entity's normal course of business.
[Nov. 20 – New Syllabus (5 Marks)]
Ans.: Examples of transactions outside the entity’s normal course of business:
• SA 550 “Related Parties” deals with the auditor’s responsibilities regarding related party
relationships and transactions when performing an audit of financial statements.
• Accordingly, if the auditor identifies significant transactions outside the entity’s normal course of
business when performing the audit procedures, the auditor shall inquire of management about:
1. The nature of these transactions; and
2. Whether related parties could be involved.
• Obtaining further information on significant transactions outside the entity’s normal course of
business enables the auditor to evaluate whether fraud risk factors, if any, are present and,
where the applicable financial reporting framework establishes related party requirements, to
identify the risks of material misstatement.
• Examples of transactions outside the entity’s normal course of business, include the following:
1. Complex equity transactions, such as corporate restructurings or acquisitions.
2. Transactions with offshore entities in jurisdictions with weak corporate laws.
3. The leasing of premises or the rendering of management services by the entity to another
party if no consideration is exchanged.
4. Sales transactions with unusually large discounts or returns.
5. Transactions with circular arrangements, for example, sales with a commitment to
repurchase.
6. Transactions under contracts whose terms are changed before expiry.
Q.90 JKL Limited is engaged in the business of Construction and real estate having various projects
across states. M/s YT & Co, Chartered Accountants have been appointed as Statutory Auditors.
Audit Team from M/s YT & Co for audit of JKL Limited comprises of CA Z-Engagement Partner, CA
Q, a paid assistant and 3 Articled Assistants. During preliminary verification, CA Z observed that
huge amount of sub-contract payments were made to M/s JB Associates, a partnership firm in
which Director of JKL Limited is a managing partner. The engagement team discussed that SA 315
and SA 240 shall include specific consideration of the susceptibility of the financial statements to
material misstatement due to fraud or error that could result from the JKL Limited's related party
relationships and transaction. Highlight the matters that are to be addressed in the discussion by
CA Z with engagement team members with reference to the relevant Standard on Auditing.
[May 22 (5 Marks)]

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Ans.: Matters to be addressed in the Engagement Team Discussion:
As per SA 550 “Related Parties”, the engagement team discussion that SA 315 and SA 240 require
shall include specific consideration of the susceptibility of the financial statements to material
misstatement due to fraud or error that could result from the entity’s related party relationships
and transactions.
Accordingly matters that are to be addressed in the discussion by CA Z among the engagement team
include:
(1) Nature and extent of the entity’s relationships and transactions with related parties.
(2) Emphasis on the importance of maintaining professional skepticism throughout the audit
regarding the potential for material misstatement associated with related party relationships
and transactions.
(3) Circumstances or conditions of the entity that may indicate the existence of related party
relationships or transactions that management has not identified or disclosed to the auditor.
(4) Records or documents that may indicate the existence of related party relationships or
transactions.
(5) Importance that management and TCWG attach to the identification, appropriate accounting
for, and disclosure of related party relationships and transactions and the related risk of
management override of relevant controls.
In addition, the discussion in the context of fraud may include specific consideration of how related
parties may be involved in fraud. For example:
(1) How special-purpose entities controlled by management might be used to facilitate earnings
management.
(2) How transactions between the entity and a known business partner of a key member of
management could be arranged to facilitate misappropriation of the entity’s assets.

1.25 - SA 560 “Subsequent Events”

Q.91 Amudhan & Co., are the Auditors of XYZ Company Ltd., for the year ended on 31.03.2022. The
Audit Report for that year was signed by the Auditors on 04.05.2022. The Annual General Meeting
was decided to be held during the month of August 2022. On 06.05.2022, the Company had
received a communication from the Central Government that an amount of ₹ 5,800 Crore kept
pending on account of incentives pertaining to Financial Year 2021-22 had been approved and
the amount would be paid to the Company before the end of May 2022. To a query to Chief
Financial officer of the company by the board, it was informed that this amount had not been
recognised in the Audited Financial Statements in view of the same not being released before the
close of the financial year and due to uncertainty of receipt. Now, having received the amount, the
board of Directors wished to include this amount in the Financial Statements of the company for
the Financial Year ended on 31.03.2022. On 08.05.2022, the Board amended the accounts,
approved the same and requested the Auditor to consider this event and issue a fresh Audit
Report for the year ended on 31.03.2022. Analyse the issues involved and give your views as to
whether or not the Auditor could accede to the request of the Board of Directors.
[Nov. 18-New Syllabus (5 Marks)]

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Ans.: Event Occurring after the Balance Sheet Date:
(a) Issues Involved:
1. Whether the Financial statements can be amended after the signing of audit report, but
before being issued to stakeholders.
2. What are the disclosure requirements if the financial statements are amended after the
signing of the audit report?
3. What are the auditor’s duties if the financial statements are revised after signing the audit
report?
(b) Reposes to issues:
• As the audit report was signed on 04.05.2022 and financial statements amended on
08.05.2022, it appears that financial statements are not yet been issued to stakeholders.
Hence, financial statements may be amended so as to incorporate any significant event
which provide evidence of conditions that existed at the end of the reporting period, in
accordance with Ind-AS 10 “Events after the Reporting period”.
• As required by Ind-AS 10, entity shall disclose the date when the financial statements
were approved for issue and who gave that approval. If the entity’s owners or others have
the power to amend the financial statements after issue, the entity shall disclose that fact.
• As per SA 560, “Subsequent Events”, the auditor has no obligation to perform any audit
procedures regarding the financial statements after the date of the 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 to the auditor that, had it been known to the
auditor at the date of the auditor’s report, may have caused the auditor to amend the
auditor’s report, the auditor shall:
(i) Discuss the matter with management and, where appropriate, those charged with
governance.
(ii) Determine whether the financial statements need amendment and, if so,
(iii) Inquire how management intends to address the matter in the financial statements.
• As per SA 560 “Subsequent Events”, if management amends the financial statements, the
auditor shall:
(a) Extend the audit procedures to the date of the new auditor’s report; and
(b) Provide a new auditor’s report on the amended financial statements.
• It is also provided in SA 560 that when law, regulation or FRF does not prohibit
management from restricting the amendment of financial statements to the effect of
subsequent events, auditor is permitted to restrict the audit procedures on subsequent
events to that amendment. In such case, the auditor shall:
(a) Amend the Audit report to include an additional date restricted to that amendment.
(b) Provide a new or amended Audit Report that includes Emphasis of Matter/Other
matter Para that conveys that auditor’s procedures on subsequent event are
restricted solely to amendments of financial statements.

Q.92 M/s LMP Associates, Chartered Accountants while conducting the audit of PQR Ltd want to
conduct an inquiry of management and those charged with governance as to whether any

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subsequent events have occurred which might affect the financial statements. Guide M/s LMP
Associates with the matters where specific enquiry may be conducted to evaluate subsequent
events. [May 19 – Old Syllabus (7 Marks)]

Ans.: Specific Inquiries having effect on the financial statements:

SA 560 “Subsequent Events” deals with the auditor’s responsibilities relating to subsequent events
in an audit of financial statements. SA 560 requires from the auditor to conduct inquiry of
management and, where appropriate, TCWG as to whether any subsequent events have occurred
which might affect the financial statements. The matters where specific inquiry may be conducted
are as listed below:
1. Whether new commitments, borrowings or guarantees have been entered into.
2. Whether sales or acquisitions of assets have occurred or are planned.
3. Whether there have been increases in capital or issuance of debt instruments, such as the issue
of new shares or debentures, or an agreement to merge or liquidate has been made or is
planned.
4. Whether any assets have been appropriated by government or destroyed, for example, by fire
or flood.
5. Whether there have been any developments regarding contingencies.
6. Whether any unusual accounting adjustments have been made or are contemplated.
7. Whether any events have occurred or are likely to occur that will bring into question the
appropriateness of accounting policies used in the financial statements, as would be the case,
for example, if such events call into question the validity of the going concern assumption.
8. Whether any events have occurred that are relevant to the measurement of estimates or
provisions made in the financial statements.
9. Whether any events have occurred that are relevant to the recoverability of assets.
Q.93 You are the auditor of PQR Ltd. which is in the business of supplying food products to various
airline companies operating aircrafts in domestic circle only. As per terms of agreement with
airlines, the company needs to stock various non-perishable food items for coming one month
(average holding of inventory to the tune of INR 75 Crores). Also the payment terms have been
settled and the company receives payment in 45 days after the supply of goods. Everything was
going-on well till the end of March 2021 when pandemic Covid hit the world and everything came
to a standstill. Aviation sector was hit hard and there were no flights from April 2021 onwards.
Consequently, the business of PQR Ltd. also got severely affected and the scheduled supplies of
goods to airlines also were not made. Also, the liquidity position of airline companies got hit and
the scheduled payments were also not received on due dates.
As the auditor of PQR Ltd. what audit procedures would you perform to ensure that all
subsequent events are considered, so that financial statements for the year ended on 31.03.2021
represent true and fair view? [Nov. 20 – New Syllabus (5 Marks)]
Ans.: Audit Procedures on subsequent Events:
• SA 560 “Subsequent Events” deals with the auditor’s responsibilities relating to subsequent
events in an audit of financial statements.
• As per SA 560 the term, Subsequent Events may be defined as the events occurring between
the dates of balance sheet and audit report and the facts that become known to the auditor
after the date of the auditor’s report.

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• The auditor shall perform audit procedures designed to obtain sufficient appropriate audit
evidence that all events occurring between the date of the financial statements and the date of
the auditor’s report that require adjustment of, or disclosure in, the financial statements have
been identified.
• The auditor’s procedures on subsequent events shall include the following:
(a) Obtaining an understanding of the procedures through which management has identified
subsequent events.
(b) Inquiring of management and, TCWG as to occurrence of subsequent events which might
affect the financial statements.
(c) Reading minutes of management & TCWG meetings that have been held after the date of
the financial statements.
(d) Reading the entity’s latest subsequent interim financial statements, if any.
• When, as a result of the procedures performed as required the auditor identifies events that
require adjustment of, or disclosure in, the financial statements, the auditor shall determine
whether each such event is appropriately reflected in those financial statements.

1.26 - SA 570 “Going Concern”

Q.94 Toddle Limited had definite plan of its business being closed within a short period from the close
of the accounting year ended on 31st March, 2023. The financial statements for the year ended on
31/03/2023 had been prepared on the same basis as it had been in earlier periods with an
additional note that the business of the company shall cease in near future and the assets shall be
disposed of in accordance with a plan of disposal as decided by the management. The statutory
auditors of the company indicated this aspect in Key Audit Matters only by a reference as to a
possible cessation of business and making of adjustments, if any, thereto to be made at the time of
cessation only. Comment on the reporting by the statutory auditor as above.
[May 18 – New Syllabus (5 Marks), MTP-March 19]
Or
TBR Limited has plan of its business being closed due to huge loss incurred due to the recent
outbreak of global pandemic, within a short period from the close of the accounting year ended on
31st March, 2023. The Financial Statements for the said year have been prepared on the same
basis as in earlier periods with an additional note that the business of the Company shall cease in
near future and the assets shall be disposed off in accordance with a plan of disposal as decided by
the Management. The Statutory Auditors of the Company indicated this aspect in Key Audit Matters
only by a reference as to a possible cessation of business and making of adjustments, if any, to be
made at the time of cessation only. Comment on the reporting by the Statutory Auditor as above.
[Nov. 20 – Old Syllabus (5 Marks)]
Ans.: Reporting of cessation of business as a Key Audit Matter:
• As per SA 570 "Going Concern", management intentions to liquidate the entity or to cease
operations is one of the events or conditions that may cast significant doubt on the entity's
ability to continue as going concern. As per SA 570, if events or conditions have been identified
that may cast significant doubt on the entity's ability to continue as a going concern but, based
on the audit evidence obtained, the auditor concludes that no material uncertainty exists, the
auditor shall evaluate whether, in view of the requirements of the applicable FRF, the financial
statements provide adequate disclosures about these events or conditions.

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• Further, as per SA 701 "Communicating Key Audit Matters in the Independent Auditor's Report",
when matters relating to going concern may be determined to be key audit matters, and explains
that a material uncertainty related to events or conditions that may cast significant doubt on the
entity's ability to continue as a going concern is, by its nature, a Key Audit Matter. SA 701 also
puts emphasis on auditor's responsibility to communicate Key Audit Matters in the auditor's
report.
• As per the facts given in the case, intention of TBR Limited has a plan of its business being closed
as huge loss is incurred due to the recent outbreak of global pandemic, within short period from
31st March 2023. However, financial statements for the year ended 31.03.2023 have been
prepared on the same basis as it had been in earlier periods with an additional note. Thus,
management’s intention to liquidate the entity or to cease operations is one of the events or
conditions that may cast significant doubt on the entity's ability to continue as going concern is a
Key Audit Matter.
Conclusion: Auditor is required to Communicate the Key Audit Matters in accordance with SA 570
as stated above. Simple reference as to a possible cessation of business and making of adjustments,
if any, he made at the time of cessation only by the auditor in his report is not sufficient.
Note: It is assumed that financial statements of current period as well as of earlier period are
not prepared on going concern basis of accounting.
Q.95 M/s Airlift Ltd., Carrying on the business of Passenger Transportation by air is running into
continuous financial losses as well as reduction in Sales due to stiff competition and frequent break
down of its own aircrafts. The Financial Statements for the year ended on 31.03.2023 are to be now
finalized. The Management is quite uncertain as to its ability to continue in near future and has
informed the Auditors that having seized of this matter, it had constituted a committee to study
this aspect and to give suggestions for recovery, if any, from this bad situation. Till the study is
completed, according to the Management, the issue involves uncertainty as to its ability to continue
its business and it informs the Auditor that the fact of uncertainty clamping on the “Going Concern”
would suitably be disclosed in notes to accounts. State the reporting requirement if any, in the
Independent Auditor’s Report in respect of this matter. [Nov. 18 – New Syllabus (5 Marks)]
Ans.: Reporting Requirements in the Independent Auditor’s report in respect of Going Concern:
• SA 570 “Going Concern”, requires the auditor to obtain sufficient appropriate audit evidence
about the appropriateness of management’s use of the going concern assumption in the
preparation and presentation of the financial statements and to conclude whether there is a
material uncertainty about the entity’s ability to continue as a going concern.
• When events or conditions have been identified that may cast significant doubt on the entity’s
ability to continue as a going concern, the auditor shall obtain sufficient appropriate audit
evidence to determine whether or not a material uncertainty exists through performing
additional audit procedures, including consideration of mitigating factors.
• When the auditor concludes that the use of the going concern assumption is appropriate in the
circumstances but a material uncertainty exists, the auditor shall determine whether the
financial statements:
(a) Adequately describe the principal events that may cast significant doubt on the entity’s
ability to continue as a going concern and management’s plans to deal with these events or
conditions; and
(b) Disclose clearly that there is a material uncertainty related to going concern and, therefore,
that it may be unable to realize its assets and discharge its liabilities in the normal course of
business.

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• If adequate disclosure is made in the financial statements, the auditor shall express an
unmodified opinion and the auditor’s report shall include a separate section under the heading
“Material Uncertainty Related to Going Concern” to:
(i) Draw attention to the note in the financial statements that discloses the matters set out
above; and
(ii) State that these events or conditions indicate that a material uncertainty exists that may
cast significant doubt on the entity’s ability to continue as a going concern and that the
auditor’s opinion is not modified in respect of the matter.
• In the instant case, the auditor should disclose about the material uncertainty and express an
unmodified opinion and in his audit report shall include a separate section under the heading
“Material Uncertainty Related to Going Concern” to draw attention to the note in the financial
statements that discloses the matters set out above; and state that these events or conditions
indicate that a material uncertainty exists that may cast significant doubt on the entity’s ability
to continue as a going concern and that the auditor’s opinion is not modified in respect of the
matter.
Q.96 AQP Limited is one of the prominent players in the chemicals industry. The company is a public
company domiciled in India and listed on BSE and NSE. The Company was facing extreme liquidity
constraints and there were multiple indicators that casted doubt over the company’s ability to
continue as a going concern.
The Company was led into insolvency proceedings by consortium of banks led by PNB and the
NCLT ordered the commencement of corporate insolvency process against the Company on 31st
August 2022. The company invited prospective lenders, investors and others to submit their
resolution plans to the Resolution Professional (RP) latest by 1st January 2023. The RP reviewed
the resolution plans and ensured conformity with Insolvency and Bankruptcy Code 2016. The
compliant plans were presented to Committee on Creditors (CoC) on 2nd February 2023 and the
resolution plan submitted by PQR Ltd. was evaluated as highest evaluated Compliant Resolution
Plan. CoC of AQP Ltd approved the Resolution Plan submitted by PQR Ltd. on 2nd March 2023. The
approval of NCLT was finally obtained on 4th May 2023.
PQR Ltd submitted detailed plans and commitments as part of the resolution plan including
clearance of all outstanding debts which were leading to negative cash flows.
Please suggest how would you deal with this situation as the auditors of AQP Ltd.
[MTP-March 19, RTP-Nov. 19]
Ans.: Evaluation of Appropriateness of Going Concern Basis of Accounting:
• As per SA 570 Going Concern, if events or conditions have been identified that may cast
significant doubt on the entity’s ability to continue as a going concern, the auditor shall obtain
sufficient appropriate audit evidence to determine whether or not a material uncertainty exists
related to events or conditions that may cast significant doubt on the entity’s ability to continue
as a going concern (hereinafter referred to as “material uncertainty”) through performing
additional audit procedures, including consideration of mitigating factors.
• Additional procedures shall include:
(i) Where management has not yet performed an assessment of the entity’s ability to continue
as a going concern, requesting management to make its assessment.
(ii) Evaluating management’s plans for future actions in relation to its going concern
assessment, whether the outcome of these plans is likely to improve the situation and
whether management’s plans are feasible in the circumstances.

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(iii) Where the entity has prepared a cash flow forecast evaluate the reliability of the underlying
data generated to prepare the forecast and determine whether there is adequate support
for the assumptions underlying the forecast.
(iv) Considering whether any additional facts or information have become available since the
date on which management made its assessment.
(v) Requesting written representations from management and, where appropriate, those
charged with governance, regarding their plans for future actions and the feasibility of
these plans.
• The auditor shall evaluate whether sufficient appropriate audit evidence has been obtained
regarding, and shall conclude on, the appropriateness of management’s use of the going concern
basis of accounting in the preparation of the financial statements.
• If events or conditions have been identified that may cast significant doubt on the entity’s ability
to continue as a going concern but, based on the audit evidence obtained the auditor concludes
that no material uncertainty exists, the auditor shall evaluate whether, in view of the
requirements of the applicable financial reporting framework, the financial statements provide
adequate disclosures about these events or conditions.
• In the instant case, the approval of the resolution plan is a significant mitigating factor to counter
the going concern issues of AQP Ltd. PQR Ltd has submitted a detailed plan and commitments
that has been given as part of the resolution plan which includes clearance of all outstanding
debts which were leading to negative cash flows.
Conclusion: Events and conditions are mitigated effectively and there is no material uncertainty in
relation to the ability of the company to continue as a going concern.
Q.97 Enumerate the Operating conditions of an entity that may cast significant doubt on the entity’s
ability to continue as a “Going Concern”. [May 19 – Old Syllabus (4 Marks)]
Ans.: Indications to be considered while evaluating Going Concern Assumption:
SA 570 “Going Concern”, requires that auditor should obtain sufficient appropriate audit evidence
about the appropriateness of management’s use of the going concern assumption in the preparation
and presentation of the financial statements. Accordingly, when performing risk assessment
procedures as required by SA 315, the auditor shall consider whether there are events or conditions
that may cast significant doubt on the entity’s ability to continue as a going concern. Examples of
such events or conditions (operating conditions) are:
1. Management intentions to liquidate the entity or to cease operations.
2. Loss of key management without replacement.
3. Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
4. Labour difficulties.
5. Shortages of important supplies.
6. Emergence of a highly successful competitor.
Q.98 Star Ltd. is a power generating company which uses coal as raw material for its power generating
plant. The Company has been allotted coal blocks in the state of Jharkhand and Odisha. During the
FY 2022-23, a scam regarding allotment of coal blocks was unveiled leading to a ban on the
allotment of coal blocks to various companies including Star Ltd. This happened in the month of
Dec. 2022 and as such entire power generation process of Star Ltd, came to a halt in that month. As
a result of such ban, and the resultant stoppage of the production process, many key managerial
personnel of the company left the Company. There were delays in the payment of wages and

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salaries and the banks from whom the Company had taken funds for project financing also decided
not to extend further finance or to fund further working capital requirements of the Company.
Further, when discussed with the management, the statutory auditor understood that the Company
had no action plan to mitigate such circumstances. Further, all such circumstances were not
reflected the financial statements of Star Ltd. What course of action should the statutory auditor of
the Company consider in such situation? [RTP-May 21]
Ans.: Evaluation of appropriateness of Going Concern Basis of Accounting:
• As per SA 570- “Going Concern” auditor is required to obtain sufficient appropriate audit
evidence about the appropriateness of management’s use of the going concern basis of
accounting in the preparation of the F.S. and to conclude whether a material uncertainty exists
about the entity’s ability to continue as a going concern.
• When the use of going concern basis of accounting is inappropriate, the auditor shall express an
adverse opinion.
• In the present case, the following circumstances indicate the inability of Star Ltd. to continue as a
going concern:
(a) Ban on the allotment of coal blocks
(b) Halt in power generation
(c) Key Managerial Personnel leaving the Company.
(d) Banks decided not to extend further finance and not to fund the working capital
requirements of the Company.
(e) Non-availability of sound action plan to mitigate such circumstances.
Conclusion: Considering the factors as stated above, it is clear that the going concern basis is
inappropriate for the Company and such circumstances are not reflected in the F.S. of the Company.
As such, the statutory auditor of Star Ltd. should:
(1) Express an adverse opinion in accordance with SA 705; and
(2) In the Basis of Opinion paragraph of the auditor’s report, the statutory auditor should state that
a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as
a going concern and that the F.S. do not adequately disclose this matter.
Q.99 TUV Ltd. is a company engaged in the business of manufacture of spare parts. Saroj & Associates
are the statutory auditors of the company for the FY 2022-23. During the course of audit, CA Saroj
noticed that the company had a major customer, namely, Korean Mart from South Korea. Owing to
an outbreak of war and subsequent destruction leading to government ban on import and export
in South Korea, the demand from Korean Mart for the products of TUV Ltd. ended for an
unforeseeable time period. When discussed with the management, CA Saroj was told that the
company is in the process of identifying new customers for their products. CA Saroj understands
that though the use of going concern assumption is appropriate but a material uncertainty exists
with respect to the identification of new customers. This fact is duly reflected in the financial
statements of TUV Ltd. for the FY 2022-23. How should CA Saroj deal with this matter in the
auditor’s report for the FY 2022-23? [MTP-Nov. 21, April 23]
Ans.: Evaluating appropriateness of going concern assumption:
• SA 570 “Going Concern” requires that the auditor shall consider whether there are events or
conditions that may cast significant doubt on the entity’s ability to continue as a going concern.
Loss of a major market or a key customer is one of the operating indicators that may cast
significant doubt on the company’s ability to continue as a going concern.

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• In the present case, TUV Ltd. has a key customer in South Korea from which the demand for its
products has ended on account of outbreak of war, subsequent destruction and government ban
on import and export in South Korea. Further, the company has not yet identified new customers
and is in the process of doing the same. As such, the identification of new customer is a material
uncertainty that cast a significant doubt on the company’s ability to continue as a going concern.
However, this matter is duly disclosed by the management of TUV Ltd. in the financial
statements for the year ended on 31.03.2023.
Conclusion: Considering that the going concern assumption is appropriate but a material
uncertainty exists with respect to identification of new customer, CA Saroj should:
(1) Express an unmodified opinion and
(2) Include in his audit report, a separate section under the heading “Material Uncertainty Related
to Going Concern” to:
(i) Draw attention to the note in the financial statements that discloses the matters and
(ii) State that these events or conditions indicate that a material uncertainty exists that may
cast significant doubt on the entity’s ability to continue as a going concern and that the
auditor’s opinion is not modified in respect of the matter.
Q.100 Abhinandan Limited a chemical manufacturing company, having its factory located at Nanded
Village, for the year 2022-23 appointed Subahu & Co. as their statutory auditors. During the course
of the audit, Subahu & Co. identified that Abhinandan Limited received a show cause notice from
National Green Tribunal based on the investigation performed by the regional forest department
for violating environmental laws. Upon gathering a further understanding of the said matter, it was
identified that Abhinandan Limited was dumping toxic solid waste, without treating it, on the
nearby grounds, and because of this, the nearby water bodies were getting polluted. Based on the
preliminary investigation performed by the regional forest department under the directions of the
National Green Tribunal, it was identified that these practices were carried out since 2009 and a
lot of damage has been done to the environment by Abhinandan Limited. A show cause notice was
already issued to Abhinandan Limited by the National Green Tribunal for levying the penalty of an
amount of ₹ 500 crore. The unaudited profit for the financial year 2022-23 of Abhinandan Limited
was ₹ 35 crore and the unaudited turnover was ₹ 100 crore. Upon inquiry it was identified that
Abhinandan Limited has disclosed this matter in the financial statements by way of footnote, the
extract of which is provided below:
“The company has received a show cause notice from the National Green Tribunal for some potential
violation of environmental laws and the company’s legal department has assessed and found that the
judgment would be in favour of the company. Accordingly, no provision has been created for such
notices.”
In the light of the above scenario kindly provide what should be the appropriate option for the
statutory auditor of the company to report this matter. [RTP-Nov. 22]
Ans.: Evaluating appropriateness of going concern assumption:
• As per SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”, the
auditor is required to obtain an understanding and need to evaluate the impact of other laws and
regulations that do not have a direct effect on the determination of the amounts and disclosures in
the financial statements, but compliance with which may be fundamental to the operating aspects
of the business, to an entity’s ability to continue its business, or to avoid material penalties (for
example, compliance with the terms of an operating license, compliance with regulatory solvency
requirements, or compliance with environmental regulations); non-compliance with such laws
and regulations may therefore have a material effect on the financial statements.

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• The auditor shall perform the following audit procedures to help identify instances of non-
compliance with other laws and regulations that may have a material effect on the financial
statements:
(a) Inquiring of management and, where appropriate, TCWG, as to whether the entity is in
compliance with such laws and regulations; and
(b) Inspecting correspondence, if any, with the relevant licensing or regulatory authorities.
• As per Sec. 143(3)(j) of the Companies Act, 2013 read with Rule 11 of Companies (Audit and
Auditor’s) Rules, 2014, the auditor is required to report whether the company has disclosed the
impact, if any, of pending litigations on its financial position in its financial statement.
• As per SA 570, “Going Concern”, if the auditor concludes that management’s use of the going
concern basis of accounting is appropriate in the circumstances but a material uncertainty exists,
the auditor shall determine whether the financial statements:
(i) Adequately disclose the principal events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern and management’s plans to deal with these
events or conditions; and
(ii) Disclose clearly that there is material uncertainty related to events or conditions that may
cast significant doubt on the entity’s ability to continue as a going concern and, therefore,
that it may be unable to realize its assets and discharge its liabilities in the normal course of
business.
• If adequate disclosure about the material uncertainty is not made in the financial statements, the
auditor shall
(a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705;
and
(b) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a
material uncertainty exists that may cast significant doubt on the entity’s ability to continue
as a going concern and that the financial statements do not adequately disclose this matter.
• In the current scenario, Abhinandan Limited has received a show cause notice from the National
Green Tribunal of an amount which is more than the net profit and the turnover of the company
for the year. In the event of an unfavorable order for Abhinandan Limited, there will be an impact
on Abhinandan Limited’s ability to continue as a going concern. As a result, appropriate disclosure
should be provided by management for such events which cast significant doubt on the entity’s
ability to continue as a going concern.
Conclusion: As no appropriate disclosure has been provided by Abhinandan Limited for show cause
notice, Subahu & Co. should report this matter in their audit report under “Going Concern Para” as
per SA 570 and under clause (j) of Sec. 143(3) of the Companies Act, 2013. Also, the auditor is
required to issue an adverse opinion as per SA 705, “Modifications to the Opinion in the Independent
Auditor’s Report”.
Q. Joy Ltd. is an entertainment company which runs a circus and travels around the country to
100A entertain the masses. The circus began losing its popularity over the past few years and attendance
has reportedly dropped by as much as 75% in the current financial year. Animal rights activists
continuously targeted the circus for its use of animal creatures like elephants in the show. The CEO
noted that the audience seemed to be abandoning the circus due to their expanding entertainment
options. The high cost of moving the show from city to city eventually made the business model
untenable. As a result, many key managerial personnel of the company left the company, there
were delays in the payment of wages and salaries, and the bank from whom the company had
taken funds also decided not to extend further finance or to fund further working capital
requirements of the company.

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When discussed with the management, the statutory auditor understood that the company had no
action plan to mitigate such circumstances (Use of going concern assumption is inappropriate).
Further, all such circumstances were not reflected in the financial statements of Joy Ltd. What
course of action should the statutory auditor of the company take in the auditor's report in such
situation? [May 23 (5 Marks)]
Ans.: Evaluation of appropriateness of Going Concern Basis of Accounting:
• SA 570 “Going Concern” deals with the auditor’s responsibilities in the audit of financial
statements relating to going concern and the implications for the auditor’s report.
• The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and
conclude on, the appropriateness of management’s use of the going concern basis of accounting in
the preparation of the financial statements, and to conclude, based on the audit evidence obtained,
whether a material uncertainty exists about the entity’s ability to continue as a going concern.
• When the use of going concern basis of accounting is inappropriate i.e., if the financial statements
have been prepared using the going concern basis of accounting but, in the auditor’s judgment,
management’s use of the going concern basis of accounting in the preparation of the financial
statements is inappropriate, the auditor shall express an adverse opinion.
• Also, when adequate disclosure of a material uncertainty is not made in the financial statements
the auditor shall express a qualified opinion or adverse opinion, as appropriate, in accordance
with SA 705; and in the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state
that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue
as a going concern and that the financial statements do not adequately disclose this matter.
• In the present case, the following circumstances indicate the inability of Joy Ltd. to continue as a
going concern:
(a) Expanding entertainment options of the audience
(b) High cost of moving the show
(c) Key Managerial Personnel leaving the Company.
(d) Banks decided not to extend further finance and not to fund the working capital
requirements of the Company.
(e) Non availability of sound action plan to mitigate such circumstances.
Conclusion: Considering the above factors it is clear that the going concern basis is inappropriate for
the Company. Further, such circumstances are not reflected in the financial statements of the
Company. As such, the statutory auditor of Joy Ltd. should:
(1) Express an adverse opinion in accordance with SA 705; and
(2) In the Basis of Opinion paragraph of the auditor’s report, the statutory auditor should state that
a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as
a going concern and that the financial statements do not adequately disclose this matter.

1.27 - SA 580 “Written Representations”

Q.101 In the course of audit of K Ltd., its auditor Mr. ‘N’ observed that there was a special audit conducted
at the instance of the management on a possible suspicion of a fraud and requested for a copy of
the report to enable him to report on the fraud aspects. Despite many reminders it was not
provided. In absence of the special audit report, Mr. ‘N’ insisted that he be provided with at least a
written representation in respect of fraud on/by the company. For this request also, the
management remained silent. Please guide Mr. ‘N’. [RTP-May 18, MTP-Oct.18]

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Ans.: Auditors Responsibilities Relating to Fraud:
• As per SA 240, “The Auditor’s Responsibilities relating to Fraud in an Audit of Financial
Statements”, the primary responsibility for the prevention and detection of fraud rests with both
TCWG of the entity and management. In addition, an auditor conducting an audit in accordance
with SAs is responsible for obtaining reasonable assurance that the financial statements taken as
a whole are free from material misstatement, whether caused by fraud or error.
• As per SA 580, “Written Representations”, if management does not provide the requested
written representations, the auditor shall discuss the matter with management; 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 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 the auditor concludes that
there is sufficient doubt about the integrity of management such that the written
representations are not reliable; or management does not provide the written representations.
• In the instant case, in the course of audit of K Ltd., its auditor Mr. N observed that there was a
special audit conducted at the instance of the management on a possible suspicion of fraud.
Therefore, the auditor requested for special audit report, which was not provided by the
management despite of many reminders. Mr. N also insisted for written representation in
respect of fraud on/by the company. For this request also, management remained silent.
• Section 143(12) of Companies Act, 2013 requires that 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 may be prescribed. For this purpose, Rule 13 prescribes
the amount of ₹ 1 Cr. or more.
• Para 3(xi) of CARO, 2020 also requires the company auditor to report whether any fraud by the
company or any fraud on the company by its officers or employees has been noticed or reported
during the year; If yes, the nature and the amount involved is to be indicated.
Conclusion: Auditor is required to state the facts in his report and he should also disclaim an
opinion on the financial statements. In exceptional circumstances, he may also consider whether it
is appropriate to withdraw from engagement.
Q.102 PRSH & Co. is the statutory auditor of Make My Journey Ltd. The company is in the business of
tours and travels. Annual turnover of the company is INR 2000 Crores and profits are INR 190
Crores. During the planning meeting of the management and the auditors, it was discussed that the
management needs to provide written representation letter to the auditors for the preparation of
the financial statements and for the completeness of the information provided to the auditor. At
the time of closure of the audit, there has been some confusion about the requirements of the
written representation letter. Management argued that representation need not be written, it can
also be verbal which has been provided to the audit team during the course of their audit. Auditors
have completed their documentation and hence in a way, representation based on verbal
discussions with the auditors has also got documented. Auditors explained that this is mandatory
to obtain written representation in accordance with the requirements of SA 580. However, still
some confusion remains regarding the date and period covered by the written representation. You
are required to advise about the date of and period covered by written representation in view of
SA 580. [RTP-May 19, MTP-March 21]

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Ans.: Date of and period covered by written representation:
SA 580 “Written Representations” provides the following:
• The date of the written representations shall be as near as practicable to the date of the auditor’s
report. However, it should not be after the date of auditor’s report. The written representations
shall be for all financial statements and period(s) referred to in the auditor’s report.
• In some circumstances it may be appropriate for the auditor to obtain a written representation
about a specific assertion in the financial statements during the course of the audit. Where this is
the case, it may be necessary to request an updated written representation.
• The written representations are for all periods referred to in the auditor’s report because
management needs to reaffirm that the written representations it previously made with respect
to the prior periods remain appropriate. The auditor and management may agree to a form of
written representation that updates written representations relating to the prior periods by
addressing whether there are any changes to such written representations and, if so, what they
are.
• Situations may arise where current management were not present during all periods referred to
in the auditor’s report. Such persons may assert that they are not in a position to provide some
or all of the written representations because they were not in place during the period. This fact,
however, does not diminish such persons’ responsibilities for the financial statements as a
whole. Accordingly, the requirement for the auditor to request from them written
representations that cover the whole of the relevant period(s) still applies.
Q.103 Comment on the following: Statutory auditor of O Ltd requested the management for a written
representation in respect of obsolescence of inventory and warranty obligations recognized by the
company in its financial statements. The management denied the representation on the ground
that during the course of audit, all the required procedures were performed by the auditor and
after obtaining sufficient appropriate audit evidence, auditor has issued a clean report. Please
comment. [MTP-March 19]
Ans.: Written Representations as to Accounting Estimates:
• SA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related
Disclosures” requires the auditor to obtain written representations from the management and,
where appropriate, those charged with governance whether they believe significant
assumptions used in making accounting estimates are reasonable.
• Depending on the nature, materiality and extent of estimation uncertainty, written
representations about accounting estimates recognised or disclosed in the financial statements
may include representations:
(a) About the appropriateness of the measurement processes, including related assumptions
and models, used by management in determining accounting estimates in the context of the
applicable FRF, and the consistency in application of the processes.
(b) That the assumptions appropriately reflect management’s intent and ability to carry out
specific courses of action on behalf of the entity, where relevant to the accounting estimates
and disclosures.
(c) That disclosure related to accounting estimates are complete and appropriate under the
applicable FRF.
(d) That no subsequent event requires adjustment to the accounting estimates and disclosures
included in the financial statements.

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• For those accounting estimates not recognised or disclosed in the financial statements, written
representations may also include representations about:
(a) The appropriateness of the basis used by management for determining that the recognition
or disclosure criteria of the applicable financial reporting framework have not been met.
(b) The appropriateness of the basis used by management to overcome the presumption
relating to the use of fair value set forth under the entity’s applicable financial reporting
framework, for those accounting estimates not measured or disclosed at fair value.
Conclusion: Management’s contention on the ground that during the course of audit, all the
required procedures were performed by the auditor and after obtaining sufficient appropriate audit
evidence, auditor has issued a clean report, for not providing written representation is not correct.
The management should provide written representations to the auditor.
Duty of the auditor if management refuses to provide written representations:
As per SA 580 “Written Representations”, if the management does not provide one or more of the
requested written representations, the auditor shall:
(i) Discuss the matter with management,
(ii) Re-evaluate the Integrity of the management and evaluate the effect that this may have on the
reliability of representations (oral or written) and audit evidence in general, and
(iii) Take appropriate actions, including determining the possible effect on the opinion in the
auditor’s report.
(iv) Disclaim an opinion on the financial statements in accordance with SA 705 “Modifications to
the Opinion in the Independent Auditor’s Report”.

1.28 - SA 600 “Using the Work of Another Auditor”

Q.104 PQ Limited, a listed entity, headquartered in Mumbai and is having 15 branches all over India. The
Company is in the business of buying paddy grown by farmers directly and processing to produce
final products for selling in domestic as well as international markets. PQ Limited appointed four
firms of Chartered Accountants for audit of its head office and branches. Your firm is one of those
firms. It was agreed that your firm will act as Principal auditor. What factors will be considered by
you while accepting the position of Principal auditor? [July 21 – New Syllabus (5 Marks)]
Ans.: Factors to be considered while accepting the position of Principal auditor:
In accordance with SA 600 “Using the work of Another Auditor”, the auditor should consider
whether the auditor's own participation is sufficient to be able to act as the principal auditor. For
this purpose, the auditor would consider:
(a) the materiality of the portion of the financial information which the principal auditor audits;
(b) the principal auditor's degree of knowledge regarding the business of the components;
(c) the risk of material misstatements in the financial information of the components audited by
the other auditor; and
(d) the performance of additional procedures as set out in this SA regarding the components
audited by other auditor resulting in the principal auditor having significant participation in
such audit.

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1.29 - SA 610 “Using the Work of Internal Auditor”
Q.105 Moon Ltd. of which you are the statutory auditor, have an internal audit being conducted by an
outside agency. State the factors that weigh considerations in opting to make use of direct
assistance of the internal auditors for the purpose of statutory audit.
[May 18 – New Course (4 Marks)]
Ans.: Using direct assistance of internal auditor:
As per SA 610 “Using the Work of Internal Auditor” statutory auditor can take direct assistance of
internal auditor subject to following conditions:
1. The external auditor is not prohibited by law or regulation from obtaining direct assistance from
internal auditors.
2. There are no significant threats to the objectivity of the internal auditor.
3. The internal auditor is sufficient competent to perform the proposed work.
Precautions to be taken while using direct assistance:
1. The external auditor shall not use internal auditors to provide direct assistance to perform
procedures that:
(a) Involve making significant judgments in the audit;
(b) Relate to higher assessed risks of material misstatement;
(c) Relate to work with which the internal auditors have been involved; or
(d) Relate to decisions the external auditor makes in accordance with this SA regarding the
internal audit function and the use of its work or direct assistance.
2. Prior to using internal auditors to provide direct assistance for purposes of the audit, the
external auditor shall:
(a) Obtain written agreement from an authorized representative of the entity that the internal
auditors will be allowed to follow the external auditor’s instructions, and that the entity will
not intervene in the work the internal auditor performs for the external auditor; and
(b) Obtain written agreement from the internal auditors that they will keep confidential
specific matters as instructed by the external auditor and inform the external auditor of any
threat to their objectivity.
3. The external auditor shall direct, supervise and review the work performed by internal auditors
on the engagement in accordance with SA 220.
Q.106 CA X, a practicing chartered accountant has been appointed as an internal auditor of Textile Ltd.
He conducted the physical verification of the inventory at the year-end and handed over the
report of such verification to CA Y, the statutory auditor of the Company, for his view and
reporting. Can CA Y rely on such report? [MTP-Oct.18]
Ans.: Evaluation of Internal Audit function so as to reply on work of Internal Auditor:
SA 610 “Using the work of Internal auditors” deals with the external auditor’s responsibilities
regarding the work of internal auditors when the external auditor has determined, in accordance
with SA 315 that the internal audit function is likely to be relevant to the audit.
For this purpose, external auditor is required to evaluate the following:
A. Objectivity of Internal Auditor: Objectivity refers to the ability to perform without allowing
bias to override professional judgments. Factors that may affect the external auditor’s evaluation
include the following:

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1. Organisational status of the internal audit function.
2. Conflicting responsibilities.
3. Oversight functions of TCWG w.r.t. employment decisions related to the internal audit
function.
4. Constraints or restrictions placed on the internal audit function by management or TCWG.
B. Level of Competency: Competence of the internal audit function refers to the attainment of
knowledge and skills to enable assigned tasks to be performed diligently. Factors that may affect
the external auditor’s determination include the following:
1. Policies for hiring, training and assigning internal auditors to internal audit engagements.
2. Adequate of technical training and proficiency in auditing of internal auditors.
3. Knowledge of internal auditors w.r.t. entity’s financial reporting and the applicable FRF.
4. Membership of relevant professional bodies that oblige internal auditors to comply with the
relevant professional standards.
C. Systematic and Disciplined Approach: Factors that may affect the external auditor’s
determination of whether the internal audit function applies a systematic and disciplined
approach include the following:
1. Existence, adequacy and use of documented internal audit procedures.
2. Existence of appropriate quality control policies and procedures for internal audit function.
Conclusion: In the present case, if the statutory auditor is satisfied about the appropriateness of the
verification, he can rely on the report but if he finds that the verification is not in order, he has to
decide otherwise. The ultimate responsibility to express opinion on the financial statement is that of
the statutory auditor.
Q.107 Mr. A is appointed as statutory auditor of XYZ Ltd. XYZ Ltd is required to appoint internal auditor
as per statutory provisions given in the Companies Act, 2013 and appointed Mr. B as its internal
auditor. The external auditor Mr. A asked internal auditor to provide direct assistance to him
regarding evaluating significant accounting estimates by the management and assessing the risk
of material misstatements.
(a) Discuss whether Mr. A, statutory auditor, can ask direct assistance from Mr. B, internal
auditor as stated above in view of auditing standards.
(b) Will your answer be different, if Mr. A ask direct assistance from Mr. B, internal auditor with
respect to external confirmation requests and evaluation of the results of external confirma-
tion procedures? [RTP-May 20]
Ans.: (a) Direct Assistance from Internal Auditor:
As per SA 610 “Using the Work of Internal Auditor”, the external auditor shall not use internal
auditors to provide direct assistance to perform procedures that involve making significant
judgments in the audit. The external auditor shall not use internal auditors to provide direct
assistance to perform procedures that:
(i) Involve making significant judgments in the audit;
Significant judgments include the following:
• Assessing the risks of material misstatement;
• Evaluating the sufficiency of tests performed;
• Evaluating the appropriateness of management’s use of the going concern assump-
tion;

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• Evaluating significant accounting estimates; and
• Evaluating the adequacy of disclosures in the financial statements, and other matters
affecting the auditor’s report.
(ii) Relate to higher assessed risks of material misstatement;
(iii) Relate to work with which the internal auditors have been involved; or
(iv) Relate to decisions the external auditor makes in accordance with this SA regarding the
internal audit function and the use of its work or direct assistance.
In the present case, Mr. A asked internal auditor to provide direct assistance regarding
evaluating significant accounting estimates and assessing the risk of material misstatements.
Conclusion: Evaluation of Accounting estimates and assessing Risk of Material Misstatements
involve significant judgments, hence Mr. A should not insists for direct assistance in these
areas.
(b) Direct Assistance from Internal Auditor in case of External Confirmation Procedures:
• SA 610 “Using the Work of Internal Auditor”, provide relevant guidance in determining the
nature and extent of work that may be assigned to internal auditors.
• In determining the nature of work that may be assigned to internal auditors, the external
auditor is careful to limit such work to those areas that would be appropriate to be assigned.
• In accordance with SA 505, “External Confirmation” the external auditor is required to
maintain control over external confirmation requests and evaluate the results of external
confirmation procedures, it would not be appropriate to assign these responsibilities to
internal auditors.
Conclusion: It would not be appropriate to use direct assistance w.r.t. obtaining external
confirmation requests and their evaluation. Assistance may be used in assembling information
necessary for the external auditor to resolve exceptions in confirmation responses.
Q.108 Mr. Sheetal is appointed as a statutory auditor of Mahi Ltd. Mahi Ltd is required to appoint an
internal auditor as per statutory provisions given in the Companies Act, 2013 and appointed Mr.
Kunthu as its internal auditor. The external auditor Mr. Sheetal asked internal auditor to provide
direct assistance to him regarding evaluating the sufficiency of tests performed and the adequacy
of disclosures in the financial statements and other matters affecting the auditor’s report. Discuss
whether Mr. Sheetal, statutory auditor, can ask direct assistance from Mr. Kunthu, internal
auditor as stated above in view of relevant Standard on Auditing. [MTP-April 21]
Ans.: Direct Assistance from Internal Auditor:
As per SA 610 “Using the Work of Internal Auditor”, the external auditor shall not use internal
auditors to provide direct assistance to perform procedures that Involve making significant
judgments in the audit.
Since the external auditor has sole responsibility for the audit opinion expressed, the external
auditor needs to make the significant judgments in the audit engagement.
Significant judgments include the following:
(i) Assessing the risks of material misstatement;
(ii) Evaluating the sufficiency of tests performed;
(iii) Evaluating the appropriateness of management’s use of the going concern assumption;
(iv) Evaluating significant accounting estimates; and
(v) Evaluating the adequacy of disclosures in the financial statements, and other matters affecting
the auditor’s report.

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Conclusion: Mr. Sheetal cannot ask direct assistance from internal auditors regarding evaluating
the sufficiency of tests performed and the adequacy of disclosures in the financial statements and
other matters affecting the auditor’s report.
Q.109 Smart Ltd. is a manufacturing unit and you are External Auditor of the company. Internal auditors
are also appointed as per the provisions of the Companies Act, 2013. As an external auditor you
want to use the internal auditors to provide direct assistance for the purposes of audit. State the
circumstances where the internal auditors cannot be used to provide direct assistance. What
would you include in the audit documentation? [July 21 – Old Syllabus (5 Marks)]
Ans.: Determining the Nature and Extent of Work that Can Be Assigned to Internal Auditors
Providing Direct Assistance:
As per SA 610 “Using the Work of Internal Auditor”, the external auditor shall not use internal
auditors to provide direct assistance to perform procedures that:
(a) Involve making significant judgments in the audit;
(b) Relate to higher assessed risks of material misstatement;
(c) Relate to work with which the internal auditors have been involved; or
(d) Relate to decisions the external auditor makes in accordance with this SA regarding the
internal audit function and the use of its work or direct assistance.
Documentation:
If the external auditor uses internal auditors to provide direct assistance on the audit, the external
auditor shall include in the audit documentation:
(1) The evaluation of the existence and significance of threats to the objectivity of the internal
auditors, and the level of competence of the internal auditors used to provide direct
assistance;
(2) The basis for the decision regarding the nature and extent of the work performed by the
internal auditors;
(3) Who reviewed the work performed and the date and extent of that review in accordance with
SA 230, Audit Documentation;
(4) The written agreements obtained from an authorized representative of the entity and the
internal auditors; and
(5) The working papers prepared by the internal auditors who provided direct assistance on the
audit engagement.
Q.110 ABC Ltd. is engaged in the business of trading and manufacturing of readymade garments. The
company has large balances of accounts receivables as on March 31, 2023, which has been
assessed as the area of high risk in the audit planning stage. For the year ended March 31, 2023, in
respect of the valuation of accounts receivable, the Statutory Auditor has assigned the checking of
the accuracy of the ageing of the accounts receivables and provision made towards doubtful
receivables, to the internal auditor. Please advise the statutory auditor, the areas in which direct
assistance from internal auditor cannot be taken Also, comment in this scenario, whether
statutory auditor can take internal auditor's assistance. [Nov. 22 (5 Marks)]
Ans.: Direct Assistance from Internal Auditor:
As per SA 610 “Using the Work of Internal Auditor”, the external auditor shall not use internal
auditors to provide direct assistance to perform procedures that involve making significant
judgments in the audit. The external auditor shall not use internal auditors to provide direct
assistance to perform procedures that:

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(a) Involve making significant judgments in the audit;
(b) Relate to higher assessed risks of material misstatement;
(c) Relate to work with which the internal auditors have been involved; or
(d) Relate to decisions the external auditor makes in accordance with this SA regarding the
internal audit function and the use of its work or direct assistance.
In the present case, Statutory auditor assigned internal auditor to provide direct assistance
regarding checking of the accuracy of the ageing of the accounts receivables and provision based on
ageing. Valuation of accounts receivable is assessed as an area of higher risk.
Conclusion: Statutory auditor could assign the checking of the accuracy of the ageing of the
accounts receivables and provision made towards doubtful receivables to an internal auditor
providing direct assistance. However, because the evaluation of the adequacy of the provision based
on the aging would involve more than limited judgment, it would not be appropriate to assign that
latter procedure to an internal auditor providing direct assistance.

1.30 - SA 620 “Using the Work of Auditor’s Expert”

Q.111 Mr. Mohan, an auditor of KTEN Limited wants to use the work of an expert. With reference to the
Standard on Auditing state the factors which suggest the need for details and written agreement
between the auditor and the auditor’s expert. [Nov. 16 (5 Marks)]
Ans.: Factors suggesting detailed and written agreement between the auditor and the auditor’s
expert:
As per SA 620 “Using work of Auditor’s Expert” the auditor shall agree, in writing when appropriate,
on the following matters with the auditor’s expert:
1. Nature, scope & objectives of Auditor’s Expert work (may include relevant technical standards or
other professional and industry requirements).
2. Respective roles & responsibilities of auditors & Auditor Expert.
3. Nature, timing & extent of communication, including form of report.
4. Need for Auditor Expert to observe confidentiality requirements under ethical requirements or
Law and regulation.
Factors suggesting detailed and written agreement between the auditor and the auditor’s
expert may be listed as follow:
1. The auditor’s expert will have access to sensitive or confidential entity information.
2. The respective roles or responsibilities of the auditor and the auditor’s expert are different from
those normally expected.
3. Multi-jurisdictional legal or regulatory requirements apply.
4. The matter to which the auditor’s expert’s work relates is highly complex.
5. The auditor has not previously used work performed by that expert.
6. The greater the extent of the auditor’s expert’s work, and its significance in the context of the
audit.
Q.112 X Ltd had a net worth of INR 1300 Crores because of which Ind AS became applicable to them. The
company had various derivative contracts – options, forward contracts, interest rate swaps etc.
which were required to be fair valued for which company got the fair valuation done through an
external third party. The statutory auditors of the company involved an auditor’s expert to audit
valuation of derivatives. Auditor and auditor’s expert were new to each other i.e. they were

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working for the first time together but developed a good bonding during the course of the audit.
The auditor did not enter into any formal agreement with the auditor’s expert. Please advise.
[MTP-Oct. 18, MTP-March 19, RTP-May 19; MTP-March 21; RTP-May 23]
Ans.: Agreement with Auditor’s Expert:
• As per SA 620 “Using work of Auditor’s Expert” the nature, scope and objectives of the auditor’s
expert’s work may vary considerably with the circumstances, as may the respective roles and
responsibilities of the auditor and the auditor’s expert, and the nature, timing and extent of
communication between the auditor and the auditor’s expert. It is therefore required that these
matters are agreed between the auditor and the auditor’s expert.
• In certain situations, the need for a detailed agreement in writing is required like -
(i) The auditor’s expert will have access to sensitive or confidential entity information.
(ii) The matter to which the auditor’s expert’s work relates is highly complex.
(iii) The auditor has not previously used work performed by that expert.
(iv) The greater the extent of the auditor’s expert’s work, and its significance in the context of
the audit.
• In the instant case X Ltd. had various derivative contracts – options, forward contracts, interest
rate swaps etc. which were required to be fair valued for which company got the fair valuation
done through an external third party. The statutory auditors of the company involved an
auditor’s expert to audit valuation of derivatives.
Conclusion: Considering the complexity involved in the valuation and volume of derivatives and
also due to the fact that the auditor and auditor’s expert were new to each other, auditor should
have signed a formal agreement/engagement letter with the auditor’s expert in respect of the work
assigned to him in accordance with SA 620.
Q.113 State what may be the evaluative or review procedures that the Statutory Auditor may do before
concluding as to relevance and reasonableness of Auditor’s Expert work for using it for his audit
purposes. [Nov. 18-New Syllabus (5 Marks)]
Or
CA Dabu has been appointed as an auditor of M/s MAP Technocraft Ltd. to conduct statutory audit.
While conducting audit, he came across some difficulties which the management could not explain
to him properly and, therefore, he decided to take services of Mr. Jay, an engineering consultant.
Mr. Jay performed his work and submitted details to CA Dabu. State the specific procedure which
CA Dabu should follow to evaluate the adequacy of work performed by Mr. Jay.
[May 19-New Syllabus (5 Marks)]
Ans.: Evaluation of Work of Auditor’s expert:
• As per SA 620 “Using the work of an Auditor’s Expert” the auditor shall evaluate the adequacy of
the auditor’s expert’s work for the auditor’s purposes, including:
(a) The relevance and reasonableness of that expert’s findings or conclusions, and their
consistency with other audit evidence;
(b) If that expert’s work involves use of significant assumptions and methods, the relevance
and reasonableness of those assumptions and methods in the circumstances; and
(c) If that expert’s work involves the use of source data that is significant to that expert’s
work, the relevance, completeness, and accuracy of that source data.
• Specific procedures to evaluate the adequacy of the auditor’s expert’s work for the auditor’s
purposes may include:

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(a) Inquiries of the auditor’s expert.
(b) Reviewing the auditor’s expert’s working papers and reports.
(c) Corroborative procedures, such as:
• Observing the auditor’s expert’s work;
• Examining published data, such as statistical reports from reputable, authoritative
sources;
• Confirming relevant matters with third parties;
• Performing detailed analytical procedures; and
• Re-performing calculations.
(d) Discussion with another expert with relevant expertise when, for example, the findings or
conclusions of the auditor’s expert are not consistent with other audit evidence.
(e) Discussing the auditor’s expert’s report with management.
Q. JIN Ltd., at its annual general meeting, appointed Mr. J, Mr. I and Mr. N as joint auditors to conduct
113A audit for the financial year 2022-23. For the valuation of gratuity scheme of the company, Mr. J, Mr.
I and Mr. N wanted to refer their own known Actuaries. Due to difference of opinion, all the joint
auditors consulted their respective Actuaries. Subsequently, major difference was found in the
actuarial reports. However, Mr. J agreed to Mr. I’s actuary report, though, Mr. N did not. Mr. J
contends that Mr. I’s actuary report shall be considered in audit report due to majority of votes.
Now, Mr. N is in dilemma. Explain the responsibility of auditors, in case, report made by Mr. I’s
actuary, later on, was found faulty. [MTP-April 23]
Ans.: Using the work of an Auditor’s Expert:
• As per SA 620 “Using the Work of an Auditor’s Expert”, the expertise of an expert may be
required in the actuarial calculation of liabilities associated with insurance contracts or
employee benefit plans etc., however, the auditor has sole responsibility for the audit opinion
expressed, and that responsibility is not reduced by the auditor’s use of the work of an auditor’s
expert.
• The auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s purposes,
including the relevance and reasonableness of that expert’s findings or conclusions, and their
consistency with other audit evidence as per SA 500.
• Further, in view of SA 620, if the expert’s work involves use of significant assumptions and
methods, then the relevance and reasonableness of those assumptions and methods must be
ensured by the auditor and if the expert’s work involves the use of source data that is significant
to that expert’s work, the relevance, completeness, and accuracy of that source data in the
circumstances must be verified by the auditor.
• In the instant case, Mr. J, Mr. I and Mr. N, jointly appointed as auditors of JIN Ltd., referred their
own known Actuaries for valuation of gratuity scheme. Actuaries are an auditor’s expert as per
SA 620. Mr. Y’s referred actuary has provided the gratuity valuation report, which later on was
found faulty. Further, Mr. N is not in agreement with this report, therefore, he submitted a
separate audit report specifically for such gratuity valuation.
• In such situation, it was duty of Mr. J, Mr. I and Mr. N, before using the gratuity valuation report
of Actuary, to ensure the relevance and reasonableness of assumptions and methods used. They
were also required to examine the relevance, completeness and accuracy of source data used for
such report before expressing their opinion.

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Conclusion: Mr. J, and Mr. I will be held responsible for gross negligence and using such faulty
report without examining the adequacy of expert actuary’s work whereas Mr. N will not be held
liable for the same due to separate opinion expressed by him.
Q.114 HAM Ltd. is engaged in the business of manufacturing of medicines. The manufacturing process
requires raw materials such as hydrochloric acid, caustic soda and other chemicals for the
manufacturing of various drugs. The Company has maintained large stock of raw materials of all
types of chemicals being used. The nature of raw material is such that its physical verification
requires the involvement of an expert. Management hired their expert for the stock taking and
auditors also involved their expert for the same purpose. The auditor observed that the work of
the auditor's expert was not adequate for the auditor's purposes and he could not resolve the
matter through additional audit procedures which included further work performed by both the
auditor's expert and the auditor.
Based on above, the auditor knows that it would be right to express a modified opinion in the
auditor's report because he has not obtained sufficient appropriate audit evidence. But he was
reluctant in doing so and issued a clean audit report and included the name of the expert in his
report to reduce his responsibility for the audit opinion expressed. Comment with respect to
relevant Standard of Auditing relating to the action of the auditor of issuing clean audit report.
[MTP-April 19; May 23 (5 Marks)]
Ans.: Auditor’s responsibility in case of use of work of Auditor’s Expert:
• As per SA 620, “Using the work of an Auditor’s Expert”, if the auditor concludes that the work of
the auditor’s expert is not adequate for the auditor’s purposes and the auditor cannot resolve the
matter through the additional audit, which may involve further work being performed by both
the expert and the auditor, or include employing or engaging another expert, it may be necessary
to express a modified opinion in the auditor’s report in accordance with SA 705 because the
auditor has not obtained sufficient appropriate audit evidence.
• In addition, the auditor shall not refer to the work of an auditor’s expert in an auditor’s report
containing an unmodified opinion unless required by law or regulation to do so. If such reference
is required by law or regulation, the auditor shall indicate in the auditor’s report that the
reference does not reduce the auditor’s responsibility for the audit opinion.
• If the auditor makes reference to the work of an auditor’s expert in the auditor’s report because
such reference is relevant to an understanding of a modification to the auditor’s opinion, the
auditor shall indicate in the auditor’s report that such reference does not reduce the auditor’s
responsibility for that opinion.
Conclusion: The auditor cannot reduce his responsibility by referring the name of auditor’s expert
and thereby issuing a clean report. Auditor should have issued a modified report and could have
given reference to the work of an auditor’s expert in that report if such reference was relevant to
understanding of a modification to the auditor’s opinion but even in that case the auditor should
have indicated in his report that such reference of auditor’s expert does not reduce his
responsibility for that opinion.

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1.31 - SA 700 “Forming an Opinion and Reporting on Financial Statements”
Q.115 CA Sameer is the statutory auditor of Tram Fram Ltd. for the FY 2022-23. While concluding the
audit CA Sameer decided to issue an unmodified opinion, though he also concluded that a material
uncertainty exists with respect to the company’s ability to continue as a going concern on account
of a pending litigation related to labour laws. He is of the view that the company has made
appropriate disclosures with respect to such pending litigation in the notes to accounts annexed to
the financial statements of Tram Fram Ltd. for the FY 2022-23. Explain how CA Sameer will deal
with the above situation in his auditor’s report (draft the relevant portion of the auditor’s report.)
Ans.: Material Uncertainty Related to Going Concern:
In the given situation, auditor is required to include in the audit report an additional para titled as
“Material Uncertainty Related to Going Concern” so as to state the fact related to going concern in
that para.
Material Uncertainty Related to Going Concern
We draw attention to Note 10 in the financial statements, which indicates that the outcome of a
litigation on account of labour laws is pending in case of the company during the year 31st March,
2023. As stated in Note 11, this event or condition, indicate that a material uncertainty exists that
may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is
not modified in respect of this matter.
Q.116 KPI Ltd. is a company on which International Standards on Auditing are applicable along with
Standard on Auditing issued by the ICAI. The company appointed new auditors for the audit of the
financial statements for the year ended on 31st March 2023 after doing all appointment
formalities. In the auditor’s report, auditor referred the International Standard on Auditing in
addition to the Standard on Auditing issued by the ICAI.
As an expert, you are required to advise the auditor regarding auditor’s report for audits
conducted in accordance with both the Standards. [RTP-Nov. 19]
Ans.: Auditor’s Report for Audits Conducted in Accordance with Both Standards on Auditing Issued
by ICAI and International Standards on Auditing:
As per SA 700, “Forming an Opinion and Reporting on Financial Statements”, an auditor may be
required to conduct an audit in accordance with the International Standards on Auditing, in addition
to the Standards on Auditing issued by ICAI. If this is the case, the auditor’s report may refer to
Standards on Auditing in addition to the International Standards on Auditing, but the auditor shall
do so only if:
(a) There is no conflict between the requirements in the International Auditing Standards and
those in SAs that would lead the auditor:
• to form a different opinion, or
• not to include an Emphasis of Matter paragraph or Other Matter paragraph that, in the
particular circumstances, is required by SAs; and
(b) The auditor’s report includes, at a minimum, each of the elements set out in Auditor’s Report
Prescribed by Law or Regulation discussed above when the auditor uses the layout or wording
specified by the Standards on Auditing.
When the auditor’s report refers to both the ISAs and the Standards on Auditing issued by ICAI, the
auditor’s report shall clearly identify the same including the jurisdiction of origin of the other
auditing standards.

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Q.117 MN & Associates, Chartered Accountants have been appointed as statutory Auditors of Cotton Ltd.
for the FY 2022-23. The Company is into the business of yarn manufacturing. For this purpose,
cotton ginning is also done within the factory premises. Raw cotton is purchased from local market
and processed in-house. The Company received a notice from the State Government to deposit
market development fee for the last 5 years to the tune of ₹ 10.00 Crores. The Company and all
other organisations in the same business has not deposited the market development fee, taking
shelter of an old circular issued by the Government. The trade association met with the
government officials to resolve the matter and agreed to deposit the same prospectively. However,
the matter relating to payment of development fee for the last 5 years is pending before the
Government as at the end of the financial year. The Company, however, disclosed the same in notes
to accounts, as contingent liability, without quantifying the effect and proper explanation. If the
liability is provided in the books of account, entire reserves will be wiped off. Auditor seeks your
guidance as to how this disclosure affects them while forming an opinion on financial statements.
[July 21 – New Syllabus (5 Marks)]
Ans.: Forming an opinion and reporting on financial statements –
• As per Ind AS 37, “Provisions, Contingent Liabilities and Contingent Assets”, an entity should
disclose for each class of contingent liability at the end of the reporting period a brief description
of the nature of the contingent liability and, where practicable:
(a) an estimate of its financial effect, measured in the standard;
(b) an indication of the uncertainties relating to the amount or timing of any outflow; and
(c) the possibility of any reimbursement.
• A 700 “Forming an opinion and reporting on financial statements”, requires the auditor to
evaluate whether in view of the requirements of the applicable FRF
(i) The financial statements adequately disclose the significant accounting policies selected
and applied;
(ii) The accounting policies selected and applied are consistent with the applicable financial
reporting framework and are appropriate;
(iii) The accounting estimates made by the management are reasonable;
(iv) The information presented in the financial statements is relevant, reliable, comparable and
understandable;
(v) 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.
• If financial statements prepared in accordance with the requirements of a fair presentation
framework do not achieve fair presentation, the auditor shall discuss the matter with
management and, depending on the requirements of the applicable FRF and how the matter is
resolved, shall determine whether it is necessary to modify the opinion in the auditor’s report in
accordance with SA 705.
• In the present case, the matter relating to payment of development fee for the last 5 years is
pending before the Government as at the end of the financial year. The Company, however,
disclosed the same in notes to accounts, as contingent liability, without quantifying the effect and
proper explanation. If the liability is provided in the books of account, entire reserves will be
wiped off.
Conclusion: Considering the requirements of Ind-AS 37 as stated above, auditor must ensure that
disclosure as per Ind-AS 37 to be given in financial statements. If appropriate disclosures not given
in the financial statements, auditor need to modify the report as per the requirements of SA 705.

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Q.118 CA S has been appointed as Statutory Auditor of SRT Ltd. for the financial year 2021-2022. The
Company while preparing financial statements for the year under audit prepared one additional
profit and loss account that disclosed specific items of expenditure and included the same as an
appendix to the financial statements. CA S has not been able to understand this as the additional
profit and loss account is not covered under applicable financial reporting framework. Guide him
as to how he should deal with this issue while reporting on the financial statements of SRT Ltd.
[July 21 – New Syllabus (5 Marks); RTP-May 23]
Ans.: Supplementary Information Presented with the Financial Statements:
SA 700 “Forming an Opinion and Reporting on Financial Statements” deals with the supplementary
information presented with the financial statements. Accordingly,
• If supplementary information that is not required by the applicable FRF is presented with the
audited F.S., the auditor shall evaluate whether, in the auditor’s professional judgment,
supplementary information is nevertheless an integral part of the F.S. due to its nature or how it
is presented.
• When it is an integral part of the F.S., the supplementary information shall be covered by the
auditor’s opinion.
• If supplementary information that is not required by the applicable FRF is not considered an
integral part of the audited F.S., the auditor shall evaluate whether such supplementary
information is presented in a way that sufficiently and clearly differentiates it from the audited
F.S. If not, then the auditor shall ask management to change the presentation of supplementary
information. If management refuses to do so, the auditor shall identify the unaudited
supplementary information and explain in the auditor’s report that such supplementary
information has not been audited.
• When an additional profit and loss account that discloses specific items of expenditure is
disclosed as a separate schedule, included as an appendix to the financial statements, the auditor
may consider this to be supplementary information that can be clearly differentiated from the
financial statements.
• Thus, additional profit and loss account is not considered an integral part of the audited financial
statements and the auditor shall evaluate that supplementary information is presented in a way
that sufficiently and clearly differentiates it from the audited financial statements.

1.32 – SA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report”
Q.119 “The auditor shall determine, from the matters communicated with those charged with govern-
ance, those matters that required significant auditor attention in performing the audit. In making
this determination, the auditor shall take into account the key factors”. You are required to define
key audit matters and briefly discuss the factors determining the key audit matters.
[RTP-April 18]
Or
As an auditor of a listed company for the year ended on 31st March, 2023, how would you
determine the ‘Key Audit Matters’? [May 19 – Old Syllabus (5 Marks)]
Ans.: Considerations to determine Key Audit Matters:
As per SA 701 “Communicating Key Audit matters in the Independent Auditor’s Report” Key Audit
Matters are those matters that, in the auditor’s professional judgment, were of most significance in
the audit of the F.S. of the current period. Key audit matters are selected from matters
communicated with TCWG.

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The auditor shall determine, from the matters communicated with TCWG, those matters that
required significant auditor attention in performing the audit. In making this determination, the
auditor shall consider the following:
(a) Areas of higher assessed RMM, or significant risks identified in accordance with SA 315;
(b) Significant auditor judgments relating to areas in the F.S. that involved significant management
judgment, including accounting estimates that have been identified as having high estimation
uncertainty.
(c) The effect on the audit of significant events or transactions that occurred during the period.
(d) The auditor shall determine which of the matters so determined above were of most
significance in the audit of the F.S. of the current period and therefore are the key audit
matters.
Q.120 The property, plant and equipment of ABC Ltd. included ₹ 25.75 Crores of earth removing
machines of outdated technology which had been retired from active use and had been kept for
disposal after knock down. These assets appeared at residual value and had been last inspected
ten years back. As an auditor, what may be your reporting concern as regards matters specified
above? [May 18 – New Syllabus (5 Marks)]
Ans.: Reporting Concerns in relation to significant events:
Auditor is required to report under the various requirements of Standards of Auditing, legal and
Regulatory provisions. In the present situation, major reporting requirements will be:
(a) As per the requirement of SA 260 “Communication with Those Charged with Governance”
auditor should communicate significant matters arising during the audit that were discussed,
or subject to correspondence, with management.
(b) The situation as given in the question appears to be a Key Audit Matter and hence auditor is
required to report the situation in the audit report as Key Audit Matter.
(c) Further as per requirement of Para 3(i) of CARO, 2020, auditor is required to comment
(i) Whether the company is maintaining proper records showing full particulars, including
quantitative details and situation of Property, Plant and Equipment;
(ii) Whether these Property, Plant and Equipment have been physically verified by the
management at reasonable intervals.
In the present case, physical verification of assets held under disposal was done ten years back.
Conclusion: In the present case, auditor reporting concerns will be as per the requirement of SA
260, SA 701 and Para 3(i) of CARO, 2020.
Alternative Answer: Answer of this question may also be based on the reporting issues like
Valuation, Accounting and Disclosures as per the requirements of applicable FRF. In that
case, if auditor is not satisfied with the valuation, accounting and disclosures, he may qualify
the report as per the requirements of SA 705.
Q.121 CA. Amar has come across certain key matters while auditing the accounts of PR Ltd. for the
financial year 2022-23. He, being the associate of your firm, seeks your advice on “Communicating
Key Audit Matters” in the Auditor’s report. Guide him. [Nov. 18-Old Syllabus (5 Marks)]
Ans.: Communicating Key Audit Matters:
• As per SA 701 “Communicating Key Audit matters in the Independent Auditor’s Report” Key
Audit Matters are those matters that, in the auditor’s professional judgment, were of most
significance in the audit of the F.S. of the current period. Key audit matters are selected from
matters communicated with TCWG.

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• The auditor shall describe each key audit matter, using an appropriate sub-heading, in a separate
section of the auditor’s report under the heading “Key Audit Matters,”.
• The introductory language in this section of the auditor’s report shall state that:
(a) Key audit matters are those matters that, in the auditor’s professional judgment, were of
most significance in the audit of the financial statements of the current period; and
(b) These matters were addressed in the context of the audit of the F.S. as a whole, and in
forming the auditor’s opinion thereon, and the auditor does not provide a separate opinion
on these matters.
• The description of each key audit matter in the Key Audit Matters section of the auditor’s report
shall include a reference to the related disclosure(s), if any, in the F.S. and shall address:
(a) Why the matter was considered to be one of most significance in the audit and therefore
determined to be a key audit matter; and
(b) How the matter was addressed in the audit.
• The auditor shall describe each key audit matter in the auditor’s report unless:
(i) Law or regulation precludes public disclosure about the matter; or
(ii) In extremely rare circumstances, the auditor determines that the matter should not be
communicated in the auditor’s report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such communication.
This shall not apply if the entity has publicly disclosed information about the matter.
• The auditor shall not communicate a matter in the Key Audit Matters section of the auditor’s
report when the auditor would be required to modify the opinion in accordance with SA 705
(Revised) as a result of the matter.
Q.122 AKY Ltd. is a listed company engaged in the business of software and is one of the largest
companies operating in this sector in India. The company’s annual turnover is ₹ 40,000 crores with
profits of ₹ 5,000 crores. Due to the nature of the business and the size of the company, the
operations of the company are spread out in India as well as outside India. The company’s
contracts with its various customers are quite complicated and different. During the course of the
audit, the audit team spends significant time on audit of revenue – be it planning, execution or
conclusion. This matter was also discussed with management at various stages of audit. The efforts
towards audit of revenue also involve significant involvement of senior members of the audit team
including the audit partner. After completion of audit for the year ended on 31st March 2023, the
audit partner was discussing significant matters with the management wherein they also
communicated to the management that he plans to include revenue recognition as key audit
matter in his audit report. The management did not agree with revenue recognition to be shown as
key audit matter in the audit report. Comment. [MTP – Oct. 19]
Ans.: Determining Key Audit Matters:
SA 701, “Communicating Key Audit Matters in the Independent Auditor’s Report”, deals with the
auditor’s responsibility to communicate key audit matters in the auditor’s report. As per SA 701, the
auditor shall determine, from the matters communicated with TCWG, those matters that required
significant auditor attention in performing the audit. In making this determination, the auditor shall
take into account the following:
(i) Areas of higher assessed risk of material misstatement, or significant risks identified in
accordance with SA 315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment.

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(ii) Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have been identified as
having high estimation uncertainty.
(iii) The effect on the audit of significant events or transactions that occurred during the period.
The auditor shall determine which of the matters determined in accordance with above were of
most significance in the audit of the financial statements of the current period and therefore are the
key audit matters.
In the instant case, AKY Ltd., a listed company engaged in the business of software and its contracts
with its various customers are also quite complicated and different. Further, the audit team spends
significant time on audit of revenue and efforts towards audit of revenue also involve significant
involvement of senior members of the audit team including audit partner during audit. This matter
was also discussed with management at various stages. After completion of audit, the audit partner
communicated the management regarding inclusion of paragraph on revenue recognition as key
audit matter in his audit report.
Conclusion: Assessment of the auditor is valid as concerned matter qualifies to be a key audit
matter; hence, it should be reported accordingly by the auditor in his audit report.
Q.123 Mr. Hemant Ramsey was appointed as the engagement partner for conducting the audit of Kshetra
Lap Ltd. for F.Y. 2022-23, on behalf of Ramsey & Associates. Mr. Vishay Tyagi was appointed as the
engagement quality control reviewer by the firm for the said audit. During F.Y. 2021-22, there was
an implementation of ERP system in a phased manner, in Kshetra Lap Ltd. due to which some of its
business processes got automated. As a result of the implementation of such a system, there was a
significant effect on the auditor’s overall audit strategy. Mr. Hemant discussed the implementation
of such a system with Mr. Vishay and also told him that such a matter may be a key audit matter to
be reported in the audit report. Mr. Vishay considered the significance of such matter but however
he was of the opinion that such a matter did not appear to link with the matters disclosed in the
financial statements and so there was no need to disclose such matter as a key audit matter.
Whether the contention of Mr. Vishay is proper with respect to the matters to be communicated as
a key audit matter? [RTP-Nov. 21]
Ans.: Determining Key Audit Matters:
SA 701, “Communicating Key Audit Matters in the Independent Auditor’s Report”, deals with the
auditor’s responsibility to communicate key audit matters in the auditor’s report. As per SA 701, the
auditor shall determine, from the matters communicated with TCWG, those matters that required
significant auditor attention in performing the audit. In making this determination, the auditor shall
take into account the following:
(i) Areas of higher assessed risk of material misstatement, or significant risks identified in
accordance with SA 315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment.
(ii) Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have been identified as
having high estimation uncertainty.
(iii) The effect on the audit of significant events or transactions that occurred during the period.
The auditor shall determine which of the matters determined in accordance with above were of
most significance in the audit of the financial statements of the current period and therefore are the
key audit matters.

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Such matters are often linked to matters disclosed in the F.S. and are intended to reflect areas of the
audit of the financial statements that may be of particular interest to intended users.
In addition to matters that relate to the specific required considerations, there may be other matters
communicated with TCWG that required significant auditor attention and that therefore may be
determined to be key audit matters. Such matters may include, for example, matters relevant to the
audit that was performed that may not be required to be disclosed in the financial statements. For
example, the implementation of a new IT system (or significant changes to an existing IT system)
during the period may be an area of significant auditor attention, in particular if such a change had a
significant effect on the auditor’s overall audit strategy or related to a significant risk (e.g., changes
to a system affecting revenue recognition).
In the given case, there was implementation of ERP system in the company due to which some of its
business processes got automated and which had a significant effect on the auditor’s overall audit
strategy during the period.
Accordingly, such a matter can be considered as a key audit matter if according to Mr. Hemant, such
a matter required significant attention that had affected his overall audit strategy.
Conclusion: Contention of Mr. Vishay is not proper as matters that do not link with the matters
disclosed in the financial statements can also be considered as a key audit matter if it required
significant attention of the auditor which had an impact on its audit.
Q.124 While auditing the complete set of consolidated financial statements of J Ltd., a listed company,
using a fair presentation framework, PQR & Co., a Chartered Accountant firm, discovered that the
consolidated financial statements are materially misstated due to the non-consolidation of one of
the subsidiaries. The material misstatement is deemed to be pervasive to the consolidated
financial statements. The effects of the misstatement on the consolidated financial statements
could not be determined because it was not practicable to do so. Thus, PQR & Co. decided to
provide an adverse opinion for the same and further determined that, there are no key audit
matters other than the matter to be described in the Basis for Adverse Opinion section. Comment
whether PQR & Co. need to report under SA 701 “Communicating Key Audit Matters in the
Independent Auditor’s Report”? [Dec. 21 – Old Syllabus (5 Marks), MTP-Sep. 22]
Ans.: Relationship between Key Audit Matters, the Auditor’s Opinion and Other Elements of the
Auditor’s Report:
• SA 700 establishes requirements and provides guidance on forming an opinion on the financial
statements. Communicating key audit matters 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.
• SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”, addresses
circumstances in which the auditor concludes that there is a material misstatement relating to
the appropriateness or adequacy of disclosures in the financial statements.
• When the auditor expresses a qualified or adverse opinion in accordance with SA 705,
presenting the description of a matter giving rise to a modified opinion in the Basis for Qualified
(Adverse) Opinion section helps to promote intended users’ understanding and to identify such
circumstances when they occur. Separating the communication of this matter from other key
audit matters described in the Key Audit Matters section, therefore, gives it the appropriate
prominence in the auditor’s report.
• Further, when the auditor expresses a qualified or adverse opinion, communicating other key
audit matters would still be relevant to enhancing intended users’ understanding of the audit,

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and therefore the requirements to determine key audit matters apply. However, as an adverse
opinion is expressed in circumstances when the auditor has concluded that misstatements,
individually or in the aggregate, are both material and pervasive to the financial statements
depending on the significance of the matter(s) giving rise to an adverse opinion, the auditor may
determine that no other matters are key audit matters.
• In the given situation J Ltd., a listed company, has not consolidated one of its subsidiaries.
Further, Consolidated Financial Statements of J Ltd. Are materially misstated due to such non-
consolidation. The material misstatement is also deemed to be material and pervasive and effect
of the failure to consolidate have not been determined. In the given situation it is appropriate to
give Adverse Opinion by PQR & Co., a Chartered Accountant Firm.
• Since, in the given case, Adverse Opinion is being expressed thus PQR & Co. can communicate
Key Audit Matter in given below manner:
“Key Audit Matters: Except for the matter described in the Basis for Adverse Opinion section,
we have determined that there are no other key audit matters to communicate in our report”
Q.125 What is the auditor’s responsibility to report a key audit matter for which there are no relevant
disclosures in the financial statements? [RTP-May 22]
Ans.: Auditor’s responsibility to report a key audit matter for which there are no relevant
disclosures in the F.S.:
• When communicating key audit matters, the fact that there are no disclosures in the financial
statements related to a matter determined to be a key audit matter does not relieve the auditor
from the requirement to communicate it. An auditor may determine a key audit matter related
to the audit for which relevant disclosure requirements do not exist in the applicable financial
reporting framework.
• For example, the implementation of a new IT system (or significant changes to an existing IT
system) during the period may be an area of significant auditor attention, in particular, if such a
change had a significant effect on the auditor’s overall audit strategy or related to significant risk
(e.g., changes to a system affecting revenue recognition
• Also, if an auditor determines that it is necessary to include information about the entity in order
to effectively describe a key audit matter that has not been disclosed by management and
management does not agree to disclose that information, the auditor should reconsider the
adequacy of the disclosures in accordance with applicable financial reporting framework.
• The auditor should communicate the matter as a key audit matter unless law or regulation
precludes public disclosure about the matter or in extremely rare circumstances, the auditor
determines that the matter should not be communicated in the auditor’s report because the
adverse consequences of doing so would reasonably be expected to outweigh the public interest
benefits of such communication.

1.33 - SA 705 “Modifications to the Opinion in the Independent Auditor’s Report”

Q.126 XYZ Ltd. is a company engaged in the manufacture of cranes. CA Sudhir is the statutory auditor of
the company for the FY 2022-23. The company has taken long-term funding for fixed capital
requirements and short-term funding for its working capital requirements. During the course of
audit, CA Sudhir found that the company’s financing arrangements are about to expire and the
company is unable to renegotiate or obtain the replacement financing. As such the company may
be unable to realize its assets and discharge its liabilities in the normal course of business. Notes to

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accounts annexed to the financial statements discuss the magnitude of financing arrangements, the
expiration and the total financing arrangements; however, the financial statements do not include
discussion on the impact or the availability of refinancing. Thus, the financial statements (and
notes thereto) do not fully disclose this fact. What kind of opinion should CA Sudhir issue in case of
XYZ Ltd.?
Ans.: Type of opinion to be expressed:
In the present case, XYZ Ltd. is unable to renegotiate or obtain the replacement financing for its
long-term and short-term funding requirements. This situation indicates the existence of a material
uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern
and therefore, XYZ Ltd. may be unable to realize its assets and discharge its liabilities in the normal
course of business. Further, the financial statements of XYZ Ltd. do not disclose this fact adequately.
Thus, the financial statements of XYZ Ltd. are materially misstated due to the inadequate disclosure
of the material uncertainty. CA Sudhir will express a qualified opinion as the effects on the financial
statements of this inadequate disclosure are material but not pervasive to the financial statements.
The relevant extract of the Qualified Opinion Paragraph and Basis for Qualified Opinion
paragraph is as under:
Qualified Opinion
In our opinion and to the best of our information and according to the explanations given to us,
except for the incomplete disclosure of the information referred to in the Basis for Qualified Opinion
section of our report, the aforesaid standalone financial statements give the information required by
the Act in the manner so required and give a true and fair view in conformity with the accounting
principles generally accepted in India, of the state of affairs of XYZ Ltd. as on March 31, 2023, and
profit/loss, for the year ended on that date.
Basis for Qualified Opinion
As discussed in Note 6, the Company’s financing arrangements are about to expire and the Company
has been unable to conclude renegotiations or obtain replacement financing. This situation
indicates that a material uncertainty exists that may cast significant doubt on the Company’s ability
to continue as a going concern. The financial statements do not adequately disclose this matter.
Q.127 ABC Ltd. is a company engaged in the manufacture of iron and steel bars. PP & Associates are the
statutory auditors of ABC Ltd. for the FY 2022-23. During the course of audit, CA Prakash, the
engagement partner, found that the Company’s financing arrangements have expired and the
amount outstanding was payable on March 31, 2023. The Company has been unable to renegotiate
or obtain replacement financing and is considering filing for bankruptcy. These events indicate a
material uncertainty that may cast significant doubt on the Company’s ability to continue as a
going concern and therefore it may be unable to realize its assets and discharge its liabilities in the
normal course of business. The financial statements (and notes thereto) do not disclose this fact.
What opinion should CA Prakash express in case of ABC Ltd.?
Ans.: Type of Opinion to be expressed:
In the present case based on the audit evidence obtained, CA Prakash has concluded that a material
uncertainty exists related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern, and the entity is considering bankruptcy. The financial
statements of ABC Ltd. omit the required disclosures relating to the material uncertainty.
In such circumstances, CA Prakash should express an adverse opinion because the effects on the
financial statements of such omission are material and pervasive.

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The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph is
as under:
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse
Opinion section of our report, the accompanying financial statements do not present fairly, the
financial position of the entity as on March 31, 2023, and of its financial performance and its cash
flows for the year then ended in accordance with the Accounting Standards issued by the Institute of
Chartered Accountants of India.
Basis for Adverse Opinion
The financing arrangements of ABC Ltd. has expired and the amount outstanding was payable on
March 31, 2022. The entity has been unable to conclude renegotiations or obtain replacement
financing and is considering filing for bankruptcy. This situation indicates that a material
uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going
concern. The financial statements do not adequately disclose this fact.
Q.128 MNO Ltd. is a power generating company having its plants in the north eastern states of the
country. For the FY 2022-23, M/s PRT & Associates are the statutory auditors of the company.
During the course of audit, the audit team was unable to obtain sufficient appropriate audit
evidence about a single element of the consolidated financial statements. That is, the auditor was
also unable to obtain audit evidence about the financial information of a joint venture investment
(in XYZ Ltd.) that represents over 90% of the entity’s net assets. What kind of opinion should the
statutory auditor’s issue in such case?
Ans.: Type of opinion to be expressed:
M/s PRT & Associates are unable to obtain sufficient appropriate audit evidence about the financial
information of a joint venture investment that represents over 90% of the entity’s net assets. The
possible effects of this inability to obtain sufficient appropriate audit evidence are both material and
pervasive to the consolidated financial statements.
Therefore, the statutory auditor should issue a disclaimer of opinion.
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion
paragraph is as under:
Disclaimer of Opinion
We do not express an opinion on the accompanying financial statements of MNO Ltd. Because of the
significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we
have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion on these financial statements.
Basis for Disclaimer of Opinion
The Group’s investment in its joint venture XYZ Company is carried at ₹ 95 crores on the Group’s
consolidated balance sheet, which represents over 90% of the Group’s net assets as on March 31,
2023. We were not allowed access to the management and the auditors of XYZ Company, including
XYZ Company’s auditors’ audit documentation. As a result, we were unable to determine whether
any adjustments were necessary in respect of the Group’s proportional share of XYZ Company’s
assets that it controls jointly, its proportional share of XYZ Company’s liabilities for which it is
jointly responsible, its proportional share of XYZ’s income and expenses for the year, (and the
elements making up the consolidated statement of changes in equity) and the consolidated cash
flow statement.

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Q.129 If financial statements prepared in accordance with the requirements of a fair presentation
framework do not achieve fair presentation, the auditor shall discuss the matter with management
and, depending on the requirements of the applicable financial reporting framework and how the
matter is resolved, shall determine whether it is necessary to modify the opinion in the auditor's
report in accordance with SA 705.
Under SA 705, in what circumstances does the report of the statutory auditor require
modifications? What are the types of modifications possible in the said report?
Ans.: Circumstances in which a modified opinion may be issued:
As per SA 705 “Modifications to the Opinion in the Independent Auditor’s Report” a modified
opinion may be expressed in the following circumstances:
(a) The auditor concludes that, based on the audit evidence obtained, the F.S. as a whole are not
free from material misstatement, may be due to following reasons:
• Inappropriate method of selection of Accounting Policies;
• Accounting policies are not consistent with applicable FRF;
• Disclosures as required by FRF are not given.
(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, may be due to following
reasons:
• Limitations imposed by management
• Circumstances beyond entity control (For Ex.: Accounting records destroyed by fire)
• Circumstances related to Nature and Timing of auditor’s work.
Types of Modified Opinion:
(a) Qualified opinion: It is issued under following circumstances:
• Financial statements are materially misstated which in the auditor’s judgments are not
pervasive.
• Auditor is unable to obtain Sufficient and appropriate audit evidence which in the auditor
judgment are not pervasive
(b) Adverse Opinion: It is issued when financial statements are materially misstated which in the
auditor’s judgments is having pervasive effect.
(c) Disclaimer of Opinion: It is issued when auditor is unable to obtain sufficient and appropriate
audit evidence which in the auditor judgment are having pervasive effect.
Q.130 “When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified
Opinion”, “Adverse Opinion”, or “Disclaimer of Opinion”, as appropriate, for the Opinion section.”
As an expert you are required to brief the special considerations required for expressing:
(a) Qualified Opinion;
(b) Adverse Opinion and
(c) Disclaimer of Opinion. [RTP-Nov. 18, May 20]
Ans.: Special Considerations required for modified opinion:
(a) Special consideration required for expressing Qualified Opinion:
When the auditor expresses a qualified opinion due to a material misstatement in the financial
statements, the auditor shall state that, in the auditor’s opinion, except for the effects of the
matter(s) described in the Basis for Qualified Opinion section:

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(i) When reporting in accordance with a fair presentation framework, the
accompanying financial statements present fairly, in all material respects (or give a true
and fair view of) […] in accordance with [the applicable FRF]; or
(ii) When reporting in accordance with a compliance framework, the accompanying
financial statements have been prepared, in all material respects, in accordance with [the
applicable FRF].
When the modification arises from an inability to obtain sufficient appropriate audit evidence,
the auditor shall use the corresponding phrase “except for the possible effects of the matter(s)
...” for the modified opinion.
(b) Special consideration needed for expressing Adverse Opinion:
When the auditor expresses an adverse opinion, the auditor shall state that, in the auditor’s
opinion, because of the significance of the matter(s) described in the Basis for Adverse Opinion
section:
(i) When reporting in accordance with a fair presentation framework, the
accompanying financial statements do not present fairly (or give a true and fair view of)
[…] in accordance with [the applicable FRF]; or
(ii) When reporting in accordance with a compliance framework, the accompanying
financial statements have not been prepared, in all material respects, in accordance with
[the applicable FRF].
(c) Special consideration is required for expressing Disclaimer of Opinion: When the auditor
disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence, the
auditor shall:
(i) State that the auditor does not express an opinion on the accompanying financial
statements;
(ii) State that, because of the significance of the matter(s) described in the Basis for
Disclaimer of Opinion section, the auditor has not been able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on the financial
statements; and
(iii) Amend the statement required in SA 700 (Revised), which indicates that the financial
statements have been audited, to state that the auditor was engaged to audit the financial
statements.
Unless required by law or regulation, when the auditor disclaims an opinion on the financial
statements, the auditor’s report shall not include a Key Audit Matters section in accordance
with SA 701.
Q.131 ADKS & Co. LLP are the newly appointed statutory auditors of PKK Ltd. During the course of audit,
the statutory auditors have come across certain significant observations which they believe could
lead to material misstatement of financial statements. Management has a different view and does
not concur with the view of the statutory auditors. Considering this the statutory auditors are
determining as to how to address these observations in terms of their reporting requirement.
Please advise. [MTP-April 19]
Ans.: Addressing material misstatements while reporting:
• As per SA 705, if the auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement or the auditor is unable to obtain
sufficient appropriate audit evidence to conclude that the financial statements as a whole are
free from material misstatement, the auditor shall modify the opinion in his report.

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• The auditor in such a case needs to determine the modification as follows:
(a) Qualified Opinion: The auditor shall express a qualified opinion when:
(i) 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
(ii) 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.
(b) Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements, individually
or in the aggregate, are both material and pervasive to the financial statements
(c) Disclaimer of Opinion: 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 statements of undetected misstatements,
if any, could be both material and pervasive. The auditor shall disclaim an opinion when, in
extremely rare circumstances involving multiple uncertainties, the auditor concludes that,
notwithstanding having obtained sufficient appropriate audit evidence regarding each of
the individual uncertainties, it is not possible to form an opinion on the financial statements
due to the potential interaction of the uncertainties and their possible cumulative effect on
the financial statements.
Q.132 After accepting the statutory audit of M/s All in One Ltd., a departmental store, you became aware
of the fact that management of the company have imposed certain limitations on the scope of your
assurance function which may adversely affect and result in your inability to obtain sufficient
appropriate audit evidence to discharge your responsibility required by the statute. Indicate the
consequences and your response to the limitations imposed by the management on your scope.
[May 19 – New Syllabus (4 Marks)]
Or
While conducting audit of VED Ltd., you as an auditor are not only prevented in completing certain
audit procedures but also are not able to obtain audit evidence even by performing alternative
procedures. How you will deal with this situation? [Jan. 21 – Old Syllabus (4 Marks)]
Ans.: Limitation after the auditor has accepted the engagement:
• As per SA 705 “Modifications to the Opinion in the Independent Auditor’s Report”, 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, unless all of those charged with governance are involved in
managing the entity, 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 implications as follows:
(a) 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
opinion; or

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(b) 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 inadequate to communicate the gravity of the situation, the auditor shall:
(i) Withdraw from the audit, where practicable and possible under applicable law or
regulation; or
(ii) If withdrawal from the audit before issuing the auditor’s report is not practicable or
possible, disclaim an opinion on the financial statements.
• If the auditor withdraws, before withdrawing, the auditor shall communicate to those charged
with governance any matters regarding misstatements identified during the audit that would
have given rise to a modification of the opinion.
Q.133 As an auditor of a company registered under section 8 of the Companies Act, 2013 you find that as
per the notification of the Ministry of Corporate Affairs regarding applicability of Indian
Accounting Standards (Ind-AS), the company has to prepare its financial statements for the year
ended on 31st March, 2023 under Ind-AS. The management of the company is however of the
strong view that being a section 8 company having charitable objects, Ind-AS cannot apply to the
company. The financial statements are therefore prepared by the management under the earlier
GAAP and a note for the same is given in the financial statements. How would you report on these
financial statements? [Nov. 19 – New Syllabus (5 Marks)]
Ans.: Reporting on financial statements:
As per SA 200 “Overall Objectives of the Independent Auditor and Conduct of Audit in accordance
with Standards on Auditing” in conducting an audit of financial statements, the overall objectives of
the auditor are:
(a) To obtain reasonable assurance about whether the F. S. as a whole are free from material
misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the F.S. are prepared, in all material respects, in accordance with an
applicable FRF, and
(b) To report on the F.S. and communicate as required by the SAs, in accordance with the auditor’s
findings.
In all cases when reasonable assurance cannot be obtained and a qualified opinion in the auditor’s
report is insufficient, the SAs require that the auditor disclaim an opinion or withdraw from the
engagement.
In the present case, company was required to prepare its financial statements as per Ind-AS, but the
financial statements are being prepared under the earlier GAAP. FRF followed by the company is not
acceptable.
Conclusion: Financial reporting framework applied by the management is unacceptable and hence
auditor is required to disclaim the opinion in accordance with SA 705 or withdraw from the
engagement.
Note: Answer given in suggested Answer of ICAI is based on the provisions of Sec. 129 and
Sec. 133 and specifies that the auditor is required to ensure applicable monetary limits w.r.t.
Ind-AS and advise the management to prepare the F.S. as per Ind-AS.
Answer given in suggested answer does not seems to be appropriate as requirement of
question was how the auditor report on such financial statements, whereas answer is given
on applicability of Ind-AS as per legal requirements of company law.

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Q.134 The auditor’s inability to obtain sufficient appropriate audit evidence (also referred to as a
limitation on the scope of the audit) may arise from:
(i) Circumstances beyond the control of the entity;
(ii) Circumstances relating to the nature or timing of the auditor’s work; or
(iii) Limitations imposed by management.
Explain with the help of examples. [RTP-May 20]
Ans.: Examples of situations in which auditor is unable to obtain sufficient and appropriate
evidences
(i) Circumstances beyond entity control
(1) The entity’s accounting records have been destroyed.
(2) The accounting records of a significant component have been seized indefinitely by
governmental authorities.
(ii) Circumstances related to Nature and Timing of auditor’s work
(1) The entity is required to use the equity method of accounting for an associated entity, and
the auditor is unable to obtain sufficient appropriate audit evidence about the latter’s
financial information to evaluate whether the equity method has been appropriately
applied.
(2) The timing of the auditor’s appointment is such that the auditor is unable to observe the
counting of the physical inventories.
(3) The auditor determines that performing substantive procedures alone is not sufficient,
but the entity’s controls are not effective.
(iii) Limitations imposed by management
(1) Management prevents the auditor from observing the counting of the physical inventory.
(2) Management prevents the auditor from requesting external confirmation of specific
account balances.
Q.135 ABC Ltd. has been dealing in tyres since 1995. The company envisaged to expand its business and
wanted to manufacture the tyres besides trading. Accordingly, the machinery was imported,
installed and manufacturing operations commenced. The Government also gave certain incentives
like power subsidy, land acquisition subsidy, etc. After 2 years of operations, company received a
notice from the Income Tax authorities to pay tax on incentive received in the form of power
subsidy. The demand notice was served for ₹ 150.00 lakhs.
The company, however filed an appeal with higher tax authorities against the demand and the
matter is undecided as on 31.03.2023. Legal team of the Company anticipated that tax liability
might mature. The company has not made a provision of anticipated tax liability. Considering the
provisions of Companies Act, 2013, how an auditor of ABC Ltd. should see this matter and report in
audit report, if required? [July 21 – New Syllabus (5 Marks)]
Ans.: Reporting of Non-provision for tax:
The Council of the ICAI has taken note of the fact that there is a practice prevalent whereby
companies do not make provision for tax even when such a liability is anticipated. It has expressed
the view that on an overall consideration of the relevant provisions of law, non-provision for tax
(where a liability is anticipated) would amount to contravention of the provisions of Sections 128
and 129 of the Companies Act, 2013.

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Accordingly, it is necessary for the auditor to qualify his report and such qualification should bring
out the manner in which the accounts do not disclose a “true and fair” view of the state of affairs of
the company and the profit or loss of the company.
Applying the above to the facts given in the question, auditor should qualify his report. An example
of the manner in which the report on the balance sheet and the Statement of Profit and Loss may be
qualified in this respect is given below:
“The company has not provided for taxation in respect of its profits and the estimated aggregate
amount of taxation not so provided for is ₹ ............ including ............ for the Year ended on ........... To the
extent of such non-provision for the year, the profits of the Company for the financial year under
report have been overstated and to the extent of such aggregate non-provision, the reserves of the
company appearing in the said balance sheet have been over-stated and the current liabilities and
provisions appearing in the said balance sheet have been understated”.
Q.136 CA Madhu is the statutory auditor of Lakshmi Ltd. for the Financial year 2022-23. In respect of
loans and advances of ₹ 75 Lakhs given to Sriman Pvt. Ltd., the company has not furnished any
agreement to CA Madhu and in absence of the same, he is unable to verify the terms of repayment,
chargeability of interest and other terms.
Justify type of opinion which Madhu should give in such situation. Draft an appropriate Opinion
paragraph & Basis of opinion paragraph. [Dec. 21 – New Syllabus (5 Marks); MTP-March 23]
Ans.: Type of Opinion to be expressed:
In the present case, with respect to loans and advances of ₹ 75 Lakhs given to Sriman Private Ltd.,
the company has not furnished any agreement to CA Madhu.
In absence of such agreement, CA Madhu is unable to verify the terms of repayment, chargeability of
interest and other terms. For an auditor, while verifying any loans and advances, one of the most
important audit evidences is the loan agreement. Therefore, the absence of such document in the
present case, tantamount to a material misstatement in the financial statements of the company.
However, the inability of CA Madhu to obtain such audit evidence is though material but not
pervasive so as to require him to give a disclaimer of opinion.
Thus, in the present case, CA Madhu should give a qualified opinion.
The relevant extract of the Qualified Opinion Paragraph and Basis for Qualified Opinion paragraph
is as under:
Qualified Opinion
In our opinion and to the best of our information and according to the explanations given to us,
except for the effects of the matter described in the Basis for Qualified Opinion section of our report,
the financial statements of Lakshmi Ltd. give a true and fair view in conformity with the accounting
principles generally accepted in India, of the state of affairs of the Company as on 31.03.2023 and
profit/ loss for the year ended on that date.
Basis for Qualified Opinion
The Company is unable to furnish the loan agreement with respect to loans and advances of ₹ 75
Lakhs given to Sriman Pvt. Ltd. Consequently, in absence of such agreement, we are unable to verify
the terms of repayment, chargeability of interest and other terms.
Q.137 TEA Ltd., FMCG Company having its tea gardens in north eastern states of the country is exclusively
dealing in blending, processing, packing and selling of various brands of Tea. During the year
under audit, the company entered into joint venture for purchasing Tea Gardens in Sri Lanka and
Kenya. M/s GN & Associates are the statutory auditors of the company for the financial year 2022-

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23. During the course of audit, the audit team was unable to obtain sufficient appropriate evidence
about a single element of the consolidated financial statement being Joint venture investment in
Kali Ltd. representing over 90% of the group’s net assets having both material and pervasive
possible effect to the consolidated financial statements. The group’s investment in Kali Ltd. is
carried at ₹ 100 crores in the group’s consolidated balance sheet.
Draft the opinion paragraph and basis of opinion paragraph to be included in the Independent
Auditor’s report. [Dec. 21 – Old Syllabus (5 Marks), MTP-Oct. 22]
Ans.: Drafting of Opinion Paragraph and Basis of Opinion Paragraph:
M/s GN & Associates are unable to obtain sufficient appropriate audit evidence about the financial
information of a joint venture investment that represents over 90% of the group’s net assets. The
possible effects of this inability to obtain sufficient appropriate audit evidence are both material and
pervasive to the consolidated financial statements. Therefore, the statutory auditor should issue a
disclaimer of opinion.
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion
paragraph is as under:
Disclaimer of Opinion
We were engaged to audit the accompanying consolidated financial statements of Tea Ltd., FMCG
Company (hereinafter referred to as the “Holding Company”) and its subsidiaries (the Holding
Company and its subsidiaries together referred to as “the Group), which comprise the consolidated
balance sheet as on March 31, 2023, the consolidated statement of Profit and Loss, (consolidated
statement of changes in equity) and consolidated statement of cash flows for the year then ended,
and notes to the consolidated financial statements, including a summary of significant accounting
policies (hereinafter referred to as the “Consolidated Financial Statements”).
We do not express an opinion on the accompanying consolidated financial statements of the Group.
Because of the significance of the matter described in the Basis for Disclaimer of Opinion section of
our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis
for an audit opinion on these consolidated financial statements.
Basis for Disclaimer of Opinion
The Group’s investment in its joint venture Kali Ltd. Company is carried at ₹ 100 crores on the
Group’s consolidated balance sheet, which represents over 90% of the Group’s net assets as on
March 31, 2023. We were not allowed access to the management and the auditors of XYZ Company,
including XYZ Company’s auditors’ audit documentation. As a result, we were unable to determine
whether any adjustments were necessary in respect of the Group’s proportional share of Kali Ltd.’s
assets that it controls jointly, its proportional share of Kali Ltd.’s liabilities for which it is jointly
responsible, its proportional share of Kali Ltd.’s income and expenses for the year, (and the
elements making up the consolidated statement of changes in equity) and the consolidated cash
flow statement.
Q.138 In the financial year 2022-23, MSD Ltd. faced an extraordinary event (earthquake), which
destroyed a lot of business activity of the company. These circumstances indicate material
uncertainty on the company’s ability to continue as going concern. Due to such event it may not be
possible for the company to realize its assets or pay off the liabilities during the regular course of
its business. The financial statement and notes to the financial statements of the company do not
disclose this fact. What kind of opinion should the statutory auditor of MSD Ltd. issue in such
circumstances? [MTP-March 22, April 23]

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Ans.: Type of Opinion to be expressed:
In the present case, there exists a material uncertainty that cast a significant doubt on the
company’s ability to continue as going concern and the same is not disclosed in the financial
statements of MSD Ltd.
As such, the financial statements of MSD Ltd. for the FY 2022-23 are materially misstated and the
effect of the misstatement is so material and pervasive on the financial statements that giving only a
qualified opinion will be insufficient and therefore the statutory auditor of MSD Ltd. should issue an
adverse opinion.
The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph is
as under:
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse
Opinion section of our report, the accompanying financial statements do not present fairly, the
financial position of MSD Ltd. as on March 31, 2023, and of its financial performance and its cash
flows for the year then ended in accordance with the Accounting Standards issued by the Institute of
Chartered Accountants of India.
Basis for Adverse Opinion
MSD Ltd. has faced an extraordinary event (earthquake), which destroyed a lot of business activity
of the company. Due to such event, it may not be possible for the company to realize its assets or pay
off the liabilities during the regular course of its business. This situation indicates that a material
uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going
concern. The financial statement and notes to the financial statements of the company do not
disclose this fact.
Q.139 You have been appointed as an auditor of Dharmnath & Sons for FY 2022-23, as entity other than a
company incorporated under the Companies Act, 2013, using a fair presentation framework.
Appointment had been made in the month of April, 2023. The financial statements have been
prepared by the management in accordance with the Accounting Standards. The management had
introduced the new computerized accounts receivable system from November 2022 and still in the
implementation phase and thus management is in the process of rectifying system deficiencies and
correcting the errors. At the time of implementation of a new system, the earlier system of
accounting of receivables had been discarded. The auditor was unable to obtain sufficient
appropriate audit evidence about the entity’s accounts receivable and inventories. The possible
effects of the inability to obtain sufficient appropriate audit evidence are deemed to be both
material and pervasive to the financial statements. Write the opinion paragraph and basis of
opinion paragraph to be included in the Independent Auditor’s Report. [RTP-May 22]
Ans.: Opinion Paragraph and Basis of Opinion Paragraph:
Disclaimer of Opinion
We were engaged to audit the financial statements of Dharmnath & Sons (“the entity”), which
comprise the balance sheet as on March 31, 2023, the statement of Profit and Loss, (the statement of
changes in equity) and the statement of cash flows for the year then ended, and notes to the
financial statements, including a summary of significant accounting policies.
We do not express an opinion on the accompanying financial statements of the entity. Because of
the significance of the matters described in the Basis for Disclaimer of Opinion section of our report,
we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion on these financial statements.

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Basis for Disclaimer of Opinion
We were not appointed as auditors of the Company until after March 31, 2023, and thus did not
observe the counting of physical inventories at the beginning and end of the year. We were unable
to satisfy ourselves by alternative means concerning the inventory quantities held on March 31,
2022, and 2023, which are stated in the Balance Sheets at ₹ xxx and ₹ xxx, respectively. In addition,
the introduction of a new computerized accounts receivable system in Nov. 2022 resulted in
numerous errors in accounts receivable. As of the date of our report, management was still in the
process of rectifying the system deficiencies and correcting the errors. We were unable to confirm
or verify by alternative means accounts receivable included in the Balance Sheet at a total amount of
₹ xxx as on March 31, 2023. As a result of these matters, we were unable to determine whether any
adjustments might have been found necessary in respect of recorded or unrecorded inventories and
accounts receivable, and the elements making up the statement of Profit and Loss (and statement of
cash flows).
Q.140 CA. K is appointed statutory auditor of SEEK INDIA LTD under Companies Act, 2013 for the first
time. The company is preparing its accounts keeping in view applicable requirements of Division II
of Schedule III of Companies Act, 2013. On scrutiny of financial statements of company put up for
audit, it was noticed that notes to accounts show ageing of trade payables as per amended
requirements of Schedule III of the Companies Act, 2013. The ageing schedule forming part of notes
is as under:
Outstanding for following periods from due date of payment (₹ In crore)
Particulars Less than 1-2 2-3 More than Total
1 year years years 3 years
MSME NIL NIL NIL NIL NIL
Others 2 4 3 1 10
Disputed dues-MSME NIL NIL NIL NIL NIL
Disputed dues-others NIL NIL NIL NIL NIL
Besides above, current ratio, debt-equity ratio, trade payables turnover ratio and net profit ratio
disclosed in notes to accounts have slipped drastically as compared to last year and from standard
norms. Most of the key financial ratios are in red. There is no other relevant information
concerning above in notes to accounts.
Further, on reviewing bank statement of cash credit limit (against hypothecation of paid stocks), it
was noticed that there is no debit transaction in the month of March, 2023. On inquiry, he came to
know that stock audit of company was conducted in the month of January, 2023 and stock auditors
have commented vide their report dated 25.2.2023 that company had negative drawing power due
to high creditors. Accordingly, the bankers have refused further debits in cash credit account from
start of March, 2023. There is no information in this respect in financial statements and notes to
accounts. Discuss how CA K should deal with above for reporting in his audit report under the
Companies Act, 2013. [MTP-Oct. 22; RTP-May 23]
Ans.: Reporting in case of significant doubt on the entity ability to continue as going concern:
• Based on the facts relating to ageing schedule given in the situation, it is clear that company is
not able to pay its creditors on time. Outstanding to creditors for a period of 1 year or more
account for 80% of total dues to the creditors of the company from due date of payment. Most of
key financial ratios are adverse. Further, bankers have refused further debits in cash credit

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account due to negative drawing power from March 2023. Cash credit loans are repayable on
demand. There is no other information or disclosure available how the company plans to run its
business without bank finance.
• All the above factors are indicators that a material uncertainty exists that may cast a significant
doubt on the company’s ability to continue as going concern. There is no express disclosure of
this fact in financial statements. Therefore, it is a situation where material uncertainty exists
which has cast a significant doubt on company’s ability to continue as going concern in
accordance with SA 570, “Going Concern”.
Conclusion: Keeping in view the fact that although a material uncertainty exists casting a significant
doubt on the ability of company to continue as going concern, adequate disclosure of material
uncertainty is not made in financial statements, CA K shall give qualified or adverse opinion in
accordance with SA-705, “Modifications to the Opinion in the Independent Auditor’s Report”.
Q.141 CA Abhimanyu is the statutory auditor of PQR Ltd. for the FY 2022-23. During the course of audit
CA Abhimanyu noticed the following:
(1) With respect to the debtors amounting to ₹ 150 crores, no balance confirmation was received
by the audit team. Further, there have been defaults on the payment obligations by debtors on
the due dates during the year under audit. The Company has created a provision for doubtful
debts to the tune of ₹ 25 Cr. during the year under audit. The Company has stated that the
provision is based on receivables which are older than 36 months, which according to the
audit team is inadequate and as such the audit team is unable to ascertain the carrying value
of trade receivables.
(2) Further, in respect of Inventories (which constitutes 40% of the total assets of the company),
during the reporting period, the management has not undertaken physical verification of
inventories at periodic intervals. Also, the Company has not maintained adequate inventory
records at the factory. The audit team was unable to undertake the physical inventory count as
such the value of inventory could not be verified.
Under the above circumstances what kind of opinion should CA Abhimanyu give? [RTP-Nov. 22]
Ans.: Type of Opinion to be expressed:
In the present case, CA Abhimanyu is unable to obtain sufficient and appropriate audit evidence
with respect to the following:
(1) The balance confirmation with respect to debtors amounting to ₹ 150 Crores is not available.
Further there has been default in payment by the debtors and the provision so made is not
adequate. The audit team is also unable ascertain the carrying value of trade receivables.
(2) With respect to 40% of the company’s inventory, neither the physical verification has been
done by the management nor are adequate inventory records maintained. The audit team is
also unable to undertake the physical inventory count as such the value of inventory could not
be verified.
In the above two circumstances the auditor is unable to obtain sufficient appropriate audit evidence
on which to base the opinion, and the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive.
Thus, CA Abhimanyu should give a Disclaimer of Opinion.
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion
paragraph is as under:

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Disclaimer of Opinion
We do not express an opinion on the accompanying financial statements of PQR Ltd. Because of the
significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we
have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion on these financial statements.
Basis for Disclaimer of Opinion
We are unable to obtain balance confirmation with respect to the debtors amounting to ₹ 150
Crores. Further, there have been defaults on the payment obligations by debtors on the due dates
during the year under audit. The Company has created a provision for doubtful debts to the tune of
₹ 25 Crores during the year under audit which is inadequate in the circumstances of the company.
The carrying value of trade receivables could not be ascertained. Further, in respect of Inventories
(which constitutes 40% of the total assets of the company), during the reporting period, the
management has not undertaken physical verification of inventories at periodic intervals. Also, the
company has not maintained adequate inventory records at the factory. We were unable to
undertake the physical inventory count and as such the value of inventory could not be verified.
Q.142 CA. Uma is the Statutory Auditor of RJ Ltd. for the financial year 2022-23. The company is engaged
in the production of electronic products. During the course of the audit, CA. Uma obtained certain
audit evidence of incorrect disclosure of related party transactions and structured finance deals
which was not considered with the affirmation leading to misstatement in the financial statements.
Discuss how CA. Uma should deal with the situation in the auditor's report and the different
options which can be considered? [Nov. 22 (5 Marks)]
Ans.: Auditor’s duties in case of inconsistency in Audit evidences:
• SA 705 “Modifications to the Opinion in the Independent Auditor’s Report” deals with the
auditor’s responsibility to issue an appropriate report in circumstances when, in forming an
opinion in accordance with SA 700 (Revised), the auditor concludes that a modification to the
auditor’s opinion on the financial statements is necessary.
• The decision regarding which type of modified opinion is appropriate depends upon:
(a) The nature of the matter giving rise to the modification, that is, whether the financial
statements are materially misstated or, in the case of an inability to obtain sufficient
appropriate audit evidence, may be materially misstated; and
(b) The auditor’s judgment about the pervasiveness of the effects or possible effects of the
matter on the financial statements.
• Further, the auditor shall modify the opinion in the auditor’s report when the auditor concludes
that based on the audit evidence obtained, the financial statements as a whole are not free from
material misstatement.
• In the present case, during the course of audit, CA Uma obtained certain audit evidence which
were not consistent with the affirmation made in the financial statements. Therefore, CA Uma
should modify his report in accordance with SA 705.
Conclusion: Since CA Uma has obtained audit evidence which are inconsistent with the affirmations
made in the financial statement, CA Uma should modify his opinion as per the circumstances of the
case.
• CA Uma shall express a qualified opinion when, having obtained sufficient appropriate audit
evidence, he concludes that misstatements, individually or in the aggregate, are material, but not
pervasive, to the financial statements

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• CA Uma shall express an adverse opinion, when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are
both material and pervasive to the financial statements.

1.34 - SA 706 “Emphasis of Matter Paragraph and Other Paragraphs in the Independent Auditor’s Report”
Q.143 In respect of the audit of BDS Ltd., the statutory auditor of the company noticed some matters. The
statutory auditor wants to draw the user’s attention towards such matters, though his opinion is
not modified in respect of such matters. Draft the relevant paragraphs of the audit report for the
following matters:
(1) The company has a plan to resume its construction activities with respect to one of its thermal
power projects, The activity of such power plant was suspended in the FY 2018-19. The
thermal power project comprises of the plant and equipment amounting to ₹ 5.95 crores and
capital work in progress of ₹ 147.50 crores.
(2) The financial statements of 5 branches are included in the Standalone Financial Statements of
BDS Ltd. whose financial statements reflect total assets of ₹ 90 crores as on 31.03.2023 and
total revenue from operations of ₹ 40 crores for the year ended on that date. The financial
statements of these branches have been audited by the branch auditors.
Ans.: Emphasis of Matter Para and Other Matter Para in Audit Report:
Emphasis of Matter
We draw attention to the following note of the standalone financial statements: Note 27 regarding
the plans of the Company to resume construction/developmental activities of a thermal power
project. The carrying amounts related to the project as on 31st March, 2023 comprise of plant and
equipment of ₹ 5.95 crores and capital work in progress of ₹ 147.50 crores. Our opinion is not
modified in respect of this matter.
Other Matter
We did not audit the financial statements of 5 branches included in the Standalone Financial
Statements of the company whose financial statements reflect total assets of ₹ 90 crores as on
31.03.2023 and total revenue from operations of ₹ 40 crores for the year ended on that date. The
financial statements of these branches have been audited by the branch auditors whose reports
have been furnished to us, and our opinion insofar as it relates to the amounts and disclosures
included in respect of these branches, is based solely on the report of the branch auditors. Our
opinion is not modified in respect of this matter.
Q.144 Beta Limited, is a company registered with SEBI, having five subsidiaries. M/s XYZ, Chartered
Accountants, have been appointed as Statutory Auditors for the audit of the consolidated Financial
Statements for the year ending on March 31, 2023. Out of five subsidiaries, the audit of one
subsidiary was conducted by another auditor, M/s Badnam and Company, Chartered Accountants.
The “Opinion” para of audit report furnished by M/s XYZ Chartered Accountants is given below:
Opinion
In Our opinion and to the best of our information and according to the explanations given to us the
consolidated financial statements give a true and fair view, except the financial statement of one
subsidiary whose accounts were audited by M/s Badnam and Company, Chartered Accountants
and about the same we are not in a position to express our opinion as the audit has not been
performed by us:

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(i) In the case of the consolidated Balance Sheet, of the state of affairs of the company as on March
31, 2023.
(ii) In the case of the consolidated profit and loss account, of the profit/loss for the year ended on
that date.
Do you find any deficiencies in the opinion para? If yes, you are required to give your suggestions
and redraft the opinion para. [Nov. 13 (5 Marks)]
Ans.: Identification of deficiencies in opinion Para:
The opinion para contains the following deficiencies:
1. Out of five subsidiaries, the audit of one subsidiary was conducted by another auditor, M/s
Badnam and Company - needs to be reported in other matter para.
2. Opinion regarding cash flow statement has not been covered.
As per SA 700 & 706 the redrafted opinion para and other matter para are given hereunder:
Opinion Para
In our opinion and to the best of our information and according to the explanations given to us and
based on the consideration of the reports of the other auditors on the financial statements of the
subsidiaries as noted below, the consolidated financial statements give a true and fair view in
conformity with the accounting principles generally accepted in India:
(a) in the case of the consolidated Balance Sheet, of the state of affairs of the Company as on March
31, 2023;
(b) in the case of the consolidated Profit and Loss Account, of the profit/loss for the year ended on
that date; and
(c) in the case of the consolidated Cash Flow Statement, of the cash flows for the year ended on
that date.
Other Matter Para
We did not audit the financial statements of one subsidiary, whose financial statements reflect total
assets (net) of XXXX as on March 31, 2023, total revenues of XXXX and net cash outflows amounting
to XXXX for the year then ended. These financial statements have been audited by other auditor’s
M/s Badnam and Company, Chartered Accountants whose reports have been furnished to us by the
Management, and our opinion is based solely on the reports of the other auditors. Our opinion is not
qualified in respect of this matter.
Q.145 D Ltd., a Delhi based company having turnover of ₹ 25 crores, has a branch at USA having a
turnover of ₹ 10 lakhs (as converted from US dollars). The area where the branch office is located
in USA was severely affected by storms and the office along with all accounting records was
completely destroyed. Due to the unavailability of records, the financial statements of D Ltd. for the
financial year 2022-23 did not include the figures pertaining to the said branch. As the statutory
auditor of D Ltd., how will you report on the same? [Nov. 17 (5 Marks)]
Ans.: Reporting on financial statements when information of component is not included:
• As per SA 200 “Overall Objectives of the Independent Auditor and Conduct of Audit in
accordance with Standards on Auditing” in conducting an audit of financial statements, the
overall objective of the auditor is to obtain reasonable assurance about whether the Financial
statements as a whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an applicable FRF. In all cases when

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reasonable assurance cannot be obtained and a qualified opinion in the auditor’s report is
insufficient, the SAs require that the auditor disclaim an opinion or withdraw from the
engagement.
• In the present case, D Ltd., a Delhi based company having turnover of ₹ 25 crores, has a branch at
USA having a turnover of ₹ 10 lakhs (as converted from US dollars). The area where the branch
office is located in USA was severely affected by storms and the office along with all accounting
records was completely destroyed. Due to the unavailability of records, the financial statements
of D Ltd. for the financial year 2022-23 did not include the figures pertaining to the said branch.
• In the present situation, company is required to make appropriate disclosures in the notes to
accounts in this regard. Based on the disclosures made in the financial statements, auditor is
required to include an Emphasis of Matter Para in the auditor’s report as per requirement of SA
706. If, however no disclosure is made in the financial statements, auditor need to qualify the
audit report as turnover of the branch is only ₹ 10 lakhs which does not seems to have pervasive
effect as the total turnover of the company is ₹ 25 Crores.
Conclusion: If appropriate disclosures are given in Notes to Accounts, an unmodified opinion with
Emphasis of Matter para need to be issued. However, if appropriate disclosures are not given in
Notes to Accounts, auditor should qualify the report in accordance with SA 705.
Note: Answer given in Suggested Answer of ICAI is based on the provisions of Sec. 143(8) and
specifies who can conduct branch audit.
Answer given in suggested answer does not seems to be appropriate as requirement of
question was how the auditor report, whereas content of answer is primarily on the basis of
who can conduct branch audit. In a case where branch records are not available, then there is
no logic of mentioning the provisions relating to the concept of branch audit. Answer needs
to be given from perspective of company auditor, how to deal in such a situation.
Q.146 Enumerate certain important matters which can be included in ‘Emphasis of Matter Paragraph’ in
an Auditor’s Report. [Nov. 19 – Old syllabus (5 Marks)]
Ans.: Matters which can be included in Emphasis of Matter Paragraph in Auditor’s Report:
• As per 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor’s Report” Emphasis of Matter is a paragraph which is included in auditor’s report to
draw users’ attention to important matter(s) which are already disclosed in Financial
Statements and are fundamental to users’ for understanding of Financial Statements.
• Specific requirements for the auditor to include Emphasis of Matter paragraphs in the auditor’s
report in certain circumstances. These circumstances include:
(a) When a FRF prescribed by law or regulation would be unacceptable but for the fact that it is
prescribed by law or regulation.
(b) To alert users that the financial statements are prepared in accordance with a special
purpose framework.
(c) When facts become known to the auditor after the date of the auditor’s report and the
auditor provides a new or amended auditor’s report (i.e., subsequent events).
• Matters which can be included in ‘Emphasis of Matter Paragraph’ in an Auditor’s Report, may be
listed as below:
(a) An uncertainty relating to the future outcome of an exceptional litigation or regulatory
action.

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(b) A significant subsequent event that occurs between the date of the financial statements and
the date of the auditor’s report.
(c) Early application (where permitted) of a new accounting standard that has a pervasive
effect on the financial statements in advance of its effective date.
(d) A major catastrophe that has had, or continues to have, a significant effect on the entity’s
financial position.
Q.147 AKB Associates, a renowned audit firm in the field of CA practice for past two decades. The firm
was appointed to conduct statutory audit of Rica Ltd. an unlisted company, which is engaged in the
business of paper manufacturing. It decided to commence the audit for the recently concluded
financial year. Once after making significant progress in the audit, the auditors made the following
observations:
Observation 1: The management had disclosed in the financials that, during the year, one of the
warehouses of the Company was affected due to a major flood. As a result of the same, the Company
had incurred some losses. But the management was of the view that it was not material.
Observation 2: Due to flood, few records maintained by the Company with respect to a particular
transaction was completely destroyed and there was no duplicate record maintained by the
Company. However, those details were not pervasive, but material.
You are required to advise, whether AKB Associates should report Observations 1 and 2 in its audit
report? If so, under which heading should it be reported? [RTP-Nov. 20]
Ans.: Reporting of modifications and EOM Para:
Observation 1:
Facts of the case: The management had disclosed in the financials that, during the year, one of the
warehouses of the Company was affected due to a major flood. As a result of the same, the Company
had incurred some losses. But the management was of the view that it was not material.
Relevant provisions: As per SA 706, “Emphasis of Matter Paragraph & Other Matter Paragraph in
the Independent Auditor’s Report”, an Emphasis of Matter Paragraph refers to matter appropriately
disclosed in the financials, that in the auditor’s judgment is of such importance that it is
fundamental to users’ understanding of the financials.
Reporting requirements: The auditor shall report about the consequences of the flood which
affected the Company’s warehouse under Emphasis of Matter Paragraph.
Observation 2:
Facts of the case: Due to flood, few records maintained by the Company with respect to a particular
transaction was completely destroyed and there was no duplicate record maintained by the
Company. However, those details were not pervasive, but material.
Relevant provisions: As per SA 705, “Modification to Opinion in the Independent Auditor’s
Report”, where the auditor is unable to obtain sufficient and appropriate audit evidence and where
such mater is material but not pervasive, the auditor shall issue a qualified opinion.
Thus, in the given situation, on account of flood few records pertaining to particular transactions
was completely destroyed and in the absence of duplicate records, the auditor was unable to obtain
sufficient and appropriate audit evidence and those details were material but not pervasive.
Reporting requirements: In accordance with SA 705, the auditor is required to issue qualified
opinion.

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Q.148 Where should the placement of the key audit matters section be in the auditor’s report?
[RTP-May 22]
Ans.: Placement of the key audit matters section in the auditor’s report:
• Generally, the Key Audit Matters section is required to be placed after the Basis for Opinion
paragraph and before the Management’s Responsibility paragraph.
• In case, ‘Material uncertainty relating to going concern’ section is required as per SA
570(Revised), then KAM section is placed after that section.
• Further, regarding placement of KAM section, SA 706, “Emphasis of Matter Paragraphs and
Other Matter Paragraphs in the Independent Auditor’s Report” provides as under:
When a Key Audit Matters section is presented in the auditor’s report, an Emphasis of Matter
(EOM) paragraph may be presented either directly before or after the Key Audit Matters section,
based on the auditor’s judgment as to the relative significance of the information included in the
Emphasis of Matter paragraph. The auditor may also add further context to the heading
“Emphasis of Matter”, such as “Emphasis of Matter – Subsequent Event”, to differentiate the
Emphasis of Matter paragraph from the individual matters described in the Key Audit Matters
section.
Q.149 Difficult Books Limited is engaged in manufacturing of active pharmaceutical ingredients. Due to
change in laws and regulations, every company engaged in manufacturing in active pharmaceutical
ingredients would now require production capacity license which will restrict the production of
companies. Management of the company assessed the impact of the change in law over the
financial position of company and appropriately disclosed the same in the financial statement.
Audit Team of the company evaluated management's disclosure and found it appropriate and
sufficient. However, considering the said matter as most important and fundamental to users
understanding regarding financial statement the audit team decided to disclose the same in Other
Matter Paragraph.
You as an Engagement Partner are required to guide the Audit Team with respect to reporting of
the said matter in Audit Report. [MTP-Oct. 22]
Ans.: Emphasis of Matter Para and Other Matter Para in Audit Report:
• As per SA 706, “Emphasis of Matter Paragraphs and Other 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 judgment, 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:
(i) The auditor would not be required to modify the opinion in accordance with SA 705 as a
result of the matter; and
(ii) When SA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.
• In the instant case, since Difficult Books Limited is engaged in manufacturing of active
pharmaceutical ingredients, would now require production capacity license which will restrict
the production of companies, due to change in laws and regulations. Management of the Difficult
Books Limited assessed the impact of the change in law over the financial position of company
and appropriately disclosed the same in the financial statement.

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• Audit team of the Difficult Books Limited evaluated management's disclosure and found it
appropriate and sufficient. However, considering the said matter as most important and
fundamental to users understanding regarding financial statement the audit team decided to
disclose the same.
Conclusion: As the matter discussed is already disclosed and presented appropriately in financial
statement and is of such importance that is fundamental to the users understanding of the financial
statement, it required to be disclosed under Emphasis of Matter paragraph.
Therefore, decision of audit team to disclose the same in Other Matter Paragraph is not in order, it
should be disclosed in Emphasis of Matter Paragraph.

1.35 - SA 710 “Comparative Information – Corresponding Figures and Comparative Financial Statements”
Q.150 Mr. A, a practicing Chartered Accountant, audited the financial statements of C Ltd. for the previous
year 2021-22 and expressed an unmodified opinion. C Ltd. was of the view that Mr. A is not
conducting the audit properly and therefore, for the current year 2022-23, it appointed Ms. B, a
leading practicing Chartered Accountant to conduct the audit and present Comparative Financial
Statements. Ms. B, while performing the auditing procedures, found that C Ltd. has undercharged
the wages of ₹ 10 lakhs during the previous year resulting in overstatement of profits. What are the
further procedures, Ms. B is required to pursue?
Ans.: Auditor’s Procedures in respect of examination of comparative financial statements:
1. SA 710 “Comparative Information – Corresponding Figure and Comparative Financial
Information deals with the auditor’s responsibilities regarding comparative information in an
audit of financial statements.
2. To examine the comparative information, auditor is required to perform the following
procedures:
• Determine whether F.S. include Comparative information required by FRF, & Whether such
information is classified appropriately.
• Evaluate Whether the comparative information agrees with the amounts and other
disclosures presented in the prior period; and
3. In the present case, auditor identified material misstatement for the previous year, financial
statements of which are audited by Mr. A; Ms. B Current Auditor is required to discuss the matter
with the management and issue suitable report based on the action taken by the management in
this regard.
Conclusion: Ms. B is required to communicate the matter to the management and request them to
inform the same to Mr. A. After revision or non-revision of the prior period’s financial statements,
Ms. B may report accordingly.
Q.151 For the year ended on 31st March, 2022, the audit report of Avinash Ltd., contained a qualification
regarding non-provision for diminution in the value of investments to the extent of ₹ 50 lakhs. As
an Auditor of the Company for the year 2022-23, how would you report, if:
(i) The Company does not make provision for diminution in the value of investments in the year
2022-23.
(ii) The Company makes adequate provision for diminution in the year 2022-23.
[May 18 – Old Syllabus (5 Marks)]

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Ans.: Auditor’s responsibilities w.r.t. Corresponding figures:
• As per SA 710, “Comparative Information – Corresponding Figures and Comparative Financial
Statements” When the auditor’s report on the prior period, as previously issued, included a
modified opinion and the matter which gave rise to the modified opinion is resolved and
properly accounted for or disclosed in the financial statements in accordance with the applicable
FRF, the auditor’s opinion on the current period need not refer to the previous modification.
• SA 710 further states that if the auditor’s report on the prior period, as previously issued,
included a modified opinion and the matter which gave rise to the modification is unresolved,
the auditor shall modify the auditor’s opinion on the current period’s financial statements.
• In the Basis for Modification paragraph in the auditor’s report, the auditor shall either:
(i) Refer to both the current period’s figures and the corresponding figures in the description
of the matter giving rise to the modification when the effects or possible effects of the
matter on the current period’s figures are material; or
(ii) In other cases, explain that the audit opinion has been modified because of the effects or
possible effects of the unresolved matter on the comparability of the current period’s
figures and the corresponding figures.
Conclusion:
(a) If P Ltd. does not make provision the auditor will have to modify his report for both current and
previous year’s figures as mentioned above.
(b) If, however, the provision is made, the auditor need not refer to the earlier year’s modification.
Q.152 It was observed from the modified audit report of the financial statements of AS Ltd. for the year
ended on 31st March, 2022 that depreciation of ₹ 2.50 crores for the year 2021-22 had been
charged off to the statement of Profit and Loss instead of including it in “Carrying value of asset
under construction”. State in relation to the audit for the year ended on 31st March 2023, whether
such modification in the previous year’s audit report would have any audit implication for the
current year and if yes, how would you deal with it in your audit report?
[Nov. 18-Old Syllabus (5 Marks), MTP-Oct. 20, March 23]
Ans.: Impact of Modification in the predecessor auditor’s report:
• SA 710 “Comparative Information – Corresponding Figure and Comparative Financial
Information deals with the auditor’s responsibilities regarding comparative information in an
audit of financial statements.
• As per SA 710, when the auditor’s report on the prior period, as previously issued, included a
qualified opinion, a disclaimer of opinion, or an adverse opinion and the matter which gave rise
to the modified opinion is resolved and properly accounted for or disclosed in the financial
statements in accordance with the applicable financial reporting framework, the auditor’s
opinion on the current period need not refer to the previous modification.
• As per SA 710, if the auditor’s report on the prior period, as previously issued, included a
modified opinion and the matter which gave rise to the modification is unresolved, the auditor
shall modify the auditor’s opinion on the current period’s financial statements. In the Basis for
Modification paragraph in the auditor’s report, the auditor shall either:
(a) Refer to both the current period’s figures and the corresponding figures in the description
of the matter giving rise to the modification when the effects or possible effects of the
matter on the current period’s figures are material; or

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(b) In other cases, explain that the audit opinion has been modified because of the effects or
possible effects of the unresolved matter on the comparability of the current period’s
figures and the corresponding figures.
• In the instant case, it was observed from the modified audit report of the financial statements of
AS Ltd. for the year ended on 31st March, 2022 that depreciation of ₹ 2.50 crores for the year
2021-22 had been charged off to the statement of Profit and Loss instead of including it in
“Carrying value of asset under construction”.
Conclusion: If AS Ltd. does not correct the treatment of depreciation to the extent of ₹ 2.50 crore
for previous year, the auditor will have to modify his report for both current and previous year’s
figures as mentioned above. If, however, the figures and provisions are corrected, the auditor need
not consider to the earlier year’s modification.
Q.153 You as a statutory auditor had audited the financial statements of A Ltd., a listed company, for F.Y.
2021-22. The company has included the comparative financial information in the financial
statements prepared for the current F.Y. 2022-23. You as an auditor want to obtain sufficient
appropriate audit evidence that comparative financial information has been presented, in all
material aspects, in accordance with the requirements in the applicable financial reporting
framework. List out audit procedures, as specified in relevant SA, which you are required to follow
for the purpose. [Dec. 21 – Old Syllabus (5 Marks)]
Ans.: Auditor’s Procedures in respect of examination of corresponding figures:
SA 710 “Comparative Information – Corresponding Figure and Comparative Financial Information
deals with the auditor’s responsibilities regarding comparative information in an audit of financial
statements.
To examine the comparative information, auditor is required to perform the following procedures:
(a) Determine whether F.S. include Comparative information required by applicable FRF, &
whether such information is classified appropriately.
(b) Evaluate the following:
• Whether the comparative information agrees with the amounts and other disclosures
presented in the prior period; and
• Whether the accounting policies reflected in the comparative information are consistent
with those applied in the current period.
• Whether, changes in accounting policies, if any, have been properly accounted for and
adequately presented and disclosed.
(c) If the auditor becomes aware of a possible material misstatement in the comparative
information while performing the current period audit, the auditor shall perform such
additional audit procedures as are necessary in the circumstances to obtain sufficient
appropriate audit evidence to determine whether a material misstatement exists.
(d) If the auditor had audited the prior period’s financial statements, the auditor shall also follow
the relevant requirements of SA 560, “Subsequent Events”.
(e) As required by SA 580, “Written Representations”, the auditor shall request written
representations for all periods referred to in the auditor’s opinion. The auditor shall also
obtain a specific written representation regarding any prior period item that is separately
disclosed in the current year’s statement of profit and loss.

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1.36 - SA 720 “The Auditor’s Responsibilities relating to Other Information.”
Q.154 LMP Associates, Chartered Accountants, conducting the audit of PQR Ltd., a listed Company for the
year ended on 31st March, 2023 is concerned with the auditor’s responsibilities relating to other
information, both financial and non-financial, included in the Company’s annual report. While
regarding other information, LMP Associates considers whether there is a material inconsistency
between other Information and the financial statements. As a basis for the consideration the
auditor shall evaluate their consistency, compare selected amounts or other items in the other
information with such amounts or other items in the financial statements. Guide LMP Associates
with examples of “Amounts” or “other items” that may be included in the “other information” with
reference to SA 720. [Nov. 19 – New Syllabus (5 Marks), MTP-April 21]
Ans.: Reading and considering the Other information:
SA 720 “The Auditor’s Responsibilities relating to Other Information” deals with the auditor’s
responsibilities relating to Other Information, whether financial or non-financial information
included in an entity’s annual report.
Other information may include amounts or other items that are intended to be the same as, to
summarize, or to provide greater detail about, the amounts or other items in the financial
statements. Examples of such amounts or other items may include:
(A) Amounts:
1. Items in a summary of key financial results, such as net income, earnings per share,
dividends, sales and other operating revenues, and purchases and operating expenses.
2. Selected operating data, such as income from continuing operations by major operating
area, or sales by geographical segment or product line.
3. Special items, such as asset dispositions, litigation provisions, asset impairments, tax
adjustments, environmental remediation provisions, and restructuring and reorganisation
expenses.
4. Liquidity and capital resource information, such as cash, cash equivalents and marketable
securities; dividends; and debt, capital lease and minority interest obligations.
5. Capital expenditures by segment or division.
6. Amounts involved in, and related financial effects of, off-balance sheet arrangements.
7. Amounts involved in guarantees, contractual obligations, legal or environmental claims, and
other contingencies.
8. Financial measures or ratios, such as gross margin, return on average capital employed,
return on average shareholders’ equity, current ratio, interest coverage ratio and debt ratio.
Some of these may be directly reconcilable to the financial statements.
(B) Other Items:
1. Explanations of critical accounting estimates and related assumptions.
2. Identification of related parties and descriptions of transactions with them.
3. Articulation of the entity’s policies or approach to manage commodity, foreign exchange or
interest rate risks, such as through the use of forward contracts, interest rate swaps, or
other financial instruments.
4. Descriptions of the nature of off-balance sheet arrangements.
5. Descriptions of guarantees, indemnifications, contractual obligations, litigation or
environmental liability cases, and other contingencies, including management’s qualitative
assessments of the entity’s related exposures.

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6. Descriptions of changes in legal or regulatory requirements, such as new tax or
environmental regulations, that have materially impacted the entity’s operations or fiscal
position, or will have a material impact on the entity’s future financial prospects.
7. Management’s qualitative assessments of the impacts of new financial reporting standards
that have come into effect during the period, or will come into effect in the following period,
on the entity’s financial results, financial position and cash flows.
8. General descriptions of the business environment and outlook.
9. Overview of strategy.
10. Descriptions of trends in market prices of key commodities or raw materials.
11. Contrasts of supply, demand and regulatory circumstances between geographic regions.
12. Explanations of specific factors influencing the entity’s profitability in specific segments.
Q.155 ING Associates, Chartered Accountants, conducting the audit of XYZ Ltd., a listed Company for the
year ended on 31st March 2023 is concerned with the auditor's responsibilities relating to
misstatements in other information, both financial and non-financial, included in the Company’s
annual report. While reading other information, ING Associates considers whether there is any
material misstatement of the other information in the Company. After performing their
procedures, the auditor concludes that a material misstatement of the other information exists.
ING Associates discussed with the management about the other information that appeared to be
materially misstated to the auditor and also requested management to provide evidence for the
basis of management’s statements in the other information along with supporting documents.
Guide ING Associates as how to respond to that material misstatement of other information
obtained prior to the date of auditor’s report. Will your answer be different in case ING Associates
conclude the same after the date of auditor’s report? [MTP-Oct. 20]
Ans.: Auditor’s responses on a material misstatement in the Other Information:
• SA 720 “The Auditor’s Responsibilities relating to Other Information” deals with the auditor’s
responsibilities relating to Other Information, whether financial or non-financial information
included in an entity’s annual report.
• If the auditor concludes that a material misstatement of the other information exists, the auditor
shall request management to correct the other information. If management:
(a) Agrees to make the correction, the auditor shall determine that the correction has been
made; or
(b) Refuses to make the correction, the auditor shall communicate the matter with TCWG and
request that the correction be made.
• If the auditor concludes that a material misstatement exists in other information obtained prior
to the date of the auditor’s report, and the other information is not corrected after
communicating with TCWG, the auditor shall take appropriate action, including:
(a) Considering the implications for the auditor’s report and communicating with TCWG about
how the auditor plans to address the material misstatement in the auditor’s report,
(b) Withdrawing from the engagement, where withdrawal is possible under applicable law or
regulation.
• If the auditor concludes that a material misstatement exists in other information obtained after
the date of the auditor’s report, the auditor shall:
(a) If the other information is corrected, perform the procedures necessary in the
circumstances; or

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(b) If the other information is not corrected after communicating with TCWG, take appropriate
action considering the auditor’s legal rights and obligations, to seek to have the uncorrected
material misstatement appropriately brought to the attention of users for whom the
auditor’s report is prepared.
Q.156 GS & Co., Chartered Accountants, have been appointed Statutory Auditors of MAP Ltd. for the F.Y
2022-23. The audit team has completed the audit and is in the process of preparing audit report
Management of the company has also prepared draft annual report.
Audit in-charge was going through the draft annual report and observed that the company has
included an item in its Annual Report indicating downward trend in market prices of key
commodities/raw material as compared to previous year. However, the actual profit margin of the
company as reported in financial statements has gone in the reverse direction. Audit Manager
discussed this issue with partner of the firm who in reply said that auditors are not covered with
such disclosures made by the management in its annual report, it being the responsibility of the
management.
Do you think that the partner is correct in his approach on this issue?
Discuss with reference to relevant Standard on Auditing the Auditor’s duties with regard to
reporting. [Nov. 20 – New Syllabus (4 Marks), MTP-Oct. 21, April 23; RTP-May 23]
Ans.: Auditor’s responsibilities as to Other Information included in Annual Report:
• SA 720 “The Auditor’s Responsibilities relating to Other Information” deals with the auditor’s
responsibilities relating to Other Information, whether financial or non-financial information
included in an entity’s annual report. Accordingly, descriptions of trends in market prices of key
commodities or raw materials is an example of amounts or other items that may be included in
the other information.
• The auditor’s discussion with management about a material inconsistency (or other information
that appears to be materially misstated) may include requesting management to provide
support for the basis of management’s statements in the other information. Based on
management’s further information or explanations, the auditor may be satisfied that the other
information is not materially misstated. For example, management explanations may indicate
reasonable and sufficient grounds for valid differences of judgment.
Auditor’s duties with regard to reporting:
If the auditor concludes that a material misstatement of the other information exists, the auditor
shall request management to correct the other information. If management:
(i) Agrees to make the correction, the auditor shall determine that the correction has been made;
or
(ii) Refuses to make the correction, the auditor shall communicate the matter with those charged
with governance and request that the correction be made.
Conclusion: Considering the requirements of SA 720 as stated above, it can be concluded that
partner is not correct in his approach.

1.37 - Other Comprehensive Questions

Q.157 The audit report of Kolsi (P) Ltd. for F.Y. 2021-22 was issued by Bishnoi & Co. on 25th July, 2022.
However, a case was filed against Kolsi (P) Ltd. on 4th August, 2022, with the Civil Court, with
respect to an incident caused in its factory on 17th January, 2022, the outcome of which may result
in paying heavy penalty by Kolsi (P) Ltd.

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Mr. Raj Bishnoi, the partner of Bishnoi & Co., discussed the said matter with the management and it
was determined to amend the financial statements for F.Y. 2021-22. Further, Mr. Raj inquired how
the management intended to address the said matter in the financial statements to which he was
told that the said matter was going to be disclosed as a “Contingent Liability for a Court case” to the
foot note in the balance sheet with no additional disclosures.
The management told Mr. Raj that such disclosure was enough as he would further going a
description of the said court case and its outcome in the ‘Emphasis of Matter’ paragraph in his
amended audit report.
In the context of aforesaid case scenario, please answer the following questions:
(1) Whether Mr. Raj on behalf of Bishnoi & Co., has properly adhered to his responsibilities in
accordance with SA 560, on becoming aware of the court case filed against Kolsi (P) Ltd.?
(2) Whether the contention of management of Kolsi (P) Ltd. is valid with respect to the disclosure
of the court case in the financial statements? [RTP-Nov. 21]
Ans.: Auditor’s Responsibilities as per SA 560:
• As per SA 560, ‘Subsequent Events’, the auditor has no obligation to perform any audit
procedures regarding the F.S. after the date of the auditor’s report. However, when, after the
date of the auditor’s report but before the date the F.S. issued, a fact becomes known to the
auditor that, had it been known to the auditor at the date of the auditor’s report, may have
caused the auditor to amend the auditor’s report, the auditor shall:
(1) Discuss the matter with management and, where appropriate, TCWG.
(2) Determine whether the financial statements need amendment and, if so.
(3) Inquire how management intends to address the matter in the financial statements.
• In the given case, on becoming aware of the court case filed against the company, Mr. Raj
discussed the said matter with the management and it was determined to amend the F.S. Also, he
inquired how the management intended to address the said matter in the F.S.
• However, if management does not take the necessary steps to ensure that anyone in receipt of
the previously issued F.S. is informed of the situation and does not amend the F.S. in
circumstances where Mr. Raj (the auditor) believes they need to be amended, the auditor shall
notify management and, TCWG (unless all of TCWG are involved in managing the entity), that the
auditor will seek to prevent future reliance on the auditor’s report. If despite such notification
the management or TCWG do not take these necessary steps, the auditor shall take appropriate
action to seek to prevent reliance on the auditor’s report in accordance with SA 560.
Disclosure of the court case in the financial statements
As per SA 706, ‘Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor’s Report’, an Emphasis of Matter paragraph is not a substitute for:
(a) A modified opinion in accordance with SA 705 (Revised) when required by the circumstances
of a specific audit engagement;
(b) Disclosures in the financial statements that the applicable financial reporting framework
requires management to make, or that are otherwise necessary to achieve fair presentation; or
(c) Reporting in accordance with SA 570 when a material uncertainty exists relating to events or
conditions that may cast significant doubt on an entity’s ability to continue as a going concern.
In the given case, the management of company has presumed that as the auditor was going to
provide a description of the said court case and its outcome in the ‘Emphasis of Matter’ paragraph in
his amended audit report, there was no further need for it to provide additional disclosures about
the court case in the financial statements.

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Conclusion: Contention of management is not valid as ‘Emphasis of Matter’ paragraph cannot be
used as a substitute for disclosures required to be made in the financial statements as per the
applicable financial reporting framework or that is otherwise necessary to achieve fair presentation,
which is the responsibility of the management.
Q.158 CA P is the auditor of Master Data Ltd. for the year 2022-23. The company requests the auditor to
undertake an exercise involving only verification of trade receivables for half year ending 30th
September 2022. The company wants to be satisfied that trade receivables are properly confirmed
and reconciled.
In this regard, CA P has to verify the arithmetical accuracy of trade receivables, obtain
confirmation of trade receivables and ensure verification of proper reconciliations with
confirmations.
He is in a dilemma as to whether he can give a report providing assurance to the company in this
respect. Guide CA P with reasoning. Assume that above exercise can be undertaken and there is no
legal bar. [RTP-May 23]
Ans.: Reporting on Fact finding function:
• In the given situation, auditor has to verify trade receivables for half year ending 30th Sep., 2022.
Such a process/exercise is only a fact finding and reporting exercise. The auditor has to report
the facts as these are. Like, he would have to state whether confirmation from a particular debtor
has been received or not.
• The auditor can issue an assurance report in case of audit and review engagements. By providing
assurance, the auditor provides comfort to users of financial statements. Assurance in the above
context refers to the auditor's satisfaction as to the reliability of an assertion made by one party
for use by another. To provide such assurance, the auditor assesses the evidence collected as a
result of procedures conducted and expresses a conclusion. The degree of satisfaction achieved
and, therefore, the level of assurance which may be provided is determined by the procedures
performed and their results.
• However, the types of services described in the given situation falls in the related services
domain. These are, in the nature, of agreed-upon procedures to be carried out by the auditor.
The auditor cannot issue an assurance report while providing such kind of services. He can only
issue a report stating facts as they are without providing any sort of assurance. He can report
only facts.
Conclusion: Auditor cannot give a report providing assurance for such type of services. He can only
issue a factual report.

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2 Auditing Planning, Strategy and Execution

"Marks Distribution of Past Exams"
6

4
Marks

0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 0 0 0 5 0 0 0 0 0 4 0

*From May 2019, Marks are given only for descriptive questions

2.1 - Audit Planning

Q.1 Planning an audit involves establishing the overall audit strategy for the engagement arid
developing an audit plan. Adequate planning benefits the audit of financial statements in several
ways. Briefly discuss the usefulness of careful and adequate audit planning.
[July 21 – Old Syllabus (5 Marks)]
Ans.: Objectives of audit planning:
(i) To ensure that appropriate attention is devoted to important areas of the audit: This is
done through formal written audit plan, laying down the objectives and the procedures to be
followed in order to meet those objectives.
(ii) To facilitate review: Work should be delegated to staff with the appropriate level of experience.
All work should be properly supervised and reviewed by a senior member of staff.
(iii) To ensure that potential problems are identified: The auditor must ensure that resources are
directed towards material/high risk areas.
(iv) To assist in the proper assignment of work: This may be to members of the audit team or to
experts or other auditors. It helps the audit to proceed in a timely and efficient manner.
(v) Coordination of work done by auditors of components and experts.
Q.2 Mr. S & Mr. J are a senior and junior articled assistant respectively, in a renowned audit firm. Both
were assigned statutory audit of a manufacturing company. Mr. S instructed his junior to draft an
audit plan by taking reference from a similar client (a partnership firm) who was engaged in the
same business. Mr. J was confused as to how that reference could suit in this case, since the nature
and extent of planning would vary for both clients. After few days, the audit work commenced.
During the course of the audit, certain events took place, which made Mr. J to rethink about the audit

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plan initially designed. He approached Mr. S and enquired about when would an audit plan require a
change. Comment about both the situations face by Mr. J in the above situation. [MTP-Oct. 21]
Ans.: Factors affecting nature and extent of Planning:
The audit planning is necessary to conduct an effective audit, in an efficient and timely manner. So far
as the nature of planning is concerned, it would vary according to:
(i) Size and Complexity of the Auditee: If the size and complexity of organization of which audit is
to be conducted is large, then much more planning activities would be required as compared to
an entity whose size and complexity is small.
(ii) Past Experience & Expertise: The key engagement team members’ previous experience &
expertise also contributes towards variation in planning activities.
(iii) Change in Circumstances: Another factor contributing towards variation in planning activities
is change in circumstances.
Changes to Audit Planning:
The auditor should update and change the overall audit strategy and audit plan as necessary during
the course of the audit. The auditor may need to modify the overall audit strategy and audit plan due
to the factors such as
(i) result of unexpected events,
(ii) changes in conditions, or
(iii) the audit evidence obtained from the results of audit procedures.
Further, the auditor would also have to modify the nature, timing & extent of further audit
procedures, based on the revised considerations of assessed risks. This may be the case when
information coming to the auditor differs significantly from the information when he planned the
audit process.
In addition to the above, there may be possibilities of change in law, notifications, government
policies, which warrants updation of overall audit strategy and audit plan.

2.2 - Audit Strategy

Q.3 You have been appointed as an auditor of Bahubali Ltd. for the first time. Enumerate the factors to be
considered while establishing an overall audit strategy and its benefits.
[May 18 – Old Course (4 Marks)]
Ans.: Factors to be considered in establishing audit strategy:
SA 300 “Planning an Audit of Financial Statements” requires that the auditor shall establish an overall
audit strategy that sets the scope, timing and direction of the audit, and that guides the development
of the audit plan. In establishing the overall audit strategy, the auditor shall:
• Identify the characteristics of the engagement that define its scope;
• Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature
of the communications required;
• Consider the factors that are significant in directing the engagement team’s efforts;
• 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
• Ascertain the NTE of procedures necessary to perform.

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Chapter 2 Auditing Planning, Strategy and Execution
Benefits of Audit Strategy:
1. Employment of Qualitative Resources: Audit strategy helps in deploying the appropriate
resources for specific audit areas, such as the use of experienced team members for high risk
areas or the involvement of experts on complex matters.
2. Allocation of Quantity of Resources: Audit strategy helps in allocating the appropriate number
of resources 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. Timing of Deployment of Resources: Audit strategy helps in determining the timing of
deploying the resources, such as whether at an interim audit stage or at key cut-off dates.
4. Management of Resources: Audit strategy helps in managing, directing, supervising the
resources, such as when team briefing and debriefing meetings are expected to be held, how
engagement partner and manager reviews are expected to take place (for example, on-site or off-
site), and whether to complete engagement quality control reviews.
Q.4 Write short note on: Relationship in between Audit strategy and Audit Plan. [RTP-May 22]
Ans.: Relationship between Audit Strategy and Audit Plan:
• Audit strategy and audit plan are inter-related to each other because change in one would result
into change in the other.
• The audit strategy is prepared before the audit plan. The audit plan contains more details than the
overall audit strategy.
• The audit strategy provides the guidelines for developing the audit plan.
• Audit strategy establishes the scope, timing and direction of the audit and thereby works as basis
for developing a detailed audit plan.
• Detailed audit plan would include the nature, timing and extent of the audit procedures so as to
obtain sufficient appropriate audit evidence.

2.3 - Audit Programme

Q.5 As an internal auditor for a large manufacturing concern, you are asked to verify whether there are
adequate records for identification and value of Plant and Machinery, tools and dies and whether
any of these items have become obsolescent and not in use. Draft a suitable audit programme for the
above. [MTP-April 18]
Or
CA. Dev, a recently qualified practicing Chartered Accountant got his first internal audit assignment
of a large manufacturing concern Growth Limited. As an internal auditor for Growth Limited, CA. Dev
is required to verify whether there are adequate records for identification and value of Plant and
Machinery, tools and dies and whether any of these items have become obsolescent and not in use.
Draft a suitable audit programme for the above. [RTP-May 21]
Ans.: Audit Programme to determine adequacy of records w.r.t. Plant and Machinery:
The Internal Audit Programme for verification of adequate records for identification and value of
plant and machinery may cover the following:
1. Examination of Internal Control System Aspects: with respect to following:
• Maintenance of separate register for fully owned assets, jointly owned assets hired assets and
leased asset.

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• Periodic inspection of fixed assets.
• Proper authorisation and recording for purchase, repair and disposal of fixed assets.
2. Examination of Assets Register: To ensure whether the registers are showing clearly the date of
purchase, cost price, location, depreciation charged, etc. for each plant and machinery.
3. Examination of Measurement of Cost: Verify the items which have been capitalised.
4. Examination of Code Register: To ensure that each item of plant and machinery has been given
a distinct code number.
5. Physical Verification: Ensure that physical verification has been conducted by management at
frequent intervals.
6. Disposal of Assets: Examine whether assets have been disposed of after proper technical and
financial advice and is properly authorised.
7. Spare Parts Register: To examine the system of control over the various tools and spare parts to
be used for each plant and machinery.
8. Review of Maintenance: Examine the programme for a periodical servicing and overhauling of
machines.
Q.6 Yex Ltd. has five entertainment centers to provide facilities for public especially for children and
youngsters at 5 different locations in the peripheral of 200 kms. Collections are made in cash.
Specify the adequate control system towards collection of money. [MTP-April 18]
Or
Cineplex, a movie theatre complex, is the foremost theatre located in Delhi. Along with the sale of
tickets over the counter and online booking, the major proportion of income is from the cafe, shops,
pubs etc. located in the complex. It’s other income includes advertisements exhibited within/outside
the premises such as hoardings, banners, slides, short films etc. The facility for parking of vehicles is
also provided in the basement of the premises.
Cineplex appointed your firm as the auditor of the entity. Being the head of the audit team, you are
therefore required to draw an audit programme initially in respect of its revenue and expenditure
considering the above-mentioned facts along with other relevant points relating to a complex.
[Nov. 19 – New Syllabus (5 Marks); MTP-March 21, March 22]
Ans.: Audit Programme for Revenue and Expenditure of Multiplex:
1. Study the MOA and AOA of the entity so as to ensure that the object clause of MOA permits the
entity to engage in this business.
2. In respect of income from sale of tickets, perform the following:
(a) Examine the internal control system to ensure proper accounting of sale of tickets.
(b) Examine the system of online booking and realization of money.
(c) Examine the system of reconciliation of collections with the number of seats available.
3. Examine the existence and effectiveness of internal control system relating to the income from
cafes shops, pubs etc., located within the multiplex.
4. Examine the control exercised relating to the income receivable from advertisements exhibited
within the premises.
5. Examine the system of collection from the parking areas.
6. Examine the system of payment to the distributors which may be either through out right
payment or percentage of collection.

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7. Examine the system of payment of salaries and other benefits to the employees and ensure
compliance of statutory requirements.
8. Examine the expenses incurred in respect of the maintenance of the building.
Q.7 XY Ltd. is a manufacturing company, provided following details of wastages of raw materials in
percentage, for various months. You have been asked to enquire into causes of abnormal wastage of
raw materials. Draw out an audit plan. Wastage percentage are:
July 2022 - 1.5% Aug. 2022 - 1.7%
Sep. 2022 - 1.4% Oct. 2022 - 4.1%
[Nov. 11 (8 Marks), MTP – April 18, April 22]
Ans.: Audit Plan to inquire causes of abnormal wastage of raw material:
Before planning for detailed investigation, the auditor is required to understand the manufacturing
operations from the initial stage of purchase of materials, issue of material, consumption of material
and conversions into finished goods. To locate the reasons for the abnormal wastage, the audit plan
may include the following:
1. Obtain a list of raw materials used in the production process mentioning therein the names and
detailed characteristics of each raw material.
2. Ascertain the basis of computation of normal wastage figures and its consistency as compared to
previous months.
3. Obtain internal control reports, in respect of manufacturing costs incurred with reference to pre-
determined standards or budgets.
4. Examine the stock records so as to determine the raw material purchased, material issued to
production.
5. Examine the production records so as to determine the material received from the stores and
actual material consumed in the production and waste produced in the production process.
6. Study the Maintenance Programme of machinery to ensure that the machinery does not consume
more raw material and quality of goods manufacture is not of sub-standard nature.
7. Ascertain whether employees engaged in production are properly trained and working efficiently.
8. Determine the existence and effectiveness of quality control techniques employed in the entity.
9. Examine inventory controls in respect of storage, pilferage, issues etc.
10. Obtain a statement showing break up of wastage figures in storage, handling and production for
the period under reference and compare the results of the analysis for each of the month.
11. Consider the existence of following situations that may also cause the abnormal wastage:
(a) Purchase of poor quality of raw materials.
(b) Machinery breakdown or power failure.
(c) High rate of rejections of finished goods.
(d) Deterioration of raw material lying in godowns.
(e) Abnormal wastages in storage and handling.
(f) Commencing new production line.
Q.8 CA. Raj is the auditor of a multiplex cinema house. He has observed during the course of the audit,
that the existing venue has undergone renovation. The auditorium was split into smaller ones and
additional - auditoriums were constructed. CA. Raj, who finalised the audit plan and audit
programme wanted to reconsider the same during the course of the audit.

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Discuss a few, circumstances where the audit programme would have to be suitably altered by the
auditor. [Nov. 22 (4 Marks)]
Ans.: Circumstances requiring changes in Audit Programme:
(1) If the audit procedures were designed for a certain volume of turnover and subsequently the
volume have substantially increased.
(2) When there have been significant changes in the accounting organisation, procedures and
personnel subsequent to the audit procedures.
(3) Where during the course of an audit, it has been discovered that internal control procedures
were not as effective as assumed at the time the audit programme was framed.
(4) Where there has been an extraordinary increase in the amount of book debts or that in the value
of stocks as compared to that in the previous year.
(5) When a suspicion is aroused during the course of audit or information has been received that
assets of the company have been misappropriated.

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3 Risk Assessment and Internal Control

Marks Distribution of Past Exams
6

4
Marks

0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 0 4 5 0 0 5 5 5 0 0 0

*From May 2019, Marks are given only for descriptive questions.
3.1 - Audit Risk
Q.1 Compute the overall Audit Risk if looking to the nature of business there are chances that 40% bills of
services provided would be defalcated, inquiring on the same matter management has assured that
internal control can prevent such defalcation to 75%. At his part the auditor assesses that the
procedure he could apply in the remaining time to complete Audit gives him satisfaction level of
detection of frauds & error to an extent of 60%. Analyse the Risk of Material Misstatement and find
out the overall Audit Risk. [MTP-April 19, Oct. 20]
Ans.: Determination of Audit Risk:
• As per SA-200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, the Audit Risk is a risk that Auditor will issue an
inappropriate opinion while Financial Statements are materially misstated.
• Audit Risk is a function of two components: Risk of material Misstatement and Detection Risk, i.e.
Audit Risk = Risk of material Misstatement × Detection Risk
• Risk of Material Misstatement is anticipated risk that a material Misstatement may exist in Financial
Statement before start of the Audit. It has two components Inherent risk and Control risk. The
relationship can be defined as Risk of material Misstatement = Inherent risk × control risk
• Inherent risk is the susceptibility of an assertion about account balance; class of transaction,
disclosure towards misstatements which may be either individually or collectively with other
Misstatement becomes material before considering any related internal control. Inherent Risk in the
given case is 40%.
• Control Risk is the risk that material misstatement will not be prevented or detected and corrected
on a timely basis by the internal control system. Control risk in the given case is 25% (100%-75%).
• Risk of material Misstatement = 40% × 25 % = 10%

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• Detection risk is the risk that the substantive procedures performed by the auditor fails to detect
material misstatement. Detection Risk in the given case is 100-60 = 40%
• Overall Audit Risk = Risk of Material Misstatement × Detection Risk = 10 × 40% = 4%

3.2 – Risk Based Audit

Q.2 ST Ltd. is a growing company and currently engaged in the business of manufacturing of tiles. The
company is planning to expand and diversify its operations. The management has increased the focus
on the internal controls to ensure better governance. The management had a discussion with the
statutory auditors to ensure the steps required to be taken so that the statutory audit is risk based
and focused on areas of greatest risk to the achievement of the company’s objectives. Please advise
the management and the auditor on the steps that should be taken for the same.
[MTP-March 19, RTP-May 19]
Or
Audit should be risk-based or focused on areas of greatest risk to the achievement of the audited
entity's objectives. Risk Based Audit (RBA) is an approach to audit that analyzes audit risks, sets
materiality thresholds based on audit risk analysis and develops audit programmes that allocate a
larger portion of audit resources to high-risk areas. What are the general steps for conducting Risk
Based Audit? [Nov. 20 – Old Syllabus (5 Marks)]
Ans.: General steps for conducting Risk Based Audit:
The auditor’s objective in a risk-based audit is to obtain reasonable assurance that no material
misstatements whether caused by fraud or errors exist in the financial statements.
This involves the following 3 key steps:
(1) Assessing the risks of material misstatement in the financial statements (Risk Assessment);
(2) Designing and performing further audit procedures that respond to assessed risks and reduce the
risks of material misstatements in the financial statements to an acceptably low level (Risk
Response); and
(3) Issuing an appropriate audit report based on the audit findings (Reporting).
Risk Assessment: In this phase of audit, auditor assesses the risk of material misstatements by
performing client acceptance or continuance procedures; planning the overall engagement; performing
risk assessment procedures and identifying the relevant internal control procedures.
Risk Response: In this phase of audit, auditor designed and perform further audit procedures that
respond to the assessed risks of material misstatement and will provide the evidence necessary to
support the audit opinion. Audit procedures designed to address the assessed risks could include a
mixture of:
(1) Tests of the operational effectiveness of internal control; and
(2) Substantive procedures such as tests of details and analytical procedures.
Reporting: This is the final phase of the audit which requires assessment of the audit evidences
obtained and determine whether they are sufficient and appropriate to reduce the risks of material
misstatement in the financial statements to an acceptably low level. It is important at this stage to
determine:
(1) If there had been a change in the assessed level of risk;
(2) Whether conclusions drawn from work performed are appropriate; and
(3) If any suspicious circumstances have been encountered.

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Chapter 3 Risk Assessment and Internal Control
Q.3 PADHAM Ltd is engaged in the business of manufacturing of carpets. The company is planning to
expand and diversify its operations. The management has increased the focus on internal controls to
ensure better governance. The management discussed with the statutory auditors to ensure the steps
required to be taken so that the statutory audit is risk based and focused on areas of greatest risk to
the achievement of the company’s objectives.
(a) Name the key steps and phases involved in Risk Based Audit.
(b) Also, discuss the steps to be taken for the risk assessment phase of the audit. [RTP-May 22]
Ans.: (a) Key Steps and Phases involved in Risk Based Audit: Refer answer of Q. No. 2
(b) Steps to be taken for Risk assessment Phase of Audit:
In this phase of audit, auditor assesses the risk of material misstatements. Aspects involved in Risk
assessment stages are:
(1) Performing client acceptance or continuance procedures;
(2) Planning the overall engagement;
(3) Performing risk assessment procedures to understand the business and identify inherent and
control risks;
(4) Identifying relevant internal control procedures and assessing their design and
implementation (those controls that would prevent material misstatements from occurring or
detect and correct misstatements after they have occurred);
(5) Assessing the risks of material misstatement in the financial statements;
(6) Identifying the significant risks that require special audit consideration and those risks for
which substantive procedures alone are not sufficient;
(7) Communicating any material weaknesses in the design and implementation of internal
control to management and those charged with governance; and
(8) Making an informed assessment of the risks of material misstatement at the financial
statement level and at the assertion level.

3.3 - Internal Control

Q.4 Y Co. Ltd. has five entertainment centers to provide recreational facilities for public especially for
children and youngsters at 5 different locations in the peripheral of 200 kilo meters. Collections are
made in cash. Specify the adequate system towards collection of money.
[Nov. 11 (6 Marks), MTP-April 18]
Ans.: System towards collection of money:
(a) Printing of tickets: Tickets should be serially numbered and pre-printed Serial numbers should
not be repeated during a reasonable period, say a month or year depending on the turnover.
(b) Sale of Tickets: Tickets should be sold from the Central ticket office at each of the 5 centers,
preferably through machines.
(c) Reconciliation of daily cash: Cash collection at each office should be reconciled with the number
of tickets sold.
(d) Banking of daily cash collection: Daily collection should be deposited in the bank on next
working day of the bank. Till that time, the cash should be in the custody of properly authorized
person.

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(e) Cancellation of Entrance ticket: Entrance tickets should be cancelled at the entrance gate when
public enters the centre.
(f) Advance booking: If advance booking of facility is made available, the system should ensure that
all advance booked tickets are paid for.
(g) Discounts and free pass: The discount policy should be such that the concessional rates should
be properly authorized and signed forms for such authorization should be preserved.
(h) Surprise checks: Internal audit system should carry out periodic surprise checks for cash counts,
daily banking, reconciliation and stock of unsold tickets etc.
Q.5 As an auditor, during your interim visit at marathon Ltd. you observed that internal controls were
not in use throughout the period covered under audit. What are the controls objectives you would
like to consider to achieve your purpose? [May 15 (6 Marks)]
Ans.: Control Objectives to be considered for Audit Purpose:
The objectives of internal control systems are determined by the management, after considering the
nature of business, scale of operations, the extent of professionalism of the management etc. Auditor’s
knowledge about the existence of control activities assists the auditor in determining whether it is
necessary to devote additional attention to obtaining an understanding of control activities.
To ensure whether the internal controls were in use throughout the period or not, the auditor may
consider the following control objectives:
1. Existence and effective implementation of policies and procedures so as to ensure orderly and
efficient conduct of business.
2. Safeguarding of assets.
3. Prevention and detection of frauds and errors.
4. Accuracy and completeness of the accounting records.
5. Timely preparation of reliable financial information.
6. Compliance with applicable laws and regulations.
7. Verification of assets at reasonable intervals.
8. Proper authorization of transactions.
9. Monitoring of accounting/financial controls.
10. Reviews of performance.
11. Segregation of duties.
Q.6 Pasta Ltd., a manufacturing concern want to develop internal control system. You are an expert in
developing the internal control system, hereby called to brief about the same. In view of above, you
are required to brief about internal control system and inherent limitations of the internal control?
[RTP-May 18]
Ans.: Internal Control System and its Inherent Limitations:
SA 315 “Identifying and Assessing the Risk of Material Misstatement Through Understanding the
Entity and its Environment” defines internal control as the process designed, implemented and
maintained by TCWG, management and other personnel to provide reasonable assurance about the
achievement of an entity’s objectives with regard to
(a) reliability of financial reporting;
(b) effectiveness and efficiency of operations;
(c) safeguarding of assets; and
(d) compliance with applicable laws and regulations.

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Chapter 3 Risk Assessment and Internal Control
Inherent Limitations of Internal Control System:
(a) Management’s consideration that a control should be cost-effective.
(b) The fact that the most controls do not tend to be directed at transactions of unusual nature.
(c) Potential for human error.
(d) Possibility of circumvention of controls through collusion with parties outside the entity or with
employees of entity.
(e) Possibility that a person responsible for exercising control could abuse that authority.
(f) Possibility that procedures may become inadequate due to changes in conditions and compliance
with procedures may deteriorate.
(g) Manipulations by management with respect to transactions or estimates and judgments required
in the preparation of financial statements.
Q.7 XYZ Hospital Private Ltd. is engaged in running a hospital of 200 Beds since last 20 years. Revenue
Track of the hospital for last 3 years is as under:
2020-21 : ₹ 20 Crores
2021-22 : ₹ 25 Crores
2022-23 : ₹ 35 Crores
Hospital has its own Pharmacy, Laboratory, Blood Bank, Radiology & General Stores. Its
management suspects that leakages/theft is happening in Pharmacy, Radiology, Laboratory and
General Stores departments. It seeks advice of RST & Co., Internal Auditors of the Company, as to
how it can Institute/Improve its Internal Control. In this context, Management wants to understand
the concept of components of Internal Control Structure in detail. Advise. [MTP-Aug. 18]
Ans.: Key components of Internal Control Structure:
Internal Control structure in an organization is referred to as the policies and procedures established
by the entity to provide reasonable assurance that the objectives are achieved.
The control structure in an organization basically has the following components:
1. Control Environment - Control environment covers the effect of various factors like management
attitude; awareness and actions for establishing, enhancing or mitigating the effectiveness of
specific policies and procedures.
2. Accounting System - Accounting system means the process by which transactions are processed
for maintaining financial records. Accounting system identifies, assemble, analyze, calculate,
classify, record, summarize and report transactions and other events.
3. Control Procedure - Policies and procedures means those policies and procedures in addition to
the control environment and accounting systems which the management has established to
achieve the entity’s specific objectives. Such Policies and Procedures cover the followings:
• Segregation of duties.
• Authorisation of Transactions.
• Adequacy of records and documents.
• Accountability and safeguarding of assets.
• Independent checks.
Q.8 During the course of his audit, the auditor noticed material weaknesses in the internal control
system and he wishes to communicate the same to the management. You are required to elucidate
the important points the auditor should keep in mind while drafting the letter of weaknesses in
internal control system. [Nov. 15 (4 Marks), MTP-Oct. 18, RTP-Nov. 18, May 20]

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Risk Assessment and Internal Control Chapter 3
Ans.: Points to be considered while drafting letter of weaknesses:
As per SA 265, “Communicating Deficiencies in Internal Control to Those who Charged with
Governance and Management”, the auditor shall include in the written communication of significant
deficiencies in internal control:
(a) A description of the deficiencies and an explanation of their potential effects; and
(b) Sufficient information to enable those charged with governance and management to understand
the context of the communication.
This communication should be, preferably, in writing through a letter of weakness. Important points
with regard to such a letter are as follows:
(a) It lists down the area of weaknesses in the internal control system and recommends suggestions
for improvement.
(b) It should clearly indicate that this letter covers only weaknesses which have come to the
attention of the auditor during his evaluation of internal control for the purpose of determining
nature, timing and extent of further audit procedures.
(c) Letter should clearly indicate that his examination of internal control has not been designed to
determine the adequacy of internal control for management.
(d) This letter serves as a significant means for management and governing body for the purpose of
improving the system and its strict implementation.
(e) The letter may also serve to minimize legal liability in the event of a major defalcation or other
loss resulting from a weakness in internal control.
Q.9 In the use of standardized Internal Control Questionnaire (ICQ), certain basic assumptions about
elements of a good internal control system are taken into account. List down few such assumptions.
[Nov. 18-New Syllabus (4 Marks)]
Ans.: Assumptions presumed about elements of good control while using standardized internal
control questionnaire:
1. Certain procedures in general used by most business concerns are essential in achieving reliable
internal control. For example, deposits into bank of the entire receipts of a day or daily balancing of
the cash book and ledgers or periodic reconciliation with the control accounts.
2. Extensive division of duties and responsibilities within the organisation.
3. Separation of accounting function with the custodial function.
4. No single person is entrusted with the responsibility of completing a transaction all by himself.
5. There should always be evidence to identify the person who has done the work whether involving
authorisation, implementation or checking.
6. The work performed by each one is expected to come under review of another in the usual course
of routine.
7. There is proper documentation and recording of the transactions.
Q.10 A newly qualified professional has received his first appointment as auditor of a large company and
is very much concerned about the effectiveness of internal control and wants to assess and evaluate
the control environment as part of his audit program. Towards achieving his objective, he seeks your
help in knowing the Standard Operating Procedures (SOPs) of assessment and evaluation of control.
[May 19 – New Syllabus (5 Marks)]

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Chapter 3 Risk Assessment and Internal Control
Or
During the course of audit of Fortune Ltd., CA Prasad is concerned with the quality and effectiveness
of internal control. Towards achieving his objective he wants to assess and evaluate the control
environment. Guide CA Prasad with well-defined set of the Standard Operating Procedures in the
assessment and evaluation of control. [Dec. 21 – New Syllabus (5 Marks); RTP-May 23]
Ans.: Standard Operating Procedures (SOPs) of assessment and evaluation of control:
1. Enterprise Risk Management: Organization having robust processes to identify & mitigate risks
across the entity & its periodical review will assist in early identification of weaknesses in internal
control and taking effective control measures. In such entities, surprises of failures in controls is
likely to be few.
2. Segregation of Job Responsibilities: Segregation of duties is an important element of control
which ensures that no two commercial activities should be conducted by the same person.
3. Job Rotation in Sensitive Areas: In key commercial functions, job rotation is regularly followed to
avoid degeneration of controls.
4. Documents of delegation of Financial Powers: Document on delegation of powers allows
controls to be clearly operated without being dependant on individuals.
5. IT based Controls: In an IT Environment, it is much easier to embed controls through the system
instead of being human dependant. The failure rate for IT embedded controls is likely to be low, is
likely to have better audit trail & is thus easier to monitor.
Q.11 Explain the concept of Integrated framework issued by Committee of the Sponsoring Organisations
of the Tread way Commission (COSO Framework) duly mentioning its four out of five components
and discuss the three category of objectives that can be achieved as per COSO framework.
[Jan. 21 – New Syllabus (5 Marks)]
Ans.: Concept of COSO Framework:
COSO Framework is designed to be used by organizations to assess the effectiveness of the system of
internal control to achieve objectives as determined by management.
Components of COSO Framework:
(1) Control Environment
(2) Risk Assessment
(3) Control Activities
(4) Monitoring
(5) Information and Communication
Objectives achieved as per COSO Framework:
The Framework lists three categories of objectives as below:
(a) Operation Objectives: Operation objectives are related to the effectiveness and efficiency of the
entity’s operations, including operational and financial performance goals, and safeguarding of
assets.
(b) Reporting Objectives: Reporting objectives are related to internal and external financial and
non-financial reporting to stakeholders, which would encompass reliability, timeliness,
transparency, or other terms as established by regulators, standard setters, or the entity’s
policies.
(c) Compliance objectives: Compliance objectives are related to the entity’s compliance with
applicable laws and regulations.

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Risk Assessment and Internal Control Chapter 3
Q.12 As auditor of Z Ltd., you would like to limit your examination of account balance tests. What are the
control objectives you would like the accounting control system to achieve to suit your purpose?
[MTP-March 21]
Or
One of the objectives of Internal control relating to accounting system is that all transactions are
promptly recorded in an appropriate manner to permit the preparation of financial information and
to maintain accountability of assets. To achieve this objective, certain matters should be ensured by
accounting controls. List down matters to be ensured by accounting controls.
[July 21 – New Syllabus (5 Marks)]
Ans.: Control Objectives:
The objectives of internal control systems are determined by the management, after considering the
nature of business, scale of operations, the extent of professionalism of the management etc. The
objectives of internal controls relating to the accounting system are:
(i) Transactions are executed through general or specific management authorization.
(ii) All transactions are promptly recorded in an appropriate manner to permit the preparation of
financial information and to maintain accountability of assets.
(iii) Assets and records are safeguarded from unauthorized access, use or disposition.
(iv) Assets are verified at reasonable intervals and appropriate action is taken with regard to the
discrepancies.
Precisely, the control objectives ensure that the transactions processed are complete, valid and
accurate. The basic accounting control objectives which are sought to be achieved by any accounting
control system are:
(a) whether all transactions are recorded;
(b) whether recorded transactions are real;
(c) whether all recorded transactions are properly valued;
(d) whether all transactions are recorded timely;
(e) whether all transactions are properly posted;
(f) whether all transactions are properly classified and disclosed;
(g) whether all transactions are properly summarized.
Q.13 During the process of extracting the exception reports, the auditors noted numerous purchase
entries without valid purchase orders. In terms of percentage, about 40% of purchases were made
without valid purchase orders whereas few purchase orders were validated after the actual
purchase. Also, there was no reconciliation between the goods received and the goods ordered. You
are required to briefly explain the audit procedures to address the validity of account balance level.
[MTP-April 21, March 23]
Ans.: Audit procedure to address validity of account balance level:
In the given scenario, the auditors noted numerous purchase entries without valid purchase orders
during the process of extracting the exception reports. Further, in terms of percentage, about 40% of
purchases were made without valid purchase orders and also few purchase orders were validated
after the actual purchase. Also, there was no reconciliation between the goods received and the goods
ordered.

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Audit Procedures: The following procedures may address the validity of the account balance:
(i) Make a selection of the purchases, review correspondence with the vendors, purchase
requisitions (internal document) and reconciliations of their accounts.
(ii) Review Vendor listing along with the ageing details. Follow up the material amounts paid before
the normal credit period and analyse the reasons for exceptions.
(iii) Meet with the company's Purchase officer and obtain responses to our inquiries regarding the
purchases made without purchase orders.
(iv) Discuss the summary of such issues with the client.
Q.14 Audit planning is necessary to conduct an effective audit in an efficient and timely manner for which
purpose formulating an audit programme becomes an essential part of audit plan. Study and
evaluation of system of Internal control and accounting procedures are important part of it. As an
auditor, discuss the features of examination of the system of Internal control.
[July 21 – Old Syllabus (5 Marks)]
Ans.: System of internal control and accounting procedures:
The study and evaluation of internal control helps the auditor to establish the reliance he can place on
the internal control in determining the nature, timing and extent of his substantive auditing
procedures.
The auditor also obtains an understanding of the accounting system to identify points in processing of
transaction and handling of assets where errors or fraud may occur.
When the auditor relies on internal control, it is at these points that he must be satisfied that internal
control procedures applied by the entity are effective for his purpose.
The auditor’s examination of the system of internal control should have three features - review and
preliminary evaluation, testing of compliance and evaluation.
(i) Review and preliminary evaluation: The auditor should review the accounting system and
related internal control to gain an understanding of the flow of transactions and the specific
control procedures to be able to make a preliminary evaluation and identification of these
aspects of internal control on which it might be efficient and effective to rely in conducting his
audit.
(ii) Test of compliance: Compliance tests should be conducted by the auditor to gain evidence that
those internal controls on which he intends to rely operate generally as identified by him and
that they function effectively throughout the period of intended reliance. Based on the results of
his compliance procedure including observed deviations, the auditor should evaluate whether
the internal controls are adequate for his purposes.
(iii) Evaluation: It is essentially an objective process of application of auditor’s judgment to
determine whether all or any of the internal controls in the client’s organisation can be relied
upon in carrying out the audit. Based on the degree of reliance which may be full, partial or none,
the auditor will programme for the substantive verification of transactions for expression of
audit opinion. The results of compliance procedure directly provide the basis for this evaluation
and, in turn, basis to determine the nature, timing and extent of the substantive audit procedure.
In evaluating the auditor recognises that some deviations from compliance may have occurred.

3.4 - Internal Check

Q.15 New life Hospital is a multi-speciality hospital which has been facing a lot of pilferage and troubles
regarding their inventory maintenance and control. On investigation into the matter it was found
that the person in charge of inventory inflow and outflow from the store house is also responsible

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Risk Assessment and Internal Control Chapter 3
for purchases and maintaining inventory records. According to you, which basic system control has
been violated? Also list down the other general conditions pertaining to such system which needs to
be maintained and checked by the management. [Nov. 15 (4 Marks), RTP-May 20]
Ans.: Deficiencies in Internal Control System:
An organisation is required to segregate the responsibilities of its employees in such a manner that no
single person should have an independent control over any important aspect of the business.
In the present case, person in charge of inventory is not only responsible for inflow an outflow of
inventory from store house but also responsible for purchase and maintaining inventory records. So,
in this case, one of the essential of internal check system that independent and complete control
should not be given to a single person has been violated.
General Conditions pertaining to internal check:
(1) No single person should have an independent control over any important aspect of the business.
(2) The duties of members of the staff should be changed from time to time without any previous
notice so that the same officer or subordinate does not, without a break, perform the same
function for a considerable length of time.
(3) Every member of the staff should be encouraged to go on leave at least once in a year.
(4) Persons having physical custody of assets must not be permitted to have access to the books of
account.
(5) To prevent loss or misappropriation of cash, mechanical devices, such as the automatic cash
register, should be employed.
(6) Budgetary control would enable the management to review from time to time the progress of
trading activities.
(7) The financial and administrative powers should be distributed very judiciously among different
officers and the manner in which these are actually exercised should be reviewed periodically.
(8) Procedures should be laid down for periodical verification and testing of different sections of
accounting records to ensure that they are accurate.
(9) Accounting procedures should be reviewed periodically, for, even well-designed and carefully
installed procedures, in course of time, cease to be effective.
Q.16 BSF Limited is engaged in the business of trading leather goods. You are the internal auditor of the
company for the year 2022-23. In order to review internal controls of the Sales Department of the
company, you visited the Department and noticed the work division as follows:
(1) An officer was handling the sales ledger and cash receipts.
(2) Another official was handling dispatch of goods and issuance of Delivery challans.
(3) One more officer was there to handle customer/ debtor accounts and issue of receipts.
As an internal auditor, you are required to briefly discuss the general condition pertaining to the
internal check system prevalent in internal control system. Do you think that there was proper
division of work in BSF Limited? If not, why? [MTP-Oct. 19, April 22; RTP-Nov. 19]
Ans.: General Conditions pertaining to internal check:
Refer the considerations specified in Q. No. 15.
In the given scenario, Company has not done proper division of work as:
(i) the receipts of cash should not be handled by the official handling sales ledger and
(ii) delivery challans should be verified by an authorised official other than the officer handling
despatch of goods.

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4 Audit in an Automated Environment

Marks Distribution of Past Exams

10
9
8
7
6
Marks

5
4
3
2
1
0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 4 4 5 4 4 0 5 5 4 9 5

*From May 2019, Marks are given only for descriptive questions.

4.1 – Meaning and Components of Automated Environment

Q.1 A real-time environment is a type of automated environment in which business operations and
transactions are initiated, processed and recorded immediately as they happen without delay. It has
several critical IT components that enable anytime, anywhere transactions to take place. You are
required to name the components and its example of real-time environment.
[MTP-Oct. 18, May 20; RTP-Nov. 18, MTP-March 21]
Ans.: Components and Example of Real-Time Environment:
• Real Time Environment is a type of automated environment in which business operations and
transactions are initiated, processed and recorded on a real-time basis, i.e. immediately on their
occurrence.
• Examples of such environments are Airlines and Railway Reservations, CORE Banking,
e-Commerce, ERP etc.
• Real-Time Environment facilitates anytime, anywhere transactions to take place. For this purpose, it
is essential to have the systems, networks and applications available during all times.
IT Components required in Real-Time Environment:
1. Applications like ERP, Core Banking Etc.
2. Middleware like web servers
3. Networks like WAN, Internet hosting.
4. Hardware like Data centers, storage devices, power supply etc.

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Audit in an Automated Environment Chapter 4
4.2 – Auditing in an Automated Environment
Q.2 A Company is using ERP for all its business processes including Procurement, Sales, Finance and
Reporting. You are required to explain the Statutory Auditor’s approach to identify the risks
associated with the IT systems.
Ans.: Auditor’s Approach to identify the risks associated with the IT System:
• The Auditor should understand and document each of the business processes in form of narratives
and/or flowcharts.
• The next process will be to identify areas/events that can lead to risks, viz. manual Invoicing and
accounting once goods are dispatched could lead to incorrect Invoicing and accounting and hence is
a ‘risk’.
• The Auditor should also analyse the risks i.e. the impact it will have if materializes. Next will be
prioritization in terms of probability of how often the risks will materialize.
Q.3 SA 315 requires the auditor to obtain an understanding of the entity and its environment as a part of
Risk Assessment procedure to identify and assess Risk of Material Misstatements. List the areas of
which auditor is required to obtain understating in an automated environment.
Or
Write a short note on: Understanding and documenting automated environment. [RTP-May 20]
Ans.: Understanding of Automated Environment
As required by SA 315, auditor is required to obtain an understanding of the entity and its environment
as a part of Risk Assessment procedure to identify and assess Risk of Material Misstatements. In an
automated environment, auditor is required to obtain an understating of the following:
1. Applications being used by the entity;
2. IT infrastructure components for each of the application;
3. Organisation structure and governance;
4. Policies, procedures and processes followed;
5. IT risks and controls.
As required by SA 230, auditor is required to document the understanding of a company automated
environment.
Q.4 “The audit cycle consists of Planning, Execution and Completion. The automation in processing of
business transactions has considerations to be weighed by auditor at every phase of this cycle” –
Enumerate the focal points of such considerations when auditing in automated environment.
[Nov. 18-New Syllabus (4 Marks)]
Or
In a controls-based audit, the audit approach can be classified into three broad phases comprising of
planning, execution, and completion. You are required to briefly explain the relevant considerations
for every phase in above audit approach in case of an automated environment.
[Nov. 19 – New Syllabus (4 Marks)]
Or
CA. M is commencing the Statutory Audit of a limited company, which is engaged in trading software
products and providing software solutions. CA. M was evaluating the controls environment and noted
that the established internal controls are functioning in an automated environment. Enumerate any
five focal points for consideration of CA. M, when auditing in the automated environment, with
respect to his audit approach during planning, execution and completion phases. [Nov. 22 (5 Marks)]

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Chapter 4 Audit in an Automated Environment
Ans.: Considerations of automated environment in different stages of Audit:
Planning Stage:
(i) During risk assessment, the auditor should consider risk arising from the use of IT systems at the
company;
(ii) When obtaining an understanding of the business process and performing walkthroughs the use
of IT systems and applications should be considered;
Execution Stage:
(iii) While assessing the entity level controls the aspects related to IT governance need to be
understood and reviewed;
(iv) Pervasive controls including segregation of duties, general IT controls and applications should
be considered and reviewed;
(v) During testing phase, the results of general IT controls would impact the nature, timing and
extent of testing;
(vi) When testing of reports and information produced by the entity (IPE) generated through IT
systems and applications;
Completion Stage:
(vii) At completion stage, evaluation of control deficiencies may require using data analytics and
CAATs.
Q.5 CA Vipin has been appointed as Statutory Auditor by IG Insurance Co. Ltd. for 3 of its branches for the
F.Y. 2022-23. Insurance Company is using a software called "Applied Epic" wherein all transactions
(policy issuance, premium receipts, expense of insurance company, incomes, assets and liabilities)
are recorded and financial statements generated at the end of the financial year. CA Vipin not
technically equipped and well versed with technology, decided to follow traditional manual auditing
approach and started the audit. He is of the view that understanding and using the auditee's
automated environment is optional and not required. Do you agree with the approach and views of
CA Vipin? [Nov. 20 – New Syllabus (4 Marks)]
Ans.: Understanding the IT Environment:
As required by SA 315, auditor is required to obtain an understanding of the entity and its environment
as a part of Risk Assessment procedure to identify and assess Risk of Material Misstatements. In an
automated environment, auditor is required to obtain an understating of the following:
1. Applications being used by the entity;
2. IT infrastructure components for each of the application;
3. Organisation structure and governance;
4. Policies, procedures and processes followed;
5. IT risks and controls.
The auditor is required to document the understanding of a company’s automated environment as per
SA 230.
Conclusion: The approach of CA Vipin is not correct considering the abovementioned requirements of
SA 315 and SA 230.
Q.6 Beta Hotel operates in an automated environment and uses application softwares for front desk,
Guest reservations, Restaurant and kitchen orders and billing for which CA Anil has been appointed
as an auditor. Guide CA Anil the various key aspects that needs to be considered by him while
understanding of the automated environment of the Company in accordance with SA 315. Is he
required to document the same? If yes, illustrate by giving one example. [May 22 (4 Marks)]

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Audit in an Automated Environment Chapter 4
Ans.: Understanding of Automated Environment:
As required by SA 315, auditor is required to obtain an understanding of the entity and its environment
as a part of Risk Assessment procedure to identify and assess Risk of Material Misstatements. In an
automated environment, auditor is required to obtain an understating of the following:
(1) Applications being used by the entity;
(2) IT infrastructure components for each of the application;
(3) Organisation structure and governance;
(4) Policies, procedures and processes followed;
(5) IT risks and controls.
Documenting the understanding:
As required by SA 230, auditor is required to document the understanding of a company automated
environment. Example given below illustrates how the auditor can document details of an automated
environment:
Application Used for Database Operating Network Server and
System Storage
SAP ECC/ Integrated Oracle 19c HP-UX LAN WAN HP Server and
HANA application software NAS
REVS Front Desk, Guest MS-SQL Windows In-house HP Server
Reservations Server 2018 2016 Server developed Internal HDD
KOTS Restaurant and MS-SQL Windows In-house HP Server
Kitchen Orders Server 2018 2016 Server developed Internal HDD
BILLSYS Billing Oracle 12c Windows Packaged HP Server
2016 Server Software Internal HDD
.

4.3 – Enterprise Risk Management

Q.7 The volatility, unpredictability and pace of fast changes that exists in the automated environment
today is far greater than in the past and consequently it throws more risks to business which requires
them to have a need to continuously manage such risks. State various risks which an enterprise may
have to face and manage. [May 19 (5 Marks), MTP-March 22, April 23]
Ans.: Risks which an enterprise may face and manage:
Businesses today operate in a dynamic environment. The volatility, unpredictability and pace of
changes that exist in the business environment today is far greater than in the past. Some of the reasons
for this dynamic environment include globalisation, use of technology, new regulatory requirements,
etc. Because of this dynamic environment the associated risks to business have also increased and
companies have a need to continuously manage risks.
Examples of risks include:
1. Market Risks;
2. Regulatory & Compliance Risks;
3. Technology & Security Risks;
4. Financial Reporting Risks;
5. Operational Risks;

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Chapter 4 Audit in an Automated Environment
6. Credit Risk;
7. Business Partner Risk;
8. Product or Project Risk; and
9. Environmental Risks.

4.4 – Assessing IT Related Risks and Controls

Q.8 Describe application controls and give three examples of automated application controls.
Ans.: Application Controls:
• Application controls are manual or automated procedures that typically operate at a business
process level and apply to the processing of individual applications.
• Application controls can be preventive or detective in nature and are designed to ensure the
integrity of the accounting records.
• Accordingly, application controls relate to procedures used to initiate, record, process and report
transactions or other financial data. These controls help ensure that transactions occurred, are
authorised, and are completely and accurately recorded and processed.
• Examples of Application controls include the following:
1. Edit checks and Validation of input data.
2. Sequence Number checks.
3. Limit Checks.
4. Reasonable Checks.
5. Mandatory Data Fields.
Q.9 Identify the controls which are automated, manual or IT dependent manual for the below mentioned
cases?
(i) Price master configured in the sales master can only be edited by authorised personnel in the
system.
(ii) Invoice cannot be booked in SAP in case Purchase orders are not approved.
(iii) Inventory ageing report is pulled out from the system based on which provisioning is
calculated after analyzing the future demand by the inventory personnel and approved by
the controller.
(iv) All invoices are signed by warehouse personnel before the goods are dispatched to the
customer.
(v) Credit limit is assigned to the customer and goods cannot be sold in excess of credit limit
configured in the system.
(vi) All changes to the credit limit is approved manually by sales manager.
(vii) Ageing report is pulled out from SAP based on which provisioning is calculated by accounting
personnel and approved by financial controller.
(viii) PO, GRN (Good received note) and invoice are matched by the system before it is posted in
the financial records. [MTP-April 18]

Ans.: Identification of Controls:

(i) Automated control as there is inbuilt control which allows editing in sales master by only
authorised personnel.

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Audit in an Automated Environment Chapter 4
(ii) Automated control as there is inbuilt control which doesn’t allow approval of invoice in case of
non approval of purchase order.
(iii) IT dependent manual control as inventory ageing report is pulled out from the system after
which provision for inventory is manually approved.
(iv) Manual control as sign off is required to be done for the invoice before the dispatch of the goods.
(v) Automated control as there is inbuilt control that doesn’t allow goods to be sold if credit limit
assigned to the customer has been crossed.
(vi) Manual control as sign off is required for every change to the credit limit.
(vii) IT dependent manual control as ageing report is relied upon for calculation of provisioning for
debtors.
(viii) Automated control as PO, GRN and invoice is matched by the system before recording of the
invoice to the vendor account.
Q.10 M/s RST & Associates have been appointed as auditors of ADI Ltd. for the financial year 2022-23.
The processes, operations, accounting and decisions are carried out by using computers in ADI Ltd.
M/s RST & Associates understand that there are several aspects that they should consider to
determine the level of automation and complexity in the business environment of ADI Ltd. While
planning the audit work, the engagement partners discussed with the audit staff about the various
types of controls in the automated environment that are put in place to mitigate the IT risks and to
maintain the confidentiality, integrity, availability and security of data such as General IT Controls;
Application Controls; and IT-Dependent Controls.
You are required to briefly explain:
(i) General IT Controls.
(ii) Application Controls.
(iii) IT-Dependent Controls. [RTP-Nov. 22]
Ans.: Controls required to mitigate IT Risks:
The controls that are put in place to mitigate the IT risks and to maintain the confidentiality, integrity,
availability and security of data are General IT Controls, Application Controls and IT-Dependent
Controls.
(1) General IT Controls: General IT controls are policies and procedures that relate to many
applications and support the effective functioning of application controls. They apply to
mainframe, miniframe, and end-user environment. General IT controls that maintain the
integrity of information and security of data commonly include controls over the following:
(i) Data center and network operations;
(ii) System software acquisition, change and maintenance
(iii) Program change;
(iv) Access security;
(v) Application system acquisition, development, and maintenance (Business Applications).
These are IT controls generally implemented to mitigate the IT specific risks and applied
commonly across multiple IT systems, applications and business processes. Hence, General IT
controls are known as “pervasive” controls or “indirect” controls.
(2) Application Controls: Application controls include both automated or manual controls that
operate at a business process level. Application controls can be preventive as well as detective in
nature and are designed to ensure the integrity of the accounting records.

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Application controls relate to procedures used to initiate, record, process and report
transactions or other financial data. These controls help ensure that transactions occurred, are
authorised, and are completely and accurately recorded and processed. Automated Application
controls are embedded into IT applications viz., ERPs and help in ensuring the completeness,
accuracy and integrity of data in those systems.
Examples of automated applications include edit checks and validation of input data, sequence
number check, limit check, format check, range check, reasonableness check, mandatory data
fields, existence check etc.
(3) IT dependent controls: IT dependent controls are basically manual controls that make use of
some form of data or information or report produced from IT systems and applications. In this
case, even though the control is performed manually, the design and effectiveness of such
controls depend on the reliability of source data.
Due to the inherent dependency on Information Technology, the effectiveness and reliability of
Automated application controls and IT dependent controls require the General IT Controls to be
effective.

4.5 – Evaluating Controls at Entity Level and Process Level

Q.11 While evaluating the risks and controls at entity level, the Auditor should take cognizance of the
prevalent direct and indirect entity level controls operating in the entity. Explain what they pertain
to with few examples. [May 18, Nov. 22 (4 Marks)]

Ans.: Direct Entity Level Controls (ELCs) and Indirect Entity Level Controls:
Direct ELCs
Direct ELCs operate at a level of business process to prevent, detect or correct a misstatement in a
timely manner. Examples of Direct ELCs are:
• Business performance reviews;
• Monitoring of effectiveness of control by Internal Audit function.
Indirect ELCs
Indirect ELCs do not relate to any specific business process, transaction or account balance and
therefore, cannot prevent, detect or correct misstatements.
Indirect ELCs contribute indirectly to the effective operation of direct ELCs. Examples of Indirect ELCs
are:
• Company code of conduct;
• Human resource policies;
• Job roles & responsibilities.
Q.12 The auditors are required to understand, evaluate and validate the entity level controls as a part of
audit engagement, the result of which has an impact on the nature, timing and extent of other audit
procedures. In evaluating the effect of such control, existence, effectiveness and assessment of the
whistle-blower policy in the company is very important. Specify the procedure you would perform
for an understanding and evaluation of such whistle-blower policy.
[July 21 – New Syllabus (5 Marks), MTP-April 22]

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Ans.: Procedure to be performed to obtain an understanding and evaluation of whistle-blower
policy:
Auditor may obtain an understanding and evaluation of the whistle-blower policy in a company by
inquiring the following:
(1) Does the company have a whistle-blower policy?
(2) Is this policy documented and approved?
(3) Has the whistle-blower policy been communicated to all the employees?
(4) Are employees aware of this policy and understand its purpose and their obligations?
(5) Has the company taken measures viz., training, to make the employees understand the contents
and purpose of the policy?
(6) Does the company monitor effectiveness of the policy from time-to-time?
(7) How does the company deal with deviations and non-compliance?

4.6 – Data Analytics

Q.13 In an automated environment, the data stored and processed in systems can be used to get various
insights into the way business operates. This data can be useful for preparation of Management
Information System (MIS) reports and electronic dashboards that give a high-level snapshot of
business performance. In view of above you are required to briefly discuss the meaning of data
analytics and example of circumstances when auditing in an automated environment, auditors can
apply the concepts of data analytics. [RTP-May 19]
Ans.: Data Analytics:
• Data analytics is an analytical process by which meaning information is generated and prepared
from raw system data using processes, tools, and techniques. In an automated environment,
various insights can be extracted from operational, financial, and other forms of electronic data
internal or external to the organization
• The data so extracted is useful for preparation of Management Information System (MIS) reports
and electronic dashboards that give a high-level snapshot of business performance. The data
analytics methods used in an audit are known as Computer Assisted Auditing Techniques or
CAATs.
Application of Data Analytics
In an automated environment, auditors can apply the concept of data analytics for several aspects of
an audit including the following:
1. Preliminary Analytics;
2. Risk Assessment;
3. Control Testing;
4. Non-Standard Journal Analysis;
5. Evaluation of Deficiencies;
6. Fraud Risk assessment.
Q.14 “Generating and preparing meaningful information from raw system data using processes, tools, and
techniques is known as Data Analytics and the data analytics methods used in an audit are known as
Computer Assisted Auditing Techniques or CAATs.” You are required to give a suggested approach to
get the benefit from the use of CAATs. [RTP-Nov. 19, MTP-Oct. 20, Oct. 22]
Or

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Chapter 4 Audit in an Automated Environment
Long Age Foundations Ltd. (LAF), a pharmaceutical company, collected the data from some hospitals
and their experts tried to understand medical needs of elderly people. After complete study, their
experts developed an application where LAF will provide complete healthcare after charging a
nominal amount from the customers, if customers download this application in their mobile phones.
CA ‘P’ in his audit has used data analytics method also known as Computer Assisted Audit
Techniques (CAATs).
Give illustrations of suggested approach to get the benefit from the use of CAATs.
[Dec. 21 (5 Marks); RTP-May 23]
Ans.: Suggested approach to get the benefit from the use of CAATs:
A suggested approach to benefit from the use of CAATs is to follow the steps given below:
Step 1: Understand Business Environment including IT;
Step 2: Define the Objectives and Criteria;
Step 3: Identify Source and Format of Data;
Step 4: Extract Data;
Step 5: Verify the Completeness and Accuracy of Extracted Data;
Step 6: Apply Criteria on Data Obtained;
Step 7: Validate and Confirm Results.

4.7 – Standards, Guidelines and Procedures

Q.15 When auditing in an automated environment the auditor should be aware, adhere to, and be guided
by the various standards, guidelines, and procedures that may be relevant to both audit and the
automated environment. Explain briefly the following common standards and guidelines that are
relevant in this context-
(a) The Cyber security Framework.
(b) Control Objectives for Information and Related Technologies.
(c) The Payment Card Industry.
(d) Information Technology Infrastructure Library. [May 23 (5 Marks)]

Ans.: Frameworks to be adhered to in an automated environment:

(a) The Cybersecurity Framework (CSF) published by the National Institute of Standards and
Technology is one of the most popular frameworks for improving critical infrastructure
cybersecurity. This framework provides a set of standards and best practices for companies to
manage cybersecurity risks.
(b) Control Objectives for Information and Related Technologies (CoBIT) is best practice IT
Governance and Management framework published by Information Systems Audit and Control
Association. CoBIT provides the required tools, resources and guidelines that are relevant to IT
governance, risk, compliance and information security.
(c) The Payment Card Industry – Data Security Standard or PCI-DSS, is the most widely adopted
information security standard for the payment cards industry. Any company that is involved in the
storage, retrieval, transmission or handling of credit card/debit card information are required to
implement the security controls in accordance with this standard.

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(d) ITIL (Information Technology Infrastructure Library) provide a set of best practice processes
and procedures for IT service management in a company. For example, change management,
incident management, problem management, IT operations, IT asset management are some of the
areas that could be relevant to audit.

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5 Professional Ethics

Marks Distribution of Past Exams

25

20

15
Marks

10

0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 22 18 14 14 12 17 12 12 12 13 9

*From May 2019, Marks are given only for descriptive questions.
5.1 – Fundamental Principles to be followed by an Accountant and NOCLAR
Q.1 Distinguish: Self- interest threat from self – review threat in an assurance engagement.
[May 18 – New Syllabus (4 Marks)]
Ans.: Self Interest Threat:
The threat that a financial or other interest will inappropriately influence a professional accountant’s
judgment or behaviour is known as Self Interest threat. As per Code of Ethics, examples of facts and
circumstances that might create self-interest threats for a professional accountant when undertaking a
professional service includes the following:
(a) A professional accountant having a direct financial interest in a client
(b) A professional accountant quoting a low fee to obtain a new engagement and the fee is so low that
it might be difficult to perform the professional service in accordance with applicable technical
and professional standards for that price.
(c) A professional accountant having a close business relationship with a client.
(d) A professional accountant having access to confidential information that might be used for
personal gain.
(e) A professional accountant discovering a significant error when evaluating the results of a previous
professional service performed by a member of the accountant’s firm.
Self-review Threat:
The threat that a professional accountant will not appropriately evaluate the results of a previous
judgment made; or an activity performed by the accountant, or by another individual within the
accountant’s firm or employing organization, on which the accountant will rely when forming a
judgment as part of performing a current activity is known as Self review Threat.

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Professional Ethics Chapter 5
As per Code of Ethics, examples of facts and circumstances that might create self-interest threats for a
professional accountant when undertaking a professional service includes the following:
(a) A professional accountant issuing an assurance report on the effectiveness of the operation of
financial systems after implementing the systems.
(b) A professional accountant having prepared the original data used to generate records that are the
subject matter of the assurance engagement.
Q.2 A professional accountant in public practice is always subject to various threats in compliance with
fundamental principles of his profession and you, as a professional accountant, is worried about
engagement specific threat in your audit assignment of M/s Soft Ltd. and want to implement some
measures to eliminate and reduce the same. Enumerate some safeguards which you may introduce to
ward off such threats. [May 19 – New Syllabus (5 Marks)]
Ans.: Safeguards to be introduced to ward off threats in compliance with fundamental principles:
Safeguards are actions, individually or in combination, that the professional accountant takes that
effectively reduce threats to compliance with the fundamental principles to an acceptable level.
Safeguards vary depending on the facts and circumstances. Examples of actions that in certain
circumstances might be safeguards to address threats include:
(a) Assigning additional time and qualified personnel to required tasks when an engagement has been
accepted might address a self-interest threat.
(b) Having an appropriate reviewer who was not a member of the team review the work performed
or advise as necessary might address a self-review threat.
(c) Using different partners and engagement teams with separate reporting lines for the provision of
non-assurance services to an assurance client might address self-review, advocacy or familiarity
threats.
(d) Involving another firm to perform or reperform part of the engagement might address self-
interest, self-review, advocacy, familiarity or intimidation threats.
(e) Separating teams when dealing with matters of a confidential nature might address a self-interest
threat.
Q.3 The audit team is preparing to conduct audit for ABC Company for the period ending 31.3.2023.
However, the audit team has not received its audit fees from ABC Company for its audit concluded for
ended 31.3.2022. The audit team might be tempted to issue a favourable report so that ABC Company
is able to secure a loan to settle the fees outstanding for their 31.3.2022 audit. The audit team is not
complying the fundamental principles of auditing hence hindering the Auditor's Independence.
Explain the types of threats that may hinder Auditor's Independence while issuing Audit Report.
[Jan. 21 – New Syllabus (5 Marks)]
Ans.: Threats that may hinder Auditor's Independence:
1. Self-interest threats: The threat that a financial or other interest will inappropriately influence a
professional accountant’s judgment or behaviour.
2. Self-review threats: The threat that a professional accountant will not appropriately evaluate the
results of a previous judgment made; or an activity performed by the accountant, or by another
individual within the accountant’s firm or employing organization, on which the accountant will
rely when forming a judgment as part of performing a current activity.
3. Advocacy threats: The threat that a professional accountant will promote a client’s or employing
organization’s position to the point that the accountant’s objectivity is compromised.

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Chapter 5 Professional Ethics
4. Familiarity threats: The threat that due to a long or close relationship with a client, or employing
organization, a professional accountant will be too sympathetic to their interests or too accepting of
their work.
5. Intimidation threats: The threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressures, including attempts to exercise undue influence
over the accountant.
Q.4 The professional accountants need to observe certain fundamental principles, which are covered in
the Code of Ethics of the ICAI. Briefly explain each of the five principles which needs to be complied by
the Chartered Accountants? [Nov. 22 (5 Marks)]
Ans.: Fundamental Principles as per Code of Ethics:
1. Integrity: A professional accountant should be straightforward and honest in all professional and
business relationships.
2. Objectivity: A professional accountant should not compromise professional or business judgments
because of bias, conflict of interest or undue influence of others.
3. Professional Competence and Due Care: A professional accountant has a continuing duty to
attain and maintain professional knowledge and skill at the level required to ensure that a client or
employing organization receives competent professional service, based on current technical and
professional standards and relevant legislation. A professional accountant should act diligently and
in accordance with applicable technical and professional standards.
4. Confidentiality: A professional accountant should respect the confidentiality of information
acquired as a result of professional and business relationships.
5. Professional Behaviour: A professional accountant should comply with relevant laws and
regulations and avoid any conduct that the professional accountant knows or should know might
discredit the profession.
Q. SAM Yarns Limited - a listed Company, having its registered office at Meerut is engaged in
4A manufacturing of various types of yarns to be supplied to the textile mills. The Company has installed
pollution control equipment for processing the pollutants so that before discharge of effluents
outside factory, the level of pollution is kept at a level below the prescribed standard. The Company
managed to get pollution clearance certificate by unfair means, while still there continues to be
breach of pollution control laws in matters of discharge of polluting effluents. Amount of ₹ 10.25 Lacs
had been incurred for arranging clearance certificate and the amount incurred unlawfully had been
booked as pollution recycling expenditure. The matter had not reached to those in governance, and
the Director-Finance who is a Chartered Accountant came to know of these matters on review of
major expenditure incurred during the period. Comment the action/responses expected of Director-
Finance (CA Rahul) referring to any applicable requirements of Responses for NOCLAR under code of
Ethics. [May 23 (5 Marks)]
Ans.: Responsibility of the senior professional accountants in service relating to NOCLAR:
Code of Ethics lays down steps that a senior professional accountant should follow while assessing the
nature of the matter and the potential harm to the interests of the employing organisation, investors,
creditors, employees or general public.
If, during the course of carrying out professional activities, a senior professional accountant becomes
aware of any information relating to NOCLAR or suspected NOCLAR, he/she should obtain an
understanding of the relevant matter and thus determine:

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(a) The nature of the matter encountered and the circumstances in which it has occurred or might
occur,
(b) The application of the relevant laws and regulations to the circumstances, and
(c) An assessment of the potential consequences to the organisation, investors, creditors, employees
or the wider public.
Depending on the nature and significance of the matter, a senior professional accountant might take
appropriate steps to investigate the matter internally. He/she might also consult confidentially with
others within the employing organisation, ICAI, or a legal counsel. A senior professional accountant
should discuss the matter with his/her immediate superior(s). If the immediate superior(s) appear to
be involved in the matter, the matter should be discussed with the next higher level of authority within
the employing organisation.
Basis the response of the senior professional accountant’s superiors and TCWG, the accountant should
determine if further action is needed in the public interest.
Additionally, it must also be determined if there is a need to disclose the matter to the employing
organisation’s external auditor.
Further action that the senior professional accountant might take includes:
(a) Informing the management of the parent entity of the matter, if the employing organisation is a
member of a group,
(b) Disclosing the matter to an appropriate authority as specified under respective law, or
(c) Resigning from the employing organisation.

5.2 - Relevant Provisions of CA Act, 1949

Q.5 Mr. S, a Chartered Accountant in practice, provides guidance on post-issue activities to his clients
e.g. follow up steps which include listing of instruments, dispatch of certificates and refunds etc.
with the various agencies connected with the work. During the year 2022, looking to the growing
needs of his clients to invest in the stock markets, he also started advising them on Portfolio
Management Services whereby he managed portfolios of some of his clients.
Ans.: Advising on Portfolio Management Services:
• The Council of the ICAI pursuant to Section 2(2)(iv) of the CA Act, 1949 has passed a resolution
permitting “Management Consultancy and other Services” by a CA in practice.
• A clause of the aforesaid resolution allows CAs in practice to act as advisor or consultant to an
issue of securities including such matters as drafting of prospectus, filing of documents with SEBI,
preparation of publicity budgets, advice regarding selection of brokers, etc.
• It is, however, specifically stated that CAs in practice are not permitted to undertake the activities
of broking, underwriting and portfolio management Services. Thus, a CA in practice is not
permitted to manage portfolios of his clients.
Conclusion: Mr. S would be guilty of misconduct under the Chartered Accountants Act, 1949 as a
practicing CA is not permitted to render portfolio management services.
Q.6 CA Natraj, in practice, accepted an assignment as advisor and consultant to the public issue of shares
by his client M/s Super Ltd. Besides helping the company as an advisor, he also underwrote the
public issue of the company to the extent of 25% at a commission of 1%. Remaining shares were
underwritten by banks and other financial institutions at the same rate of commission. He contends

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that above assignments are part of management consultancy work permitted by the council of the
Institute. Do you agree with the view of CA Natraj? Decide in the light of applicable code of conduct.
[May 19 – New Syllabus (4 Marks)]
Ans.: Advising on Portfolio Management Services:
• The Council of the ICAI pursuant to Section 2(2)(iv) of the CA Act, 1949 has passed a resolution
permitting “Management Consultancy and other Services” by a CA in practice.
• A clause of the aforesaid resolution allows CAs in practice to act as advisor or consultant to an
issue of securities including such matters as drafting of prospectus, filing of documents with SEBI,
preparation of publicity budgets, advice regarding selection of brokers, etc.
• It is, however, specifically stated that CAs in practice are not permitted to undertake the activities
of broking, underwriting and portfolio management Services. Thus, a CA in practice is not
permitted to render underwriting services to his clients.
Conclusion: CA Natraj would be guilty of misconduct under the Chartered Accountants Act, 1949 as a
practicing CA is not permitted to render underwriting services.

Q.7 Mr. Dice, a practicing Chartered Accountant was ordered to surrender his certificate of practice and
he was suspended for one year on certain professional misconduct against him. During the period of
suspension, Mr. Dice, designating himself as GST consultant, did the work of filing GST returns and
made appearance as a consultant before various related authorities. He contended that there is
nothing wrong in it as he, like any other GST consultant, could take such work and his engagement
as such in no way violate the order of suspension inflicted on him. Is he right in his contention?
[May 18 – New Syllabus (4 Marks)]

Ans.: Undertaking Tax Representation Work:

• Sec. 6 of CA Act, 1949, requires that no member of the Institute shall be entitled to practice unless
he has obtained from the Council a certificate of practice.
• In case a person has been suspended from practice for a period, he remains a member of ICAI and
abide by the provisions of CA Act and its regulations.
• Such a member cannot take up in any other capacity, any practice separable from his capacity to
practices as a member of the Institute. If he appears before the taxation and related authorities, he
is only doing so in his capacity as a CA and a member of the Institute.
• However, if a member of ICAI, is doing so in any other capacity such as GST Consultant wherein his
capacity is not chartered accountant in practice, he will not be held guilty for misconduct.
• In the instant case, Mr. Dice was a practicing chartered accountant and he was ordered to
surrender his certificate of practice and was suspended for one year. Mr. Dice is doing the work of
filing GST returns and has appeared as a consultant before various related authorities as GST
Consultant which is not in capacity of a practicing chartered accountant rather in capacity of
authorized representative. Any person who has been authorized to act as a GST Practitioner on
behalf of the concerned registered person can become authorized representative. Thus, filing GST
return and appearing as GST Consultant by Mr. Dice is not professional misconduct.
Conclusion: Contention of Mr. Dice is correct as long as he is not working in his capacity as a CA,
during the period he was suspended from practice as CA.

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Q. Mr. Sheetal is a practicing chartered accountant. Due to natural calamities and misfortune during
7A the year 2021, he lost almost all of his wealth and became undischarged insolvent. After a few court
hearings, finally, in the year 2023, he was declared discharged insolvent and obtained a certificate
from the court stating that his insolvency was caused by misfortune without an y misconduct on his
part. You are required to comment on the above situation with reference to the Chartered
Accountants Act, 1949 and Schedules thereto, (especially from the point of section 8: Entry of name
in Register of Members). [MTP-April 23]
Ans.: Disabilities for the Purpose of Membership:
• As per Sec. 8 of Chartered Accountants Act, a person is debarred from having his name entered in
or borne on the Register of Members, if he, being a discharged insolvent, has not obtained from the
court a certificate stating that his insolvency was caused by misfortune without any misconduct on
his part. Here it may be noted that a person who has been removed from membership for a
specified period shall not be entitled to have his name entered in the Register until the expiry of
such period.
• In addition, failure on part of a person to disclose fact that he suffers from any one of the
disabilities would constitute professional misconduct. The name of the person, who is found to
have been subject at any time to any of the disabilities discussed in Sec. 8, can be removed from
the Register of Members by the Council.
• In the given case, it is clearly stated that Mr. Sheetal was discharged insolvent, and he has also
obtained from the court a certificate stating that his insolvency was caused by misfortune without
any misconduct on his part.
Conclusion: Mr. Sheetal has not violated the provisions of Section 8, and he is not debarred from
having his name entered in the Register of Members.
Q.8 M & Co., a sole proprietary Chartered Accountant firm in practice with an office in a busy belt of a
city, had great difficulty in regularly attending to the consultancy needs of his client who are mostly
located in an industrial cluster in a nearby outskirt which is situated at a distance of 26 kms from
the office of the firm. To mitigate the difficulty and to have ease of business, a facilitation center was
opened in the industrial cluster. The proprietor managed both the office and the facilitation center,
by himself. No intimation was made to the institute of chartered accountants of India. Examine
whether there is any professional misconduct in this respect. [May 18 – New Syllabus (5 Marks)]
Ans.: Maintenance of Separate office:
• In terms of Section 27 of the CA Act, 1949 if a chartered accountant in practice has more than one
office in India, each one of these offices should be in the separate charge of a member of the
Institute.
• There is however an exemption from the above if the second office is located in the same premises,
in which the first office is located; or the second office is located in the same city, in which the first
office is located; or the second office is located within a distance of 50 kms from the municipal
limits of a city, in which the first office is located.
• Regulation 189 of CA Regulations, 1988 requires that a CA in practice or a firm of such CAs shall
inform the Council within one month of the opening or closing of a branch office.
• In the present case, proprietor of M & Co. has opened a new office at a distance of 26 Kms from the
existing office and managing both offices by himself. However, no intimation was made to the ICAI.

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Conclusion: Though there is no problem in managing both the offices, but misconduct arises due to
non-intimation to Council of ICAI.
Q.9 Mr. K, Chartered Accountant in practice as a sole proprietor at Chennai has an office in the suburbs
of Chennai. Due to increase in the income tax assessment work, he opens another office near the
income tax office, which is within the city and at a distance of 30 kms. from his office in the suburb.
For running the new office, he has employed a retired Income Tax Commissioner who is not a
Chartered Accountant. Comment. [May 19 – Old Syllabus (4 Marks)]

Ans.: Maintenance of Branch office:

• In terms of Section 27 of the CA Act, 1949 if a chartered accountant in practice has more than one
office in India, each one of these offices should be in the separate charge of a member of the
Institute.
• There is however an exemption from the above if the second office is located in the same premises,
in which the first office is located; or the second office is located in the same city, in which the first
office is located; or the second office is located within a distance of 50 kms from the municipal
limits of a city, in which the first office is located.
Conclusion: As the distance between new office and municipal limits of Suburbs (area where existing
office is situated) is less than 50 Km., Mr. K would not be liable for any misconduct.

Q.10 Mr. Z, a newly qualified chartered accountant started his practice in February 2021 by setting up an
office in the hill station Kodaikanal. Initially, since he was getting very less assignments, he decided
to set up a temporary office in the nearby city Madurai, situated at about 100 kms from the main
office. As planned, he took an office space on rent for the months of Dec. Jan. and Feb. During these
months, his regular office was not closed and Mr. Z was in-charge for both the offices. Mrs. A, another
newly qualified chartered accountant who is also in practice in Madurai came to know about the
new office of Mr. Z. Thinking that he could be a potential competitor, she informed the institute
stating that Mr. Z had violated the provisions of the Chartered Accountant Act. As a member of the
Board of Discipline of ICAI, you are requested to analyse this complaint. [MTP-March 21]

Ans.: Maintenance of Branch office:

• In terms of Sec. 27 of CA Act, 1949, if a Chartered Accountant in practice has more than one office
in India, each one of such offices should be in the separate charge of a member of the Institute.
This condition applies to any additional office situated at a place beyond 50 kms from the
municipal limits in which any office is situated.
• However, exemption has been given to members in practicing in hill areas subject to certain
conditions such as:
1. Such member be allowed to open temporary offices in a city in the plains for a limited period
not exceeding 3 months in a year.
2. The regular office need not be closed during this period and all correspondence can continue to
be made at the regular office.
3. The name board of the firm in temporary office should not be displayed at times other than the
period such office is permitted to function.
4. The temporary office should not be mentioned in letter head, visiting card, any other
documents as a place of business of the member/ firm.

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5. Before commencement of every winter, it shall be obligatory on the member/firm to inform
the Institute that he/it is opening the temporary office from a particular date and after the
office is closed at the expiry of the period of permission, an intimation to that effect should also
be sent to the office of the Institute by registered post.
• In the given case, Mr. Z has set up his regular office in the hill area of Kodaikanal, he decided to set
up a temporary office in the nearby city Madurai, situated at about 100 kms from the main office.
As planned, he took an office space on rent for the months of Dec. Jan. and Feb. During these
months, his regular office was not closed. Further he was in-charge for both the offices.
• In view of abovementioned criteria’s, he is eligible to avail the benefits of the above exemptions.
Also, it is given that the temporary office was open in Madurai for only 3 months and not beyond
that. The fact that Mr. Z is in-charge for both the offices, the temporary office being set-up in the
plains which is 100 kms away and the regular office kept open during the 3 months does not
constitute any violation of the provisions of the Chartered Accountant Act. Assuming Mr. Z has
informed the Institute regarding such temporary office in the prescribed manner.
Conclusion: No penal action needs to be taken on the basis of complaint registered by Mrs. A, as Mr. Z
is not guilty of professional misconduct.

Q.11 Mr. Gautam & Mr. Mahaveer, partners of a Chartered Accountant Firm, one in-charge of Head Office
and another in-charge of Branch at a distance of 80 km. from the municipal limits, puts up a name-
board of the firm in both premises and also in their respective residences. Comment with reference
to the Chartered Accountants Act, 1949, and Schedules thereto. [MTP-Nov. 21]

Ans.: Putting up of name-board:

• The council of the Institute has decided that with regard to the use of the name-board, there will
be no bar to the putting up of a name-board in the place of residence of a member with the
designation of chartered accountant, provided, it is a name-plate or board of an individual member
and not of the firm.
• In the given case, partners of CA Firm, put up a name-board of the firm in both offices and also in
their respective residences.
Conclusion: Mr. Gautam & Mr. Mahaveer are guilty of misconduct, as name-board of the firm cannot
be put in place of residence.

5.3 - First Schedule Part I – Professional Misconduct in Relation to Members in Practice

Q.12 CA Sant, a newly qualified professional with certificate of practice, approached CA Pant, the auditor
of his father’s company M/s Max Ltd., to allow him to have some practical and professional
knowledge and experience in his firm before he can set up his own professional practice. CA Pant
allowed him to sit in his office for 6 months and allotted a small chamber with other office
infrastructure facility. In the course of his association with CA Pant’s office, he used to provide tax
consultancy independently to the client of the firm and also filed few IT and GST return and
represented himself before various tax authorities on behalf of the firm although no documents
were signed by him. During his association in CA Pant’s office he did not get any salary or share of
profit or commission but only reimbursement of usual expenses like conveyance, telephone etc. was

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made to him. After the end of the agreed period, he was given a lump sum amount of ₹ 3,00,000 by
CA Pant for his association out of gratitude.
Examine the case in the light of code of professional misconduct.
[May 19 – New Syllabus (5 Marks), MTP-March 22, April 23]

Ans.: Allowing Others to use firm’s name:

• As per Clause (1) of Part 1 of First Schedule to the Chartered Accountants Act, 1949, a CA in
Practice is deemed to be guilty of professional Misconduct if he allows any person to practice in
his name as a Chartered Accountant, unless such person is also a Chartered Accountant in
practice, and is in partnership with, or employed by himself.
• The above clause is intended to safeguard the public against unqualified accountant practicing
under the cover of qualified accountants. It clause ensures that the work of the accountant will be
carried out by a Chartered Accountant who may be his partner, or his employee and would work
under his control and supervision.
• In the present case, CA Pant allowed Mr. Sant, another Chartered Accountant, holding Certificate
of Practice to practice in his firm for a period of 6 months, whereas Mr. Sant is not a partner or
employee. Further after expiry of six months, Mr. Pant also gives Mr. Sant a lump sum amount of
₹ 3,00,000 for his association out of gratitude.
Conclusion: Mr. Pant will be guilty of professional misconduct by virtue of Clause 1 of Part I of First
Schedule as he allows another person to practice in his firm name, whereas other person (Mr. Sant) is
neither a partner nor an employee.
Q.13 Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto:
K, a practicing Chartered Accountant gave 50% of the audit fees received by him to L, who was not a
Chartered Accountant, under the nomenclature of office allowance and such an arrangement
continued for a number of years. [MTP-Oct. 19]
Ans.: Sharing Fees with Employees:
As per clause (2) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a CA in
practice is deemed to be guilty of professional misconduct if he pays or allows or agrees to pay or
allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his
professional business, to any person other than
• a member of the Institute or
• a partner or
• a retired partner or
• the legal representative of a deceased partner,
• or a member of any other professional body or
• with such other persons having such qualification as may be prescribed,
for the purpose of rendering such professional services from time to time in or outside India.
In the given case in substance the CA has shared his profit and therefore, is guilty of professional
misconduct under the clause. It is not the nomenclature to a transaction that is material but it is the
substance of the transaction, which has to be looked into.
Conclusion: Mr. K will be deemed to be guilty of professional misconduct under Clause 2 of Part I of
First Schedule.

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Professional Ethics Chapter 5
Q.14 CA Ravi, a practising Chartered Accountant, was proprietor of M/s. Ravi & Associates, CA Ravi died
on 15th September, 2021 due to cardiac arrest. Only family member left behind CA Ravi was his
wife, Roohi. On 30th September, 2022, Roohi sold the practice of her husband to CA Balwan for ₹ 25
Lacs along with right to use the firm name i.e., M/s. Ravi & Associates and requested the Institute to
consider the effect of such sale. Give your comments on the following issues with reference to the
Chartered Accountants Act, 1949 and schedules thereto:
(i) Whether Roohi can sell the practice to CA Balwan?
(ii) Can CA Balwan continue to practice as proprietor in name of M/s. Ravi & Associates?
[May 22 (4 Marks)]

Ans.: Sharing of Profits with widow of deceased Partner:

With reference to Clause 2 of Part I of First Schedule to CA Act, 1949, in case of sole proprietorship
firm, the Council of ICAI has resolved that the sale / transfer of goodwill shall be permitted in respect
of cases where the death of the proprietor occurred on or after 30.08.1998 provided:
• ICAI’s permission to practice in the deceased’s firm name is sought within a year of death. (In
such a case, name of the firm is kept in abeyance till one year from the date of death).
• In case there exist a dispute as to the legal heir of the deceased proprietor, information as to the
existence of the dispute is received by the Institute within a year of the death. (In such a case,
name of the firm is kept in abeyance till one year from the date of settlement of dispute).
In the given case, CA Ravi, a practising Chartered Accountant, was proprietor of M/s. Ravi &
Associates, CA Ravi died on 15th September, 2021 due to cardiac arrest. Only family member left
behind CA Ravi was his wife, Roohi. On 30th September, 2022, Roohi sold the practice of her husband
to CA Balwan for ₹ 25 Lacs along with right to use the firm name i.e., M/s. Ravi & Associates and
requested the Institute to consider the effect of such sale.
Conclusion:
(i) As more than one year elapsed since date of death of Mr. Ravi, Roohi cannot sell the practice to
CA Balwan on 30.9.2022.
(ii) CA Balwan cannot practice in the name of M/s Ravi & Associates as the transaction of sale of
goodwill occurs after one year of death of Mr. Ravi.

Q.15 CA. Vasu started his practice from August 15, 2022. On 16th August 2022, one female candidate
approached him for articleship. In addition to monthly stipend, CA. Vasu also offered her 2% profits
of his CA firm. She agreed to take both 2% profits of the CA firm and stipend as per the rate
prescribed by the ICAI. The Institute of Chartered Accountants of India sent a letter to CA. Vasu
objecting the payment of 2% profits. CA. Vasu replies to the ICAI stating that he is paying 2% profits
of his firm over and above the stipend to help the articled clerk as the financial position of the
articled clerk is very weak.
Is CA. Vasu liable to professional misconduct? Comment with reference to the Chartered
Accountants Act, 1949, and Schedules thereto. [MTP-Oct. 22]

Ans.: Sharing Fees with an Articled Clerk:

As per Clause (2) of Part I of First Schedule to the Chartered Accountants Act 1949, a Chartered
Accountant in practice shall be deemed to be guilty of professional misconduct if he pays or allows or

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agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits
of his professional business, to any person other than-
• a member of the Institute or
• a partner or
• a retired partner or
• the legal representative of a deceased partner, or
• a member of any other professional body or
• with such other persons having such qualification as may be prescribed,
for the purpose of rendering such professional services from time to time in or outside India.
Based on the above stated provisions, the objections of the Institute are correct and reply of CA. Vasu,
stating that he is paying 2% profits of his firm over and above the stipend to help the articled clerk as
the position of the articled clerk is weak, is not tenable.
Conclusion: CA. Vasu is guilty of professional misconduct in terms of Clause (2) of Part I of First
Schedule to the Chartered Accountants Act 1949.

Q.16 CA. P is a newly qualified Chartered Accountant in practice and in order to increase his professional
practice and client base, entered into an agreement with Mr. A, a qualified and experienced
registered valuer to share 20% professional fees for all cases of valuation referred to him by CA. P.
Based on this, CA. P received ₹ 1,20,000 during the year 2021-22 from Mr. A. Is CA. P guilty of
misconduct under the Chartered Accountants’ Act, 1949? [Nov. 19 – Old Syllabus (4 Marks)]

Ans.: Sharing Fees of professional work of others:

• As per Clause 3 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a CA in
Practice is deemed to be guilty of professional Misconduct if he accepts or agrees to accept any
part of the profits of the professional work of a person who is not a member of the Institute.
However, such a restriction does not apply in respect of member of any other professional bodies
or with such other persons having prescribed qualifications.
• Regulation 53A of CA Regulations 1988 prescribes the qualifications of persons with whom
profits can be shared.
• In this case, CA. P a practicing Chartered Accountant entered into an agreement with Mr. A, a
qualified and experienced registered valuer to share 20% professional fees for all cases of
valuation referred to him by CA. P. Based on this, CA. P received ₹ 1,20,000 during the year 2021-
22 from Mr. A.
Conclusion: Mr. P will be deemed to be guilty of professional misconduct by virtue of Clause 3, Part I
of First Schedule as he accepts professional fees from a person who is not a member of ICAI. Further,
registered valuers are not recognised for profit sharing purpose under Regulations 53A and 53B.

Q.17 Mr X is a practising Chartered Accountant. Mr. Y is a practising advocate representing matters in the
court of law, X and Y decided to help each other in matters involving their professional expertise.
Accordingly, Mr. X recommends Mr. Y in all litigation matters in the court of law and Y consults X in
all matters relating to finance and other related matters, which come to him in arguing various cases
consequently they started sharing profits of their professional work. Is Mr. X liable for professional
misconduct? [Nov. 22 (4 Marks)]

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Professional Ethics Chapter 5
Ans.: Sharing Fees with Advocate:
• As per clause (2) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a CA in
practice is deemed to be guilty of professional misconduct if he pays or allows or agrees to pay or
allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his
professional business, to any person other than a member of the Institute or a partner or a retired
partner or the legal representative of a deceased partner, or a member of any other professional
body or with such other persons having such qualification as may be prescribed, for the purpose
of rendering such professional services to time in or outside India.
• As per Clause 3 of Part I of the First Schedule to the CA Act, 1949, a CA in Practice is deemed to be
guilty of professional Misconduct if he accepts or agrees to accept any part of the profits of the
professional work of a person who is not a member of the Institute. However, such a restriction
does not apply in respect of member of any other professional bodies or with such other persons
having prescribed qualifications.
• For the purpose of Clauses (2) & (3), Regulation 53A of CA Regulations, 1988 allows sharing of
profit with an advocate.
Conclusion: Mr. X will not be deemed to be guilty of professional misconduct as Clauses (2) & (3)
permits a CA in practice for profit sharing with members of any other professional bodies or with
such other persons having prescribed qualifications and advocates are prescribed under Regulation
53A.
Q.18 Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules
thereto: Mr. P, a Chartered Accountant in practice entered into a partnership with Mr. L, an advocate
for sharing of fees for work sent by one to the other. However, due to some disputes, the partnership
was dissolved after 1 month without any fees having been received. [RTP-Nov. 18]
Ans.: Partnership with an Advocate:
As per Clause 4, Part I of First Schedule, a CA in Practice is deemed to be guilty of professional
Misconduct if he enters into partnership in or outside India with any person other than the following:
• C.A. in practice, or
• Member of any other professional body having prescribed qualifications, or
• a person who but for his residence abroad would be entitled to be registered as member, or
• a person whose qualifications are recognized by CG or Council for the purpose of permitting such
partnerships.
As per Regulations 53A and 53B of Chartered Accountants Regulations, 1988, a member is permitted
to enter into partnership with an advocate, member of Bar council of India, besides other qualified
persons and members of other professional bodies.
Conclusion: Mr. P will not be deemed to be guilty of professional misconduct as clause (4) permits a
CA in practice for entering into partnership with members of any other professional bodies or with
such other persons having prescribed qualifications and members of bar council of India and persons
having Bachelor of Law are prescribed.
Q.19 Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto: A Partner of a firm of Chartered Accountants during a T.V. interview handed over a bio-data
of his firm to the Chairperson. Such bio-data detailed the standing with international firm and also
his achievements and recognition as an expert in the field of Taxation. The bio-data was read out
during the said interview.

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Ans.: Prohibition on solicitation of work
• Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949 prohibits solicitation
of work either directly or indirectly by circular, advertisement, personal communication or
interview or by any other means, would constitute professional misconduct.
• In the present case, partner of a firm handed over bio-data of firm which was read out during
interview. The bio-data contains personal recognition and achievements of the partner as an
expert in the field of taxation. Such an act would lead to the promotion of his name and publicity
thereof to the firm.
Conclusion: Partner is guilty of professional misconduct under Clause (6) of Part I of the First
Schedule to the Chartered Accountants Act, 1949.
Q.20 Can a practicing CA be held guilty of professional misconduct under the following circumstance: Z, a
Chartered Accountant wrote several letters to Government Department, pointing out seniority of his
firm, sending his life sketch and stating that he had a glorious record of service to the country as
well as to the organisation of accountancy profession with a view to get the audit work.
Ans.: Soliciting work directly or indirectly:
• As per Clause 6 of Part I of First Schedule to the Chartered Accountants Act, 1949 a member shall
be held guilty if a Chartered Accountant in practice solicits clients or professional work either
directly or indirectly by circular, advertisement, personal communication or interview or by any
other means.
• As per Council Guidelines for Advertisement for the members in practice, a member is not
permitted to claim any superiority over any other Member(s)/Firm(s) or to include the names of
the clients in any write up.
• In the present case, Mr. Z, a practicing Chartered Accountant sent the letter to government
departments, pointing out his seniority and stating his record of serving the nation, which seems
to be indirect methods to adventure their professional practice with a view to solicit professional
work.
Conclusion: Mr. Z will be deemed to be guilty of professional misconduct as per clause 6 of part I of
First Schedule of the Chartered Accountants Act, 1949.
Note: Alternatively, answer may be based on Clause 7, Part I to First Schedule referring to
advertisement of professional attainments.
Q.21 Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules
thereto: M/s XYZ, a firm of Chartered Accountants created a website “www.xyzindia.com”. The
website besides containing details of the firm and bio-data of the partners also contains the
photographs of all the partners of the firm.
Ans.: Hosting Details on Website:
• As per guidelines of the ICAI laid down in Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949, a firm of chartered accountant can create its own website using any format
subject to guidelines.
• However, the website should be so designed that it does not solicit clients or professional work
and should not amount to direct or indirect advertisement.
• The guidelines of the ICAI allows a firm to put up the details of the firm, bio-data of partners and
display of a passport size photograph.
Conclusion: M/s XYZ had complied with all the guidelines and there does not appear any violation of
the Chartered Accountants Act, 1949 and its Regulations.

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By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Professional Ethics Chapter 5
Q.22 Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules
thereto: Mr. S, a Chartered Accountant published a book and gave his personal details as the author.
These details also mentioned his professional experience and his present association as partner
with M/s RST, a firm.
Ans.: Solicitation of Professional Work:
• As per clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a CA in
practice will be deemed to be guilty of professional misconduct if he solicits client or professional
work either directly or indirectly, by circular, advertisement, personal communication or
interview or by any other means.
• While elaborating forms of soliciting work, the Council has specified that it is not permissible for a
member to mention in a book or an article published by him, or a presentation made by him, any
professional attainment(s), whether of the member or the firm of chartered accountants, with
which he is associated. However, he may indicate in a book, article or presentation the designation
“Chartered Accountant” as well as the name of the firm.
• In the present case, Mr. S a Chartered Accountant published the book and mentioned his
professional experience and his association as a partner with M/s RST, a firm of chartered
accountants.
Conclusion: Mr. S has violated the restriction imposed under Clause 6 of Part I of First Schedule by
mentioning the professional experience and hence held to be guilty of professional misconduct.
Q.23 Comment on the following with reference to the Chartered Accountants Act, 1949, Code of Ethics and
Schedules to the Act: XYZ & Associates, a firm with 5 partners developed a website
www.xyzassociates.com. The website also contained a link to “All India Chartered Accountants
Association”, a voluntary association where X, a partner of the firm is currently the Vice-president.
Ans.: Hosting Details on Website:
• As per guidelines of the ICAI laid down in Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949, a chartered accountant or the firm of chartered accountants can create its
own website using any format subject to guidelines.
• As per guidelines, a website may provide a link to website of ICAI, its regional councils, branches
and government departments and other professional bodies like AICPA, ICAEW etc.
• In the present case, website provide a link to the “All India Chartered Accountants Association”
which is not permitted.
Conclusion: The firm is guilty of professional misconduct by virtue of Clause 6 of Part I of First
Schedule.
Q.24 Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto: Mr. Brilliant, a chartered accountant in practice, created his own website in attractive
format and highlighted the contents in blue colour. He also circulated the information contained in
the website through E-mail to acknowledge public at large about his expertise. However, due to
shortage of time, he could not intimate his website address to the Institute.
Ans.: Solicitation of work through website:
• As per Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a CA in
practice shall be deemed to be guilty of misconduct if he solicits clients or professional work either
directly or indirectly by a circular, advertisement, personal communication or interview or by any
other means.

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Chapter 5 Professional Ethics
• Guidelines issued by the ICAI under Clause 6 of Part I of First Schedule to the CA Act 1949, for
development of website by members in practice does not prescribe any standard format or
restriction on use of colours.
• However, it is a requirement that none of the information contained in the website be circulated
on their own or through e-mail or by any other mode except on a specific pull request.
• Further, there is no requirement to intimate the website address to the Institute. Members are
only required to comply with the website guidelines issued by Council of ICAI.
• In the present case, information is circulated through e-mail, hence it is a violation of guidelines.
Conclusion: Mr. Brilliant would be held guilty of professional misconduct for circulation of
information through e-mail.
Q.25 CA. S and CA. M are two partners of the CA firm ‘SM & Co. Being very pious, CA. S organised a
religious ceremony at his home for which he instructed his printing agent to add his designation
“Chartered Accountant” with his name in the invitation cards. Later on, the invitations were
distributed to all the relatives, close friends and clients of both the partners.
Ans.: Using designation “Chartered Accountant” on invitation cards:
• As per Clause 6, Part I of First Schedule of Chartered Accountants Act, 1949, a CA in practice shall
be deemed to be guilty of professional misconduct if he solicits clients or professional work either
directly or indirectly, by circular, advertisement, personal communication or interview or by any
other means.
• Guidelines issued by the Council of ICAI under Clause 6 allowed a member to use designation
“Chartered Accountant” as well as name of firm in greeting cards, invitations for marriages and
religious ceremonies and any invitation for opening or inauguration of office, or letters regarding
change in office premises or telephone numbers provided these are sent only to clients, relatives
and close friends of concerned member.
• In the present case, CA. S is adding the designation Chartered Accountant with his name on
invitation cards and these cards were distributed to his and his partner’s relatives, close friends
and clients.
Conclusion: CA. S shall be deemed to be guilty of professional misconduct for sending the invitation
cards using designation chartered accountant to partner’s relatives, close friends and clients.
Q.26 Comment on the following with reference to the Chartered Accountants Act, 1949, and Schedules
thereto: Mr. X, a CA in practice, provides part-time tutorship under the coaching organization of the
Institute. On 30th June, 2022, he was awarded ‘Best Faculty of the year’ as gratitude from the
Institute. Later on, he posted his framed photograph on his website wherein he was receiving the
said award from the Institute.
Ans.: Posting other than passport size photo on website:
• As per Clause 6, Part I of First Schedule of Chartered Accountants Act, 1949, a CA in practice shall
be deemed to be guilty of professional misconduct if he solicits clients or professional work either
directly or indirectly, by circular, advertisement, personal communication or interview or by any
other means.
• As per guidelines of the ICAI laid down in Clause (6) of Part I of the First Schedule to the
Chartered Accountants Act, 1949, a chartered accountant or the firm of chartered accountants
can create its own website using any format subject to guidelines.
• As per the guidelines, a member is not permitted to display any photograph on the website, other
than passport size photograph.

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Professional Ethics Chapter 5
• In the present case, Mr. X displayed his framed photograph on website wherein he was receiving
“Best faculty of the year” award from the Institute.
Conclusion: Mr. X will be guilty of professional misconduct because as per the guidelines for the
website issued under Clause 6 of Part I of First Schedule, no photograph of any sort (except passport
size photograph of member) is permitted to be displayed on website.
Q.27 Comment on the following with reference to the CA Act, 1949, and Schedules thereto: A special
notice has been issued for a resolution at 6th AGM of F Ltd. providing expressly that CA. S shall not
be reappointed as an auditor of the company. Consequently, CA. S submitted a representation in
writing to the company as provided under section 140(4)(iii) of the Companies Act, 2013. In the
representation, CA. S incorporated his independent working as a professional throughout the term
of office and also indicated his willingness to continue as an auditor if reappointed by the
shareholders of the Company.
Ans.: Sending representation to solicit the professional work:
• As per Clause 6, Part I of First Schedule of Chartered Accountants Act, 1949, a CA in practice shall
be deemed to be guilty of professional misconduct if he solicits clients or professional work either
directly or indirectly, by circular, advertisement, personal communication or interview or by any
other means.
• Guidelines issued by the Council of ICAI under Clause 6 allowed a member to send representation
to the company provided right of Representation should not be used to secure needless publicity.
It needs to be set out in a dignified manner how he has been acting independently through his
term of office and his willingness to continue as an auditor if reappointed by shareholders.
• In the present case, CA. S has submitted the representation u/s 140(4)(iii) of Companies Act,
2013 in the proper manner.
Conclusion: No misconduct arises on Part of CA. S as guidelines issued under Clause 6 of Part I of
First Schedule allows a CA in practice to make the representation u/s 140(4) of Companies Act, 2013
which is not used by the auditor to secure needless publicity.
Q.28 Comment on the following with reference to the Chartered Accountants Act, 1949, and its Schedules
to the Act: CA. N, in practice, started project consultancy work as a part of his practice and to
advance the same, sent mail to all the CAs in the country informing them of his services and for
securing professional work.
Ans.: Soliciting the professional work from another chartered accountant:
• As per Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients or
professional work either directly or indirectly by a circular, advertisement, personal
communication or interview or by any other means.
• However, it is specifically provided under Clause 6, that noting contained in Clause 6 shall be
construed as preventing or prohibiting any chartered accountant from applying or requesting for
or inviting or securing professional work from another chartered accountant in practice.
• In the present case, CA. N sent mail to all the CAs in the country informing them of his services
and for securing professional work.
Conclusion: There is no misconduct on Part of CA. N as exceptions to Clause 6 of Part I of First
Schedule allows a CA in practice to secure professional work from another CA in practice.

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Chapter 5 Professional Ethics
Q.29 Discuss the following with reference to the Chartered Accountants Act, 1949 and the schedules
thereto: M/s XYZ a firm of Chartered Accountants in practice develops a website “XYZ.com”. The
colour chosen for the website was a very bright green and the website was to run on a “push”
technology where the name of the partners of the firm and the major clients were to be displayed on
the website without any disclosure obligation from any regulator.
Ans.: Hosting Details on Website:
• As per guidelines of the ICAI laid down in Clause (6) of Part I of the First Schedule to the
Chartered Accountants Act, 1949, a chartered accountant of the firm can create its own website
using any format subject to guidelines.
• However, the website should be so designed that it does not solicit clients or professional work
and should not amount to direct or indirect advertisement.
• As per guidelines, there is no restriction on the use of colours. However, the website is required
to run on a “pull” technology and not on “push” technology; and the name of clients and fees
charged from them is not permitted to be appear on the website.
• Disclosure of names of clients and/or fees charged, on the website is permissible only where it is
required by a regulator, whether or not constituted under a statute, in India or outside India,
provided that such disclosure is only to the extent of requirement of the regulator.
• In the present case, M/s XYZ, a firm of Chartered Accountants in practice develops a website
“XYZ.com”. The colour chosen for the website was a very bright green and the website was to run
on a “push” technology where the name of the partners of the firm and the major clients were to
be displayed on the website without any disclosure obligation from any regulator.
Conclusion: The firm would be liable for professional misconduct due to running website on Push
Technology and displaying name of clients on website without any requirement of regulator.
Q.30 Give your comments with reference to the Chartered Accountants Act, and schedules thereto: An
advertisement was published in a Newspaper containing the photograph of Mr. X, a member of the
institute wherein he was congratulated on the occasion of the opening ceremony of his office.
Ans.: Solicitation of Client or Professional Work:
• As per Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients or
professional work either directly or indirectly by a circular, advertisement, personal
communication or interview or by any other means.
• In the given case, Mr. X published an advertisement in a Newspaper containing his photograph on
the occasion of the opening ceremony of his office.
• This kind of advertisement will amount to soliciting professional work by advertisement directly
or indirectly.
Conclusion: Mr. X would be guilty under Clause 6 of Part-I of the First Schedule to the Chartered
Accountants Act, 1949.
Q.31 Give your comments with reference to the Chartered Accountants Act, and schedules thereto: Mr. X,
a Chartered Accountant and the proprietor of X & Co., wrote several letters to the Assistant Registrar
of Co-operative Societies stating that though his firm was on the panel of auditors, no audit work
was allotted to the firm and further requested him to look into the matter.

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By: CA. Pankaj Garg
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Professional Ethics Chapter 5
Ans.: Soliciting Professional Work:
• As per Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients or
professional work either directly or indirectly by a circular, advertisement, personal
communication or interview or by any other means.
• In the given case, Mr. X, a Chartered Accountant and proprietor of M/s X and Co, wrote several
letters to the Assistant Registrar of Cooperative Societies, requesting for allotment of audit work.
• The writing of continuous letter to ascertain the reasons for not getting the work is quite alright
but request for allowing the work does not appears to be correct.
Conclusion: Mr. X would be held guilty under clause 6 of Part I of First Schedule of the CA Act, 1949.
Q.32 Comments with reference to the Chartered Accountants Act, 1949 and schedules thereto: PQR and
Associates, Chartered Accountants have their website and on the letterhead of the firm it is
mentioned that "Visit our website: www.pqr.com". In the website the nature of assignments
handled, names of prominent clients and fees charged is also displayed without any disclosure
obligation by any regulator.
Ans.: Website Particulars:
• The Council of the ICAI has issued guidelines for posting the particulars on Website by CA in
practice and firms of CA in practice under Clause (6) of Part I of First Schedule to the CA Act, 1949.
• According to the guidelines the details in the website should be so designed that it does not
amount to soliciting client or professional work. It is permitted to mention the website address on
letterhead but soliciting people to visit website is not permitted.
• PQR and Associates letterhead invites to people to visit their website. Similarly, the website
mentions the nature of assignments, names of the prominent clients and fees charged. The nature
of assignments is permitted for display only on specific “Pull" request, and the name of clients, the
fees charged is not permitted at all.
• Disclosure of names of clients and/or fees charged, on the website is permissible only where it is
required by a regulator, whether or not constituted under a statute, in India or outside India,
provided that such disclosure is only to the extent of requirement of the regulator.
Conclusion: PQR & Associates will be held guilty of Professional Misconduct under Clause 6 of Part I of
First Schedule to the Chartered Accountants Act, 1949.
Q.33 A CA firm M/s GST & Associates, has sent a letter to the Goods and Service Tax Council stating that
the firm has 2 partners who specialize in the law of Goods and Service Tax and asked the said
Council to include their name in the panel, whenever formed, for providing advisory to the
Chartered Accountants Act, 1949.
Ans.: Roving Enquiries:
• As per Clause 6 of Part I of the First Schedule to the CA Act, 1949, a CA in practice shall be deemed
to be guilty of misconduct if he solicits clients or professional work either directly or indirectly by
a circular, advertisement, personal communication or interview or by any other means.
• Such a restraint has been put so that the members maintain their independence of judgment and
may be able to command respect from their prospective clients.
• In case of making an application for the empanelment for the allotment of audit and other
professional work, the Council has opined that, “where the existence of such a panel is within the
knowledge of the member, he is free to write to the concerned organization with a request to place
his name on the panel.

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Chapter 5 Professional Ethics
• However, it would not be proper for the member to make roving inquiries by applying to any such
organization for having his name included in any such panel.
Conclusion: The member is guilty of misconduct in terms of the above provision as he has solicited
professional work by making roving inquiries about the panel.
Q.34 Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto:
M, a practicing Chartered Accountant sent a letter to another firm of Chartered Accountants,
claiming himself to be a pioneer in liasoning with Central Government Ministries and its allied
Departments for getting various Government clearances for which he had claimed to have expertise
and had given a list of his existing clients and details of his staff etc.
Ans.: Soliciting work directly or indirectly:
• As per Clause 6 of Part I of First Schedule to the Chartered Accountants Act, 1949, a member shall
be held guilty if a Chartered Accountant in practice solicits clients or professional work either
directly or indirectly by circular, advertisement, personal communication or interview or by any
other means.
• As per Council Guidelines for Advertisement for the members in practice, a member is not
permitted to claim any superiority over any other Member(s)/Firm(s) or to include the names of
the clients in any write up.
• In the present case, Mr. M, a practicing Chartered Accountant sent the letter to another firm of
Chartered Accountants, claiming himself to be a pioneer in liasoning with Central Government
Ministries and its allied Departments for getting various Government clearances for which he had
claimed to have expertise and had also given a list of his existing clients and details of his staff etc.
which seems to be indirect methods to adventure their professional practice with a view to gain
publicity and thereby solicit clients or professional work.
Conclusion: Mr. M was guilty of professional misconduct as per clause 6 of part I of First Schedule of
the Chartered Accountants Act, 1949.
Q.35 Mr. Honest, a Chartered Accountant in practice, wrote two letters to M/s XY Chartered Accountants a
firm of CA’s; requesting them to allot him some professional work. As he did not have a significant
practice or clients, he also wrote a letter to M/s ABC, a firm of Chartered Accountants for securing
professional work. Mr. Clever, another CA, informed ICAI regarding Mr. Honest’s approach to secure
the professional work. Is Mr. Honest wrong in soliciting professional work? [MTP-March 23]
Ans.: Solicitation of professional work from another CA:
• As per Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients or
professional work either directly or indirectly by a circular, advertisement, personal
communication or interview or by any other means.
• However, nothing in clause 6 shall be construed as preventing or prohibiting any Chartered
Accountant from applying or requesting for or inviting or securing professional work from
another chartered accountant in practice.
• Such a restraint has been put so that the members maintain their independence of judgment and
may be able to command respect from their prospective clients.
• In the given case, Mr. Honest wrote letters only to other Chartered Accountants, M/s XY and M/s
ABC requesting them to allot some professional work to him, which is not prohibited under
clause 6.
Conclusion: Mr. Honest is not wrong in soliciting professional work from another CA, hence there is
no professional misconduct.

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Professional Ethics Chapter 5
Q.36 During the opening ceremony of a new branch office of CA. Young, his friend CA. Old introduced to
CA. Young, his friend and client Mr. Rich, the owner of an Export House whose accounts had been
audited by CA. Old for more than 15 years. After few days, Mr. Rich approached CA. Young and
offered a certification work which hitherto had been done by CA. Old CA. Young undertook the work
for a fee which was not less than fee charged by CA. Old in earlier period.
Comment whether CA. Young had done any professional misconduct.
[Nov. 18 – New Syllabus (5 Marks)]
Ans.: Soliciting work directly or indirectly:
• As per Clause 6 of Part I of First Schedule to the Chartered Accountants Act, 1949, a member shall
be held guilty if a Chartered Accountant in practice solicits clients or professional work either
directly or indirectly by circular, advertisement, personal communication or interview or by any
other means.
• As per Council Guidelines for Advertisement for the members in practice, acceptance of original
professional work emanating from a client introduced by another member is not permitted.
• In the present case, during the opening ceremony of a new branch office of CA. Young, his friend
CA. Old introduced to CA. Young, his friend and client Mr. Rich, the owner of an Export House
whose accounts had been audited by CA. Old for more than 15 years. After few days, Mr. Rich
approached CA. Young and offered a certification work which hitherto had been done by CA. Old
CA. Young undertook the work for a fee which was not less than fee charged by CA. Old in earlier
period.
Conclusion: Mr. Young will be deemed guilty of professional misconduct under clause 6, Part I of
First Schedule.
Q.37 Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto:
A special notice has been issued for a resolution at 3rd AGM of LED Ltd., providing expressly that CA.
Anoop shall not be reappointed as an auditor of the company. Consequently, CA. Anoop submitted a
representation in writing to the company with a request to circulate to the members. In the detailed
representation, CA. Anoop included the contributions made by him in strengthening the control
procedures of the company during his association with the company and also indicated his
willingness to continue as an auditor if reappointed by the shareholders of the company.
[Nov. 19 – New Syllabus (4 Marks)]
Ans.: Right of representation:
• As per Clause 6 of Part I of First Schedule to the Chartered Accountants Act, 1949, a member shall
be held guilty if a Chartered Accountant in practice solicits clients or professional work either
directly or indirectly by circular, advertisement, personal communication or interview or by any
other means.
• Section 140(4) of the Companies Act, 2013 permits an auditor to make a representation in
writing (not exceeding a reasonable length) to the company. The proposition of the auditor to
highlight contributions made by the firm in strengthening the control procedures in the
representation is not acceptable because the representation letter should not be prepared in a
manner so as to seek publicity.
• The Code of Ethics issued by the Institute makes it amply clear that the right to make
representation does not mean that an auditor has any prescriptive right or a lien on an audit.
• The wording of his representation should be such that, apart from the opportunity not being
abused to secure needless publicity, it does not tantamount directly or indirectly to canvassing or

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Chapter 5 Professional Ethics
soliciting for his continuance as an auditor. The letter should merely set out in a dignified manner
how he has been acting independently and conscientiously through the term of office and may in
addition, indicate if he so chooses his willingness to continue as auditor if reappointed by the
shareholders.
Conclusion: Mr. Anoop will be guilty of professional misconduct under Clause (6) of Part I of the First
Schedule to the Chartered Accountants Act, 1949, as including contributions made by him in
strengthening the control procedures of the company, amounts to solicitation of work which is not
permitted.
Q.38 M/s ABC & Co., a firm of Chartered Accountants responded to a tender from a State Government for
appointment of GST Auditor wherein no minimum fee was prescribed. For this purpose, the Firm
also paid ₹ 50,000 as earnest deposit as part of the terms of the tender. Comment on the above with
reference to the Chartered Accountants Act, 1949, Code of Ethics and Schedules to the Act.
[Nov. 20 – Old Syllabus (5 Marks)]
Ans.: Responding to tenders:
• Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 lays down
Guidelines for responding to tenders, etc. As per the Guideline issued by the Council of the ICAI, a
member in practice shall not respond to any tender issued by an organization or user of
professional services in areas of services which are exclusively reserved for chartered
accountants, such as audit and attestation services.
• However, such restriction shall not be applicable where minimum fee of the assignment is
prescribed in the tender document itself or where the areas are open to other professionals along
with the Chartered Accountants. Further, in respect of a non-exclusive area, members are
permitted to pay reasonable amount towards earnest money/security deposits.
• In the given case, M/S ABC & Co., a firm of Chartered Accountants responded to a tender from a
State Government for appoint of GST Auditor and for this purpose, the firm also paid ₹ 50,000 as
earnest deposit as part of the terms of the tender.
Conclusion: Since GST Audit does not fall within exclusive areas for chartered accountants, M/S ABC
& Co. can respond to tender as well as deposit ₹ 50,000 as earnest deposit and shall not have
committed any professional misconduct.
Q.39 Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto: Mr. Vineet,
a chartered accountant in practice, created his own website in attractive format and highlighted the
contents in purple colour. The website also displayed the nature of assignments handled along with
the names of clients without such requirement from any of the regulator. He also circulated the
information contained in the website through e-mail to acknowledge public at large about his
expertise. However, he did not intimate his website address to the Institute.
[Nov. 20 – New Syllabus (4 Marks)]
Ans.: Circulating Information Contained in Own Website:
• As per Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he solicits
clients or professional work either directly or indirectly by circular, advertisement, personal
communication or interview or by any other means.
• Guidelines issued by the Council of the ICAI permit creation of own website by a chartered
accountant in his or his firm name and no standard format or restriction on colours is there.

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Professional Ethics Chapter 5
• As per the guidelines, members or the firm, should ensure that none of the information contained
in the website be circulated on their own or through e-mail or by any other mode except on a
specific “Pull” request.
• Further, nature of assignments handled can be displayed on the website only on specific “pull”
request. Names of clients and fee charged cannot be given without such requirement from any of
the regulator.
• The website address of the member be obtained on annual basis in the annual form required to be
filed by the member while paying fee and the same be taken as entry on record.
• In the given case, Mr. Vineet has circulated the information contained in the website through
e-mail to public at large and has displayed the nature of assignments handled along with the name
of clients without such requirement from the regulator.
Conclusion: Mr. Vineet is guilty of professional misconduct under Clause 6 of Part I of First Schedule
as name of clients are displayed on the website without any requirement of regulator, website
information is circulated through e-mail and website address not intimated to the Institute.
Q.40 Comment on the following with reference to the Chartered Accountants Act, 1949, Code of Ethics and
Schedules to the Act: M/s LMN, a firm of Chartered Accountants responded to a tender from a State
Government for computerization of land revenue records. For this purpose, the firm also paid
₹ 50,000 as earnest deposit as part of the terms of the tender. [Jan. 21 – Old Syllabus (4 Marks)]
Ans.: Solicitation of Work:
• Clause 6 of Part I of First Schedule allows solicitation of client or professional work through
responding to tenders.
• Further Guidelines are being issued by Council allowing therein a member to respond to tenders
where minimum fees of the assignment is prescribed in the tender document itself or where the
areas are open to other professionals along with Chartered Accountants.
• Further, in respect of a non-exclusive area, members are permitted to pay reasonable amount
towards earnest money/security deposits.
• In the present case, since computerisation of property records does not fall within exclusive areas
for Chartered Accountants, M/s LMN can respond to tenders as well as deposit ₹ 50,000 as earnest
deposit and shall not have committed any professional misconduct.
Conclusion: There is no professional misconduct on part of M/s LMN.
Q.41 M/s. SR & Associates is one of the three firms shortlisted by ARG Cooperative Bank for assignment of
Statutory Audit for the F.Y 2021-2022. Bank mailed the list of branches to the audit firms along with
the maximum fee per branch and asked them to submit the quotations. SR & Associates responded
to the bank and submitted their quotation. Comment with reference to the provisions of the
Chartered Accountants Act, 1949 and schedules thereto. [July 21 – New Syllabus (4 Marks)]
Ans.: Roving Enquiries:
• As per Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice will be deemed to be guilty of professional misconduct if he Solicits clients
or professional work either directly or indirectly by circular, advertisement, personal
communication or interview or by any other means.
• Provided that nothing herein contained shall be construed as preventing or prohibiting:
(i) Any Chartered Accountant from applying or requesting for or inviting or securing
professional work from another chartered accountant in practice; or
(ii) A member from responding to tenders or enquiries issued by various users of professional
services or organizations from time to time and securing professional work as a consequence.

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• However, as per the guideline issued by the Council of the ICAI, a member of the Institute in
practice shall not respond to any tender issued by an organization or user of professional services
in areas of services which are exclusively reserved for chartered accountants, such as audit and
attestation services.
• However, such restriction shall not be applicable where minimum fee of the assignment is
prescribed in the tender document itself or where the areas are open to other professionals along
with the Chartered Accountants.
• In the given case of ARG Cooperative Bank, Bank mailed the list of branches to the audit firms
along with maximum fees per branch, in response to which SR & Associates responded and
submitted their quotation.
Conclusion: Keeping in view the facts, clause 6 and guideline issued by the council, it can be
concluded that SR & Associates is guilty of Professional misconduct.
Q.42 Mr. Avi, a newly qualified Chartered Accountant, started his practice and sought clients through
telephone calls from his family and friends, almost all of them employed in one or the other retail
trade business. One of his friends Mr. Ravi gave him an idea to start online services and give stock
certifications to traders with Cash Credit Limits in Banks. Mr. Avi started a website with colourful
catchy designs and shared the website address on his all social media posts and stories and tagged
30 traders of his local community with the caption “Easy Online Stock Certification Services”.
Besides, Mr. Avi entered in an agreement with a Digital Marketer to give him 5% commission on
each service procured through him. Discuss if the actions of Mr. Avi are valid in the light of the
Professional Ethics and various pronouncements and guidelines issued by ICAI. [RTP-May 22]
Ans.: Solicitation of Client and Professional Work:
• As per clause (2) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a CA in
practice is deemed to be guilty of professional misconduct if he pays or allows or agrees to pay or
allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his
professional business, to any person other than a member of the Institute or a partner or a retired
partner or the legal representative of a deceased partner, or a member of any other professional
body or with such other persons having such qualification as may be prescribed, for the purpose of
rendering such professional services to time in or outside India.
• As per Clause (6) of Part I of the First Schedule of the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he solicits
clients or professional work either directly or indirectly by circular, advertisement, personal
communication or interview or by any other means.
• In the given case, Mr. Avi entered in an agreement with a Digital Marketer to give him 5%
commission on each service procured through him, which is a violation of restriction imposed
under Clause 2 as stated above.
• Mr. Avi is also wrong in seeking clients through family and friends.
• Creating a website is not a non-compliance provided it is in line with the guidelines issued by the
Institute in this regard. One of the guidelines is that the website should not be in push mode.
Further, mentioning of clients’ names is also prohibited as per the guidelines. Mr. Avi also
contravenes guidelines on website issued by the ICAI as he shares the website address on his all
social media posts and stories and tagged 30 traders of his local community with the caption “Easy
Online Stock Certification Services” mentioning his current clients as well.
Conclusion: CA. Avi would be held guilty of professional misconduct under clause 6 of Part I of First
Schedule of the Chartered Accountants Act, 1949.

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Q.43 CA Praful has recently qualified and has obtained COP. In the initial years, it is taking time to set up
his clientele base. He is also conducting audit of few entities. Simultaneously, he plans to provide
coaching to CA students online taking advantage of his fresh reservoir of knowledge. Therefore, he
advertises his classes on various social media platforms. Comment with reference to the Chartered
Accountants Act, 1949, and Schedules thereto. [MTP-Oct. 22]
Ans.: Solicitation of Client or professional Work:
• Regulation 190A of the Chartered Accountants Regulations, 1988 provides that a chartered
accountant in practice shall not engage in any business or occupation other than the profession of
accountancy except with the permission granted in accordance with a resolution of the Council.
• The Council has passed a resolution under Regulation 190A granting general permission for
private tutorship and part time tutorship under coaching organization of the Institute. Such
general permission is subject to the condition that direct teaching hours devoted to such activities
taken together should not exceed 25 hours a week in order to be able to perform attest functions.
• Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949 states that
Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he
solicits clients or professional work either directly or indirectly by circular, advertisement,
personal communication or interview or by any other means.
• An advertisement of online coaching activities through social media platforms amounts to indirect
solicitation as well as solicitation by another means and is, therefore, violative of Clause 6 of Part I
of the First Schedule to Chartered Accountants Act, 1949.
• Therefore, although a member in practice can engage in private tutorship subject to Council
Guidelines but he cannot advertise by any means for coaching activities as it amounts to indirect
solicitation of clients and professional work. In the given case, CA Praful is providing coaching to
CA students online and also advertising his classes on various social media platforms.
Conclusion: Based on above stated provisions, CA. Praful is guilty of professional misconduct under
Clause (6) of Part I of First Schedule to the Chartered Accountants Act 1949 for advertising his classes
on various social media platforms.
Q.44 Discuss whether the following action by a Chartered Accountant would amount to misconduct or
not: A practising Chartered Accountant uses a visiting card in which he designates himself, besides
as Chartered Accountant, as
(a) Tax Consultant
(b) Cost Accountant.
Ans.: Using designation other than Chartered Accountant:
• Clause 7 of Part I of First Schedule to the CA Act, 1949 provides that a CA in practice is deemed to
be guilty of professional misconduct if he (i) advertises his professional attainments or services or
(ii) uses any designation or expressions other than “Chartered Accountant” on professional
documents, visiting cards, letter heads or sign boards.
• As per Section 7 of Chartered Accountants Act, 1949, every member of the Institute in practice
shall use the designation of a chartered accountant.
• However, a degree of a university established by law in India or recognized by the Central
Government or a title indicating membership of the ICAI or of any other institution that has been
recognized by the Central Government or may be recognized by the council is permitted to be
mentioned.

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• In the given case, a practising Chartered Accountant uses a visiting card in which he designates
himself, besides as Chartered Accountant, as Tax Consultant/Cost Accountant.
Conclusion: Concerned CA shall be held guilty of professional misconduct as per Clause (7) of Part I
of First Schedule to the Chartered Accountants Act, 1949.
Q.45 Comment on the following with reference to the Chartered Accountants Act, 1949, Code of Ethics and
Schedules to the Act: B, a Chartered Accountant in practice is a partner in 3 firms. While printing his
personal letter heads, B gave the names of all the firms in which he is a partner.
Ans.: Mentioning Firm’s Name on Letter Heads:
• Clause 7 of Part I of First Schedule to the CA Act, 1949 provides that a CA in practice is deemed to
be guilty of professional misconduct if he (i) advertises his professional attainments or services
or (ii) uses any designation or expressions other than “Chartered Accountant” on professional
documents, visiting cards, letter heads or sign boards.
• However, a degree of a university established by law in India or recognized by the Central
Government or a title indicating membership of the ICAI or of any other institution that has been
recognized by the Central Government or may be recognized by the council is permitted to be
mentioned.
• There is no prohibition for printing names of all firms on the personal letter heads in which a
member holding certificate of practice is a partner.
Conclusion: Mr. B is not guilty of any professional misconduct in the above case.
Q.46 Give your comments with reference to Chartered Accountants Act, 1949 and schedules thereto: Mr.
B, a practicing Chartered Accountant as well as a qualified lawyer, was permitted by the bar council
to practice as a lawyer also. He printed his visiting card where he mentioned his designation as
Chartered Accountant and Advocate.
Ans.: Using designation other than Chartered Accountant:
• As per clause 7 of Part I of First Schedule, a CA in practice is deemed to be guilty of professional
misconduct if he (i) advertises his professional attainments or services or (ii) uses any designation
or expressions other than “Chartered Accountant” on professional documents, visiting cards, letter
heads or sign boards unless it be a degree of a university established by law in India or recognized
by the Central Government or a title indicating membership of the ICAI or of any other institution
that has been recognized by the Central Government or may be recognized by the council.
• Members of the Institute in practice who are otherwise eligible may practice as advocates subject
to the permission of the Bar Council but in such case, they should not use designation “Chartered
Accountant” in respect of the matters involving the practice as an advocate.
• In respect of other matters, they should use the designation ‘chartered accountant’ but they should
not use the designation ‘chartered accountant’ and ‘advocate’ simultaneously.
• In the present case, Mr. B has printed his visiting card where he mentioned his designation as
Chartered Accountant and Advocate which is prohibited under the clause 7.
Conclusion: Mr. B is guilty of professional misconduct due to use of designation of advocate in
addition to Chartered Accountant.
Q.47 Comment with respect to Chartered Accountants Act, 1949: Mr. SP, a Chartered Accountant obtains
registration as category IV merchant banker under the SEBI’s Rules and Regulations and act as
Advisor to a capital issue of MB Co. Ltd. He designated himself under the caption “Merchant banker”
in client offer documents and ‘Advisor to issue’ in his own letterheads, visiting cards and
professional documents.

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Professional Ethics Chapter 5
Ans.: Using designation other than Chartered Accountant:
• As per clause 7 of Part I of First Schedule, a CA in practice is deemed to be guilty of professional
misconduct if he (i) advertises his professional attainments or services or (ii) uses any
designation or expressions other than “Chartered Accountant” on professional documents,
visiting cards, letterheads or sign boards unless it be a degree of a university established by law
in India or recognized by the Central Government or a title indicating membership of the ICAI or
of any other institution that has been recognized by the Central Government or may be
recognized by the council.
• A Chartered Accountant is allowed to act as advisor to a capital issue and offer document of client
company may specify the name of address of chartered accountant under the caption “Advisor to
issue”. However, it is specifically prohibited that member concerned should not use the
designation either “Merchant Banker” or “Advisor to issue” in their own letterheads, visiting
cards and professional documents.
• In the present case, Mr. SP designated himself under the caption “Merchant banker” in client offer
documents and ‘Advisor to issue’ in his own letterheads, visiting cards and professional
documents.
Conclusion: Mr. SP is guilty of Professional Misconduct under Clause 7 of Part I of First Schedule due
to use of designation other than Chartered Accountant.
Q.48 Mr. M, a chartered accountant in practice, has printed visiting cards which besides other details also
carries a Quick Response (QR) code. The visiting card as well the QR code contains his name, office
and residential address, contact details, e-mail id and name of the firm’s website. Comment with
reference to the Chartered Accountants Act, 1949 and schedules thereto.
Ans.: Printing of Visiting Cards and using QR Code:
• As per clause 7 of Part I of First Schedule, a CA in practice is deemed to be guilty of professional
misconduct if he (i) advertises his professional attainments or services or (ii) uses any
designation or expressions other than “Chartered Accountant” on professional documents,
visiting cards, letterheads or sign boards unless it be a degree of a university established by law
in India or recognized by the Central Government or a title indicating membership of the ICAI or
of any other institution that has been recognized by the Central Government or may be
recognized by the council.
• As per guidelines issued under Clause 7, printing photograph on the visiting cards is not
permissible. However Quick Response Code may be printed on visiting card provided that the
Code does not contain information that is not otherwise permissible to be printed in their visiting
card.
• In the present case, Mr. M, a chartered accountant in practice, has printed visiting cards which
besides other details also carries a Quick Response (QR) code. The visiting card as well the QR
code contains his name, office and residential address, contact details, e-mail id and name of the
firm’s website.
Conclusion: No misconduct arises on part of Mr. M as information printed on visiting card and
information contained in QR Code are permissible.
Q.49 Comment with the reference to the Chartered Accountants Act, 1949 and schedules thereto: R, a
practicing Chartered Accountant, is a Director in X Ltd; a Public Company. The prospectus of X Ltd.
mentions the name of Mr. R as a director along with his various professional attainments, his areas
of specialization and expertise in the fields of international taxation.
[Nov. 18-Old Syllabus (4 Marks)]

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Ans.: Advertisements of professional attainments:
• As per clause 7 of Part I of First Schedule, a CA in practice is deemed to be guilty of professional
misconduct if he (i) advertises his professional attainments or services or (ii) uses any designation
or expressions other than “Chartered Accountant” on professional documents, visiting cards, letter-
heads or sign boards unless it be a degree of a university established by law in India or recognized
by the Central Government or a title indicating membership of the ICAI or of any other institution
that has been recognized by the Central Government or may be recognized by the council.
• As per guidelines issued under Clause 7, name of CA acting as director in the company is permissible
to appear in the prospectus of the company, however descriptions regarding his expertise,
specialisation and knowledge in any particular field is not permitted.
• In the present case, R, a practicing Chartered Accountant, is a Director in X Ltd. a Public Company.
The prospectus of X Ltd. mentions the name of Mr. R as a director along with his various
professional attainments, his areas of specialization and expertise in the fields of international
taxation.
Conclusion: Mr. R will be deemed to be guilty of professional misconduct under Clause 7, Part I of First
Schedule.
Q.50 Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto: A Chartered Accountant in practice, empanelled as IP (Insolvency Professional) has
mentioned the same on his visiting cards, letterheads and other communications also. Mr. A, who is
residing in his neighbourhood has filed a complaint for professional misconduct against the said
member for such mention of insolvency professional on circulations.
[May 19-Old Syllabus (4 Marks), MTP-March 22]
Ans.: Using designation other than Chartered Accountant:
• As per clause 7 of Part I of First Schedule, a CA in practice is deemed to be guilty of professional
misconduct if he (i) advertises his professional attainments or services or (ii) uses any
designation or expressions other than “Chartered Accountant” on professional documents,
visiting cards, letterheads or sign boards unless it be a degree of a university established by law
in India or recognized by the Central Government or a title indicating membership of the ICAI or
of any other institution that has been recognized by the Central Government or may be
recognized by the council.
• In the present case, a Chartered Accountant in practice, empanelled as IP (Insolvency
Professional) has mentioned the same on his visiting cards, letterheads and other
communications also. Mr. A, who is residing in his neighbourhood has filed a complaint for
professional misconduct against the said member for such mention of insolvency professional on
circulations.
Conclusion: A Chartered Accountant empanelled as IP (Insolvency Professional) can mention
'Insolvency Professional' on his visiting cards, Letterheads and other communication, as this is a title
recognised by the Central Government in terms of Clause 7 of Part I of First Schedule to the Chartered
Accountants Act, 1949. Thus, complaint of neighbour is not enforceable/valid.
Q.51 A company has appointed a practicing Chartered Accountant as an independent director on its
board. The said company publishes description about the Chartered Accountant's expertise,
specialization and knowledge in any particular field or add appellations or adjectives to his name in
the prospectus or public announcements issued by this company. Whether the said publication will
be covered under Code of Ethics? What should be the role of the Chartered Accountant in this
regard? [July 21- Old Syllabus (4 Marks)]

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Professional Ethics Chapter 5
Ans.: Publishing details of practicing CA in a Prospectus:
• The Council of the ICAI has in a communication to members stated that if the prospectus or public
announcements issued by these Companies often publish descriptions about the Chartered
Accountant’s expertise, specialisation and knowledge in any particular field or add appellations or
adjectives to their names. it shall constitute a misconduct under Clauses (6) and (7) of Part I of the
First Schedule to the Chartered Accountants Act.
• The Council has further stated that in such cases the member concerned has to take necessary
steps to ensure that such prospectus or public announcements or public communications do not
advertise his professional attainments and also that such prospectus or public announcements or
public communications do not directly or indirectly amount to solicitation of clients for
professional work by the members.
• It is advisable for a member that as soon as he is appointed as a director on the Board of a
Company, he should specifically invite the attention of the management of the Company to the
aforesaid provisions and should request that before any such prospectus or public
announcements or public communication mentioning the name of the member concerned, is
issued, the material pertaining to the member concerned should, as far as practicable be got
approved by him.
• In the given situation, a company has appointed a practicing chartered accountant as independent
director on its board. The said company published description about the Chartered Accountant’s
expertise, specialisation and knowledge in any particular field or add appellations or adjectives to
his names in the prospectus or public announcements issued by this Company.
• Thus, in the instant case, Chartered Accountant would be held to be guilty of professional
misconduct under Clauses (6) and (7) of Part I of the First Schedule to the Chartered Accountants
Act, 1949 and liable for disciplinary action.
Q.52 Mr. Sirish, a Chartered Accountant in practice, delivered a speech in the national conference
organized by the Ministry of Information Technology. While delivering the speech, he told to the
audience that he is a Cybersecurity Expert and his firm provides services of cloud accounting, IT
governance, risk compliance, and information security at reasonable rates. He also requested the
audience to approach his firm of chartered accountants for these services and at the request of the
audience he also distributed his business cards and telephone number of his firm to those in the
audience. Comment in the light of professional Code of Ethics. [May 22 (4 Marks)]
Ans.: Solicitation of Professional Work and Advertisement:
• Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949 states that a
Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients
or professional work either directly or indirectly by a circular, advertisement, personal
communication or interview or by any other means.
• Section 7 of the Chartered Accountants Act, 1949 read with Clause 7 of Part I of the First Schedule
to the said Act prohibits advertising of professional attainments or services of a member. It also
restrains a member from using any designation or expression other than that of a Chartered
Accountant in documents through which the professional attainments of the member would come
to the notice of the public.
• Guidelines issued under clauses 6 & 7 permits a practicing member to give lectures at forums and
may give their names and describe themselves as Chartered Accountants, but no reference should
be made, to the name and address or services of his firm.

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Chapter 5 Professional Ethics
• In the present case, Mr. Sirish uses the designation of "Cybersecurity Expert" and also made
reference to the services provided by his firm of Chartered Accountants at reasonable rates and
distribute business cards to audience.
Conclusion: Mr. Sirish will be held guilty of professional misconduct under clauses 6 & 7 of Part I of
First Schedule to the CA Act, 1949 due to solicitation of professional work and advertisement of
services rendered by his firm.
Q.53 Mr. X a chartered Accountant accepted his appointment as tax auditor of a firm under Sec. 44AB of
the Income-tax Act and commenced the tax audit within two days of his appointment since the client
was in a hurry to file return of income before the due date. After commencing the audit, Mr. X
realised his mistake of accepting this tax audit without sending any communication to the previous
tax auditor. In order to rectify his mistake, before signing the tax audit report, he sent a registered
post to the previous auditor and obtained the postal acknowledgement. Will Mr. X be held guilty
under the CA Act?
Ans.: Prior Communication with the previous auditor:
• As per Clause 8 of Part I of First Schedule to the CA Act, 1949, a chartered accountant in practice is
deemed to be guilty of professional misconduct if he accepts a position as auditor previously held
by another chartered accountant without first communicating with him in writing.
• This requirement would apply to all types of audit i.e. statutory audit, tax audit, internal audit,
concurrent audit, etc.
• It is further provided that if time schedule given for the assignment is such that there is no time to
wait for the reply from the retiring auditor, the incoming auditor may give conditional acceptance
of the appointment and can commence the work immediately after he has sent the communication
to the retiring auditor.
• In the present case, Mr. X has commenced his work and thereafter he sent the letter to the
predecessor auditor.
Conclusion: Mr. X is guilty of professional misconduct by virtue of clause 8 of Part I of First Schedule.
Q.54 Can a practicing Chartered Accountant be held guilty of professional misconduct under the following
circumstance: W, a chartered Accountant has sent letters under certificate of posting to the previous
auditor informing him his appointment as an auditor before the commencement of audit by him.
Ans.: Prior Communication with the previous auditor:
• As per Clause 8 of Part I of First Schedule to the CA Act, 1949, a chartered accountant in practice is
deemed to be guilty of professional misconduct if he accepts a position as auditor previously held
by another chartered accountant without first communicating with him in writing.
• This requirement would apply to all types of audit i.e. statutory audit, tax audit, internal audit,
concurrent audit, etc.
• It is further provided that incoming auditor is required to send his communication by Registered
post acknowledgement due or by hand against an acknowledgement in writing. Mere posting of a
letter under certificate of posting is not sufficient to establish communication.
• In the present case, Mr. W has sent letter under Certificate of posting.
Conclusion: Mr. W will be Guilty of professional misconduct by virtue of clause 8 of Part I of first
schedule in accordance with which communication need to be sent “Registered Post
Acknowledgement Due” or by “hand against a written acknowledgement”.

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Q.55 CA B, is appointed to carry out internal audit of Stock brokers, AKA Finstock Ltd., listed with NSE. CA
B started his work and submitted his first monthly report. CA Z, a partner of AZA & Co., statutory
auditors of AKA Finstock Ltd., during his first visit got to see the internal audit report of CA B. CA Z
feels that since CA B did not inform about his appointment as an internal auditor to AZA & Co., this is
violation of professional ethics. Comment with reference to the Chartered Accountants Act, 1949 and
Schedules thereto. [July 21 – Old Syllabus (4 Marks)]
Ans.: Prior Communication with the previous auditor:
• As per Clause 8 of Part I of First Schedule to the CA Act, 1949, a chartered accountant in practice is
deemed to be guilty of professional misconduct if he accepts a position as auditor previously held
by another chartered accountant without first communicating with him in writing.
• This requirement would apply to all types of audit i.e. statutory audit, tax audit, internal audit,
concurrent audit, etc.
• Further the requirement of Clause 8 is applicable in situation of replacing of one auditor by
another auditor and not in case of parallel positions.
• In the present case, CA B was appointed as Internal Auditor, he owes no duty towards statutory
auditor for prior communication.
Conclusion: There is no violation of professional ethics as Clause 8 of Part I of First schedule applies
in case of replacement positions and not in case of parallel positions.
Q.56 Vineet & Associates have been offered Statutory Audit of TLP Ltd. As a part of ethical requirements
of the Institute of Chartered Accountants, CA. V, partner of the firm, communicated with the
previous auditor enquiring as to whether any professional reason exists for which he should not
accept the audit assignment. Previous auditor informed that he issued a qualified report, so
management is changing the auditor. Comment with reference to the provisions of the Chartered
Accountants Act, 1949 and schedules thereto as to whether Vineet & Associates can accept the audit.
[July 21 – New Syllabus (4 Marks)]
Ans.: Acceptance of Audit in case of qualified report by predecessor auditor:
• As per Clause 8, Part I of First Schedule to the CA Act, 1949, a member in practice shall be deemed
to be guilty of professional misconduct if he accept a position as Auditor previously held by
another chartered accountant or certified auditor without first communicating with him in writing.
• This clause enables a member to know the reasons for the change, in order to safeguard his own
interest, public interest and to ensure independence. Professional reasons for not accepting Audit:
(i) Non-compliance of provisions of Secs. 139 and 140 of Companies Act, 2013.
(ii) Non-payment of undisputed audit fee (except sick unit). Provision for Audit fees in accounts
signed by auditor and the client shall be considered as undisputed.
(iii) Issuance of a qualified Report.
• In first two cases, acceptance of audit amounts to professional misconduct. In (iii) case, member
may accept audit if he thinks that attitude of retiring auditor wasn’t proper and justified. But if the
report was qualified for good and valid reasons, non-acceptance of audit would be a healthy
practice.
Conclusion: Based on the above discussions, Vineet & Associates can accept the audit if attitude of
retiring auditor wasn’t proper and justified. But if the report was qualified for good and valid reasons,
non-acceptance of audit would be a healthy practice.

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Q.57 Can a practicing Chartered Accountant be held guilty of professional misconduct under the following
circumstance: P, a Chartered Accountant had accepted appointment as an auditor of QRS Company
limited without ascertaining from the company whether the requirements of Secs. 139 and 140 of
the Companies Act, 2013 had been complied with. However, he realised this defect only after
acceptance.
Ans.: Non-observance of compliance of Sections 139 & 140 of Companies Act, 2013:
• As per Clause 9 of Part I of First Schedule to Chartered Accountants Act, 1949, a CA in practice
shall be deemed to be guilty of professional misconduct if he accepts an appointment as auditor of
a company, without ascertaining whether requirements of Sections 224 & 225 of Companies Act,
1956 (Sections 139 & 140 of Companies Act, 2013), in respect of such appointment have been duly
complied with.
• In the present case, P, a Chartered Accountant had accepted appointment as an auditor of QRS
Company limited without ascertaining from the company whether the requirements of Sections
139 and 140 of the Companies Act, 2013 had been complied with.
Conclusion: P will be held to be guilty of professional misconduct under clause 9 of Part I of First
Schedule to the Chartered Accountants act, 1949. Realisation of defect subsequent to acceptance of
audit is immaterial.
Q.58 Comment on the following with reference to Chartered Accountants Act, 1949 and Schedules
thereto: Mrs. X is a Director of ABC Pvt. Ltd. During the year 2021-22, the company appointed CA Mr.
Y, Mrs. X's spouse, as its statutory auditor. Mr. Y used to deliver audit report without any comments
or disclosures, thereupon.
Ans.: Auditing the F.S. of entity in which relative is a director:
• As per Clause (9) of Part I of the First Schedule to the Chartered Accountants Act, 1949, provides
that a member in practice shall be deemed to be guilty of professional misconduct if he accepts an
appointment as auditor of a company without first ascertaining from it whether the requirements
of Secs. 139 and 140 read with Sec. 141 of the Companies Act, 2013, in respect of such appointment
have been duly complied with.
• As per Sec. 141(3)(f) 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 KMP. The definition of ‘Relative’ includes husband and wife.
• In this case Mrs. X is a Director of ABC Pvt. Ltd. and the company has appointed Mr. Y, Chartered
Accountant, Mrs. X's spouse, as its statutory auditor. Mr. Y should not accept the appointment as
statutory auditor of the company, where his wife Mrs. X is a director. This is contravention of
section 141 of the Companies Act, 2013.
Conclusion: Mr. Y is guilty of professional misconduct under Clause 9 of Part I of First Schedule and
due to accepting appointment as statutory auditor of the entity in which his relative is a director.
Q.59 M/s. AWE & Co., Chartered Accountants were appointed as Auditors of WOW Ltd. for the F.Y. 2022-
23. Since they declined to accept the appointment, the Board of Directors appointed M/s GDC & Co., a
CA firm as the auditor in the place of M/s. AWE & Co. This was accepted by M/s GDC & Co. Discuss
this with reference to Chartered Accountants Act, 1949 and Companies Act, 2013.
[July 21 – Old Syllabus (4 Marks)]
Ans.: Violation of Clause 9:
• Clause (9) of Part I of the First Schedule to the Chartered Accountants Act, 1949, provides that a
member in practice shall be deemed to be guilty of professional misconduct if he accepts an

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appointment as auditor of a company without first ascertaining from it whether the requirements
of Sections 224 and 225 of the Companies Act, 1956 (now Sections 139 and 140 read with Section
141 of the Companies Act, 2013), in respect of such appointment have been duly complied with.
• Board of Directors has been given powers u/s 139(6) and u/s 139(8)(i) to appoint first auditors
and to fill casual vacancy respectively. The non-acceptance of appointment by M/s. AWE & Co.
does not constitute a casual vacancy to be filled by the Board. In this case, it will be deemed that no
auditor was appointed in the AGM.
• As per Sec. 139(10) of the Companies Act, 2013 when at any AGM, no auditor is appointed or re-
appointed, the existing auditor shall continue to be the auditor of the company. Hence, the
appointment of the auditor by the Board is not valid in law.
Conclusion: M/s GDC & Co. is guilty of professional misconduct as per clause 9 of the First Schedule
as he accepted the appointment without verification of statutory requirements.
Q.60 CA Mehta was appointed as the Auditor of CS Ltd. for the year 2022-23 in the place of retiring
auditor CA Gupta. CA Mehta accepted the appointment after obtaining a certificate from the
management that the provisions of the Sections 139 and 140 of the Companies Act, 2013 have been
complied with. Comment with reference to the Chartered Accountants Act, 1949 and schedules
thereto. [Dec. 21 – New Syllabus (4 Marks)]
Ans.: Non-observance of compliance of Sections 139 & 140 of Companies Act, 2013:
• As per Clause 9 of Part I of First Schedule to Chartered Accountants Act, 1949, a CA in practice
shall be deemed to be guilty of professional misconduct if he accepts an appointment as auditor of
a company, without ascertaining whether requirements of Sections 224 & 225 of Companies Act,
1956 (Sections 139 & 140 of Companies Act, 2013), in respect of such appointment have been duly
complied with.
• For the purpose of ascertaining whether the Company has complied with the provisions of Section
140 of the Companies Act the incoming auditor should verify the records of the Company in
respect of the following matters:
(a) Whether a member of the Company has given special notice of the resolution as required u/s
140(4) of the Companies Act, 2013. The notice shall be sent by members to the company not
earlier than 3 months but at least 14 days before the date of the meeting at which the
resolution is to be moved, exclusive of the day on which the notice is given and the day of the
meeting. A true copy of this notice should be obtained by the incoming auditor.
(b) Whether this special notice has been sent to all the members, of the Company as required u/s
115 of Companies Act, 2013 at least 7 days before the date of the General Meeting.
(c) Whether this special notice has been sent to the retiring auditor forthwith as required u/s
140(4).
(d) Whether the representation received from the retiring auditor has been sent to the members
of the Company as required u/s 140(4).
(e) Whether the representation received from the retiring auditor has been considered at the
general meeting and the resolution proposed by the special notice has been properly passed
at the general meeting.
• In the given case, CA Mehta was appointed as the Auditor of CS Ltd. for the year 2022-23 in the
place of retiring auditor CA Gupta. CA Mehta accepted the appointment after obtaining a certificate
from the management that the provisions of the Sections 139 and 140 of the Companies Act, 2013
have been complied with.

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Conclusion: Misconduct arises on part of CA Gupta as he needs to ascertain compliance of provisions
of Secs. 139 and 140 through verification of records. Obtaining a certificate in this regard from
management will not be suffice.
Q.61 Comment with reference to the CA Act, 1949 and schedules thereto: CA D, a Chartered Accountant
prepared a project report for one of his clients to obtain bank finance (long-term) of ₹ 50 lakhs from
a Commercial Bank. Consequent to the sanction of the loan by the bank CA. D raised a bill for his
services @ 2% of the loan sanctioned.
Ans.: Charging fees on % age basis:
• Clause 10 of Part I to First Schedule to the CA Act, 1949 prohibits a CA in practice to charge, or
offers to charge, accept or offers to accept in respect of any professional employment, fees which
are based on a percentage of profits or which are contingent upon the findings or results of such
employment.
• However, this restriction is not applicable where such payment is permitted by the regulations
made in this behalf. The Council of the Institute has framed regulation 192 which exempts certain
professional services from the operation of clause 10.
Conclusion: Mr. D is guilty of professional misconduct as he charges fees on a %age basis.
Note: It is assumed that Bank finance is not covered within the meaning of fund-raising service.
Alternatively, if it is presumed that bank finance is covered within the meaning of fund-raising
services, charging fees on a %age of loan sanctioned will not amount to professional misconduct.
Q.62 Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules
thereto: PQR Pvt Ltd. approached CA. Whai, a Chartered Accountant in Practice, for debt recovery
services. CA Whai accepted the work and insisted for fees to be based on 2% of the debt recovered.
Ans.: Charging Fees on Percentage Basis:
• Clause 10 of Part I of First Schedule to CA Act, 1949, prohibits a CA in practice to charge or offer
to charge, accept or offer to accept in respect of any professional work, fees which are based on a
percentage of profits or which are contingent upon the findings or result of work.
• However, this restriction is not applicable where such payment is permitted by the regulations
made in this behalf. The Council of the Institute has framed regulation 192 which exempts certain
professional services from the operation of clause 10.
• As per Regulation 192, in the case of debt recovery services, fees may be charged on a percentage
of amount of debt recovered.
Conclusion: Charging fees on a percentage of debt recovered in case of debt recovery services is
included in the exceptions stated in regulation 192, Hence CA. Whai is not guilty of any professional
misconduct.
Q.63 Comment with respect to Chartered Accountants Act, 1949: Mr. P a practicing chartered accountant
acting as liquidator of AB & Co. charged his professional fees on percentage of the realization of
assets.
Ans.: Charging Fees on Percentage Basis:
• Clause 10 of Part I of First Schedule to CA Act, 1949, prohibits a CA in practice to charge or offer to
charge, accept or offer to accept in respect of any professional work, fees which are based on a
percentage of profits or which are contingent upon the findings or result of work.
• However, this restriction is not applicable where such payment is permitted by the regulations
made in this behalf. The Council of the Institute has framed regulation 192 which exempts certain
professional services from the operation of clause 10.

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• As per Regulation 192, in case of a receiver or a liquidator, the fees may be charged on a
percentage of the realisation or disbursement of the assets.
Conclusion: No Misconduct arises on part of Mr. P under Clause 10 of Part I to First schedule as
charging fees as a percentage of realisation of assets while acting as a liquidator is permitted by
Regulation 192.
Q.64 Efficient Ltd. is running into loses and in order to optimize resource utilization and cost reduction,
approaches you to carry out the assignment and offers a fee of 5% of benefits derived from the
suggestions made by you. Comment with respect to Chartered Accountants Act, 1949 and
Regulations there to. [May 18 – Old Syllabus (4 Marks)]
Ans.: Charging Fees on Percentage Basis:
• Clause 10 of Part I of First schedule to CA Act, 1949, prohibits a CA in practice to charge or offer to
charge, accept or offer to accept in respect of any professional work, fees which are based on a
percentage of profits or which are contingent upon the findings or result of work.
• However, this restriction is not applicable where such payment is permitted by the regulations
made in this behalf. The Council of the Institute has framed regulation 192 which exempts certain
professional services from the operation of clause 10.
• As per Regulation 192, in the case of services related to cost optimization, fees may be charged on
the basis of percentage of benefit derived.
Conclusion: No Misconduct arises under Clause 10 of Part I to First schedule as charging fees as a
percentage of benefit derived while providing services related to cost optimisation is permitted by
Regulation 192.
Q.65 Mr. Joe, a practicing chartered accountant, has accepted an appointment as auditor of cooperative
society and agreed to charge fees @ 7% of the profits of the society during the financial year 2022-
23. Comment on action of Mr. Joe with reference to the Chartered Accountants Act, 1949 and
Schedules thereto. [Dec. 21 – Old Syllabus (4 Marks)]
Ans.: Charging Fees on Percentage Basis:
• Clause 10 of Part I of First Schedule to CA Act, 1949, prohibits a CA in practice to charge or offer to
charge, accept or offer to accept in respect of any professional work, fees which are based on a
percentage of profits or which are contingent upon the findings or result of work.
• However, this restriction is not applicable where such payment is permitted by the regulations
made in this behalf. The Council of the Institute has framed regulation 192 which exempts certain
professional services from the operation of clause 10.
• As per Regulation 192, in the case of an audit of a cooperative society, fees may be charged on a
percentage of the paid-up capital or the working capital or the gross or net income or profits.
Conclusion: Audit of Cooperative society is included in the exceptions stated in regulation 192, the
auditor is not guilty of any professional misconduct.
Q.66 A Chartered Accountant holding certificate of practice and having four articled clerks registered
under him accepts appointment as a full-time lecturer in a college. Also he becomes a partner with
his brother in a business. Examine his conduct in the light of Chartered Accountants Act, 1949 and
the regulations thereunder.
Ans.: Partnership with a relative and entering into business:
As per Clause 4, part I of First Schedule, a CA in Practice is deemed to be guilty of professional
Misconduct if he enters into partnership in or outside India with any person other than the following:

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• C.A. in practice, or
• Member of any other professional body having prescribed qualifications, or
• a person who but for his residence abroad would be entitled to be registered as member, or
• a person whose qualifications are recognized by CG or Council for the purpose of permitting
such partnerships.
As per Clause 11 of Part I of First Schedule to the CA Act, 1949 a member in practice is prohibited to
engage in any business or occupation other than the profession of chartered accountants unless
permitted by the Council so to engage.
In the present case, A CA in practice entered into partnership with his brother in a business. And
accepts appointment as a full-time lecturer in a college which requires prior approval from the
Council of the ICAI.
Conclusion: A CA in practice cannot engage in any business or occupation other than the profession
of Chartered Accountant unless permitted by the council so to engage. Hence the CA will be guilty
under clauses 4 & 11.
Q.67 CA. Preeti is a leading Income Tax Practitioner in Delhi. She is very much fond of cooking. Due to this
passion of her, she also wrote a cookery book “Delight your tummy” during the year. But she didn’t
take any permission from the Council of the Institute for engaging herself into authorship of such
book. Comment.
Ans.: Engagement in other occupations:
• Clause 11 of Part I of First Schedule to the CA Act, 1949 prohibits a member in practice to engage
in any business or occupation other than the profession of chartered accountants unless permitted
by the Council so to engage.
• It does not prohibit a CA from being a director of a company, except MD or a whole-time director.
But if any of the partners is interested in such company as an auditor then he cannot be director of
the said company.
• General permission is granted under Regulation 190A for authorship of any book or article.
• In the present case CA. Preeti has authored a cookery book for which no specific permission is
required.
Conclusion: Clause 11 permits authorship of any book, hence no misconduct arises on part of CA.
Preeti.
Q.68 Give your comments with reference to CA Act and schedules thereto: Mr. A, a practicing CA, took
over as the executive Chairman of a software company on 01.04.2022. On 10.04.2022 he applied to
the council for permission.
Ans.: Engagements in other occupations:
• As per Clause 11 of Part I of First Schedule of the Chartered Accountants Act, 1949, a Chartered
Accountant in practice will be deemed to be guilty of professional misconduct if he engages in any
business or occupation other than the profession of Chartered Accountant unless permitted by the
Council so to engage.
• In the instant case, Mr. A took over as the executive chairman on 01.04.2022 and applied for
permission on 10.04.2022.
• On the basis of these facts, he was engaged in other occupation between the period 01.04.2022
and 10.04.2022, without the permission of the Council.

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Conclusion: Mr. A is guilty of professional misconduct in terms of Clause 11 of Part I of First Schedule
of the Chartered Accountants Act, 1949 as he accepted the employment without obtaining permission
from Council.
Q.69 Give your comments with reference to the Chartered Accountants Act, 1949 and schedules thereto:
Mr. B is a practising Chartered Accountant holding a valid certificate of practice. He accepted the
appointment as Director of the Green WorId Co. Ltd. Mr. C, a partner of Mr. B is statutory auditor of
the said company.
Ans.: Engagement in other occupations:
• Clause 11 of Part I of First Schedule to the CA Act, 1949 prohibits a member to engage in any
business or occupation other than the profession of chartered accountants unless permitted by
the Council so to engage.
• It does not prohibit a CA from being a director of a company, except MD or a whole-time director.
But if any of the partners is interested in such company as an auditor then he cannot be director of
the said company.
• In the present case Mr. B has accepted the directorship in a Company where his partner Mr. C is an
auditor without obtaining specific permission of the council.
• As per Clause 4 of Part I of the Second Schedule to the CA Act, 1949, expressing an opinion on F.S.
of any entity in which the auditor, his firm or a partner of his firm has a substantial interest would
constitute misconduct.
• Sec. 141(3)(c) of the Companies Act, 2013 also disqualifies a person to be appointed as an auditor
if he is a partner of an officer of the company. Sec. 141(4) of the Companies Act, 2013 requires the
appointed auditor to vacate his office if he incurs any of the disqualifications mentioned under Sec.
141(3).
Conclusion: Mr. B will be held for Professional Misconduct under Clause 11 of Part I of First Schedule
to the Chartered Accountants Act, 1949.
Mr. C, a partner of Mr. B, should vacate the office as per requirement of Sec. 141(4) of Companies Act,
2013, being disqualified u/s 141(3)(c).
Q.70 Comment with respect to Chartered Accountant Act, 1949: A Chartered Accountant having COP
entered into partnership with persons, who are not the members of the institute, for the purpose of
carrying on business. The share of the chartered accountant in the profit and losses was 25%. He
was to take part in the business and was entitled to represent the firm before Govt. authorities etc.
he was operating the bank account of the firm was receiving moneys from the customers and was
also looking after the affairs of the partnership. [May 15 (4 Marks)]
Ans.: Entering into partnership with others and engagement into other occupation:
• As per Clause 4 of Part I of First Schedule a CA in Practice shall be deemed to be guilty of
professional Misconduct if he enters into partnership in or outside India with any person other
than C.A. in practice or other recognised person.
• As per Clause 11 of Part I of First Schedule of CA Act, 1949, a CA in practice shall be deemed to be
guilty of professional misconduct if he “engages in any business or occupation other than the
profession of Chartered Accountant unless permitted by the Council so to engage”.
• In the present case, A CA entered into partnership with persons who are not covered under Clause
4 for the purpose of carrying on a business activity for which specific and prior permission of
Council was required.

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Conclusion: CA shall be guilty of Professional Misconduct by virtue of clauses 4 & 11 of Part I of First
Schedule due to entering into partnership with persons other than prescribed under Clause 4 and
carrying on a business without obtaining permission from Council of ICAI.
Q.71 CA Raghu is practicing in the field of Income-tax over a period of 12 years. He has gained experience
in this domain over others.
Sam, a student of Chartered Accountancy Course is very much impressed with the knowledge of CA
Raghu. He approached CA Raghu to take guidance on some topics of Income-tax related to his
course. CA Raghu, on request decided to spare time and started providing private tutorship to Sam
and some of his friends along with. However, he forgot to take specific permission from the ICAI, for
such private tutorship.
Is CA Raghu, professionally liable for misconduct? [May 16 (4 Marks)]
Ans.: Engagement into other occupation:
• As per clause 11 of Part I of First Schedule of CA Act, 1949, a Chartered Accountant is deemed to
be guilty of professional misconduct if he “engages in any business or occupation other than the
profession of Chartered Accountant unless permitted by the Council so to engage”.
• Regulation 190A of Chartered Accountants Regulations, 1988 allowed a CA in practice to engage in
other occupations with the permission of Council. However, Council has granted general
permission to the members to engage in certain specific occupation. In respect of all other
occupations specific permission of the Institute is necessary.
• In this case CA Raghu is engaged in the occupation of private tutorship which is covered under the
general permission, hence specific permission of the Institute is not required. In order to be able
to undertake attest functions, it is to be ensured that direct teaching hours should not exceed 25 in
a week.
Conclusion: Mr. Raghu will not be liable for professional misconduct as for imparting private
tutorship no specific permission is required to be obtained from Council of ICAI as provided under
Regulations 190A.
Q.72 C.A Z, is a leading income tax practitioner and consultant for derivative products. He resides in
Mumbai near to the ABC commodity stock exchange and does trading in commodity derivatives.
Every day, he invests nearly 50% of his time settle the commodity transactions. Is CA Z liable for
professional misconduct? [RTP-May 18]
Ans.: Engagement into other occupation:
• As per clause 11 of Part I of First Schedule of CA Act, 1949, a Chartered Accountant is deemed to
be guilty of professional misconduct if he “engages in any business or occupation other than the
profession of Chartered Accountant unless permitted by the Council so to engage”.
• However, the Council has granted general permission to the members to engage in certain specific
occupation. In respect of all other occupations specific permission of the Institute is necessary.
• In this case CA Z is engaged in the occupation of trading in commodity derivatives which is not
covered under the general permission, hence specific permission of the Institute has to be
obtained.
Conclusion: If CA Z has obtained specific permission of the council, then there is no misconduct,
otherwise he will be deemed to be guilty of professional misconduct under clause 11 of Part I of First
Schedule of CA Act, 1949.

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Professional Ethics Chapter 5
Q.73 Comment on the following with reference to the Chartered Accountants Act, 1949, and Schedules
thereto: CA. Sufi is practicing since 2008 in the field of company auditing. Due to his good practical
knowledge, he was offered editorship of a ‘Company Audit’ Journal which he accepted. However, he
did not take any permission from the council regarding such editorship.
[RTP-Nov. 20, MTP-April 21]
Ans.: Engagement in other occupations:
• Clause 11 of Part I of First Schedule to the CA Act, 1949 prohibits a member in practice to engage
in any business or occupation other than the profession of chartered accountants unless permitted
by the Council so to engage.
• It does not prohibit a CA from being a director of a company, except MD or a whole-time director.
But if any of the partners is interested in such company as an auditor then he cannot be director of
the said company.
• General permission is granted under Regulation 190A for being appointed as editor of
professional journal.
• In the present case CA Sufi has accepted the appointment as editor of a “Company Audit”, which is
a professional journal.
Conclusion: Clause 11 permits editorship of professional journals, hence no misconduct arises on
part of Mr. Sufi.
Q.74 CA. AB, a practicing chartered accountant, is a promoter director of ABG Pvt. Ltd. and moreover he is
also a sleeping partner in his family business of garments manufacturing firm. Is CA. AB liable for
professional misconduct as per Chartered Accountants Act, 1949? [Jan. 21 – New Syllabus (4 Marks)]
Ans.: Engagement into other occupation:
• As per clause 11 of Part I of First Schedule of CA Act, 1949, a Chartered Accountant is deemed to
be guilty of professional misconduct if he “engages in any business or occupation other than the
profession of Chartered Accountant unless permitted by the Council so to engage”.
• There is no bar for a member to be a promoter/signatory to the Memorandum and Articles of
Association of any company. There is also no bar for such a promoter/signatory to be a Director
Simplicitor of that company irrespective of whether the object of the company include areas which
fall within the scope of the profession of chartered accounts. Therefore, members are not required
to obtain specific permission of the Council in such cases.
• However, to acquire interest in family business concerns (including such interest devolving on the
members as a result of inheritance/succession/partition of the family business) or concerns in
which interest has been acquired as a result of relationships and in the management of which no
active part is taken, prior approval from Council is required.
• In the given case, CA AB is a promoter director of ABG Pvt Ltd. and also he is a sleeping partner in
his family business of garments manufacturing firm.
Conclusion: Applying the abovementioned provisions, it can be concluded that no misconduct arises
on part of CA. AB if prior approval from council obtained as to acquiring interest in family business.
However, if prior approval from Council is not obtained to be a sleeping partner in family business he
will be considered as guilty of professional misconduct.
Q.75 M/s SS limited is a partly owned subsidiary of M/s HH limited. For the upcoming financial year, M/s
DD & Co., Chartered Accountants, were appointed as the statutory auditors of SS limited. The CEO of
the holding company was impressed with the knowledge and experience of Mr. D, one of the

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partners of the firm and hence, he offered Mr. D to take up the position of Director (not MD/ whole-
time director) of HH limited. At the same time, Mr. D’s friend approaches him with an assignment to
act as a Recovery Consultant for a bank. Mr. D is now confused whether to accept or reject the offers.
He approaches you and seeks your advice on the same. Advise what Mr. D about what he can do with
the offers with reference to the Chartered Accountants Act, 1949 and Schedules thereto.
[MTP-March 21]
Ans.: Engagements in Other Occupations:
• As per Clause (11) of Part I of First Schedule of CA Act, 1949, a member in practice is deemed to be
guilty of professional misconduct if he engages in any business or occupation other than the
profession of Chartered Accountant unless permitted by the Council so to engage.
Provided nothing contained herein shall disentitle a chartered accountant from being a director of
a company (not being MD or whole-time director) unless he or his partners is interested in such
company as auditor.
• The Ethical Standards Board (ESB) noted that public conscience is expected to be ahead of law.
Members, therefore, are expected to interpret the requirement as regards independence much
more strictly than what the law requires and should not place themselves in positions which
would either compromise or jeopardise their independence. In the view of the above, the Board,
via a clarification, decided that the auditor of a Subsidiary company cannot be a Director of its
Holding company, as it will affect the independence of the auditor.
• However, the Council has granted general permission to the members to engage in certain specific
occupation. In respect of all other occupations specific permission of the Institute is necessary.
‘acting as Recovery Consultant in the banking sector’ is covered under general permission.
• In the given situation, M/s SS limited is a partly owned subsidiary of M/s HH limited. For the
upcoming financial year, M/s DD & Co., Chartered Accountants, were appointed as the statutory
auditors of SS limited. The CEO of the holding company was impressed with the knowledge and
experience of Mr. D, one of the partners of the firm and hence, he offered Mr. D to take up the
position of Director (not MD/whole-time director) of HH limited. Further, Mr. D’s friend
approached him for an assignment for acting as a Recovery Consultant for a bank.
Conclusion: Based on the provisions as stated above, Mr. D should not accept the offer to be
appointed as director of HH Limited. However, he can accept the assignment offered by his friend and
can act as a recovery consultant for a bank.
Q.76 C.A. Ajitnath is Special Executive Magistrate. He also took over as the Executive Chairman of
Software Company on 1.4.2022. He is also a leading income tax practitioner and consultant for
derivative products. He resides in Chennai near to the ION commodity stock exchange and does
trading in commodity derivatives. Every day, he invests nearly 40% of his time to settle the
commodity transactions. He has not taken any permission for becoming Special Executive
Magistrate. However, he has got special permission of Council of ICAI for becoming Executive
Chairman. Is C.A. Ajitnath liable for professional misconduct? [RTP-May 21, MTP-Nov. 21]
Ans.: Engagements in Other Occupations:
• As per Clause (11) of Part I of First Schedule of CA Act, 1949, a member in practice is deemed to be
guilty of professional misconduct if he engages in any business or occupation other than the
profession of Chartered Accountant unless permitted by the Council so to engage.
• However, the Council has granted general permission to the members to engage in certain specific
occupation. In respect of all other occupations specific permission of the Institute is necessary.

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Professional Ethics Chapter 5
• In this case, C.A. Ajitnath is Special Executive Magistrate, engaged in the occupation of trading in
commodity derivatives and also took over as the Executive Chairman on 01.04.2022.
• In this context, it may be noted that the Special Executive Magistrate which is generally permitted
for Members of the Institute in practice, further specific permission is required for holding the
position of Executive Chairman and getting engaged in the occupation of trading in commodity
derivatives.
• In the given situation, C.A. Ajitnath is acting as Special Executive Magistrate which is generally
permitted for Members of the Institute in practice. Further, he is engaged in the occupation of
trading in commodity derivatives which is not covered under the general permission. He also took
over as the Executive Chairman for which specific permission is required. CA. Ajitnath got the
permission for the same from the Council of ICAI.
Conclusion: CA. Ajitnath is not guilty for acting as Special Executive Magistrate as it is covered under
the general permission. He is also not guilty for holding the position of Executive Chairman after
getting specific permission of the Institute.
However, he is guilty of professional misconduct under Clause (11) of Part I of First Schedule of
Chartered Accountants Act, 1949 for getting engaged in the occupation of trading in commodity
derivatives which is not covered under the general permission.
Q.77 Sanyam, a chartered accountant in practice is owner of three agriculture lands. He lost his father
due to Covid Pandemic. After death of his father, he started carrying out agricultural activities. His
neighbour Raja who is a farmer, filed a complaint against him to ICAI that being a member he is
carrying out agricultural activities, therefore, he is liable for misconduct. You are required to
examine the same with reference to the Chartered Accountants Act, 1949 and Schedules thereto.
[MTP-April 22]
Ans.: Engaging into Agricultural Activity:
• As per Clause (11) of Part I of First Schedule of Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he engages in any
business or occupation other than the profession of Chartered Accountant unless permitted by the
Council so to engage.
• However, the Council has granted general permission to the members to engage in certain specific
occupation. In respect of all other occupations specific permission of the Institute is necessary.
• In this case, CA Sanyam is owner of 3 agriculture lands, and he is carrying out agricultural
activities which is covered under the general permission.
Conclusion: CA Sanyam is not guilty of professional misconduct and complain of neighbour is not
justified.
Q.78 Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto: S, a practicing chartered accountant gives power of attorney to an employee chartered
accountant to sign reports and financial statements, on his behalf.
Ans.: Delegation of Certification work:
• As per clause 12 of Part I of the First Schedule of the Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct “if he allows a person not
being a member of the Institute in practice or a member not being his partner to sign on his behalf
or on behalf of his firm, any balance sheet, profit and loss account, report or financial statements”.

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• This clause should be read in conjunction with Section 26 of Chartered Accountants Act, 1949
which stipulates that no person other than a member of the Institute shall sign any document on
behalf of a chartered accountant in practice or a firm of such chartered accountants in his or its
professional capacity.
• In this case CA ‘S’ gives power of attorney to an employee to sign reports and financial statements
on his behalf, which is not permitted as such.
Conclusion: S is guilty of professional misconduct under clause 12 of Part I of First Schedule.
Q.79 Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto:
CA Smart, a practicing Chartered Accountant was on Europe tour between 15-9-22 and 25-9-22. On
18-9-22 a message was received from one of his clients requesting for a stock certificate to be
produced to the bank on or before 20-9-22. Due to urgency, CA Smart directed his assistant, who is
also a Chartered Accountant to sign and issue the stock certificate after due verification, on his
behalf.
Ans.: Signing of Stock Certificate:
• As per clause 12 of Part I of the First Schedule of the CA Act, 1949, a CA in practice is deemed to be
guilty of professional misconduct “if he allows a person not being a member of the Institute in
practice or a member not being his partner to sign on his behalf or on behalf of his firm, any
balance sheet, profit and loss account, report or financial statements”.
• In this case CA Smart allowed his assistant who is not a partner but a member of the ICAI to sign
stock certificate on his behalf and thereby commits misconduct.
Conclusion: CA Smart is guilty of professional misconduct under clause 12 of Part I of First Schedule
of the CA Act, 1949.
Q.80 Mr. 'A' is a practicing Chartered Accountant working as proprietor of M/s A & Co. He went abroad for
3 months. He delegated the authority to Mr. 'Y' a Chartered Accountant his employee for taking care
of routine matters of his office. During his absence Mr. 'Y' has conducted the under mentioned jobs
in the name of M/s A & Co.
(i) He issued the audit queries to client which were raised during the course of audit.
(ii) He issued production certificate to a client under GST Laws.
(iii) He attended the Income Tax proceedings for a client as authorized representative before
Income Tax Authorities.
Please comment on eligibility of Mr. 'Y' for conducting such jobs in name of M/s A & Co. and liability
of Mr. 'A' under the Chartered Accountants Act, 1949. [MTP-April 18, RTP-Nov. 19]
Ans.: Delegation of Certification work:
• As per clause 12 of Part I of the First Schedule of the Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct “if he allows a person not
being a member of the Institute in practice or a member not being his partner to sign on his behalf
or on behalf of his firm, any balance sheet, profit and loss account, report or financial statements”.
• In this case CA ‘A’ proprietor of M/s A & Co., went to abroad and delegated the authority to
another Chartered Accountant Mr. Y, his employee, for taking care of routine matters of his office
who is not a partner but a member of the Institute of Chartered Accountants.
• The Council has clarified that the power to sign routine documents on which a professional
opinion or authentication is not required to be expressed, may be delegated and such delegation
will not attract provisions of clause 12. Examples of such instances are issue of audit queries,
asking for information or issue of questionnaire, attending to routine matters in tax practice etc.

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Conclusion:
(i) Issuing audit queries during the course of audit falls under routine work, which can be delegated
by the auditor. Therefore, there is no misconduct in this case.
(ii) Issuance of production certificate to a client under GST Laws by Mr. “Y” is not a routine work and
it is outside his authorities. Thus, CA ‘A’ is guilty of professional misconduct under clause 12 of
Part I of First Schedule of the Chartered Accountants Act, 1949.
(iii) Attending Income tax proceedings for a client as authorized representative before Income Tax
Authorities falls under routine work, hence Mr. Y, the employee of M/s A & Co. can attend to
routine matter in tax practice. Therefore, there is no misconduct in this case.
Q.81 Mr. ‘K’, a practicing Chartered Accountant is the proprietor of M/s K & Co. since 1995. He went
abroad in the month of December 2020. He delegated the authority to Mr. ‘Y’ a Chartered
Accountant, his employee for taking care of the important matters of his office.
During his absence Mr. ‘Y’ has conducted the under mentioned jobs in the name of M/s K & Co.
(i) He issued Net worth certificate to a client for furnishing to a Bank.
(ii) He attended the GST proceedings for a client as authorized representative before GST
Authorities.
Please comment on eligibility of Mr. ‘Y’ for conducting such jobs in name of M/s K & Co. and liability
of Mr. ‘K’ under the Chartered Accountants Act, 1949. [Nov. 19 – New Syllabus (5 Marks)]
Ans.: Delegation of Certification work:
• As per clause 12 of Part I of the First Schedule of the Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct “if he allows a person not
being a member of the Institute in practice or a member not being his partner to sign on his behalf
or on behalf of his firm, any balance sheet, profit and loss account, report or financial statements”.
• In this case CA ‘K’ proprietor of M/s K & Co., went abroad and delegated the authority to another
Chartered Accountant Mr. Y, his employee, for taking care of routine matters of his office.
• The Council has clarified that the power to sign routine documents on which a professional
opinion or authentication is not required to be expressed, may be delegated and such delegation
will not attract provisions of clause 12. Examples of such instances are issue of audit queries,
asking for information or issue of questionnaire, attending to routing matters in tax practice etc.
Conclusion:
(i) Issuance of Net Worth Certificate to a client for furnishing to Bank by Mr. “Y” is not a routine
work and it is outside his authorities. Thus, CA ‘K’ is guilty of professional misconduct under
clause 12 of Part I of First Schedule of the Chartered Accountants Act, 1949.
(ii) Attending GST proceedings for a client as authorized representative before GST Authorities falls
under routine work, hence Mr. Y, the employee of M/s K & Co. can attend to routine matter in tax
practice. Therefore, there is no misconduct in this case.
Q.82 CA. Sambhav, the auditor of Mahvir Pvt. Ltd. has delegated following works to his articles and staff:
• Raising of bills and issuing acknowledgements for money receipts.
• Initiating and stamping of vouchers and of schedules prepared for the purpose of audit.
• Issuing acknowledgements for records produced.
• Signing financial statements of the company.
Is this correct as per the Professional Ethics and ICAI’s guidelines and pronouncements?
[RTP-May 21]

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Ans.: Delegation of Certification work:
• As per Clause 12 of Part I of the First Schedule of the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he allows a
person not being a member of the institute in practice or a member not being his partner to sign
on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or financial
statements.
• The Council has clarified that the power to sign routine documents on which a professional
opinion or authentication is not required to be expressed may be delegated in the following
instances and such delegation will not attract provisions of this clause:
(i) Issue of audit queries during the course of audit.
(ii) Asking for information or issue of questionnaire.
(iii) Letter forwarding draft observations/financial statements.
(iv) Initiating and stamping of vouchers and of schedules prepared for the purpose of audit.
(v) Acknowledging and carrying on routine correspondence with clients.
(vi) Issue of memorandum of cash verification and other physical verification or recording the
results thereof in the books of the clients.
(vii) Issuing acknowledgements for records produced.
(viii) Raising of bills and issuing acknowledgements for money receipts.
(ix) Attending to routine matters in tax practice, subject to provisions of Section 288 of Income-
tax Act.
(x) Any other matter incidental to the office administration and routine work involved in
practice of accountancy.
• In the instant case, CA. Sambhav, the auditor of Mahvir Pvt. Ltd. has delegated certain task to his
articles and staff such as raising of bills and issuing acknowledgements for money receipts,
initiating and stamping of vouchers and of schedules prepared for the purpose of audit and issuing
acknowledgements for records produced and signing financial statements of the company.
• Therefore, CA. Sambhav is correct in allowing first three tasks i.e., raising of bills and issuing
acknowledgements for money receipts, initiating and stamping of vouchers and of schedules
prepared for the purpose of audit.
• However, if the person signing the financial statements on his behalf is not a member of the
institute in practice or a member not being his partner to sign on his behalf or on behalf of his
firm, CA. Sambhav is not right in delegating signing of financial statements to his staff.
Conclusion: In view of this, CA. Sambhav would be guilty of professional misconduct for allowing the
person signing the financial statements on his behalf to his articles and staff under Clause 12 of Part 1
of First Schedule of the Chartered Accountants Act, 1949.
Q.83 Mr. S, the auditor of ABC Pvt. Ltd. has delegated following works to his articles and staff:
(i) Issue of audit queries during the course of audit.
(ii) Issue of memorandum of cash verification and other physical verification.
(iii) Letter forwarding draft observations/financial statements.
(iv) Issuing acknowledgements for records produced.
(v) Signing financial statements of the company.
Is this correct as per the Professional Ethics and ICAI’s guidelines and pronouncements?
[MTP-Nov. 21]

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Ans.: Delegation of Certification work:
• As per Clause (12) of Part I of the First Schedule of the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he allows a
person not being a member of the institute in practice or a member not being his partner to sign
on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or financial
statements.
• The Council has clarified that the power to sign routine documents on which a professional
opinion or authentication is not required to be expressed may be delegated in the following
instances and such delegation will not attract provisions of this clause:
(i) Issue of audit queries during the course of audit.
(ii) Asking for information or issue of questionnaire.
(iii) Letter forwarding draft observations/financial statements.
(iv) Initiating and stamping of vouchers and of schedules prepared for the purpose of audit.
(v) Acknowledging and carrying on routine correspondence with clients.
(vi) Issue of memorandum of cash verification and other physical verification or recording the
results thereof in the books of the clients.
(vii) Issuing acknowledgements for records produced.
(viii) Raising of bills and issuing acknowledgements for money receipts.
(ix) Attending to routine matters in tax practice, subject to provisions of Section 288 of
Income-tax Act.
(x) Any other matter incidental to the office administration and routine work involved in
practice of accountancy.
• In the instant case, Mr. S, the auditor of ABC Pvt. Ltd. has delegated certain task to his articles and
staff such as issue of audit queries during the course of audit, issue of memorandum of cash
verification and other physical verification, letter forwarding draft observations/financial
statements, issuing acknowledgements for records produced and signing financial statements of
the company.
• Mr. S is correct in allowing first four tasks i.e. issue of audit queries during the course of audit,
issue of memorandum of cash verification and other physical verification, letter forwarding draft
observations/financial statements, issuing acknowledgements for records produced to his staff
and articles.
• However, if the person signing the financial statements on his behalf is not a member of the
institute in practice or a member not being his partner to sign on his behalf or on behalf of his
firm, Mr. S is wrong in delegating signing of financial statements to his staff.
Conclusion: In view of this, S would be guilty of professional misconduct for allowing the person
signing the financial statements on his behalf to his articles and staff under Clause 12 of Part 1 of First
Schedule of the Chartered Accountants Act, 1949.

5.4 - First Schedule, Part II–Professional Misconduct in relation to Members in Service

Q.84 Give your comments with reference to Chartered Accountants Act, 1949 and Schedules thereto: Mr.
'C', a Chartered Accountant holds a certificate of practice while in employment also, recommends a
particular lawyer to his employer in respect of a case. The lawyer, out of the professional fee
received from employer paid a particular sum as referral fee to Mr. 'C'.

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Ans.: Referral Fee from Lawyer:
• As per Clause 2 of Part II of First Schedule of the Chartered Accountant Act, 1949, a member of the
Institute (other than a member in practice) shall be guilty of professional misconduct, if he being
an employee of any company, firm or person accepts or agrees to accept any part of fee, profits or
gains from a lawyer, a chartered accountant or broker engaged by such company, firm or person
or agent or customer of such company, firm or person by way of commission or gratification.
• In the present case, Mr. C who besides holding a certificate of practice, is also an employee and by
referring a lawyer to the company in respect of a case, he receives a particular sum as referral fee
from the lawyer out of his professional fee.
Conclusion: Mr. C is guilty of professional misconduct by virtue of clause 2 of Part II of First schedule
for accepting referral fees from the lawyer of his employer.
Q.85 Mr. ‘C’, a Chartered Accountant employed as Senior executive in charge of Tax in a company, and not
holding certificate of practice recommends a particular lawyer to his employer in respect of a case.
The lawyer, out of the professional fee received from the employer of Mr. ‘C’ paid a particular sum as
referral fee to Mr. ‘C’. Comment with reference to the Chartered Accountants Act, 1949 and
schedules thereto. [Nov. 19 – New Syllabus (5 Marks)]
Or
C, a member of the Institute of Chartered Accountants of India, not holding certificate of practice, is
employed with a firm of Chartered Accountants. He recommends a particular lawyer to his firm for
some client related litigation being handled by the firm. The lawyer, out of the professional fee
received by him from the said client, paid a certain sum as referral fee to C. Is A guilty of misconduct
under the Chartered Accountants’ Act, 1949? [Nov. 19 – Old Syllabus (4 Marks)]
Ans.: Referral Fee from Lawyer:
• As per Clause 2 of Part II of First Schedule of the Chartered Accountants Act, 1949, a member of
the Institute (other than a member in practice) shall be guilty of professional misconduct, if he
being an employee of any company, firm or person accepts or agrees to accept any part of fee,
profits or gains from a lawyer, a chartered accountant or broker engaged by such company, firm or
person or agent or customer of such company, firm or person by way of commission or
gratification.
• In the present case, Mr. C, a Chartered Accountant is working in capacity of an employee and by
referring a lawyer to the employer in respect of a case, he receives a particular sum as referral fee
from the lawyer out of his professional fee.
Conclusion: Mr. C is guilty of professional misconduct by virtue of clause 2 of Part II of First schedule
for accepting referral fees from the lawyer of his employer.

5.5 - First Schedule, Part III – Professional Misconduct in Relation to Members Generally
Q.86 Give your comments with reference to Chartered Accountants Act, 1949 and Schedules there to: Mr.
'G', while applying for a certificate of practice, did not fill in the columns which solicit information
about his engagement in other occupation or business, while he was indeed engaged in a business.
Ans.: Disclosure of Information:
• As per Clause 2 of Part III of First Schedule to the Chartered Accountants Act, 1949 a member
shall be held guilty if a Chartered Accountant, in practice or not, does not supply the information

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called for, or does not comply with the requirements asked for, by the Institute, Council or any of
its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review
Board or the Appellate Authority;
• In the given case, Mr. “G”, a Chartered Accountant while applying for a certificate of practice, did
not fill in the columns which solicit information about his engagement in other occupation or
business, while he was indeed engaged in a business.
• Details of engagement in business need to be disclosed while applying for the certificate of
practice as it was the information called for in the application, by the Institute.
Conclusion: Mr. G will be held guilty for professional misconduct under the clause 2 of Part III of First
Schedule for not providing the information to the Institute.
Q.87 XYZ Associates, a Chartered Accountants Firm is having a relationship with a multi-national
accounting firm in India. The ICAI required that all firms having networking relationship with any
other entity need to furnish information online within the stipulated time. XYZ Associated failed to
respond. Comment on this with reference to professional misconduct, if any.
[Nov. 18-New Syllabus (4 Marks)]
Ans.: Failed to supply information called for:
• Clause 2 of Part III of the First Schedule to the Chartered Accountants Act, 1949, a member,
whether in practice or not, will be deemed to be guilty of professional misconduct if he does not
supply the information called for, or does not comply with the requirements asked for, by the
Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary
Committee, Quality Review Board or the Appellate authority.
• In the given case, XYZ Associates, a Chartered Accountants Firm is having a relationship with a
multi-national accounting firm in India. The ICAI required that all firms having networking
relationship with any other entity need to furnish information online within the stipulated time.
XYZ Associated failed to respond.
Conclusion: XYZ Associates will be deemed to be guilty of professional misconduct as per Clause 2 of
Part III of the First Schedule to the Chartered Accountants Act, 1949.
Q.88 Mr. Shanti, a Chartered Accountant, employed as a paid Assistant with a Chartered Accountant firm,
leaves the services of the firm on 31st December, 2021. Despite many reminders from ICAI he fails
to reply regarding the date of leaving the services of the firm. Comment with reference to the
Chartered Accountants Act, 1949, and Schedules thereto. [MTP-March 22]
Ans.: Failed to supply information called for:
• Clause 2 of Part III of the First Schedule to the Chartered Accountants Act, 1949, a member,
whether in practice or not, will be deemed to be guilty of professional misconduct if he does not
supply the information called for, or does not comply with the requirements asked for, by the
Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary
Committee, Quality Review Board or the Appellate authority.
• In the given case, Mr. Shanti has failed to reply to the letters of the Institute asking him to confirm
the date of leaving the service as a paid assistant.
Conclusion: Mr. Shanti is held guilty of professional misconduct as per Clause 2 of Part III of the First
Schedule to the Chartered Accountants Act, 1949.

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5.6 - First Schedule, Part IV - Other Misconduct in relation to Members Generally
Q.89 Comment on the following: Mr. P, a Chartered Accountant in practice approached Manager of a
Nationalised Bank for a loan of ₹ 25 lakhs. He has also informed the Manager that if the loan is
sanctioned, the Income Tax return of the Manager and staff will be filed without charging any fees,
as quid Pro quo for the loan sanctioned.
Ans.: Coercive Method for Sanction of Loan:
• Clause 2 of Part IV of First Schedule to the Chartered Accountants Act, 1949 states that member
of the Institute, whether in practice or not, shall be deemed guilty of other misconduct, if he in
the opinion of the Council, brings disrepute to the profession or to the Institute as a result of his
action whether or not related to his professional work.
• Accordingly, a Chartered Accountant is also expected to maintain the highest standards and
integrity even in his personal affairs and any deviation from these standards calls for
disciplinary action.
• In the present case, the action of Mr. P, a Chartered Accountant in practice offering free service
in return to sanction of loan brings disrepute to the profession of a Chartered Accountant.
Conclusion: Mr. P will be held guilty of other misconduct under Clause 2 of Part IV of the First
Schedule of the Chartered Accountants Act, 1949.
Q.90 Give your comments with reference to Chartered Accountants Act, 1949 and schedules thereto: Mr.
A, a practicing Chartered Accountant, failed to return the books of account and other documents of
a client despite many reminders from the client. The client had settled his entries fees dues also.
Ans.: Non-return of Client’s Books:
• As per Part IV of the First Schedule to the Chartered Accountants Act, a member of the Institute,
whether in practice or not, shall be deemed to be guilty of other misconduct, if he
(1) is held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term not exceeding six months;
(2) in the opinion of the Council, brings disrepute to the profession or the Institute as a result
of his action whether or not related to his professional work.
• A member may be found guilty of “Other Misconduct”, as per clause 2, if he retains the books of
account and documents of the client and fails to return these to the client on request without a
reasonable cause.
• In the given case, Mr. A failed to return the books of account and other documents of his client
without any reasonable cause.
Conclusion: Mr. A would be guilty of Other Misconduct under Part IV of First Schedule and liable to
disciplinary action under Section 21.
Q.91 A Chartered Accountant is liable for disciplinary action under section 21 of CA Act, 1949, if he is
found guilty of any professional or other misconduct.
Explain the meaning of other misconduct with the help of two illustrative example.
[Nov. 16 (4 Marks)]
Ans.: Other Misconduct:
As per Part IV of First Schedule to Chartered Accountants Act, 1949, a member of the Institute,
whether in practice or not, shall be deemed to be guilty of other misconduct, if he

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1. is held guilty of any civil or criminal court for an offence which is punishable with imprisonment
for a term not exceeding six months.
2. in the opinion of the Council brings disrepute to the profession or the Institute as a result of his
action whether or not related to his professional work.
As per Part III of Second Schedule to Chartered Accountants Act, 1949, a member of the Institute,
whether in practice or not, shall be deemed to be guilty of other misconduct, if he is held guilty of
any civil or criminal court for an offence which is punishable with imprisonment for a term
exceeding six months.
Some illustrative examples, where a member may be found guilty of “Other Misconduct”, under the
aforesaid provisions rendering, himself unfit to be member are:
(i) Where a chartered accountant retains the books of account and documents of the client and
fails to return these to the client on request without a reasonable cause.
(ii) Where a chartered accountant makes a material misrepresentation.
(iii) Where a chartered accountant uses the services of his articled or audit clerk for purposes
other than professional practice.
(iv) Misappropriation by office-bearer of a Regional Council of the Institute, of a large amount and
utilisation thereof for his personal use.
(v) Non-replying within a reasonable time and without a good cause to the letter of the public
authorities.
(vi) Where a chartered accountant had adopted coercive methods on a bank for having a loan
sanctioned to him.
Q.92 CA D, a chartered accountant in practice availed of a loan against his personal investments from a
bank. He issued 2 cheques towards repayment of the said loan as per the instalments due.
However, both the cheques were returned back by the bank with the remarks “Insufficient funds”.
Comment with reference to the Chartered Accountants Act, 1949. [Nov. 17 (4 Marks)]
Ans.: Bringing disrepute to the profession:
• As per Clause 2 of Part IV of First Schedule to the Chartered Accountants Act, 1949, a member of
the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if in
the opinion of the council, that member brings disrepute to the profession or the Institute, as a
result of his action, whether or not related to his professional work.
• Accordingly, a Chartered Accountant is also expected to maintain the highest standards and
integrity even in his personal affairs and any deviation from these standards calls for disciplinary
action.
• In the present case, two cheques were dishonoured and returned back with the remarks
“Insufficient Funds”. Issuing cheques without having sufficient balance in the account is
punishable offence under the Negotiable Instruments Act, 1881.
Conclusion: As the cheques were dishonoured due to insufficiency of funds, the drawer will be held
guilty of offence under Negotiable Instruments Act, 1881 and consequently he would be held guilty
of “Other Misconduct”.
Q.93 Give your comments with reference to the Chartered Accountants Act, 1949 and schedules thereto:
YKS & Co., a proprietary firm of Chartered Accountants was appointed as concurrent auditor of a
bank. YKS used his influence for getting some cheques purchased and thereafter failed to repay the
loan/overdraft. [MTP-March 19]

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Ans.: Bringing disrepute to profession:
• Clause 2 of Part IV of First Schedule to the Chartered Accountants Act, 1949 states that member
of the Institute, whether in practice or not, shall be deemed guilty of other misconduct, if he in
the opinion of the Council, brings disrepute to the profession or to the Institute as a result of his
action whether or not related to his professional work.
• Accordingly, a Chartered Accountant is also expected to maintain the highest standards and
integrity even in his personal affairs and any deviation from these standards calls for
disciplinary action.
• In the present case YKS & Co, being a concurrent auditor used his position to obtain the funds
and failed to repay the same to the bank. This brings disrepute to the profession of a Chartered
Accountant.
Conclusion: YKS & Co will be held guilty of other misconduct under clause 2 of Part IV of First
Schedule of the Chartered Accountants Act, 1949.
Q.94 Discuss the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto: Mr. R, a Chartered Accountant in practice has been elected as the treasurer of a Regional
Council of the Institute. The Regional Council had organized an international tour through a tour
operator during the year for its members. During the audit of the Regional Council, it was found
that Mr. R had received a personal benefit of ₹ 50,000 from the tour operator.
[MTP-Oct. 20, March 23]
Ans.: Bringing disrepute to profession:
• Section 21 of the Chartered Accountants Act, 1949 provides that a member is liable for
disciplinary action if he is guilty of any professional or “Other Misconduct.” Other misconduct
has been defined in Part IV of the First Schedule and Part III of the Second Schedule.
• These provisions empower the Council to inquire into any misconduct of a member even it
does not arise out of his professional work. This is considered necessary because a chartered
accountant is expected to maintain the highest standards of integrity even in his personal
affairs and any deviation from these standards, even in his non-professional work, would
expose him to disciplinary action.
• The Council has also laid down that among other things “misappropriation by an office-bearer
of a Regional Council of the Institute of a large amount and utilization thereof for his personal
use” would amount to “other misconduct”.
• In the instant case, receipt of personal benefit of ₹ 50,000 from the tour operator by Mr. R for
organising an international tour as treasurer of a Regional Council of the Institute would
amount to other misconduct as per section 21.
Conclusion: Mr. R would be held guilty for other misconduct.
Q.95 Ms. Preeto, a CA, had an account with a bank. The normal balance in this account remained at a
level below ₹ 5,000. The bank inadvertently credited this account with a cheque of ₹ 2,70,000
belonging to another account holder. When CA. Preeto came to know about this she withdrew the
amount of ₹ 2,75,000 and closed the bank account. After 1 year the bank noticed the mistake and
claimed ₹ 2,75,000 with interest. CA. Preeto contested this claim. Can the bank approach the
Institute of Chartered Accountants of India for disciplinary action against CA. Preeto?
[RTP-Nov. 20]

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Ans.: Bringing disrepute to the Profession:
• As per Clause 2 of Part IV of First Schedule of the Chartered Accountants Act, 1949, a Chartered
Accountant will be deemed to be guilty of other misconduct if he in the opinion of the Council
brings disrepute to the profession or the Institute as a result of his action whether or not related
to his professional work.
• In the instant case, CA. Preeto, a CA, had an account with a bank from which she withdrew the
amount of ₹ 2,75,000 and closed the account. This amount of ₹ 2,75,000 was pertaining to
₹ 5,000 minimum balance and ₹ 2,70,000 belonging to other account holder and inadvertently
credited to his account by the bank.
• The said act of CA. Preeto to withdraw the money which does not belongs to her will bring
disrepute to the profession.
Conclusion: Bank can file a suitable complaint under Clause 2 of Part IV of First Schedule of the
Chartered Accountants Act, 1949 with the Institute of Chartered Accountants of India for a case of
“Other Misconduct”.
Q.96 P, a Chartered Accountant availed a loan against his securities held as investments from a
nationalised bank. He issued 2 cheques towards repayment of the said loan. Both the cheques were
returned unpaid by the bank with the remark “Refer to Drawer”. Comment with reference to the
Chartered Accountants Act, 1949 as amended by the Chartered Accountants (Amendment) Act,
2006 and schedules thereto. [Jan. 21 – Old Syllabus (4 Marks)]
Ans.: Bringing disrepute to the profession:
• As per Clause 2 of Part IV of First Schedule to the Chartered Accountants Act, 1949, a member of
the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if in
the opinion of the council, that member brings disrepute to the profession or the Institute, as a
result of his action, whether or not related to his professional work.
• Accordingly, a Chartered Accountant is also expected to maintain the highest standards and
integrity even in his personal affairs and any deviation from these standards calls for
disciplinary action.
• Under Negotiable Instruments Act, 1881, where any cheque drawn by a person for the discharge
of any liability is returned by the bank unpaid, either for insufficiency of funds or the cheque
amount exceeds the arrangements made by the drawer of the cheque, the drawer of such cheque
shall be deemed to have committed an offence.
• In the present case, P, a Chartered Accountant availed a loan against his securities held as
investments from a nationalised bank. He issued 2 cheques towards repayment of the said loan.
Both the cheques were returned unpaid by the bank with the remark “Refer to Drawer”.
Conclusion: As the cheque was dishonoured with the remark “refer to drawer”, such dishonour
need not necessarily be only due to insufficiency of funds. If it is proved that the cheques were
dishonoured due to insufficiency of funds, the CA would be held guilty of “other misconduct”.
Q.97 Mr. P, a practicing Chartered Accountant did not reply within a reasonable time and without any
cause to the letter received from the local Police Station, a public authority, soliciting his
suggestions as regards some non-professional work. Comment with reference to Chartered
Accountant Act, 1949. [Jan. 21 – Old Syllabus (4 Marks)]
Ans.: Other Misconduct:
• As per Part IV of First Schedule to Chartered Accountants Act, 1949, a member of the Institute,
whether in practice or not, shall be deemed to be guilty of other misconduct, if he

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(1) is held guilty of any civil or criminal court for an offence which is punishable with
imprisonment for a term not exceeding six months.
(2) In the opinion of the Council brings disrepute to the profession or the Institute as a result of
his action whether or not related to his professional work.
• One of the situations, where a member may be found guilty of “Other Misconduct”, under the
aforesaid provisions rendering, himself unfit to be member is non-replying within a reasonable
time and without a good cause to the letter of the public authorities.
• In the present case, Mr. P, a practicing Chartered Accountant did not reply within a reasonable
time and without any cause to the letter received from the local Police Station, a public authority,
soliciting his suggestions as regards some non-professional work.
Conclusion: Mr. P will be deemed to be guilty of other misconduct.
Q.98 Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto: CA Kumar who is contesting Central Council Elections of Institute, engages his Articled
Assistant for his election campaigning promising him that he will come in contact with influential
people which will help to enhance his career after completion of his training period. [RTP-May 22]
Ans.: Engaging Articled Assistance for personal work:
• As per Part IV of the First Schedule to the Chartered Accountants Act, a member of the Institute,
whether in practice or not, shall be deemed to be guilty of other misconduct, if he
(1) is held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term not exceeding six months;
(2) in the opinion of the Council, brings disrepute to the profession or the Institute as a result
of his action whether or not related to his professional work.
• A member may be found guilty of “Other Misconduct”, as per clause 2, if he uses the services of
articles for personal work.
• In the given case, CA Kumar who is contesting Central Council Elections of Institute, engages his
Articled Assistant for his election campaigning promising him that he will come in contact with
influential people which will help to enhance his career after completion of his training period.
Conclusion: CA. Kumar would be guilty of Other Misconduct under Part IV of First Schedule and
liable to disciplinary action under Section 21.

5.7 - Second Schedule, Part I “Professional Misconduct in relation to Members in Practice”

Q.99 Give your comments with reference to Chartered Accountants Act, 1949 and schedules thereto: Mr.
C, a practicing Chartered Accountant, in the course of the audit of a listed company discovered
serious violations of the provisions of the Companies Act, 2013, informed the registrar of
companies out of public interest.
Ans.: Disclosure of Confidential Information:
• As per Clause 1 of Part I of the Second Schedule to the Chartered Accountants Act, 1949 a member
in practice will be guilty of professional misconduct if he discloses information acquired in the
course of his professional engagement to any person other than his client so engaging him without
the consent of his client or otherwise than as required by any law for the time being in force.
• Further, Sec. 143(12) of Companies Act, 2013 requires that if an auditor of a company, in the
course of the performance of his duties as auditor, has reason to believe that an offence involving
fraud is being or has been committed against the company by officers or employees of the

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company, he shall immediately report the matter to the Central Government within 60 days of his
knowledge and after following the prescribed procedure.
• In the given case, Mr. C has disclosed serious violations of the provisions of the Companies Act,
2013 to Registrar of Companies without the consent of the client under the impression that it
would be in public interest. It is not clear from the questions whether the violations of provisions
involve fraud being committed by officers or employees of the company.
• Hence, in the present case, instead of disclosing the violations to the RoC directly, auditor should
mention the violations in his report in due compliance of SA 250 “Consideration of Laws and
regulations in an audit of financial statements”.
Conclusion: Mr. C will be guilty of professional misconduct covered by clause 1 of Part I of Second
Schedule to the Chartered Accountants Act, 1949.
Q.100 Mr. B, a chartered accountant in practice was invited to deliver a seminar on GST which was
attended by professionals as well as by representatives of various industry to which it pertains. Mr.
B enthusiastically explained the issue and elaborated how he actually solved this for his client
facing the same issue with worked out examples from the computer storage device using the actual
data of one of his clients with full identification of client details being displayed to the group for the
sake giving clarity on a topic in a real life situation. Comment his acts in the light of code of conduct.
[May 18 – New Syllabus (4 Marks), MTP-April 22]
Ans.: Disclosure of Client’s Information:
• Clause 1 of Part I of the Second Schedule to the CA Act, 1949 deals with the professional
misconduct relating to the disclosure of information by a CA in practice relating to the business
of his clients to any person other than his client without the consent of his client or otherwise
than as required by any law for the time being in force would amount to breach of confidence.
• The Code of Ethics further clarifies that such a duty continues even after completion of the
assignment. The CA may, however, disclose the information in case it is required as a part of
performance of his professional duties.
• In the given case, Mr. B has disclosed vital information of his client’s business without the
consent of the client under the impression that it will help the nation to compete with other
countries at international level.
Conclusion: Disclosing the client’s information without obtaining consent of client amounts to
professional misconduct under clause 1 of Part I of Second Schedule to the CA Act, 1949.
Q.101 Tiger Ltd. has applied to a bank for loan facilities. The bank on studying the financial statements of
the company notices some discrepancies in the books of the company. Upon discussion with the
auditor of the company, the bank manager requested for detailed information regarding a few
items in the financial statements. The information is available in the working paper file of the
auditor. What should be the response of the auditor in this regard?
[Nov. 20 – Old Syllabus (5 Marks)]
Ans.: Divulging information obtained in the course of audit:
• As per Clause (1) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, a
chartered accountant in practice shall be deemed to be guilty of professional misconduct if he
discloses information acquired in the course of his professional engagement to any person other
than his client, without the consent of the client or otherwise than as required by law for the
time being in force.

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• SA 200 on “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing" requires that the auditor should respect confidentiality
of information acquired in the course of his work and should not disclose any such information
to a third party without specific authority or unless there is a legal or professional duty to
disclose.
• In the instant case, Tiger Ltd. has applied to a bank for loan facilities and the bank has asked the
auditor for detailed information regarding few items in the financial statements available in his
working papers. Having regard to the position stated earlier, the auditor cannot disclose the
information in his possession without specific permission of the client.
• As far as working papers are concerned, working papers are the property of the auditor. The
auditor may at his discretion, make portions of or extracts from his working papers available to
his client.
Conclusion: There is no requirement compelling the auditor to divulge information obtained in the
course of audit and included in the working papers to any outside agency except as and when
required by any law or permitted by the client.

Q. SR and Associates are the statutory auditor of ABC Ltd. Audit of the company is pending for F.Y
101A 2021-22 and 2022-23 due to a dispute between auditor and company with respect to certain
proposed remarks by the auditor in the audit report for F.Y. 2021-22. The company removed the
auditor on 02.05.2023 in shareholders meeting complying with all legal formalities. SR and
Associates after coming to know about the removal, intimated the Registrar of Companies (ROC)
through letter highlighting the points of dispute including non- existence of fixed assets, bogus
creditors etc. ABC Ltd complained to ICAI against SR and Associates for their above letter to ROC.
Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto.
[May 23 (5 Marks)]

Ans.: Disclosure of Information to third Party:

• Clause (1) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 states that a
chartered accountant in practice shall be deemed to be guilty of professional misconduct if he
discloses information acquired in the course of his professional engagement to any person other
than his client, without the consent of the client or otherwise than as required by law for the time
being in force.
• An accountant in public practice has access to a great deal of information of his client, which is of a
highly confidential character. It is important for the work of an accountant and for maintaining the
dignity and status of the profession that he should treat such information as having been provided
to him, only to facilitate the performance of his professional duties for which his services have
been engaged. To divulge such information would be a breach of professional confidence, which
may give rise to the most serious consequences, even to an action by the client for the loss
suffered by him through such a breach. The accountant’s duty not to disclose continues even after
the completion of his assignment.
• In the given case, SR and Associates are the statutory auditor of ABC Ltd. and a dispute exist
among auditor and company with respect to certain proposed remarks by the auditor in the audit
report for F.Y. 2021-22. Company removed the auditor on 02.05.2023 in shareholders meeting

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complying with all legal formalities. SR and Associates after coming to know about their removal,
intimated the Registrar of Companies (ROC) through letter highlighting the points of dispute
including non- existence of fixed assets, bogus creditors etc. ABC Ltd complained to ICAI against
SR and Associates for their above letter to ROC.
Conclusion: Applying the above provision, SR & Associates will be liable for professional misconduct
under clause 1 of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

Q.102 Give your comments with reference to Chartered Accountants Act, 1949 and Schedules thereto: Mr.
'E', a practicing Chartered Accountant, was requested by one of his clients to prepare a projection
for next five years and also a report on the same. Mr. 'E' after having prepared the same stated in
his report “the sources of information, the basis of forecasts and also the major assumptions made
in arriving at the forecasts”. He also stated that he does not vouch for the accuracy of the forecasts.

Ans.: Certification of Financial Forecast:

• As per Clause 3 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a chartered
accountant in practice is deemed to be guilty of professional misconduct if he permits his name
or the name of his firm to be used in connection with an estimate of earnings contingent upon
future transactions in a manner which may lead to the belief that he vouches for the accuracy of
the forecast.
• Further SAE 3400 “The Examination of Prospective Financial Information”, provides that the
management is responsible for the preparation and presentation of the prospective financial
information, including the identification and disclosure of the sources of information, the basis
of forecasts and the underlying assumptions.
• In the given case, Mr. E is being engaged by the client to prepare and report the projection. Mr. E
is required to ensure that the requirements of SAE 3400 have been fulfilled. Mr. E after having
prepared the projections for next five years stated in his report, “the sources of information, the
basis of forecasts and also the major assumptions made in arriving at the forecasts.” He also
stated that he does not vouch for the accuracy of the forecasts.
Conclusion: There is no violation of the Chartered Accountants Act, 1949 and its Regulations.

Q.103 L, a chartered accountant prepares and certifies projected financial statements of his client Abacus
Ltd. Abacus Ltd. forwarded the same to their banks to secure some loans and bank, on that basis
sanctioned a loan. Comment with reference to the Chartered Accountants Act, 1949 and schedules
thereto. [May 17 (4 Marks), MTP-Aug. 18]

Ans.: Certification of Financial forecast:

• As per Clause 3 of Part I, second schedule to the CA Act, 1949 Chartered Accountant in practice
shall be deemed to be guilty of professional misconduct if he permits his name or the name of
the firm to be used in connection with the estimates of earnings, contingent upon future
transactions, in a manner which may lead to the belief that he vouches for the accuracy of the
forecast.
• Further SAE 3400 “The Examination of Prospective Financial Information”, provides that the
management is responsible for the preparation and presentation of the prospective financial
information, including the identification and disclosure of the sources of information, the basis
of forecasts and the underlying assumptions.

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• The auditor may be asked to examine and report on the prospective financial information to
enhance its credibility, whether it is intended for use by third parties or for internal purposes.
Thus, while making report on projection, the auditor needs to mention that his responsibility is
to examine the evidence supporting the assumptions and other information in the prospective
financial information, his responsibility does not include verification of the accuracy of the
projections, therefore, he does not vouch for the accuracy of the same.
• In the given case, Mr. L, a chartered accountant prepares and certifies projected financial
statements of his client Abacus Ltd. Abacus Ltd. forwarded the same to their banks to secure
some loans and bank, on that basis sanctioned a loan.
• Preparing as well as certifying projected financial statements by the same chartered accountant
is not in order.
Conclusion: Mr. L will be deemed to be guilty of professional misconduct under clause 3 of Part I of
Second Schedule assuming that conditions stated in SAE 3400 not being fulfilled.

Q.104 Comment with the reference to the Chartered Accountants Act, 1949 and schedules thereto: D, a
practicing Chartered Accountant examined and reported on the prospective financial statements
for one of his clients to obtain a cash credit facility of ₹ 75 lakhs from a Private Bank. The bank has
sanctioned the cash credit facility for ₹ 60 lakhs to his client. Consequent to the sanction of loan by
Bank, he charged a fees of ₹ 60,000 based on 1% of the credit facility sanctioned.
[Nov. 18-Old Syllabus (4 Marks)]

Ans.: Certification of Financial Forecast and charging fees on a % age basis:

• As per Clause 3 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a chartered
accountant in practice is deemed to be guilty of professional misconduct if he permits his name
or the name of his firm to be used in connection with an estimate of earnings contingent upon
future transactions in a manner which may lead to the belief that he vouches for the accuracy of
the forecast.
• Further SAE 3400 “The Examination of Prospective Financial Information”, provides that the
management is responsible for the preparation and presentation of the prospective financial
information, including the identification and disclosure of the sources of information, the basis of
forecasts and the underlying assumptions.
• The auditor may be asked to examine and report on the prospective financial information to
enhance its credibility, whether it is intended for use by third parties or for internal purposes.
Thus, while making report on projection, the auditor needs to mention that his responsibility is
to examine the evidence supporting the assumptions and other information in the prospective
financial information, his responsibility does not include verification of the accuracy of the
projections, therefore, he does not vouch for the accuracy of the same.
• Clause 10 of Part I to First Schedule to the CA Act, 1949 prohibits a CA in practice to charge, or
offers to charge, accept or offers to accept in respect of any professional employment, fees which
are based on a percentage of profits or which are contingent upon the findings or results of such
employment.
• However, this restriction is not applicable where such payment is permitted by the regulations
made in this behalf. The Council of the Institute has framed regulation 192 which exempts

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certain professional services from the operation of clause 10. Charging fees on % age of credit
facility is not covered under Regulation 192.
Conclusion: Mr. D will be deemed to be guilty of professional misconduct by virtue of clause 10 of
part I of First schedule as he charges fees on % age of credit facility sanctioned.

Q.105 Mr. D, a practicing CA, is appointed as a Director Simplicitor in XYZ Pvt. Ltd. After one year of
appointment, Mr. D resigned as the Director and accepted the Statutory Auditor position of the
company. Is Mr. D right in accepting the auditor position?

Ans.: Accepting appointment as auditor:

• As per Clause (4) of Part I of the Second Schedule of the Chartered Accountants Act, 1949, a CA in
practice is deemed to be guilty of professional misconduct if he expresses his opinion on F.S. of
any business or enterprise in which he, his firm, or a partner in his firm has a substantial
interest.
• Sec. 141 of the Companies Act, 2013 specifically prohibits a member from auditing the accounts
of a company in which he is an officer or employee.
• Further, as per the clarifications issued by the Council, a member shall not accept the assignment
of audit of a company for a period of 2 years from the date of completion of his tenure as
Director, or resignation as director of the said Company.
• In the instant case, Mr. D, a practicing CA, is appointed as a Director Simplicitor in XYZ Pvt. Ltd.
After one year of appointment, Mr. D resigned as the Director and accepted the Statutory Auditor
position of the company. In view of above provisions Mr. D cannot accept the Directorship of the
company until the completion of two years after his resignation.
Conclusion: Mr. D would be held guilty of professional misconduct under clause 4 of Part 1 of
Second Schedule of the Chartered Accountants Act, 1949.

Q.106 AP & Co., a firm of Chartered Accountants, was appointed by D Ltd., to evaluate the cost of a new
product manufactured by it for their information system and fixation of fair market price. Partner
‘P’ of the CA firm is a non-executive director of the Company. Comment with reference to Chartered
Accountants Act, 1949 and Regulations there to. [May 18 – Old Syllabus (4 Marks)]
Or
Comment on the followings: A firm of chartered accountants were appointed by a company to
evaluate the costs of the various products manufactured by it for their operation system. One of
the partners of the firm of chartered accountants was a non-executive director of the company.
[Nov. 20 – Old Syllabus (5 Marks)]

Ans.: Evaluation of Cost structure:

• Clause 4 of Part I of the Second Schedule to the Chartered Accountants Act, 1949 desists a
chartered accountant in practice to express opinion on financial statements of an enterprise in
which he, his firm or a partner in his firm has a substantial interest.
• In the present case, the firm has been appointed to evaluate the costs of the various products
manufactured by it for their operation system, not for expressing opinion on financial
statements, so it cannot be construed to be misconduct, as it is a verification of facts and no
opinion is expressed.

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Conclusion: There is no professional misconduct in evaluating the costs of a company in which one
of the partners of firm is a non-executive director.
However, the firm while accepting the position as auditor in future would have to consider whether
it would be possible to act in an independent manner and express opinion on financial statements.

Q.107 Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto: CA. D, a
practicing Chartered Accountant, was appointed as a simplicitor Director in a Pvt. Ltd. company on
1.1.2021. After serving 18 months, Mr. D resigned as the Director. He accepted the appointment as
the Statutory Auditor of the company with effect from 1-10-2022.
Is CA. D right in accepting the audit? [Dec. 21 – New Syllabus (4 Marks)]
Ans.: Accepting the appointment as auditor:
• As per Clause (4) of Part I of the Second Schedule of the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
expresses his opinion on financial statements of any business or enterprise in which he, his firm,
or a partner in his firm has a substantial interest.
• Sec. 141 of the Companies Act, 2013 specifically prohibits a member from auditing the accounts
of a company in which he is an officer or employee. Although the provisions of the aforesaid
section are not specifically applicable in the context of audits performed under other statutes,
e.g., tax audit, yet the underlying principle of independence of mind is equally applicable in those
situations also. Therefore, Council clarifications need to be considered in such situations.
• As per the clarifications issued by the Council, a member shall not accept the assignment of audit
of a Company for a period of 2 years from the date of completion of his tenure as Director, or
resignation as Director of the said Company.
• In the given case, CA. D, a practicing Chartered Accountant, was appointed as a simplicitor
Director in a Pvt. Ltd. company on 1.1.2021. After serving 18 months, Mr. D resigned as the
Director. He accepted the appointment as the Statutory Auditor of the company with effect from
1-10-2022. Mr. D cannot accept the Directorship of the company as tenure of two years after his
resignation is not completed.
Conclusion: Mr. D will be deemed to be guilty of professional misconduct as he accepts the
statutory auditor position of the company before completion of 2 years after his resignation as
directorship.
Q.108 Comment on the following with reference to the with reference to the Chartered Accountants Act,
1949 and Schedules thereto:
CA Dev started practice in Punjab in the year 2019. CA Dev issued ‘Turnover Certificate’ for M/s.
ASAUS Traders to be forwarded to the Bank for the purpose of availing cash credit facility and
machinery term loan. Brother of CA Dev was proprietor of M/s. ASAUS Traders. [RTP-Nov. 22]
Ans.: Accepting appointment as auditor:
• As per Clause (4) of Part I of Second Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty if he expresses his opinion on financial statements of
any business or enterprise in which he, his firm, or a partner in his firm has a substantial interest.
• Further, it is not permissible for a member to undertake the assignment of certification, wherein
the client is relative of the member. The “relative" for this purpose would refer to the definition
mentioned in AS 18.

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• In the given situation, CA Dev started practice in Punjab in the year 2019. CA Dev issued Turnover
certificate for M/s. ASAUS Traders to be forwarded to the Bank for the purpose of obtaining Loan.
Brother of CA Dev is proprietor of M/s. ASAUS Traders. Brother is very well covered in the
definition of relative mentioned in Accounting Standard AS 18.
Conclusion: CA Dev is guilty of professional misconduct.
Q.109 In the course of his assignment in M/s Bailey Ltd., CA J came to know that the company, due to
financial crunch and unable to meet employees salary, has taken a loan of ₹ 50 lacs from
Employees Gratuity Fund. The said loan was not reflected in the books of account of the company
and the auditor ignored this transaction in his report.
Comment with reference to the Chartered Accountants Act, 1949 and Regulations there to.
[May 18 – Old Course (4 Marks)]
Ans.: Failure to Disclose Material Facts:
• As per Clause (5) of Part I of Second Schedule to the CA Act, 1949, a CA in practice will be held
liable for misconduct if he fails to disclose a material fact known to him, which is not disclosed in
the financial statements but disclosure of which is necessary to make the financial statements not
misleading.
• In this case, CA J has come across an information that a loan has been taken by the company from
Employees PF and the said loan has not been reflected in the books of account and hence not
disclosed in the financial statements.
Conclusion: If CA J fails to disclose the fact stated above in his report, he will be attracted by the
provisions of professional misconduct under Clause (5) of Part I of Second Schedule to the Chartered
Accountants Act, 1949.
However, if he discloses the fact in his report, there will not be any misconduct.
Q.110 Comment with the reference to the Chartered Accountants Act, 1949 and schedules thereto: ENI
Ltd; a company registered under the Companies Act, 2013 has created a separate Trust “ENI
Employees Gratuity Fund Trust”. Both the Company and Trust are under the same management.
Mr. A is the auditor of both the entities. Mr. A has observed that some part of the expenditure was
not applied towards the objects of the Trust. He informed the matter to the Board of Trustees
through a separate report but did not qualify the Audit Report of the Trust.
[Nov. 18-Old Syllabus (4 Marks)]
Ans.: Non-disclosure of irregularities:
• A chartered Accountant in practice is deemed to be guilty of professional misconduct under
clause 5 of Part I of the Second Schedule if he “fails to disclose a material fact known to him
which is not disclosed in a financial statement but disclosure of which is necessary to make the
financial statement not misleading”.
• In this case, the Chartered Accountant was aware of the contraventions and irregularities
committed by the trust as these were referred to in the confidential report given by the
Chartered Accountant to the trustees of the company. However, he had issued the annual
accounts without any qualification.
• On similar facts it was held by the Supreme Court in Kishorilal Dutta vs. P. K. Mukherjee that it
was the duty of the Chartered Accountant to have disclosed the irregularities and contravention
to the beneficiaries of the fund in the statement of accounts signed by him.

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Conclusion: Mr. A is guilty of professional misconduct if the amount of irregularities is proved
material.
Q.111 Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto:
CA. Dice had signed the Balance sheet of QR Ltd. for the year ended on 31st March, 2022 which
failed to give disclosure of the charge created for ₹ 4.35 crores against the Corporate Guarantee
given in favour of a Group Company. The Balance Sheet size of the company filed with the Registrar
of Companies was ₹ 26.12 crores. [Nov. 20 – New Syllabus (4 Marks)]
Ans.: Failure to disclose material facts:
• As per Clause (5) of Part I of Second Schedule to the CA Act, 1949, a member in practice will be
held liable for misconduct if he fails to disclose a material fact known to him which is not
disclosed in a F.S., but disclosure of which is necessary in making such F.S. not misleading where
he is concerned with that F.S. in a professional capacity.
• It may be observed that this clause refers to failure to disclose a material fact, which is known to
him, in a financial statement reported on by the auditor. It is obvious, that before a member
could be held guilty of misconduct, materiality has to be established. The determination of
materiality has been provided in SA 320, “Materiality in Planning and Performing an Audit”.
• FRFs often discuss the concept of materiality in the context of the preparation and presentation
of F.S. Although FRFs may discuss materiality in different terms, they generally explain, among
other points, that Judgments about materiality are made in the light of surrounding
circumstances, and are affected by the size or nature of a misstatement, or a combination of
both.
• In this case, CA Dice has signed a Balance Sheet which failed to give disclosure of ₹ 4.35 crores
(considered material fact applying above SA 320 principle) against the corporate guarantee
given in favour of a Group Company. Size of Balance Sheet of QR Ltd. is ₹ 26.12 crore. This
material fact has to be disclosed in the financial statements.
Conclusion: Based on the above discussion, it may be concluded that Mr. Dice is attracted by the
provisions of professional misconduct under Clause (5) of Part I of Second Schedule to the
Chartered Accountants Act, 1949.
Q.112 Mr. X partner of X & co. Chartered Accountants, has compiled and signed the balance sheet of False
Limited., for submission to the bankers of the said company. Mr. X has also compiled and signed at
the request of the company another balance Sheet inflating the value of assets by 20%, for
submission to a term lending institution. Both the Balance Sheets were not in conformity with the
books of account maintained by the company as they were not up-to-date. Comment on Mr. X
liability.
Ans.: Failure to disclosure the material irregularities:
• As per clause 5 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a member in
practice will be deemed to be guilty of professional misconduct if he fails to disclose a material
fact known to him which is not disclosed in a financial statement, but disclosure of which is
necessary to make the financial statement not misleading, where he is concerned with that
financial statement in a professional capacity.
• As per clause 6 of Part I of Second Schedule, a member in practice will be deemed to be guilty of
professional misconduct if he fails to report a material misstatement known to him to appear in a
financial statement with which he is concerned in a professional capacity.

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• In the present case, Mr. X partner of X & co. Chartered Accountants, has compiled and signed the
balance sheet of False Limited., for submission to the bankers of the said company. Mr. X has also
compiled and signed at the request of the company another balance Sheet inflating the value of
assets by 20%, for submission to a term lending institution. Both the Balance Sheets were not in
conformity with the books of account maintained by the company as they were not up-to-date.
Conclusion: Mr. X would be held guilty under clauses 5 and 6 of Part I of Second Schedule to the CA
Act, 1949 as Mr. X had compiled the two different balance sheets for the same date without reference
to the actual books of account, but on instructions of the client. As per clause 5 he has failed to
disclose material fact known to him and further, as per clause 6 he has also failed to report a material
misstatement known to him.
Q.113 D, a Chartered Accountant in practice was appointed by Realty Limited to represent its cases
before GST Authorities under a duty executed power of representation. In the course of
proceedings, he submitted certain statements – written as well as oral – which later found to be
false and materially misleading.. Comment this in the light of Professional Code.
[Nov. 18-New Syllabus (4 Marks)]
Ans.: Failure to disclose the material facts:
• As per clause 5 of Part I of Second Schedule, a member in practice will be deemed to be guilty of
professional misconduct if he fails to disclose a material fact known to him which is not disclosed
in a financial statement, but disclosure of which is necessary to make the financial statement not
misleading, where he is concerned with that financial statement in a professional capacity.
• As per clause 6 of Part I of Second Schedule, a member in practice will be deemed to be guilty of
professional misconduct if he fails to report a material misstatement known to him to appear in a
financial statement with which he is concerned in a professional capacity.
• In given case, Mr. D had submitted the statements before the GST authorities, which later found
to be false and materially misleading. Although the statements were misleading, the Chartered
Accountant had only submitted them acting on the instructions of his client as his authorized
representative.
Conclusion: D would not be held liable for professional misconduct.
Q.114 Mr. X, a CA in practice and statutory auditor of True Ltd., advised the Managing Director of the
company to include in sales, “Orders under negotiation” to reflect a better financial position for
obtaining bank loan. Mr. X, thereafter, gave clean reports on the balance sheet prepared
accordingly without examining the accounts. Comment with reference to Chartered Accountants
Act, 1949 and Schedules thereto. [MTP-March 23]
Ans.: Auditor’s negligence in performance of duties:
• As per clause 7 of Part I of Second Schedule of Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he “does not exercise
due diligence or is grossly negligent in the conduct of his professional duties”.
• Furthermore, Clause (2) of Part IV of the First Schedule to the said Act states that a member of
the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he, in
the opinion of the Council, brings disrepute to the profession or the Institute as a result of his
action whether or not related to his professional work.
• In the present case, Mr. X, a partner of X & Co., advised the M.D. of True Ltd. to include in sales,
orders under negotiations to reflect a better financial position for obtaining bank loan.

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Conclusion: Mr. X is guilty of professional misconduct under Clause 7 of Part I, Second Schedule to
the CA Act, 1949, as he has acted in a negligent manner.
He will also be deemed guilty of other misconduct under Clause (2) of part IV of First Schedule for
advising unethical practice to the client.
Q.115 Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules
there to: Mr. B a practicing CA expressed his opinion on the financial statements of M/s ABC Ltd.
for the year ended on 31st March, 2022. It was later found that the closing stock was valued
arbitrarily by Management which was accepted by him without verification and large amount of
revenue expenditure was capitalized.
Ans.: Auditor’s negligence in performance of duties:
• As per clause 7 of Part I of Second Schedule of Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he “does not exercise
due diligence or is grossly negligent in the conduct of his professional duties”.
• In the present case, Mr. B a practicing CA expressed his opinion on the financial statements of
M/s ABC Ltd. and it was found later that the closing stock was valued arbitrarily by Management
which was accepted by him without verification and large amount of revenue expenditure was
capitalized.
• Thus, having regard to this, it is reasonable to think that prima facie there is a case against the
auditor for gross negligence.
Conclusion: Mr. B is guilty of gross negligence by virtue of clause 7 of Part I of second schedule.
Q.116 Give your comments with reference to Chartered Accountants Act, 1949 and schedules thereto:
Mr. D, a practicing Chartered Accountant, did not complete his work relating to the audit of the
accounts of a company and had not submitted his audit report in due time to enable the company
to comply with the statutory requirements. [RTP-Nov. 18, Nov. 19. MTP-Oct. 20]
Ans.: Failure to exercise due diligence:
• As per clause 7 of Part I of Second Schedule of Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he “does not exercise
due diligence or is grossly negligent in the conduct of his professional duties”.
• Where a Chartered Accountant had not completed his work relating to the audit of the accounts
a company and had not submitted his audit report in due time to enable the company to comply
with the statutory requirement in this regard, it can be said that the work is carried out with
gross negligence.
Conclusion: Mr. D is guilty of professional misconduct by virtue of clause 7 of Part I of Second
Schedule to the CA Act, 1949.
Q.117 You were the statutory auditor of Speed Ltd., a PSU, for the year 2020-21. In the course of your
audit, you did not observe any fraud having been committed during that year. However, the C & AG
audit staffs during their routine inspection found that chief cashier of the Company have
committed a fraud in Debtor’s ledger and absconded with the amount. Investigation made in the
fraud revealed that the Auditor did not exercise proper skill and care and performed his work in
an improper way.
Director of the Company, intends to file disciplinary proceeding against the Auditor with the ICAI.
Discuss the position of the auditor with regard to the disciplinary proceeding under Chartered
Accountants Act, 1949 and Regulations there to. [May 18 – Old Course (4 Marks)]

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Or
The Cashier of a company committed a fraud and absconded with the proceeds thereof. This
happened during the course of the accounting year. The Chief Accountant of the company also did
not know about fraud.
In the course of the audit, at the end of the year, the auditor failed to discover the fraud. After the
audit was completed, however, the fraud was discovered by the Chief Accountant. Investigation
made at that time indicate that the auditor did not exercise proper skill and care and performed
his work in a desultory and haphazard manner. With this background, the Directors of the
company intend to file disciplinary proceedings against the auditor. Discuss the position of the
auditor with regard to the disciplinary proceedings. [Dec. 21 – New Syllabus (4 Marks)]
Ans.: Failure to Exercise Reasonable Care and Skill:
• As per clause 7 of Part I of Second Schedule of Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he “does not exercise
due diligence or is grossly negligent in the conduct of his professional duties”.
• In the present case, it appears that the auditor did not exercise proper skill and care and he
performed his work in a desultory and haphazard manner. Cash is a very significant item in any
situation and the fact that the cashier had left during the year without notice should have placed
the auditor on alert as regards the cash book. In fact, the very fact that the cashier was
absconding, i.e., left without any notice constituted sufficient circumstances to excite suspicion of
the auditor to probe to the bottom.
• Thus, having regard to this and a fraud has actually taken place during the year, committed by the
absconding cashier, it is reasonable to think that prima facie there is a case against the auditor for
gross negligence. Thus, such instances require reference to Disciplinary Committee of the Council
of the Institute.
Q.118 Comment on the following with reference to the with reference to the Chartered Accountants Act,
1949 and Schedules thereto: Aagam Private Limited requested CA Sheetal, a practicing Chartered
Accountant, to digitally sign the form related to resignation of Mr. Rohit, one of the Director of
Aagam Private Limited, along with the copy of Resignation Letter to be uploaded on the website of
Registrar of Companies. The signature of Mr. Rohit was simply copied and pasted by another
Director of Aagam Private Limited. CA Sheetal, without verifying the genuineness of the
resignation letter, digitally signed the form and the said form was uploaded on the website of
Registrar of Companies. [RTP-Nov. 22]
Ans.: Failure to Exercise Reasonable Care and Skill:
• As per Clause (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty if he does not exercise due diligence or is
grossly negligent in the conduct of this professional duties.
• In the given case, Aagam Private Limited requested CA Sheetal, a practicing chartered
accountant, to digitally sign the form related to resignation of Mr. Rohit, one of the Director of
Aagam Private Limited, along with the copy of Resignation Letter to be uploaded on the website
of Registrar of Companies. The signature of Mr. Rohit was simply copied and pasted by another
Director of Aagam Private Limited.
• CA Sheetal, without verifying the genuineness of the Resignation Letter, digitally signed the Form
and the said form was uploaded on the website of Registrar of Companies. Due to forged
resignation letter, the resignation of Mr. Rohit from directorship of the Aagam Private Limited

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had been occurred. It was noted that CA Sheetal had not taken any step to verify forged signature
on resignation letter which anyone would have taken in normal circumstances.
Conclusion: CA. Sheetal would be held liable for professional misconduct as per Clause (7) of Part I
of Second Schedule to the Chartered Accountants Act, 1949.
Q.119 Give your comments with reference to the Chartered Accountants Act, 1949 and schedules
thereto: Mr. Z is a practicing Chartered Accountant. He issued a certificate of consumption which
did not reflect the correct factual position of the consumption of raw material by the concerned
entity. It is found that the certificate is given on the basis of data appearing in the minutes of
meeting of the Board of Directors. [MTP-Oct.18]
Or
CA. Z, a practicing Chartered Accountant issued a certificate of circulation of a periodical without
going into the most elementary details of how the circulation of a periodical was being maintained
i.e., by not looking into the financial records, bank statements or bank pass books, by not
examining evidence of actual payment of printer’s bills and by not caring to ascertain how many
copies were sold and paid for. Is CA. Z liable to professional misconduct? Comment with reference
to the Chartered Accountants Act, 1949, and Schedules thereto. [MTP-Oct. 22, April 23]
Ans.: Failure to exercise due diligence and to obtain necessary information:
• Clause 2 of Part I of Second Schedule of CA Act, 1949 states that a CA in practice shall be guilty
of professional misconduct if he Certifies or submits in his name or in the name of his firm a
report of an examination of financial statements unless the examination of such statements and
the related records has been made by him or by a partner or an employee in his firm or by
another CA in practice.
• Clause 7 of Part I of Second Schedule of CA Act, 1949 states that a CA in practice shall be
deemed to be guilty of professional misconduct if he “does not exercise due diligence or is
grossly negligent in the conduct of his professional duties”.
• Clause 8 of Part I of Second Schedule to CA Act, 1949 states that if a CA in practice fails to obtain
sufficient information to warrant the expression of an opinion or its exceptions are sufficient
material to negate the expression of an opinion, the CA shall be deemed to be guilty of a
professional misconduct.
• In the present case, Mr. Z, did not exercise due diligence and is grossly negligent in the conduct
of his professional duties since he certified the circulation figures without the examination of
records and other required documents. He should not express his opinion before obtaining the
required data and information.
• As an auditor, Mr. Z ought to have verified the basic records such as print order, printer’s bill,
number of copies sold and paid for, number of copies returned unsold to ensure the correctness
of circulation figures.
Conclusion: Mr. Z will be held guilty of professional misconduct as per clauses 2, 7 and 8 of Part I of
Second Schedule of Chartered Accountants Act, 1949.
Q.120 Give your comments with reference to the Chartered Accountants Act, and schedules thereto: Mr.
A, a Chartered Accountant was the auditor of 'A Limited'. During the financial year 2022-23, the
investment appeared in the Balance Sheet of the company of ₹ 10 lakhs and was the same amount
as in the last year. Later on, it was found that the company's investments were only ₹ 25,000, but
the value of investments was inflated for the purpose of obtaining higher amount of Bank loan.
[MTP-Oct.18, Oct. 20]

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Ans.: Negligence in performance of duties:
• As per Clause 2 Part I of Second Schedule to the Chartered Accountants Act, 1949, a CA in
practice shall be deemed to be guilty of professional misconduct, if he, certifies or submits in his
name or in the name of his firm, a report of an examination of financial statements unless the
examination of such statements and the related records has been made by him or by a partner
or an employee in his firm or by another chartered accountant in practice.
• As per Clause 7 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a CA in
practice shall be guilty of professional misconduct if does not exercise due diligence, or is
grossly negligent in the conduct of his professional duties.
• As per Clause 8 of Part I of Second Schedule, a CA in practice will be deemed to be guilty of
professional misconduct if he fails to obtain sufficient information which is necessary for
expression of an opinion or its exceptions are sufficiently material to negate the expression of
an opinion.
• The primary duty of physical verification and valuation of investments is of the management.
However, the auditor’s duty is also to verify the physical existence and valuation of investments
placed, at least on the last day of the accounting year.
• In the instant case, it appears that auditors failed to confirm the value of investments from any
proper source and he simply relied on the management’s representation.
Conclusion: Mr. A, will be held liable for professional misconduct under Clauses (2), (7) and (8) of
Part I of the Second Schedule to the Chartered Accountants Act, 1949.
Q.121 Nam & Co., conducted Stock Audit of DEF Ltd. as per instructions issued by HEG Bank. However
instead of visiting the site where the stock was lying, the firm relied on the Management
Information Systems report along with inspections reports and photographs of Stock taken by the
employees of DEF Ltd. The photographs were also carrying the date and time printed on them.
Comment with reference to the Chartered Accountants Act, 1949 and its schedules thereto.
[Jan. 2021 – New Syllabus (4 Marks)]
Ans.: Negligence in performance of duties:
• As per Clause 7 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a CA in
practice shall be guilty of professional misconduct if does not exercise due diligence, or is
grossly negligent in the conduct of his professional duties.
• To conduct stock audit, ascertainment of existence and physical condition of stocks, cross
tallying the stock with Stock statement submitted by bank borrower, correct classification of
stocks for valuation purpose etc. is essential. Further submitting stock audit report without
physically verifying the stock amounts to gross negligence.
• As per Clause 8 of Part I of Second Schedule, a CA in practice will be deemed to be guilty of
professional misconduct if he fails to obtain sufficient information which is necessary for
expression of an opinion or its exceptions are sufficiently material to negate the expression of
an opinion.
• In the present case, Mr. Z, did not exercise due diligence and is grossly negligent in the conduct
of his professional duties as instead of visiting the site where the stock was lying, the firm relied
on the Management Information Systems report along with inspections reports and
photographs of Stock taken by the employees of DEF Ltd.
Conclusion: Nam & Co. is guilty of professional misconduct as per Clauses 7 and 8 of Part I of
Second Schedule of CA Act, 1949 due to the reason that stock audit is being done without

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examination of related records, failure to exercise due diligence and failure to obtain necessary
information.
Q.122 CA K qualified as Chartered Accountant and started practice as proprietor in the name of M/s. K &
Associates in the year 2015-16. LST Limited, a listed entity, appointed M/s. K & Associates as
Statutory Auditor for the year ended on 31st March, 2022. CA K signed the balance sheet of LST
Limited for the year ended on 31st March, 2022 on 14th May, 2022. M/s. K & Associates never
subjected themselves to the Peer Review process of the Institute since its inception of practice.
Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto.
[May 22 (4 Marks)]
Ans.: Departure from generally accepted procedures of audit:
• As per Clause 9 of Part I of Second Schedule to the Chartered Accountants Act, 1949. a CA in
Practice shall be deemed to be guilty of professional misconduct if he fails to invite attention to
any material departure from the generally accepted procedure of audit applicable to the
circumstances.
• Pursuant to SEBI Notification, Statutory Audit of Listed Companies under the Companies Act,
2013 shall be done by only those auditors who have subjected themselves to the Peer Review
process of the Institute, and hold a valid certificate issued by the Peer Review Board of the ICAI.
• In the given case, CA K is practicing as proprietor in the name of M/s. K & Associates from the
year 2015-16. LST Limited, a listed entity, appointed M/s. K & Associates as Statutory Auditor for
the year ended on 31st March, 2022. CA K signed the balance sheet of LST Limited for the year
ended on 31st March, 2022 on 14th May, 2022. M/s. K & Associates never subjected themselves
to the Peer Review process of the Institute since its inception of practice.
Conclusion: CA K is guilty of professional misconduct by virtue of Clause 9 of Part I of Second
Schedule.
Q.123 Comment on the following with reference to Chartered Accountants Act, 1949 and schedules
thereto: A charitable institution entrusted ₹ 10 lakhs with its auditor’s M/s Ram and Co., a
Chartered Accountant firm, to invest in a profitable portfolio. The auditors pending investment of
the money, deposited it in their Savings bank account and no investment was made in the next
three months.
Ans.: Deposit of Client’s Money in Separate Bank account:
• As per Clause 10 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice will be deemed to be guilty of professional misconduct if he
fails to keep moneys of his client other than the fees or remuneration or money meant to be
expended in a separate banking account or to use such moneys for purposes for which they are
intended within a reasonable time.
• The term reasonable time would depend upon the circumstances of the case. Moneys which are
intended to be spent within a reasonably short time need not be put in a separate bank account.
• In the instant case, M/s Ram & Co. should have deposited the amount into a separate bank
account. Further, they are not permitted to provide the service of portfolio management to the
client.
Conclusion: M/s Ram & Co. will be held guilty of professional misconduct as he deposited the client
money in his saving bank account.

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Q.124 Mr. Ram, a Chartered Accountant in practice, received ₹ 15,00,000 on 15th December, 2022 on
behalf of one of his clients, who has gone to USA. Mr. Ram deposited the said amount in his saving
bank account (SB Account). As per instruction of the client, the said amount is to be returned to
the client on March 31, 2023 when he will return to India. On the occasion of birthday of his wife
Sita, Mr. Ram withdrew ₹ 5,00,000 and spent on Birthday party. He re-deposited ₹ 5,00,000 in the
said SB account on 25th March, 2023 and then returned the entire amount of ₹ 15,00,000 to the
client on March 31, 2023.

Ans.: Deposit of Client’s Money in Separate Bank account:

• As per Clause 10 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice shall be deemed to be guilty of professional misconduct if he fails to keep
moneys of his client other than the fees or remuneration or money meant to be expended in a
separate banking account or to use such moneys for purposes for which they are intended within
a reasonable time.
• The term reasonable time would depend upon the circumstances of the case. Moneys which are
intended to be spent within a reasonably short time need not be put in a separate bank account.
• In the instant case, Mr. Ram should have deposited the amount into a separate bank account.
Further, he was not supposed to spent the amount for personal purposes.
Conclusion: Mr. Ram will be guilty of professional misconduct for his failure to keep the client
money in separate bank account and using the client money for personal purposes.
Q.125 A film artist who was going abroad for long shooting, deposited a sum of ₹ 20 lakhs with his tax
consultant Mr. G, a practicing chartered accountant for payment of GST monthly when they were
due. Mr. G duly remitted all but one instalment. He utilized the amount of instalment which he did
not pay, to remit his own advance of income tax. However, while filing return of GST of the film
artist, he duly remitted on her behalf the tax payable with interest due for late payment of GST out
of money lying with him. He also bore for himself the interest due to short fall in remittance of tax
of his client. Comment on the above in the light of Code of Conduct.
[May 18 – New Course (4 Marks)]

Ans.: Deposit of Client’s Money in separate Bank account:

• Clause 10 of Part I of Second Schedule to the Chartered Accountants Act, 1949 states that a
Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if “he
fails to keep money of his clients other than fees or remuneration or money meant to be
expended in separate banking account or to use such money for the purpose for which they are
intended”.
• In the present case, a film artist who was going abroad, deposited a sum of ₹ 20 lakhs with Mr.
G, a practicing chartered accountant for payment of GST monthly when they were due. Mr. G
duly remitted all but one instalment. He utilized the amount of instalment which he did not pay,
to remit his own advance of income tax. However, while filing return of GST of the film artist, he
duly remitted on her behalf the tax payable with interest due for late payment of GST out of
money lying with him.
Conclusion: Since Mr. G uses the client money for payment of personal taxes, he will be deemed to
be guilty of professional misconduct under clause 10 of part I of Second Schedule.

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Q.126 Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto: M/s XYZ a firm of Chartered Accountants received ₹ 2 lakhs in January, 2022 on behalf of
one of their clients, who has gone abroad and deposited the amount in their Bank account, so that
they can return the money to the client in July, 2022, when he is due to return to India.
[RTP-Nov. 19]
Ans.: Deposit of Client’s Money in Separate Bank account:
• As per Clause 10 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice will be deemed to be guilty of professional misconduct if he fails to keep
moneys of his client other than the fees or remuneration or money meant to be expended in a
separate banking account or to use such moneys for purposes for which they are intended within
a reasonable time.
• The term reasonable time would depend upon the circumstances of the case. Moneys which are
intended to be spent within a reasonably short time need not be put in a separate bank account.
• In the instant case, M/s XYZ should have kept the amount in a separate bank account.
Conclusion: M/s XYZ will be deemed to be guilty of professional misconduct by virtue of clause 10
of Part I of Second Schedule as the money is required to be kept in a separate bank account.
Q.127 CA N was appointed as an auditor of JAL Ltd. The company has branches all over the state of
Haryana. CA N, in consultation with management, decided to visit 6 out of 10 branches.
Management decided to pay him advance of ₹ 2 Lacs on visits to be conducted as a part of services
rendered. As agreed, ₹ 2 Lacs was transferred in his bank account from which he met all the
expenses. Comment with reference to Chartered Accountants Act, 1949 whether the action of CA N
of receiving the advance money in his saving accounts and not keeping it in separate bank account
is valid. [Jan. 21 – New Syllabus (4 Marks)]
Ans.: Deposit of Client’s Money in separate Bank account:
• Clause 10 of Part I of Second Schedule to the Chartered Accountants Act, 1949 states that a
Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if “he
fails to keep money of his clients other than fees or remuneration or money meant to be
expended in separate banking account or to use such money for the purpose for which they are
intended”.
• In connection with compliance of Clause 10, Council has considered some practical difficulties
of the members and suggest that an advance received by a Chartered Accountant against
services to be rendered does not fall under Clause (10) of Part I of the Second Schedule.
• In the given case, CA N was appointed as an auditor of JAL Ltd. The company has branches all
over the state of Haryana. CA N, in consultation with management, decided to visit 6 out of 10
branches. Management decided to pay him advance of ₹ 2 Lacs on visits to be conducted as a
part of services rendered. As agreed, ₹ 2 Lacs was transferred in his bank account from which
he met all the expenses.
Conclusion: An advance received by a Chartered Accountant against services to be rendered does
not fall under Clause (10) of Part I of the Second Schedule, hence no misconduct arises on part of
CA. N.

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5.8 - Second Schedule, Part II “Professional Misconduct in relation to the Members of the Institute
Generally”
Q.128 CA X is a chartered accountant in practice. He has an articled trainee H. X has informed H that
since his practice and receipt of fees is seasonal, the stipend would not be paid in the months of
April to December, but would be paid from January to March and the shortfall for the earlier 9
months will be made good in these 3 months along with interest @ 5% p.a. Comment with
reference to the Chartered Accountants Act, 1949. [Nov. 17 (4 Marks)]
Ans.: Contravening Provisions of the Act/Regulations:
• As per Clause (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949, a
member of the Institute, whether in practice or not, shall be deemed to be guilty of professional
misconduct under, if he contravenes any of the provisions of this Act or the regulations made
there under or any guidelines issued by the Council.
• Regulation 48 of Chartered Accountants Regulations, 1988 requires that payment to articled
clerks to be made on monthly basis.
• In the present case, Chartered Accountant has failed to make the payments of stipend to articled
assistant every month in accordance with Regulation 48. The fact that the articled assistant will
be compensated with extra sum in the form of interest on late payment and the plea that his
receipts are seasonal is of no relevance and hence not acceptable.
Conclusion: Regulation 48 of CA Regulations, 1988 has been violated, hence chartered accountant
would be guilty of professional misconduct under Clause 1, Part II of Second Schedule.
Q.129 Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto: The manager of ABC (P) Ltd. approached CA. X in the need of a certificate in respect of a
consumption statement of raw material. Without having Certificate of Practice (CoP), CA. X issued
the certificate to the manager of the company, acting as a CA in Practice and applied for the CoP to
the Institute on very next day to avoid any dispute. [RTP-May 18]
Ans.: Contravening Provisions of the Act:
• As per Clause (1) of Part II of Second Schedule to the Chartered Accountants Act, 1949, a
member of the Institute, whether in practice or not, shall be deemed to be guilty of professional
misconduct, if he contravenes any of the provisions of this Act or the regulations made
thereunder or any guidelines issued by the Council.
• Section 6 of Chartered Accountants Act, 1949 provides that no member of the Institute shall be
entitled to practice (whether in India or elsewhere) unless he has obtained from the Council a
certificate of practice.
• In the given case, CA. X has issued a certificate in respect of a consumption statement of raw
material to the manager of ABC (P) Ltd., as a Chartered Accountant in practice when he had not
even applied for the CoP to the Institute, thereby contravening the provisions of section 6 of the
Chartered Accountants Act, 1949.
Conclusion: Mr. X has violated the provisions of Sec. 6 of CA Act, 1949 and hence would be guilty of
professional misconduct under Clause 1, Part II of Second Schedule.
Q.130 Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto: A Chartered Accountant in practice certified in requisite Form that an articled assistant
was undergoing training with him, whereas, he was also employed in a company between 10 a.m.
and 6 p.m. on a monthly salary of ₹ 17,000 and attended the office of the Chartered Accountant
thereafter until 7 p.m. The Chartered Accountant pleaded that the articled assistant was on audit
of the company. [MTP-Oct.18, Oct. 19]

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Ans.: Failure to Observe Regulations:
• As per Clause 1 of Part II of Second Schedule to the Chartered Accountants Act, 1949, a member
shall be held guilty of professional misconduct if he contravenes any of the provisions of the Act
or the regulations made thereunder or any guidelines issued by the Council. The chartered
accountant, as per Regulations also, is expected to impart proper practical training.
• As per Clause 3 of Part II of Second Schedule to the CA Act, 1949, a member is deemed to be guilty
of professional misconduct if he includes in any information, statement, return or form to be
submitted to the Institute, Council or any of its Committees, Director (Discipline), Board of
Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority any
particulars knowing them to be false.
• In the instant case, the articled assistant is not attending office on timely basis and the
explanation of the Chartered Accountant that the articled assistant was on audit of the company
cannot be accepted particularly in view of the fact that articled assistant is getting monthly salary
from that company.
Conclusion: Chartered Accountant will be deemed to be guilty of professional misconduct under
Clause 1 of Part II of Second Schedule for contravention of regulations of the Institute and under
Clause 3 of Part II of Second Schedule for submission of false information to the ICAI.

Q.131 Mr. P and Mr. Q are running a firm of Chartered Accountants in the name of M/s PQ & Co. On
23.5.2022, they included the name of Mr. R, a practicing Chartered Accountant, without his
knowledge, as a partner while submitting an application for empanelment as auditor for Public
Sector Bank branches to the Institute. However, they added Mr. R as a partner to their firm
offering a share of 25% of the profits, on 25.5.2022. [MTP-April 18, RTP-May 20]

Ans.: Providing False information to ICAI:

• As per clause 3 of Part II of second schedule, a Chartered Accountant whether in practice or not
is guilty of professional misconduct if he includes in any information, statement, return or form
to be submitted to the Institute, Council or any of its committees, Directors (Discipline), Board
of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority any
particulars knowing them to be false.
• In the instant case PQ & Co. included another Chartered Accountant name as partner in his firm,
in his application for empanelment as Auditor of branches of Public Sector Banks submitted to
the Institute. In fact, such a member was not a partner of the said firm on the date of
application.
Conclusion: CA P & CA Q will be held guilty of professional misconduct as per Clause 3, Part II of
Second Schedule for submitting false information with the Institute.

5.9 – Council General Guidelines, 2008

Q.132 Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto: A is the auditor of Z Ltd., which has a turnover of ₹ 200 crores. The audit fee for the year is
fixed at ₹ 50 lakhs. During the year, the company offers Mr. A, assignment of management
consultancy within the meaning of Section 2(2)(iv) of the CA Act, 1949 for a remuneration of ₹ 1
Crore. A seeks your advice on accepting the assignment.

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Professional Ethics Chapter 5
Ans.: Appointment as a statutory auditor of a PSUs’/Govt company/listed company and other
public company:
• As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty of
professional misconduct if he Contravenes any of the provisions of this act or the regulations
made thereunder or any guidelines issued by the council.
• Council General Guidelines, 2008, specifies that a member of the Institute in practice shall be
deemed to be guilty of professional misconduct if he accepts the appointment as a statutory
auditor of a PSUs’/Govt companies/listed companies and other public company having a
turnover of ₹ 50 crores or more in a year and accepts any other work(s) or assignment(s) or
service(s) in regard to same undertaking(s) on a remuneration which in total exceeds the fee
payable for carrying out the statutory audit of the same undertaking.
• For this purpose, the other work/services include Management Consultancy and all other
professional services permitted by Council excluding audit under any other statute,
Certification work required to be done by the statutory auditor and any representation before
an authority.
Conclusion: In view of the above position, it would be a misconduct on A’s part if he accepts the
management consultancy assignment.
Note: Applicability of Chapter IX of Council General Guidelines, 2008 seems to be redundant
in case of companies, because as per Sec. 144 of the Companies Act, 2013, auditor of a
company cannot render management services to the company, its holding company or
subsidiary company, directly or indirectly.
Q.133 D, who conducts the tax audit u/s 44AB of the Income-tax Act, 1961 of M/s ABC, a partnership firm,
has received the audit fees of ₹ 2,50,000 on progressive basis in respect of the tax audit for the
year ended on 31.3.2022. The audit report was, however, signed on 25.5.2022. Comment.
Ans.: Appointment of an auditor when he is indebted to the concern:
• As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty of
professional misconduct if he Contravenes any of the provisions of this act or the regulations
made thereunder or any guidelines issued by the council.
• Council General Guidelines, 2008 specifies that a member of the Institute in practice or a
partner of a firm in practice or a firm shall not accept appointment as auditor of a concern while
indebted to the concern or given any guarantee or provided any security in connection with the
indebtedness of any third person to the concern, for limits fixed in the statute and in other cases
for amount exceeding ₹ 1,00,000.
• As per Explanation to Sec. 288 to Income-tax Act, 1961, an individual who, or his relative or
partner is indebted to the assessee cannot conduct tax audit, provided that the relative may be
indebted to the assessee for an amount not exceeding ₹ 1,00,000.
• In the instant Case, D is appointed to conduct a tax audit u/s 44AB of the Income-tax Act, 1961
and received the audit fees of ₹ 2,50,000 on progressive basis.
Conclusion: As the fees were recovered on progressive basis, amount received will not be
considered as indebtedness. Hence, no professional misconduct arises on part of Mr. D.
Q.134 A member of the institute shall not accept in a year more than the specified number of tax audits
under section 44AB of the Income-tax Act.
Mr. Gaurav is a partner in M/s XYZ & Co., a firm of Chartered Accountants with 6 partners.
During the assessment year 2022-23, Mr. Gaurav alone had signed 290 tax audit reports consisting
of both corporate and non-corporate assessees. [Nov. 16 (4 Marks)]

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Ans.: Signing of Tax Audit Report:
• As per Chapter VI of Council General Guidelines 2008, a member of the Institute in practice shall
not accept, in a financial year, more than the “specified number of tax audit assignments” u/s
44AB of the Income-tax Act, 1961.
• In the case of a firm of CAs in practice, the “specified number of tax audit assignments” shall be
construed as the specified number of tax audit assignments for every partner of the firm.
• The specified number of tax audit assignments in the case of firm of CAs in practice, 60 tax audit
assignments per partner in the firm, in a financial year, whether in respect of corporate or non-
corporate assessees.
• It is further clarified by the Council of ICAI that tax audit report accepted by the firm of
Chartered Accountants can be signed by any partner on the behalf of the firm.
• In the present case, there are six partners in the firm and hence the firm can accept 360 tax
audit assignment and any partner can sign the tax audit report on the behalf of the firm.
Conclusion: Mr. Gaurav can sign the 290 tax audit reports on behalf of the firm.
Q.135 Mr. Z accepted the statutory audit of a sick unit – NCT Limited for the year ending on 31.3.2023.
During course of audit it was noticed by the statutory auditor that company’s net worth was
negative for year ended on 31.3.2022 and there was also a liability of tax audit fees of ₹ 35,000 in
favour of the previous auditors. Comment. [Nov. 16 (4 Marks)]
Ans.: Accepting Appointment as an Auditor:
• As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty of
professional misconduct if he Contravenes any of the provisions of this act or the regulations
made thereunder or any guidelines issued by the council.
• As per Chapter VII of Council General Guidelines, 2008, a member of the Institute in practice
shall not accept the appointment as auditor of an entity in case the undisputed audit fee of
another Chartered Accountant for carrying out the statutory audit under the Companies Act,
2013 or various other statutes has not been paid. As per the proviso, such prohibition shall not
apply in case of a sick unit.
• “Sick unit” shall mean a unit registered for not less than 5 years, which has at the end of any
financial year accumulated losses equal to or exceeding its entire net worth.
• In the present case, Mr. Z accepted the audit of M/s PSU Ltd., though the undisputed fees of
previous auditor remain unpaid.
Conclusion: Assuming that M/s PSU Ltd. falls under the criteria of Sick Unit, Mr. Z would not be
guilty of professional misconduct.
Q.136 Comment on the following with reference to the Chartered Accountants Act, 1949, and Schedules
thereto: M (P) Ltd. appointed CA. P for some professional assignments like company’s ROC work,
preparation of minutes, statutory register etc. For this, CA. P charged his fees depending on the
complexity and the time spent by him on each assignment.
Later on, M (P) Ltd. filed a complaint against CA. P to the ICAI that he has charged excessive fees for
the assignments comparative to the scale of fees recommended by the Committee as well as duly
considered by the Council of ICAI. [MTP-April 18]
Ans.: Charging Excess Fees:
• Prescribed scale of fees for the professional assignments done by the chartered accountants is
recommendatory in nature. Fees in any professional assignment depend upon the mutual
agreement and understanding between the member and the client.

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• Charging fee more than the fees recommended for a professional assignment does not
constitute any misconduct in the context of the provisions of the Chartered Accountants Act,
1949 and regulation made thereunder.
• In the given case, CA. P has charged excess fees comparative to the scale of fees recommended
by the Committee as well as duly considered by the Council of ICAI.
Conclusion: Scale of fees recommended by the Committee as well as duly considered by the Council
of ICAI is only recommendatory and not mandatory, hence no misconduct arise on part of Mr. P.
Q.137 J, a practicing Chartered Accountant has not maintained the records of audit assignments of the
companies on the ground that he is conducting lesser number of audits prescribed under Section
141(3) (g) of the Companies Act, 2013. [Nov. 18-Old Syllabus (4 Marks)]
Ans.: Record of Audit Assignments:
• As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty of
professional misconduct if he Contravenes any of the provisions of this act or the regulations
made thereunder or any guidelines issued by the council.
• Chapter VIII of Council General Guidelines, 2008 requires a Chartered Accountant in practice as
well as firm of Chartered Accountants in practice to maintain a record of the audit assignments
accepted by him or by the firm of Chartered Accountants, or by any of the partners of the firm in
his individual name or as a partner of any other firm, as far as possible, in the following format:
S. No. Name of the Registration Date of Date of Date on which Form
Company No. Appointment Acceptance ADT-1 Filed with ROC
1 2 3 4 5 6

• In the present case, J, a practicing Chartered Accountant has not maintained the records of audit
assignments of the companies on the ground that he is conducting lesser number of audits
prescribed under Section 141(3)(g) of the Companies Act, 2013.
Conclusion: Ground of Mr. J is not admissible and he will be held guilty of professional misconduct
by virtue of Clause 1 of Part II of Second Schedule, due to contravention of Chapter VIII of Council
General Guidelines, 2008 for not maintaining of record of audit assignments.
Q.138 Mr. X, a Chartered Accountant in Practice filed his income tax return for the Assessment Year
2022-23 u/s 44ADA of the Income-tax Act, 1961, declaring his income on presumptive basis. In a
disciplinary proceeding alleged against him for an alleged misuse of funds of his clients, it was
asked that he should submit his books of account for the financial year ended on 31.3.2022. Mr. X
refused to submit books of account on the ground that he had not maintained any books and even
for income tax purposes, he submitted his Return of Income on a presumptive basis. Is he right in
putting such a defence? Analyse the issue in the lights of Professional Code, if any.
[Nov. 18-New Syllabus (5 Marks)]
Ans.: Maintenance of Books of Account:
• As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty of
professional misconduct if he Contravenes any of the provisions of this act or the regulations
made thereunder or any guidelines issued by the council.
• Chapter V of the Council General Guidelines, 2008 specifies that a member of the Institute in
practice or the firm of Chartered Accountants of which he is a partner shall maintain and keep
in respect of his/its professional practice, proper books of account including the following:

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(a) a Cash Book
(b) a Ledger
• In the instant case, Mr. X, a Chartered Accountant in Practice filed his income tax return for the
u/s 44ADA of the Income-tax Act, 1961, declaring his income on presumptive basis. In a
disciplinary proceeding alleged against him for an alleged misuse of funds of his clients, it was
asked that he should submit his books of account for the financial year ended on 31.3.2022. Mr.
X refused to submit books of account on the ground that he had not maintained any books and
even for income tax purposes, he submitted his Return of Income on a presumptive basis.
Conclusion: Defence of Mr. X is not admissible and he will be held guilty of professional
misconduct by virtue of Clause 1 of Part II of Second Schedule, due to contravention of Chapter V of
Council General Guidelines, 2008 for non-maintenance of books of account.
Q.139 M/S PQR & Co. is a partnership firm of 3 partners P, Q and R. All partners are exclusively
associated with the firm in practice and are not doing practice in individual capacity. For the year
ended 31st March, 2022, the partners have undertaken audits and signed audit reports under
section 44AB/ 44AD of the Income-tax Act, 1961 as under:
Under Section 44AB Under Section 44AD
P 10 15
Q 60 5
R 100 5
Discuss whether there is any professional misconduct by the firm in regard to the aforesaid audits.
[Nov. 19 – Old Syllabus (4 Marks)]
Ans.: Signing of Tax Audit Report:
• As per Chapter VI of Council General Guidelines, 2008, a member of the Institute in practice
shall not accept, in a financial year, more than the “specified number of tax audit assignments”
u/s 44AB of the Income-tax Act, 1961.
• In the case of a firm of CAs in practice, the “specified number of tax audit assignments” shall be
construed as the specified number of tax audit assignments for every partner of the firm.
• The specified number of tax audit assignments in the case of firm of CAs in practice, 60 tax audit
assignments per partner in the firm, in a financial year, whether in respect of corporate or non-
corporate assessees.
• The audits conducted under Sections 44AD, 44AE, 44AF of the Income-tax Act, 1961 shall not be
taken into account for the purpose of reckoning the “specified number of tax audit
assignments”.
• It is further clarified by the Council of ICAI that tax audit report accepted by the firm of
Chartered Accountants can be signed by any partner on the behalf of the firm.
• In the present case, there are three partners in the firm and hence the firm can accept 180 tax
audit assignment and any partner can sign the tax audit report on the behalf of the firm. Firm
has accepted 170 tax audit assignments other than the audit under section 44AD.
Conclusion: No Misconduct arises on part of Firm or partners.
Q.140 Mr. Kushal, a practicing Chartered Accountant has signed the GST Audit Reports, Tax Audit
Reports u/s 44AB of the Income-tax Act, 1961 for the financial year 2021-22 that are filed online
using Digital Signature and without generating UDIN on the ground that there is no field for

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mentioning UDIN on digitally signed online reports. Is the contention of Mr. Kushal valid? Give
your comments with reference to the Chartered Accountants Act, 1949 and schedules thereto.
[Nov. 20 – New Syllabus (4 Marks)]
Ans.: Non-Generation of UDIN:
• As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty of
professional misconduct if he Contravenes any of the provisions of this act or the regulations
made thereunder or any guidelines issued by the council.
• Chapter XIV of Council General Guidelines, 2008, specifies that a member of the Institute in
practice shall generate Unique Document Identification Number (UDIN) for all kinds of the
certification, GST and Tax Audit Reports and other Audit, Assurance and Attestation functions
undertaken/signed by him which made mandatory from the following dates through
announcements published on the website of the ICAI www.icai.org at the relevant time:
(i) For all Certificates w.e.f. 1st February, 2019.
(ii) For all GST and Tax Audit Reports w.e.f. 1st April, 2019.
(iii) For all other Audit, Assurance and Attestation functions w.e.f. 1st July, 2019.
Conclusion: Contention of Mr. Kushal is not valid as non-generating of UDIN amounts to
professional misconduct under Clause 1, Part II of Second Schedule due to non-compliance of
Council General Guidelines, 2008.
Q.141 CA. R, a Chartered Accountant, in practice is specializing in the field of Information Systems Audit.
He is considered to be one of the experts of this field because of his command over the subject.
HKC Limited; a Company engaged in rendering management consultancy offered him to appoint as
its managing director. CA. R accepted the position of managing director without obtaining prior
permission from the Institute. One of his friends CA. S informed him that now he cannot retain full
time certificate of practice, thus cannot do attest function and train articled assistants. Comment
with reference to the provisions of the Chartered Accountants Act, 1949 and schedules thereto.
[July 21 – New Syllabus (4 Marks)]
Ans.: Engaging into other Occupations (MD of Management Consultancy company):
• As per Clause (11) of Part I of First Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice will be deemed to be guilty of professional misconduct if he engages in any
business or occupation other than the profession of Chartered Accountant unless permitted by
the Council so to engage.
• As per Chapter XVII of Council General Guidelines, 2008, a member in practice is allowed to hold
the office of Managing Director of a body corporate provided that the body corporate is engaged
exclusively in rendering Management Consultancy and Other Services permitted by the Council
and complies with the conditions(s) as specified by the Council from time to time in this regard.
• In such cases, members can retain full time Certificate of Practice besides being the Managing
Director of such Management Consultancy Company. Such members shall be regarded as being in
full-time practice and therefore can continue to do attest function and they are also entitled to
train articled assistants.
• In the given case, CA. R accepted the position of managing director of a company engaged in
rendering management consultancy without obtaining prior permission from the Institute. It is
not specified whether the conditions as stated in the guidelines as to name, registration etc. of
management consultancy company are being complied with or not.
Conclusion: Assuming that conditions as regard to name and registration of management
consultancy company, as stated in the guidelines are compiled with, action of CA. R will stands valid.

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Q.142 Mr. P, a Chartered Accountant did not maintain books of account for his professional work on the
ground that his income is assessed u/s 44ADA of the Income-tax Act, 1961. Comment with
reference to the Chartered Accountants Act, 1949 and Schedules thereto. [Nov. 22 (4 Marks)]
Ans.: Maintenance of Books of Account:
• As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty of
professional misconduct if he Contravenes any of the provisions of this act or the regulations
made there under or any guidelines issued by the council.
• Chapter V of the Council General Guidelines, 2008 specifies that a member of the Institute in
practice or the firm of Chartered Accountants of which he is a partner shall maintain and keep
in respect of his/its professional practice, proper books of account including the following:
(i) a Cash Book
(ii) a Ledger
• In the instant case, Mr. P, a Chartered Accountant did not maintain books of account for his
professional work on the ground that his income is assessed u/s 44ADA of the Income-tax Act,
1961.
Conclusion: Mr. P will be held guilty for professional misconduct for violation of Council General
Guidelines, 2008.

5.10 – KYC Norms

Q.143 Mr. F, a Chartered Accountant, gave advisory services to PQR Pvt. Ltd. Further, he gave them GST
consultancy and helped in ERP set up. Later, the company turned out to be a part of a group of
companies involved in money laundering. Mr. F was asked to provide details of the companies. Mr.
F refused on the grounds that he gave only consultancy services to the company and wasn’t
supposed to keep any information about the company. Is Mr. F right as per the guidelines issued
by the ICAI?
Ans.: KYC Norms:
• The financial services industry globally is required to obtain information of their clients and
comply with Know Your Client Norms (KYC norms). Keeping in mind the highest standards of
Chartered Accountancy profession in India, the Council of ICAI issued such norms to be
observed by the members of the profession who are in practice.
• In the given situation, CA. F, gave GST consultancy and helped in ERP set up along with advisory
services to PQR Pvt. Ltd. Mr. F was asked to provide details of the companies as the company,
turned out to be a part of a group of companies, involved in money laundering.
Conclusion: Contention of Mr. F that he gave only consultancy services to the company and wasn’t
supposed to keep any information about the company is not valid as Mr. F should have kept
following information in compliance with KYC norms which are mandatory in nature and shall
apply in all assignments pertaining to attestation functions.
In the given case of PQR Pvt. Ltd., a Corporate Entity, Mr. F should have kept following information:
A. General Information:
• Name and Address of the Entity
• Business Description
• Name of the Parent Company in case of Subsidiary
• Copy of last Audited Financial Statement

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B. Engagement Information: Type of Engagement
C. Regulatory Information:
• Company PAN No.
• Company Identification No.
• Directors’ Names & Addresses
• Directors’ Identification No.
Q.144 Write short note on: KYC norms for a Chartered Accountant in practice.
[May 18 – Old Course (4 Marks)]
Ans.: KYC Norms for a Chartered Accountant in Practice:
The financial services industry globally is required to obtain information of their clients and comply
with KYC norms. Keeping in mind the highest standards of Chartered Accountancy profession in
India, the Council of ICAI recommended such norms to be observed by the members of the
profession who are in practice. A Chartered Accountant is required to observe certain KYC norms, in
accordance with which he need to maintain certain details about his clients. Details required as per
KYC norms are:
(A) Individual Client:
General Information: Name of the Individual, PAN No. or Aadhaar Card No. of the Individual,
Business Description and Copy of last Audited Financial Statement
Engagement Information: Type of Engagement
(B) Corporate Entity:
General Information: Name and Address of the Entity, Business Description, Name of the
Parent Company in case of Subsidiary, Copy of last Audited Financial Statement
Engagement Information: Type of Engagement
Regulatory Information: Company PAN No., Company Identification No., Directors’ Names &
Addresses, Directors’ Identification No.
(C) Non-Corporate Entity:
General Information: Name and Address of the Entity, Copy of PAN No., Business
Description, Partner’s Names & Addresses (with their PAN/Aadhaar Card/DIN No.), Copy of
last Audited Financial Statement
Engagement Information: Type of Engagement.

5.11 - Guidelines for Networking

Q.145 AJ & Associates and PK & Co., chartered accountant firms have joined the Network firm A to Z &
Affiliates registered with Institute. AJ & Associates was statutory auditor of B Ltd. for last 10 years.
Due to rotation of auditor as per section 139(2) of Companies Act, 2013, B Ltd, retires AJ &
Associates and appoints PK & Co., as auditor for the year 2021-22. Comment as per Chartered
Accountants Act, 1949 - Guidelines for Networking. [Dec. 21 – Old Syllabus (4 Marks)]
Ans.: Ethical Compliance in case of Network Firms:
• In accordance with Guidelines for networking, once the relationship of network arises, it will be
necessary for such a network to comply with all applicable ethical requirements prescribed by
the Institute from time to time in general and in particular in cases, where rotation of firms is

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prescribed by any regulatory authority, no member firm of the network can accept
appointment as an auditor in place of any member firm of the network which is retiring.
• In the given case, AJ & Associates and PK & Co., chartered accountant firms have joined the
Network firm A to Z & Affiliates registered with Institute. AJ & Associates was statutory auditor
of B Ltd. for last 10 years. Due to rotation of auditor as per Sec. 139(2) of Companies Act, 2013,
B Ltd., retires AJ & Associates and appoints PK & Co., as auditor for the year 2021-22.
Conclusion: PK & Co. cannot accept appointment as an auditor in place of any member firm of the
network which is retiring.

5.12 – Miscellaneous
Q.146 Mr. S is a practising chartered accountant based out of Chennai. During the weekends, he involved
himself in equity research and used to advise his friends, relatives and other known people who
are not his clients. Apart from this, he was also involved as a papersetter for Accountancy subject
in the school in which he studied. He also owned agricultural land and was doing agriculture
during his free time. During the year 20X1, heavy losses were incurred in agricultural activity due
to natural calamities and misfortune, and he lost almost all of his wealth and became
undischarged insolvent. After a few court hearings, finally, in the year 20X3, he was declared
discharged insolvent and obtained a certificate from the court stating that his insolvency was
caused by misfortune without any misconduct on his part. You are required to comment on the
above situation with reference to the Chartered Accountants Act, 1949 and Schedules thereto,
(especially from the point of section 8: Entry of name in Register of Members). [RTP-May 23]
Ans.: Miscellaneous Provisions over Code of Ethics:
Given situation can be visualised in following parts:
(A) Mr. S used to involve himself in equity research and used to advise his friends, relatives
and other known people:
As per the recent decisions taken by the Ethical Standards Board of ICAI, a Chartered
Accountant in practice may be an equity research adviser, but he cannot publish a retail report,
as it would amount to other business or occupation.
In the given case, though Mr. S is involved in doing equity research and in advising people, it is
clear that he does not publish any retail report of his research. Hence, this act of Mr. S shall not
make him guilty of professional misconduct.
(B) Mr S is involved in paper-setting for the Accountancy subject in the school where he
studied. He also owns agricultural land and does agriculture activities:
As per Clause 11 of Part I of First Schedule of Chartered Accountants Act and regulation 190A of
Chartered Accountants Regulations, a Chartered Accountant in practice is deemed to be guilty
of professional misconduct if he engages in any business or occupation other than the
profession of chartered accountant unless permitted by the Council so to engage.
Further, Regulation 190A mentions the 'Permissions granted Generally' to engage in a certain
category of occupations, for which no specific permission of Council is required. Those cases
include:
• Valuation of papers, acting as paper-setter, head examiner or a moderator, for any
examination.
• Owning agricultural land and carrying out agricultural activities.

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Therefore, in the given case, the activities of Mr. S as a paper-setter and involvement in
agricultural activities do not make him guilty of professional misconduct.
(C) Mr. S was discharged insolvent: Disabilities for the Purpose of Membership:
Section 8 of the Chartered Accountants Act, 1949 enumerates the circumstances under which a
person is debarred from having his name entered in or borne on the Register of Members, If he,
being a discharged insolvent, has not obtained from the court a certificate stating that his
insolvency was caused by misfortune without any misconduct on his part. Here it may be noted
that a person who has been removed from membership for a specified period shall not be
entitled to have his name entered in the Register until the expiry of such period.
In addition, failure on the part of a person to disclose the fact that he suffers from any one of the
aforementioned disabilities would constitute professional misconduct. The name of the person,
who is found to have been subject at any time to any of the disabilities discussed in section 8,
can be removed from the Register of Members by the Council.
In the given case, it is clearly stated that Mr S was discharged insolvent, and he has also
obtained from the court a certificate stating that his insolvency was caused by misfortune
without any misconduct on his part. Hence, Mr S has not violated the provisions of Section 8,
and he is not debarred from having his name entered in the Register of Members.

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6 Company Audit
Marks Distribution of Past Exams
10
9
8
7
6
Marks

5
4
3
2
1
0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 9 0 8 5 5 0 5 0 5 0 5

*From May 2019, Marks are given only for subjective questions.
6.1 - Appointment of Auditors
Q.1 CA. X is a partner in M/s. AB & Associates and M/s. MN & Associates simultaneously. M/s. AB &
Associates has completed its tenure of 10 years as an auditor in XYZ Ltd. immediately preceding the
current financial year. It may be noted that the provisions for applicability of rotation of auditors are
applicable to XYZ Ltd. Now, the company wants to appoint M/s. MN & Associates as auditor for 5
years.
(a) Whether M/s. MN & Associates is allowed to accept the appointment as auditor of XYZ Ltd.?
(b) Would your answer be different from above if CA. X, being in-charge of M/s. AB & Associates and
certifying authority of financial statements of XYZ Ltd., retires from the partnership in M/s. AB
& Associates and joins M/s. MN & Associates?
Ans.: Appointment of Firm as auditor having common Partner:
• As per Second Proviso to sec. 139(2) of Companies Act, 2013, 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.
• In the present case, CA X is common partner in the firm AB & Associates and MN & Associates.
Conclusion: MN & Associates is disqualified for appointment as auditor of XYZ Ltd. for a period of 5
years
Appointment of firm as auditor having one of partner was in-charge in previous audit firm:
• As per Explanation given in Rule 6 of Companies (Audit & Auditors) Rules, 2014 if a partner, who
is in-charge of an audit firm and also certifies the financial statements of the company, retires

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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.
• In the present case, CA. X was incharge of M/s. AB & Associates and certifying authority of
financial statements of XYZ Ltd. Retires from the M/s. AB & associates and joins MN & Associates.
Conclusion: MN & Associates is disqualified for appointment as auditor of XYZ Ltd. for a period of 5
years
Q.2 ABC Pvt. Ltd., a new company, incorporated on 01.07.2022 is engaged in the manufacturing business.
On 30.07.2022, the Managing Director of ABC Pvt. Ltd. himself appointed CA Mohan, his daughter’s
husband, as the first auditor of the company. You are required to –
(i) State the provisions of the Companies Act, 2013 relating to appointment of first auditor.
(ii) Comment on the action of the Managing Director.
Ans.: Appointment of First Auditor of Non-Govt. Company:
• Section 139(6) of the Companies Act, 2013 lays down that “the first auditor or auditors of a
company shall be appointed by the Board of directors within 30 days from the date of registration
of the company”.
• In the instant case, the appointment of CA Mohan, a practicing Chartered Accountant as first
auditors by the Managing Director of ABC Pvt. Ltd. by himself is in violation of Section 139(6) of
the Companies Act, 2013, which authorizes the Board of Directors to appoint the first auditor of
the company.
Conclusion: In view of the above, the Managing Director of ABC Pvt. Ltd. should be advised not to
appoint the first auditor of the company.
Note: As the appointment of CA Mohan as such is not valid, there is no relevance of any discussion
with regard to his relationship with the managing director.
Q.3 KM Pvt. Ltd., engaged in the manufacturing business of Silk Shirts, is a newly incorporated company
dated 01.09.2022. On 28.09.2022, the members of KM Pvt. Ltd. themselves appointed CA Raj, a
renowned practitioner, as the first auditor of the company opposing that Board is not authorised to
appoint the auditor. You are required to comment on the action of the Members.
Ans.: Appointment of First Auditor of Non-Govt. Company:
• Section 139(6) of the Companies Act, 2013 lays down that “the first auditor or auditors of a
company shall be appointed by the Board of directors within 30 days from the date of registration
of the company”.
• In the case of failure of the Board to appoint the auditor, it shall inform the members of the
company. The members of the company shall within 90 days at an extraordinary general meeting
appoint the auditor. Appointed auditor shall hold office till the conclusion of the first annual
general meeting.
• In the instant case, the appointment of CA Raj, a practicing Chartered Accountant as first auditors
by the members of the company, opposing that Board is not authorised to appoint the auditor, is
not in order.
Conclusion: Appointment of CA Raj as first auditor, within 30 days of registration by the members of
the company is not in order.
Q.4 The first auditor of M/s. Healthy Wealthy Ltd., a Government company, was appointed by the Board
of Directors. Comment.

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Chapter 6 Company Audit
Ans.: Appointment of First Auditor of Govt. Company
• Section 139(7) of the Companies Act, 2013 lays down that in the case of a Government company
or any other company owned or controlled, directly or indirectly, by the CG, or by any SG, or SGs,
or partly by the CG and partly by one or more SGs, the first auditor shall be appointed by the CAG
of India within 60 days of registration of the company.
• In case the CAG of India does not appoint such auditor within the said period, the BoD of the
company shall appoint such auditor within the next 30 days.
• In the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform
the members of the company who shall appoint such auditor within the 60 days at an EGM.
• Hence in the case of M/s. Healthy Wealthy Ltd., being a government company, the first auditors
shall be appointed by the CAG of India.
Conclusion: The appointment of first auditors made by the Board of Directors of M/s. Healthy
Wealthy Ltd., is null and void.
Q.5 Nick Ltd. is a subsidiary of Ajanta Ltd., whose 20% shares have been held by Central Government,
25% by Uttar Pradesh Government and 10% by Madhya Pradesh Government. Nick Ltd. appointed
Mr. P as statutory auditor for the year.
Ans.: Appointment of Auditor of Govt. Company:
• As per Sec. 2(45) of the Companies Act, 2013, a Government company is defined “as 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 and partly by one or
more State Governments and includes a company which is a subsidiary of a Government Company
as thus defined”.
• Sec. 139(7) requires that the auditors of a government company shall be appointed or reappointed
by the Comptroller and Auditor General of India.
• In the given case Ajanta Ltd. is a government company as its 20% shares have been held by Central
Govt., 25% by U.P. State Government and 10% by M.P. State Govt. Total 55% shares have been held
by Central and State governments.
• Nick Ltd. will also be a government company, being subsidiary company of Ajanta Ltd. and hence
the Auditor of Nick Ltd. can be appointed only by C & AG.
Conclusion: Appointment of ‘P’ is invalid and ‘P’ should not give acceptance to the Directors of Nick
Ltd.
Q.6 While auditing, CA Mr. X, the statutory auditor of Y Ltd. encounters exceptional circumstances that
bring into question his ability to continue performing the audit. Considering it appropriate, CA Mr. X
resigned from the office of auditor of Y Ltd. Due to the resignation of the existing auditor, the Board
of Directors of Y Ltd. itself appointed CA Mr. Y, a practicing Chartered Accountant, as the statutory
auditor till the conclusion of 6th meeting.
You are required to state the provisions related to filling of casual vacancy as per the Companies Act,
2013 and comment upon the validity of appointment made by the Board.
Ans.: Filling of Casual Vacancy:
• As per Section 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor
shall-
(i) In the case of a non-government company, be filled by the Board of Directors within 30 days.
But, 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 3 months of the

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Company Audit Chapter 6
recommendation of the Board and the auditor so appointed shall hold the office till the
conclusion of the next AGM.
(ii) In the case of a government company, the casual vacancy be filled by the CAG of India within
30 days. But if the CAG does not fill the vacancy within the said period the Board of Directors
shall fill the vacancy within next 30 days.
• In the given case, CA Mr. X, the statutory auditor of Y Ltd. has resigned from the office of auditor.
Therefore, such casual vacancy can be filled by the Board of Directors subject to approval by the
company at a general meeting convened within 3 months of the recommendation of the Board.
Conclusion: The appointment of CA Mr. Y made by the Board of Directors without the approval of the
company at a general meeting is invalid and further, if appointment is approved by the company, CA
Mr. Y can hold office only till the conclusion of the next AGM.
Q.7 C.A. Ashwin was appointed as auditor of Bristol Ltd. for the year 2022-23. Since he declined to accept
the appointment, the Board of Directors appointed CA John as the Auditor in place of C.A. Ashwin and
the appointment was accepted by C.A. John. Discuss.
Ans.: BoD Powers to fill the Vacancy:
• Board of Directors of the company has been empowered to appoint the auditor other than first
auditor in case any casual vacancy arises in the office of auditor. [Sec. 138(8)]
• The present case does not fall u/s 139(8); hence BoD does not have power to fill-up the vacancy.
• Under the circumstances, it may be deemed that no auditor appointed at AGM and provisions of
Sec. 139(10) may be invoked which provides that where at any AGM, no auditor is appointed or re-
appointed, the existing auditor shall continue to be the auditor of the company.
• Further, clause 9 of Part I of the First Schedule to the Chartered Accountants Act, 1949 provides
that a member in practice shall be deemed to be guilty of professional misconduct if he accepts an
appointment as auditor of a company without first ascertaining from it whether the requirements
of Sections 139 and 140 of the Companies Act, 2013, in respect of such appointment have been
duly complied with.
• In the present case, appointment of Mr. John by Board of Directors is not in line with the provisions
of Sec. 139 of Companies Act, 2013.
• Vacancy so remains due to non–acceptance by Mr. Ashwin can only be filled by the Company in
General Meeting.
Conclusion: Board of Directors are not authorised to fill-up the vacancy in case the auditors
appointed at the AGM refuse to accept the appointment.
Mr. John will be guilty of professional misconduct by virtue of clause 9 of Part I of First Schedule of
Chartered Accountants Act, 1949.

Q.8 M/s. IO Ltd. is registered with Registrar of Companies on 1st of May 2022. The company’s 27% of
paid-up share capital is held by Central Government; 28% by State Government and the remaining
45% by public. The Board of Directors appointed RMG, Chartered Accountants as statutory auditors
for the financial year 2022-23 by passing a resolution at the Board Meeting held on 25th May, 2022.
Comment whether appointment is valid or not. [May 16 (4 Marks)]
Ans.: Appointment of First Auditor of Government Company:
• As per Sec. 2(45) of the Companies Act, 2013, a government company is defined “as any company
in which not less than 51% of the paid-up share capital is held by the C.G. or by any S.G.(s) or
partly by the C.G. and partly by one or more S.G.(s) and includes a company which is a subsidiary
of a Government Company as thus defined”.

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Chapter 6 Company Audit
• As per Sec. 139(7) of Companies Act, 2013, in the case of a Government company or any other
company owned or controlled, directly or indirectly, by the CG, or by any SG, or SGs, or partly by
the CG and partly by one or more SGs, the first auditor shall be appointed by the CAG of India,
within 60 days of registration of company.
• In case the CAG of India does not appoint such auditor within the said period, the BoD of the
company shall appoint such auditor within next 30 days; In the case of failure of the Board to
appoint such auditor within the next 30 days, it shall inform the members of the company who
shall appoint such auditor within 60 days at an EGM.
• In the present case, 55% of share capital is held by Central Government and State Government,
hence it is a case of Government Company and the first auditor need to be appointed by CAG
within 60 days of registration of company.
Conclusion: Appointment of First Auditor within 60 days of registration of government company by
Board of Directors is not valid.
Q.9 M/s. ABC & Co. is an audit firm having partners Mr. A, Mr. B and Mr. C, whose tenure as statutory
auditor in R Ltd. a listed entity, has expired as per the Companies Act, 2013. M/s. XY is another audit
firm which is appointed as the statutory auditor of R Ltd. for the subsequent year. Mr. A joins M/s. XY
as partner, 3 months after it was appointed as the statutory auditor of R Ltd. Comment.
[May 17 (5 Marks)]
Ans.: Applicability of Rotation provisions:
• Sec. 139(2) of Companies Act, 2013 provides that no listed company or other prescribed
companies, shall appoint or reappoint an audit firm as auditor for more than two terms of five
consecutive years.
• An audit firm which has completed its term, shall not be eligible for reappointment as auditor in
the same company for five years from the completion of such term.
• It is also provided 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.
• In the present case, on completion of tenure of M/s. ABC & Co., retiring auditor, company has
appointed M/s. XY as their auditor. After three months of appointment of XY Ltd. as auditor, Mr. A,
joins M/s. XY as partner. As per provisions of Sec. 139(2), incoming auditor shall not be eligible for
appointment in case of common partner as on date of appointment. But in this case, there were no
common partner as on date of appointment. Mr. A joins after 3 months of appointment.
Conclusion: Applying the provisions of Sec. 139(2), no issue arises as there were no common
partners as on date of appointment.
Note: Interpretation of this provision appears to be against the intention of law, which intends
for the cooling off period of retiring auditor for a period of 5 years in case of listed and other
prescribed companies.
Q.10 Under which circumstances the retiring Statutory Auditor of a company cannot be reappointed?
[Jan. 21 – Old Syllabus (5 Marks)]
Ans.: Reappointment of Retiring Auditor:
A retiring auditor cannot be reappointed at an annual general meeting, if-
(i) he is disqualified for reappointment;
(ii) he has given the company a notice in writing of his unwillingness to be reappointed; and

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Company Audit Chapter 6
(iii) a special resolution has been passed at that meeting appointing some other auditor or providing
expressly that he shall not be reappointed;
(iv) where at any annual general meeting, other auditor is appointed or reappointed.

6.2 - Removal of Auditor

Q.11 Comment: “M/s. PQR, audit firm has been re-appointed as sole statutory auditor of a listed company
in the AGM, where till last year M/s. LMN, audit firm was also one of the joint auditors along with
M/s. PQR. One tenure of consecutive five years of both the firms get completed in the mentioned
AGM. Mention the steps that should be taken by M/s. PQR before commencing the audit”.
Ans.: Appointment of Sole Auditor:
When one of the joint auditors of the previous years is considered for reappointment by the members
as the sole auditor for the next tenure, 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 AGM appointing as auditor a person other than a 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 u/s 139(2).
Accordingly, provisions of the Companies Act, 2013 to be complied with are as under:
1. Special Notice: Ascertain that special notice u/s 140(4) of the Companies Act, 2013 was received
by the company from requisite number of members (1% of total voting power or paid-up capital
not less than ₹ 5 Lacs) at least 14 days before the AGM date.
2. Sending copy of notice: Check whether the said notice has been sent to all the members at least 7
days before the date of the AGM.
3. Contents of Notice: Verify that 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. Notice to Auditor: Ensure that the notice has also been sent to the retiring auditor.
5. Sending the Representation: Verify whether any representation, received from the retiring
auditor was sent to the members of the company.
6. Consideration of representation: Verify from the minutes book whether the representation
received from the retiring joint auditor was considered at the AGM.
In addition to requirements of Companies Act, 2013, auditor is required to ensure compliance of
Clauses 8 and 9 of Part I of First Schedule to Chartered Accountants Act, 1949.
Q.12 What are the professional obligations of the auditor who has resigned from the audit before
completion of his term due to non-co-operation of the Management in completing certain audit
procedures? [Nov. 20 – Old Syllabus (5 Marks)]
Ans.: Professional Obligations in case of resignation by auditor:
• SA 705 "Modifications to the Opinion in the Independent Auditor's Report" provides the
consequence of an inability to obtain sufficient appropriate audit evidence due to a management -
imposed limitation after the auditor has accepted the engagement. The practicability of resigning
from the audit may depend upon the stage of completion of the engagement at the time that
management Imposes the scope limitation.
• When the auditor concludes that resignation from the audit is necessary because of a scope
limitation, there may be a professional, regulatory or legal requirement for the auditor to
communicate matters relating to the resignation from the engagement to regulators or the entity's
owners.

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Chapter 6 Company Audit
• Sec. 140(2) of Companies Act, 2013 requires that the auditor who has resigned from the company
shall file within a period of 30 days from the date of resignation, a statement in the prescribed form
(ADT-3) with the company and the Registrar.
• In case of Government companies, such statement is also required to be filed with the Comptroller
and Auditor-General of India.
• Statement must indicate the reasons and other facts as may be relevant with regard to his
resignation.
• Sec. 140(3) of Companies Act, 2013 provides that if the auditor does not comply with Sec. 140(2),
he shall be punishable with fine of ₹ 50,000 or the remuneration of the auditor, whichever is less,
and in case of continuing failure, with further penalty of ₹ 500 for each day after the first during
which such failure continues, subject to a maximum of ₹ 2 lakh.
Q.13 Write short note on: Direction by Tribunal in case auditor acted in a fraudulent manner.
[May 18 – Old Syllabus (4 Marks), RTP-Nov. 21]
Or
The Auditor of M/s. Quick Limited succumbed to the pressure of the Management in Certifying the
financials with an over stated figure of turnover by not adhering to the cut-off principles of the time
scale for the transaction of the year. On taking cognizance of this act of the Auditor, the Tribunal
under the Companies Act, 2013 initiated the proceedings against him. Briefly list the powers of the
tribunal in this respect including those relating to making orders against the auditor found to be
guilty. [May 18 – New Syllabus (4 Marks), MTP-March 22]
Or
On the advice of Management of M/s. Quick Ltd., the auditor of the Company overlooked and did not
report on shifting of certain current year’s sales transactions to the next year. The National Company
Law Tribunal (NCLT) wants to take action against you. Describe the powers of the NCLT under Sec.
140(5) of the Companies Act, 2013 for such action and consequences to the auditor.
[Nov. 19 – Old Syllabus (5 Marks)]
Ans.: Power of Tribunal in case Auditor acted in a Fraudulent Manner:
• Sec. 140(5) of the Companies Act, 2013, provides that the Tribunal either suo motu or on an
application made to it by the Central Government or by any person concerned, if it is satisfied that
the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or
abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it
may, by order, direct the company to change its auditors.
• However, if the application is made by the Central Government and the Tribunal is satisfied that
any change of the auditor is required, it shall within 15 days of receipt of such application, make
an order that he shall not function as an auditor and the Central Government may appoint another
auditor in his place.
• It may be noted that an auditor, whether individual or firm, against whom final order has been
passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any
company for a period of five years from the date of passing of the order and the auditor shall also
be liable for action under section 447 of the said Act.
• It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every
partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in
relation to, the company or its director or officers.

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Company Audit Chapter 6
6.3 - Qualifications and Disqualifications of Auditor (Sec. 141)
Q.14 “Mr. A”, a practicing Chartered Accountant, is holding securities of “XYZ Ltd.” having face value of ₹
900. Whether Mr. A is qualified for appointment as an Auditor of “XYZ Ltd.”?
Would your answer be different, if instead of Mr. A, Mr. B the step father of Mr. A is holding the
securities.
Ans.: Disqualification as to Security:
As per section 141(3)(d)(i) an auditor is disqualified to be appointed as an auditor if he, or his relative
or partner 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.
However, the relative of the auditor may hold the securities or interest in the company of face value
not exceeding ₹ 1,00,000.
Conclusion: In the present case, Mr. A. is holding security of ₹ 900 in the XYZ Ltd., therefore he is not
eligible for appointment as an Auditor of “XYZ Ltd”.
However, in second case, Mr. A is eligible, as relative may hold securities of face value upto ₹ 1 Lac.
Q.15 “Mr. P” is a practicing Chartered Accountant and “Mr. Q”, the relative of “Mr. P”, is holding securities
of “ABC Ltd.” having face value of ₹ 90,000. Whether “Mr. P” is Qualified from being appointed as an
Auditor of “ABC Ltd.”?
Ans.: Disqualifications as to Securities:
• As per section 141(3)(d)(i) an auditor is disqualified to be appointed as an auditor if he, or his
relative or partner 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.
• However, the relative of the auditor may hold the securities or interest in the company of face
value not exceeding ₹ 1,00,000.
Conclusion: In the present case, Mr. Q (relative of Mr. P, an auditor), is having securities of ₹ 90,000
face Value in the ABC Pvt. Ltd., which is as per requirement of proviso to section 141(3)(d)(i),
Therefore, Mr. P will not be disqualified to be appointed as an auditor of ABC Ltd.
Q.16 “BC & Co.” is an Audit Firm having partners “Mr. B” and “Mr. C”, and “Mr. A” the relative of “Mr. C”, is
holding securities of “MWF Ltd.” having face value of ₹ 1,01,000. Whether “BC & Co.” is qualified from
being appointed as an Auditor of “MWF Ltd.”?
Ans.: Disqualifications as to security:
• As per section 141(3)(d)(i) an auditor is disqualified to be appointed as an auditor if he, or his
relative or partner 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.
• However, the relative of the auditor may hold the securities or interest in the company of face
value not exceeding of ₹ 1,00,000.
Conclusion: In the instant case BC & Co., will be disqualified for appointment as an auditor of MWF
Ltd. as the relative of Mr. C i.e. partner of BC & Co., is holding the securities in MWF Ltd. which is
exceeding the limit mentioned in proviso to section 141(3)(d)(i).
Q.17 A, a Chartered Accountant has been appointed as auditor of Laxman Ltd. in the AGM of the company
held in Sep. 2022, which assignment he accepted. Subsequently in January, 2023 he joined B,
another chartered accountant, who is the Manager Finance of Laxman Ltd., as partner.

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Chapter 6 Company Audit
Ans.: Disqualification as to partner of employee:
• Section 141(3)(c) of the Companies Act, 2013 prescribes that any person who is a partner or in
employment of an officer or employee of the company will be disqualified to act as an auditor of a
company.
• Sec. 141(4) provides that an auditor who becomes subject, after his appointment, to any of the
disqualifications specified in Sec. 141(3), he shall be deemed to have vacated his office as an
auditor.
Conclusion: In the present case, A, an auditor of M/s. Laxman Ltd., joined as partner with B, who is
Manager Finance of M/s. Laxman Limited, will be disqualified by Sec. 141(3)(c) and, therefore, he
shall be deemed to have vacated office of the auditor of M/s. Laxman Limited.
Q.18 Ram and Hanuman Associates, Chartered Accountants in practice have been appointed as Statutory
Auditor of Krishna Ltd. for the accounting year 2022-23. Mr. Hanuman, a partner of Ram and
Hanuman Associates, holds 100 equity shares of Shiva Ltd., a subsidiary company of Krishna Ltd.
Comment.
Ans.: Auditor holding securities of a company:
• As per Sec. 141(3)(d) of the Companies Act, 2013, a person shall not be eligible for appointment as
an auditor of a company, who, 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.
• In the present case, Mr. Hanuman, Chartered Accountant, a partner of M/s. Ram and Hanuman
Associates, holds 100 equity shares of Shiva Ltd. which is a subsidiary of Krishna Ltd.
Conclusion: The firm, M/s. Ram and Hanuman Associates would be disqualified to be appointed as
statutory auditor of Krishna Ltd., which is the holding company of Shiva Ltd., because one of the
partner Mr. Hanuman is holding equity shares of its subsidiary.
Q.19 Mr. Amar, a Chartered Accountant, bought a car financed at ₹ 7,00,000 by Chaudhary Finance Ltd.,
which is a holding company of Charan Ltd. and Das Ltd. He has been the statutory auditor of Das Ltd.
and continues to be even after taking the loan.
Ans.: Disqualification as to indebtedness:
• As per Sec. 141(3)(d)(ii) of the Companies Act, 2013, a person is not eligible for appointment as
auditor of any company, If he is indebted to the company, or its subsidiary, or its holding or
associate company or a subsidiary of such holding company, in excess of ₹ 5 Lacs.
• In the given case Mr. Amar is disqualified to act as an auditor u/s 141(3)(d)(ii) as he is indebted
to M/s. Chaudhary Finance Ltd. for more than ₹ 5 Lacs.
• Further he cannot act as an auditor of any subsidiary of Chaudhary Finance Ltd. i.e. he is also
disqualified to work in Charan Ltd. & Das Ltd.
• Further Sec. 141(4) provides that a person appointed as auditor incurs any of the disqualification
mentioned u/s 141(3) after his appointment, he shall vacate the office immediately and it will be
treated a casual vacancy.
Conclusion: Mr. Amar should vacate his office immediately and Das Ltd. must have to appoint any
other CA as an auditor of the company.
Q.20 CA Mr. X was indebted to ABC Ltd. for a sum of ₹ 5,50,000 as on 01.04.2022. However, Mr. X having
come to know that he might be appointed as auditor of the company, he squared up the amount on
10.7.2022. Later on, he was appointed as an auditor of the company at the Annual General Meeting

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Company Audit Chapter 6
held on 16.07.2022. Subsequently, one of the shareholders complains that the appointment of Mr. X
as an auditor is invalid because he incurred disqualification u/s 141 of the Companies Act, 2013.
Comment. [Nov. 16 (4 Marks)]
Ans.: Auditor’s Disqualifications as to Indebtedness:
• Section 141(3)(d)(ii) of the Companies Act, 2013 provides that a person who is indebted to the
company for an amount exceeding ₹ 5,00,000 shall be disqualified to act as an auditor of such
company.
• However, where the person proposed to be appointed as auditor, liquidated the debt before the
date of appointment, no disqualification arises as to appointment.
• In the given case, CA Mr. X was indebted to ABC Ltd. for a sum of ₹ 5,50,000 as on 01.04.2022. He
repaid the loan amount fully to the company on 10.07.2022. He was appointed as an auditor of the
company at the Annual General Meeting held on 16.07.2022. At the time of appointment, he was
not indebted to the company hence, not disqualified.
Conclusion: The appointment of CA Mr. X as an auditor is valid and the shareholder’s complaint is not
acceptable.
Q.21 Comment on the validity of the appointments of Mr. A as an auditor of ABC Ltd. in the following
situations:
(i) Mr. B, a partner of Mr. A held shares of face value of ₹ 1,00,000 in DEF Ltd., the holding company
of ABC Ltd. Mr. B has sold the securities after a period of 45 days from the date of appointment of
Mr. A as an auditor of ABC Ltd.
(ii) Mrs. A, wife of Mr. A had given a financial guarantee for the principal amount of a debt owed by
Mr. X to ABC Ltd. for ₹ 6 lakhs. Mr. X has repaid ₹ 5 lakhs to ABC Ltd. 2 days before the date of
appointment of Mr. A as an auditor of the company. [Nov. 18-Old Syllabus (6 Marks)]
Ans.: Validity of Appointments:
(a) Auditor’s disqualifications as to security:
• As per section 141(3)(d)(i) a person is disqualified to be appointed as an auditor if he, or his
relative or partner 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.
• However, the relative of the auditor may hold the securities or interest in the company of face
value not exceeding of ₹ 1,00,000. It is also provided that in the event of acquiring and
security or interest by a relative above the threshold limit, the corrective action to maintain
the limits as specified above shall be taken by the auditor within 60 days of such acquisition
or interest.
• In the present case, Mr. B, a partner of Mr. A held shares of face value of ₹ 1,00,000 in DEF
Ltd., the holding company of ABC Ltd. Mr. B has sold the securities after a period of 45 days
from the date of appointment of Mr. A as an auditor of ABC Ltd.
Conclusion: Appointment of Mr. A as auditor in ABC Ltd. is not valid as he is disqualified by virtue
of provisions as stated in Sec. 141(3)(d)(i). Subsequent sale of securities by the partner is of no
relevance in this case.
(b) Auditor’s disqualifications as to security:
• As per Sec. 141(3)(d)(iii) a person is disqualified to be appointed as an auditor if he, or his
relative or partner has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or its holding or associate
company or a subsidiary of such holding company, in excess of ₹ 1 lakh.

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Chapter 6 Company Audit
• These disqualifications need to be examined as at the time of appointment.
• In the present case, Mrs. A, wife of Mr. A had given a financial guarantee for the principal
amount of a debt owed by Mr. X to ABC Ltd. for ₹ 6 lakhs. Mr. X has repaid ₹ 5 lakhs to ABC
Ltd. 2 days before the date of appointment of Mr. A as an auditor of the company.
Conclusion: Appointment of Mr. A as auditor in ABC Ltd. is valid as the amount of guarantee
given by the Mrs. A for indebtedness of Mr. X in the company does not exceed ₹ 1 lac as on date of
appointment.
Q.22 Mr. Y, a practicing Chartered Accountant, has been appointed as an auditor of M/s. Z Ltd. on 12th
June, 2022 for the year ended 31st March, 2023. Following persons have done following transactions
in securities of M/s. Z Ltd.:
• Daughter of Mr. Y: Purchase of Securities on 10th Sep., 2022 of face value of ₹ 45,000 (market
value ₹ 90,000).
• Husband of daughter of Mr. Y: Purchase of Securities on 10th Dec., 2022 of face value of ₹ 90,000
(Market value ₹ 1,90,000).
All the above securities were sold on 10th March, 2023 for ₹ 3,00,000. Discuss the implications of the
above on the appointment of Mr. Y. [May 19 – Old Syllabus (5 Marks)]
Ans.: Auditor’s disqualifications as to security:
• As per section 141(3)(d)(i) of Companies Act, 2013, a person is disqualified to be appointed as an
auditor if he, or his relative or partner 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.
• As per Rule 10 of Companies (Audit and Auditor’s) Rules, 2014, the relative of the auditor may
hold the securities or interest in the company of face value not exceeding of ₹ 1,00,000. It is also
provided that in the event of acquiring and security or interest by a relative above the threshold
limit, the corrective action to maintain the limits as specified above shall be taken by the auditor
within 60 days of such acquisition or interest.
• The term relative as defined in Sec. 2(77) includes daughter and daughter’s husband.
• In the present case, Mr. Y, has been appointed as an auditor of M/s. Z Ltd. on 12th June, 2022 for
the year ended 31st March, 2023. His daughter purchases securities of Z Ltd. on 10th Sep., 2022 of
face value of ₹ 45,000, whereas husband of daughter of Mr. Y purchases securities of Z Ltd. on 10th
Dec., 2022 of face value of ₹ 90,000. Aggregate face value of securities held by relatives of Mr. Y
amounts to ₹ 1,35,000. Mr. Y was required to take corrective action within 60 days of 10th Dec.
2022 to bring the value of securities held by relatives to ₹ 1,00,000. However, securities were sold
on 10th March, 2023 after expiry of 60 days from 10th Dec. 2022.
Conclusion: Mr. Y becomes disqualified on expiry of 60 days from 10th Dec. 2022 as he fails to take
corrective action so as to bring the shareholding of relatives within prescribed limit of ₹ 1 lakh (face
Value).
Q.23 CTR & Associates is an audit firm with CA C and CA T as partners. M/s CTR & Associates has been
appointed as statutory auditor of M/s TP Hotel Ltd. for the financial year 2022-23. The audit firm is a
regular customer of the hotel and the partners usually used to stay in the same hotel at various
locations in the course of travelling for their various professional assignments. Normally, payments
for such stays are settled against monthly bills raised by the company. Give your comment on
qualification of the audit firm with respect to the provisions of The Companies Act, 2013.
[May 19 – New Syllabus (4 Marks); May 23 (5 Marks)]

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Company Audit Chapter 6
Ans.: Auditor’s disqualifications as to business relationship:
• As per Sec. 141(3)(d)(ii) of the Companies Act, 2013 read with Rule 10 of Companies (Audit and
Auditors) Rules, 2014, a person who is indebted to the company for an amount exceeding ₹ 5 Lacs
shall be disqualified to be appointed as auditor.
• As per section 141(3)(e) of Companies Act, 2013, a person or a firm who, whether directly or
indirectly, has business relationship with the company, or its subsidiary, or its holding or associate
company or subsidiary of such holding company or associate company of such nature as may be
prescribed, is disqualified to be appointed as auditor of that company.
• As per Rule 10 of Companies (Audit and Auditors) Rules, 2014, the term “business relationship”
shall be construed as any transaction entered into for a commercial purpose, except:
 commercial transactions which are in the nature of professional services permitted to be
rendered by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949
and the rules or the regulations made under those Acts;
 commercial transactions which are in the ordinary course of business of the company at
arm’s length price - like sale of products or services to the auditor, as customer, in the
ordinary course of business, by companies engaged in the business of telecommunications,
airlines, hospitals, hotels and such other similar businesses.
• In the present case, audit firm is a regular customer of the client running a hotel and the partners
usually stay in the same hotel at various locations in the course of travelling for their various
professional assignments. Normally, payments for such stay are settled against quarterly bills
raised by the company.
Conclusion: No disqualification arises as the services availed are in ordinary course of business of
client and cannot be considered as business relationship. (It is assumed that outstanding does not
exceed ₹ 5 Lacs.)

6.4 - Ceiling on Number of Audits [Sec. 141(3)(g)]

Q.24 “ABC & Co.” is an Audit Firm having partners “Mr. A”, “Mr. B” and “Mr. C”, Chartered Accountants.
“Mr. A”, “Mr. B” and “Mr. C” are holding appointment as an Auditor in 4, 6 and 10 Companies
respectively.
(i) Provide the maximum number of Audits remaining in the name of “ABC & Co.”
(ii) Provide the maximum number of Audits remaining in the name of individual partner i.e. Mr. A,
Mr. B and Mr. C.
(iii) Can ABC & Co. accept the appointment as an auditor in 60 private companies having paid-up
share capital less than ₹ 100 Cr. which has not committed default in filing its financial
statements under section 137 or annual return under section 92 of the Companies Act with the
Registrar, 2 small companies and 1 dormant company?
(iv) Would your answer be different, if out of those 60 private companies, 45 companies are having
paid-up share capital of ₹ 110 crore each?
Ans.: Ceiling on Number of Audit:
As per Sec. 141(3)(g) of the Companies Act, 2013, a person shall not be eligible for appointment as an
auditor if he 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 other than one
person company, dormant companies, small companies and private companies having paid-up share

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Chapter 6 Company Audit
capital less than ₹ 100 Crores, which has not committed default in filing its financial statements u/s
137 or annual return u/s section 92 of the Companies Act with the Registrar.
As per Sec. 141(3)(g), this limit of 20 company audits is per person. In the case of an audit firm having
3 partners, the overall ceiling will be 3 × 20 = 60 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.
Conclusion:
(i) ABC & Co. can hold appointment as an auditor of 40 more companies as computed below:
Total Number of Audits available to the Firm = 20 × 3 = 60
Number of Audits already taken by all the partners
In their individual capacity = 4+6+10 = 20
Remaining number of Audits available to the firm = 40
(ii) Mr. A can hold: 20 - 4 = 16 more audits.
Mr. B can hold: 20 - 6 = 14 more audits and
Mr. C can hold: 20 – 10 = 10 more audits.
(iii) M/s. ABC & Co. can hold appointment as an auditor in all the 60 private companies having paid-
up share capital less than ₹ 100 crores, 2 small companies and 1 dormant company as these are
excluded from the ceiling limit of company audits given under section 141(3)(g) of the
Companies Act, 2013.
(iv) M/s. ABC & Co. can also accept the appointment as an auditor for 2 small companies, 1 dormant
company, 15 private companies having paid-up share capital less than ₹ 100 crores and 40
private companies having paid-up share capital of ₹ 110 crores each in addition to above 20
company audits already holding.
Q.25 KSY & Co. Chartered Accountants is an audit firm having two partners CA K and CA Y. KSY & Co. is
already holding appointment as auditors of 36 public companies.
KSY & Co. seeks your advice in the following situations:
(i) KSY & Co. has been offered the appointment as Auditors of 7 more Private Limited Companies. Of
the seven, one is a company with a paid-up share capital of ₹ 150 crores, five are “small
companies” as per the Act and one is a “Dormant Company”.
(ii) Would your answer be different, if out of those 7 Private Companies, 3 Companies have paid-up
capital of ₹ 90 crores each?
Note: None of the private companies has committed default in filing its financial statements u/s 137
or annual return u/s 92 of the Companies Act with the Registrar.
Ans.: Ceiling on Number of Audits:
• Sec. 141(3)(g) of Companies Act, 2013 provides that a person is not eligible to be appointed as
auditor of a company if he at the date of such appointment or reappointment holding appointment
as auditor of more than 20 Companies other than one-person company, dormant companies, small
companies and private companies having paid-up share capital less than ₹ 100 Crores, which has
not committed default in filing its financial statements u/s 137 or annual return u/s 92 of the
Companies Act with the Registrar.
• In the case of 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.
• In the present case, KSY & Co. has two partners and hence eligible for audit of 40 Companies. Firm
is already holding audit of 36 Public companies. It can accept the audit of 4 more companies other

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Company Audit Chapter 6
than One-person company, dormant companies, small companies and private companies having
paid-up share capital less than ₹ 100 Crores.
Conclusion:
(i) KSY & Co. can accept audit of all 7 Private companies, because 5 small companies and one
dormant company will not be considered for the purpose of ceiling limit. Total number of audit
after acceptance of all seven audits remains at 37.
(ii) Answer will remain same, as the private companies having paid-up capital less than ₹ 100 Crores
are not considered for the purpose of ceiling limit. Total number of audit after acceptance of all
seven audits remains at 40 assuming that other four companies having paid up capital in excess
of ₹ 100 Crores.
Q.26 M/s. ABC and Co., a firm of Chartered Accountants, comprising of three partners A, B and C are
Statutory Auditors of 50 Companies as per details given below:
(i) Small Companies - 10
(ii) Private Companies having paid-up share capital of less than ₹ 100 Crores – 20
(iii) Private Companies having paid-up share capital of more than ₹ 100 Crores – 15
(iv) Public Companies – 5
Mr. A signs the Balance Sheet of 10 Small Companies and 10 Private Companies having paid-up
share capital of less than ₹ 100 Crores. Mr. B signs the Balance Sheet of 10 Private Companies having
paid-up share capital of less than ₹ 100 Crores and 5 private Companies having paid-up share
capital of more than ₹ 100 Crores. Mr. C signs the Balance Sheet of 10 Private Companies having
paid-up share capital of more than ₹ 100 crores and 5 Public Companies.
What is the maximum number of audits that the firm as a whole can accept and what is the
maximum number of audits each individual partner can accept?
Note: None of the private companies has committed default in filing its financial statements u/s 137
or annual return u/s 92 of the Companies Act with the Registrar. [May 18 – Old Syllabus (6 Marks)]
Ans.: Ceiling on Number of Audit:
As per section 141(3)(g) of the Companies Act, 2013, a person shall not be eligible for appointment as
an auditor if he 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 other than one
person company, dormant companies, small companies and private companies having paid-up share
capital less than ₹ 100 Crores, which has not committed default in filing its financial statements u/s
137 or annual return u/s 92 of the Companies Act with the Registrar.
As per section 141(3)(g), this limit of 20 company audits is per person. In the case of an audit firm
having 3 partners, the overall ceiling will be 3 × 20 = 60 company audits.
Conclusion:
• Firm can accept 40 more audits of public companies and private companies having paid-up
capital of more than ₹ 100 Crores. Audit of Small companies and private companies having paid
up share capital less than ₹ 100 Crores are not considered for the purpose of ceiling.
• Partner A can accept 20 audits of public companies and private companies having paid-up capital
of more than ₹ 100 Crores. Partner B can accept 15 audits of public companies and private
companies having paid-up capital of more than ₹ 100 Crores. Partner C can accept 5 audits of
public companies and private companies having paid-up capital of more than ₹ 100 Crores. Audit
of Small companies and private companies having paid-up share capital less than ₹ 100 Crores
are not considered for the purpose of ceiling.

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Chapter 6 Company Audit
Q.27 RAJUL & Co.” is an Audit Firm having partners “Mr. R”, “Mr. A”, “Mr. J”, “Mr. U” and “Mr. L”, Chartered
Accountants. “Mr. R”, “Mr. A”, “Mr. J”, “Mr. U” and “Mr. L” are holding appointment as an Auditor in 4,
5, 6, 10 and 15 Companies respectively.
(i) Provide the maximum number of Audits remaining in the name of “RAJUL & Co.”
(ii) Provide the maximum number of Audits remaining in the name of individual partner i.e., “Mr.
R”, “Mr. A”, “Mr. J”, “Mr. U” and “Mr. L”.
(iii) Can RAJUL & Co. accept the appointment as an auditor in 80 private companies having paid-up
share capital less than ₹ 100 crores which has not committed default in filing its financial
statements u/s 137 or annual return u/s 92 of the Companies Act with the Registrar, 2 small
companies and 1 dormant company?
(iv) Would your answer be different, if out of those 80 private companies, 65 companies are having
paid-up share capital of ₹ 115 crores each? [MTP – April 21]
Ans.: Ceiling on No. of Audits:
As per section 141(3)(g) of the Companies Act, 2013, a person shall not be eligible for appointment as
an auditor if he 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 20 companies other than OPC, dormant
companies, small companies and private companies having paid-up share capital less than ₹ 100
crores (private company which has not committed a default in filing its financial statements under
section 137 of the said Act or annual return under section 92 of the said Act with the Registrar).
As per section 141(3)(g), this limit of 20 company audits is per person. In the case of an audit firm
having 5 partners, the overall ceiling will be 5 × 20 = 100 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.
Conclusion: based on the provisions as stated above, following conclusions may be drawn:
(i) RAJUL & Co. can hold appointment as an auditor of 60 more companies:
Total Number of Audits available to the Firm = 20 × 5 = 100
Number of Audits already taken by all the partners
in their individual capacity = 4+5+6+10+15 = 40
Remaining number of Audits available to the Firm = 60
(ii) With reference to above provisions, an auditor can hold more appointment as auditor = ceiling
limit as per section 141(3)(g)- already holding appointments as an auditor.
Hence Mr. R can hold: 20 - 4 = 16 more audits.
Mr. A can hold: 20 - 5 = 15 more audits.
Mr. J can hold: 20 - 6 = 14 more audits.
Mr. U can hold: 20 - 10 = 10 more audits and
Mr. L can hold: 20 - 15 = 5 more audits.
(iii) RAJUL & Co. can hold appointment as an auditor in all the 80 private companies having paid-up
share capital less than ₹ 100 crores (private company which has not committed a default in
filing its financial statements u/s 137 of the said Act or annual return u/s 92 of the said Act with
the Registrar), 2 small companies and 1 dormant company as these are excluded from the
ceiling limit of company audits given under section 141(3)(g) of the Companies Act, 2013.

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Company Audit Chapter 6
(iv) RAJUL & Co. is already having 40 company audits and they can accept only 60 more company
audits. In addition, they can also conduct the audit of OPC, small companies, dormant
companies and private companies having paid-up share capital less than ₹ 100 crores. In the
given case, out of the 80 private companies RAJUL & Co. is being offered, 65 companies have
paid-up share capital of ₹ 115 crores each.
Therefore, RAJUL & Co. can accept the appointment as an auditor for 2 small companies, 1 dormant
company, 15 private companies having paid-up share capital less than ₹ 100 crores (Private
company which has not committed a default in filing its financial statements under section 137 of
the said Act or annual return under section 92 of the said Act with the Registrar) and 60 private
companies having paid-up share capital of ₹ 115 crores each in addition to above 40 company
audits already held.
Q.28 M/s. XYZ & Co. is an Audit Firm having partners Mr. X, Mr. Y and Mr. Z, Chartered Accountants. Mr. X,
Mr. Y and Mr. Z are holding appointment as Auditors in 5, 5 and 10 companies respectively.
(i) Provide the maximum number of Audits remaining in the name of XYZ & Co.
(ii) Provide the maximum number of Audits remaining in the name of individual partner i.e., Mr. X,
Mr. Y and Mr. Z.
(iii) Can XYZ & Co. accept the appointment as an auditor in 60 private companies having paid-up
share capital less than 100 crore, 2 small companies and 2 dormant companies?
(iv) Would your answer be different, if out of those 60 private companies, only 15 companies are
having paid-up share capital of less than ₹ 100 crore each?
Discuss with reference to ceiling on number of audits as per Companies Act, 2013.
[July 21 – Old Syllabus (5 Marks)]
Ans.: Ceiling on Number of Audit:
As per Sec. 141(3)(g) of the Companies Act, 2013, a person shall not be eligible for appointment as an
auditor if he 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 other than one
person company, dormant companies, small companies and private companies having paid-up share
capital less than ₹ 100 Crores, which has not committed default in filing its financial statements u/s
137 or annual return u/s section 92 of the Companies Act with the Registrar.
As per Sec. 141(3)(g), this limit of 20 company audits is per person. In the case of an audit firm having
3 partners, the overall ceiling will be 3 × 20 = 60 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.
Conclusion:
(i) XYZ & Co. can hold appointment as an auditor of 40 more companies as computed below:
Total Number of Audits available to the Firm = 20 × 3 = 60
Number of Audits already taken by all the partners
In their individual capacity = 5+5+10 = 20
Remaining number of Audits available to the firm = 40
(ii) Mr. X can hold: 20 - 5 = 15 more audits.
Mr. Y can hold: 20 - 5 = 15 more audits and
Mr. Z can hold: 20 - 10 = 10 more audits.

6.16
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Chapter 6 Company Audit
(iii) M/s. XYZ & Co. can hold appointment as an auditor in all the 60 private companies having paid-
up share capital less than ₹ 100 crores, 2 small companies and 2 dormant companies as these
are excluded from the ceiling limit of company audits given under section 141(3)(g) of the
Companies Act, 2013.
(iv) M/s. XYZ & Co. can also accept the appointment as an auditor for 2 small companies, 1 dormant
company, 15 private companies having paid-up share capital less than ₹ 100 crores and 40
private companies having paid-up share capital of ₹ 100 crores or more each in addition to
above 20 company audits already holding.

6.5 - Powers and Duties of Auditor – Sec. 143, Sec. 144, Sec. 145, Sec. 146
Q.29 Director of T Ltd. draws an advance of US$ 200 per day in connection with the foreign trip
undertaken on behalf of the company. On his return he files a declaration stating that entire advance
was expended without any supporting or evidence. T Ltd. books the entire expenses on the basis of
such declaration. As the auditor of T Ltd. how do you deal with this?
Ans.: Personal Expenses Charged to revenue Account:
• Sec. 143(1)(e) of the Companies Act, 2013 requires an auditor to inquire and report whether
personal expenses have been charged to revenue account.
• SA 500 “Audit Evidence” states that an auditor should obtain sufficient appropriate audit evidence
to be able to draw reasonable conclusions on which to base his option.
• All payments to Directors as remuneration or perquisites whether in the case of a public or private
company need to be authorised in accordance with the Companies Act as well as Articles of
Association of the company.
• In the present case, company has booked foreign trip expenses of director in its revenue account.
In the context, auditor is required to inquire whether the payment made by the company for the
foreign trip is personal expense or not and collect the necessary supporting evidences.
• If it appears to be personal expense, auditor is required to ascertain whether such expense is
properly authorized or not. If not authorized, auditor should state the matter in his report.
Q.30 While conducting the audit of a limited company for the year ended 31st March, 2023, the auditor
wanted to refer to the Minute Books. The Board of Directors refused to show the Minute Books to the
auditor.
Ans.: Right of Access to Books of Account:
• Sec. 143(1) of the Companies Act, 2013 grants powers to the auditor that every auditor has a right
of access, at all times, to the books of account and vouchers of the company.
• The term books of account include all books which have any bearing or are likely to have any
bearing on the accounts, whether these be the usual financial books or the statutory or statistical
books.
• In order to verify actions of the company and to vouch and verify some of the transactions of the
company, it is necessary for the auditor to refer to the decisions of the shareholders and/or the
directors of the company.
• It is, therefore, essential for the auditor to refer to the Minute Books. In the absence of the Minute
Books, the auditor may not be able to vouch/verify certain transactions of the company.
Conclusion: In case the directors have refused to produce the Minute Books, the auditor may
consider extending the audit procedure as also consider qualifying his report in any appropriate
manner.

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Company Audit Chapter 6
Q.31 The auditor of X Ltd. did not report on the matters, specified u/s 143(1) of the Companies Act, 2013,
on which he inquired into, because of the reason that he was satisfied. But the management of the
company wanted the auditor to report on those matters so that the members can also be aware of
the true position of the company. Comment as to whether the auditor is required to report the
matters, specified under the Act, he inquired into and whether the contention of the management is
sustainable.
Ans.: Reporting of Matters contained under Section 143(1) of the Companies Act, 2013:
• Sec. 143(1) of the Act deals with the duties of an auditor requiring him to make an inquiry in
respect of specified propriety matters.
• The matters in respect of which the inquiry has to be made by the auditor are relating to loans
and advances on the basis of security, transactions represented merely by book entries,
investments sold at less than cost price, loans and advances shown as deposits, personal expenses
charged to revenue account etc.
• The law requires the auditor to make an inquiry, the Research Committee of the Institute opined
that the auditor is not required to report on these matters unless he has any special comments to
make on any of the items referred to therein. If the auditor is satisfied as a result of the inquiries,
he has no further duty to report that he is so satisfied.
• Therefore, it could be said that the auditor should make a report to the members in case he finds
answer to any of these matters in adverse.
Conclusion: The auditor of X Ltd. is correct in non-reporting on the matters specified in Sec. 143(1) of
the Act and hence, the contention of the management is not sustainable.
Q.32 You have been appointed statutory auditor of a company for the financial year ended 31st March,
2023 in place of the retiring auditor. During the course of audit, you observe that a fraud had been
committed by a general manager who retired in March 2023. While going into further details, it was
found that the fraud was going on since last 2-3 years and the total amount misappropriated was
likely to exceed ₹ 100 lakhs. As statutory auditor, what would be your reporting responsibilities to
the government? [Nov. 17 (5 Marks)]
Ans.: Auditor’s duties to report fraud to the Central Government:
• Sec. 143(12) of Companies Act, 2013 requires that 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 may be prescribed. For this purpose, Rule 13 prescribes the amount of
₹ 1 Cr. or more.
• However, in case of a fraud involving lesser than the specified amount, i.e. below ₹ 1 Cr., the
auditor shall report the matter to the audit committee constituted u/s 177 or to the Board in other
cases within such time and in such manner as may be prescribed.
• The companies, whose auditors have reported frauds 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.
• Rule 13 of Companies (Audit and Auditors) Rules, 2014 prescribes the manner of Reporting of
Frauds in various cases. Accordingly:
(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 or is expected to involve
individually an amount of ₹ 1 Cr. or above, is being or has been committed against the
company by its officers or employees, the auditor shall report the matter to the CG.

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Chapter 6 Company Audit
(2) The auditor shall report the matter to the CG 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 2 days of his knowledge of the fraud, seeking their
reply or observations within 45 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 CG within 15
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 45 days, he shall forward his report to the CG
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;
(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover
by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail
in confirmation of the same;
(e) the report shall be on the letterhead of the auditor containing postal address, e-mail
address and contact telephone number or mobile number and be signed by the auditor
with his seal and shall indicate his Membership Number; and
(f) the report shall be in the form of a statement as specified in Form ADT-4.
(3) In case of a fraud involving amount less than ₹ 1 Cr., the auditor shall report the matter to
Audit Committee constituted u/s 177 or to the Board immediately but not later than 2 days of
his knowledge of the fraud and he shall report the matter specifying the following:
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
(4) 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:
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.
Q.33 RX Ltd. is a sugar manufacturing company. The company appointed Mr. Suresh, a practicing cost
accountant, to conduct cost audit of its cost records under section 148 of the Companies Act, 2013.
While conducting audit, Mr. Suresh found some misstatement resulting into fraud committed by the
officers of the company amounting ₹ 1.5 crore. However, he did not report the matter to the Central
Government believing that liability for such reporting lies only with statutory auditor of the
company. Advise.
Ans.: Reporting of Fraud u/s 142(12) by a Cost Accountant:
• Sec. 143(12) of the Companies Act, 2013 along with Rule 13 of the Companies (Audit and
Auditors) Rules, 2014 provides that if 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 or is
expected to involve individually an amount of ₹ 1 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 as per the prescribed procedure.

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Company Audit Chapter 6
• Sec. 143(14) of Companies Act, 2013 provides that the provisions related to reporting of fraud
shall also apply, mutatis mutandis, to a cost accountant conducting cost audit u/s 148 of the
Companies Act, 2013.
• In the present case, Mr. Suresh, being the cost auditor of RX Ltd., found misstatement resulting
into fraud amounting ₹ 1.5 crore committed by the officers of the company. He was required to
report the fraud to the Central Government.
Conclusion: Mr. Suresh failed to perform his duties to report the fraud to C.G.
Q.34 Comment: Contravene Ltd. appointed CA Innocent as an auditor for the company for the current
financial year. Further the company offered him the services of actuarial, investment advisory and
investment banking which was also approved by the Board of Directors. [MTP-Oct. 19]
Ans.: Services not to be Rendered by the Auditor:
Sec. 144 of the Companies Act, 2013 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 (whether such services are rendered directly or indirectly to the
company or its holding company or subsidiary company), 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.
Further Sec. 141(3)(i) of the Companies Act, 2013 also disqualify a person for appointment as an
auditor of a company who, directly or indirectly, renders any service referred to in Sec. 144 to the
company or its holding company or its subsidiary company.
In the given case, CA Innocent was appointed as an auditor of Contravene Ltd. He was offered
additional services of actuarial, investment advisory and investment banking which was also
approved by the Board of Directors.
Conclusion: The auditor is advised not to accept the services as these services are specifically notified
in the services not to be rendered by him as an auditor as per Sec. 144 of the Act.
Q.35 CA G, was appointed by DP Ltd., as Statutory Auditor. While doing the audit of DP Ltd., CA G observed
that certain loans and advances were made without proper securities; certain trade receivables and
trade payables were adjusted inter se; and personal expenses were charged to revenue. As a
company auditor comment on the reporting responsibilities of CA G.
[Nov. 19 – New Syllabus (5 Marks)]
Ans.: Inquiry into Propriety Matters u/s 143(1):
• Section 143(1) of the Companies Act, 2013 requires the auditor to conduct inquiry into certain
matters and if the auditor finds answer of any of these matters in adverse, auditor is required to
report, otherwise no reporting is required. In relation to observations stated in the question,
auditor should inquire as follows:

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Chapter 6 Company Audit
1. Clause (a) of Section 143(1) requires the auditor to inquire “Whether loans and advances
made by the company on the basis of security have been properly secured and whether the
terms on which they have been made are prejudicial to the interests of the company or its
members”.
2. Clause (b) of section 143(1), requires the auditor to inquire “whether transactions of the
company which are represented merely by book entries are prejudicial to the interests of the
company”.
3. Clause (e) of section 143(1) requires the auditor to inquire “Whether personal expenses have
been charged to revenue account”.
• If the auditor finds that the loans and advances have not been properly secured, he may enter an
adverse comment in the report without modifying opinion on financial statements if the loans and
advances are properly described and presented in terms of Part I of Schedule III to the Companies
Act.
• If relation to his observation regarding inter se adjustment of trade receivables and trade payables,
being a book entry, auditor should have inquired into the legitimate interests of the company. If
appears prejudicial, he may enter adverse comment in the report.
• Regarding charging of personal expenses to revenue account auditor should inquire whether such
expenses are incurred on the basis of the company’s contractual obligations, or in accordance with
accepted business practice. If personal expenses incurred by the company are not covered by
contractual obligations or by accepted business practice and charged to revenue account, it would
be the duty of the auditor to report thereon.
Conclusion: In the instant case, Mr. G, the statutory auditor of DP Ltd., needs to enquire in light of
above provisions, as a result of the enquiries if he is satisfied then there is no further duty to report on
these matters.
Q.36 As an auditor, how would you deal with the following: In the audit of ABC Private Limited, auditor
came across cases of payments to Directors, whereby, expenses of a personal nature were re-
imbursed. [Nov. 20 – Old Syllabus (4 Marks)]
Ans.: Personal Expenses of Directors:
• All payments to Directors as remuneration or perquisites whether in the case of a public or private
company need to be authorised in accordance with the Companies Act as well as Articles of
Association of the company.
• If the terms of appointment of a Director include payment of expenses of a personal nature, then
such expenses can be incurred by the company; otherwise, no such expense can be incurred or
reimbursed by the company.
• In the instant case the auditor has to ensure that the payment is authorized by the Articles of
Association and the same has been covered by terms of appointment.
• Further as this payment is also covered u/s 143(1), and hence auditor is also required to inquire
into the matter and make a disclosure in his report accordingly.
Q.37 Mr. Raj, the engagement partner of R.O.K. & Co., in connection with statutory audit of Waria Ltd., had
assigned the responsibility of enquiring into propriety matters of the Company as required by
section 143(1) of the Companies Act, 2013, to Mr. Samay, an engagement team member. Mr. Samay
while making such enquiries, was having following queries, as tabulated below, which he ought to
get resolved from Mr. Raj, as follows:-

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Company Audit Chapter 6
Sr. No. Query of Mr. Samay
1 What documents to be seen in case of loan given by the company in lieu of hypothecation
of goods from lender as a security for the purpose of reporting as per clause (a) of
section 143(1) of the Companies Act, 2013?
2 What shall be the cost of Debentures and Bonus Shares sold by the company for which
the cost is not ascertainable for the purpose of reporting as per clause (c) of section
143(1) of the Companies Act, 2013?
3 Whether the shares allotted by Waria Ltd. against a loan taken by it from a NBFC can be
considered to be allotted for cash for the purpose of reporting as per clause (f) of section
143(1) of the Companies Act, 2013?
Assuming that you are Mr. Raj the engagement partner, please provide answer to the queries of Mr.
Samay? [MTP – March 21]
Ans.: Responses to Queries raised by Samay:
Query 1: What documents to be seen in case of loan given by the company in lieu of
hypothecation of goods from lender as a security for the purpose of reporting as per clause (a)
of section 143(1) of the Companies Act, 2013?
Response: Mr. Samay should see deed of Hypothecation or other document creating the charge,
together with a statement of stocks held at the balance sheet date in order.
Query 2: What shall be the cost of Debentures and Bonus Shares sold by the company for which
the cost is not ascertainable for the purpose of reporting as per clause (c) of section 143(1) of
the Companies Act, 2013?
Response:
For Debentures sold: Where the cost of debentures sold is not ascertainable, the book value thereof
at the date of sale may be treated as the cost for the purposes of this clause.
For Bonus Shares sold: When bonus shares are received, the number of shares in the portfolio
would be increased by the bonus shares while the cost of the total portfolio would remain the same as
before. The result would be that the average cost per unit of the total holding would come down
proportionately. The usual accounting practice for apportioning the cost of a part of the total holding
on the sale thereof is to take it at its average cost.
Query 3: Whether the shares allotted by Waria Ltd. against a loan taken by it from a NBFC can
be considered to be allotted for cash for the purpose of reporting as per clause (f) of section
143(1) of the Companies Act, 2013?
Response: The law on the subject has hitherto been that, where the consideration for the issue of
shares is an adjustment against a bona fide debt payable in money on demand by the company, the
shares are deemed to have been subscribed in cash.
According to the legal opinion obtained by the ICAI, the expression “shares allotted for cash” may also
include shares allotted against a debt. Therefore, in cases which are covered by the decision in
Spargo’s case, no comment is required by the auditor, even though the company may have in the
Return of Allotment u/s 75, shown such shares as allotted against adjustment of a debt. Thus, the
shares allotted by Waria Ltd. against a loan taken by it from a NBFC can be considered to be allotted
for cash.

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Chapter 6 Company Audit
6.6 – Punishment for Contravention (Sec. 147)
Q.38 AB & Co. were appointed auditors for NOME Limited, a listed company, for the term of two five
consecutive years from 2012-13, 2013-14, 2014-15, 2015-16, 2016-17, 2017-18, 2018-19, 2019-20,
2020-21 and 2021-22. As per the provision of the section 139(2)(b) “No listed company or a
company belonging to such class or classes of companies as may be prescribed, shall appoint or re-
appoint an audit firm as auditor for more than two terms of five consecutive years”.
Hence, Management of NOME Limited reached out (based on the recommendation of Audit
Committee) to BCD & Co. for their nomination as the appointment of Statutory Auditor for the
financial year 2022-23. However, BCD & Co. did not provide any written consent to such
appointment neither they provided a certificate that the appointment, if made, shall be in
accordance with the conditions laid in the Act and Rules therein.
Still the management went ahead and proposed an appointment in AGM and BCD & Co. were
appointed as an auditor for the financial year 2022-23. Post appointment, TCWG identified that
majority of the partners in the BCD & Co. are same which were there in AB & Co. Now, fearing the
contravention of the provision of Companies Act, 2013.
Management, on guidance of TCWG, decided to file a complaint with tribunal u/s 140(5) of the
Companies Act against statutory auditors.
You are required to guide the BCD & Co. regarding the contravention of the provisions of the
Companies Act, 2013 with respect to appointment of Auditor. [RTP-Nov. 21]
Ans.: Punishment for contravention of the provisions with respect to appointment of Auditor:
• As per Sec. 139(1) of the Companies Act, 2013, every company shall, at the first AGM, appoint an
individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the
conclusion of its 6th AGM and thereafter till the conclusion of every 6th meeting in the prescribed
manner.
• Before such appointment is made, the written consent of the auditor to such appointment, and a
certificate from him or it that the appointment, if made, shall be in accordance with the conditions
as may be prescribed, shall be obtained from the auditor. Certificate shall also indicate whether the
auditor satisfies the criteria provided in Sec. 141 of the Companies Act, 2013.
• As per Sec. 139(2) of the Companies Act, 2013, no listed company or a prescribed company, shall
appoint or re-appoint (a) an individual as auditor for more than one term of 5 consecutive years;
and (b) an audit firm as auditor for more than 2 terms of 5 consecutive years.
• It is also provided 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 5 years.
• In the current case, while appointing the auditors of the company a written consent of the auditor
to such appointment was not obtained. Moreover a certificate from him that the appointment if
made shall be in accordance with the conditions laid down in the Act and Rules was also not
obtained. Further, majority of the partners of AB & Co. were partners in BCD & Co. AB & Co.
already served two terms of 5 consecutive years i.e., from 2012-13 to 2021-22 as a statutory
auditor of the company.
• Hence, BCD & Co. were not eligible to be appointed as an auditor of NOME Limited as all partners
of BCD & Co. are partner of AB & Co. who have already served 2 terms of 5 consecutive years as an
auditor of NOME Limited. Since, before the appointment of Statutory Auditor, the management
should have obtained the required certification and written consent from BCD & Co., therefore, in

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Company Audit Chapter 6
this case both, the management and the auditors have contravened the provision of the Companies
Act, 2013 as a result fine as per Sec. 147 of Companies Act will be applicable.
• As per Sec. 147 of the Companies Act, 2013, if any of the provisions of sections 139 to 146 is
contravened, the company shall be punishable with fine which shall not be less than ₹ 25,000 but
which may extend to ₹ 5 lakh and every officer of the company who is in default shall be
punishable with fine which shall not be less than ₹ 10,000 but which may extend to ₹ 1 lakh. If an
auditor of a company contravenes any of the provisions of section 139, section 144 or section 145,
the auditor shall be punishable with fine which shall not be less than ₹ 25,000, but which may
extend to ₹ 5 lakh or 4 times the remuneration of the auditor, whichever is less.
• It may be noted that if an auditor has contravened such provisions knowingly or wilfully with the
intention to deceive the company or its shareholders or creditors or tax authorities, he shall be
punishable with imprisonment for a term which may extend to 1 year and with fine which shall
not be less than ₹ 50,000, but which may extend to ₹ 25 lakh or 8 times the remuneration of the
auditor, whichever is less.

6.7 – Cost Audit and Companies (Cost Records and Audit) Rules, 2014
Q.39 Electro Ltd. is engaged in generation of electricity for captive consumption through Captive
Generating Plant. The Company also maintain cost records in their books of account as required
under Cost Records and Audit Rules. Mr. X, friend of Managing Director of the company, suggested
name of his brother, who is a Cost Accountant in Practice, for the purpose of cost audit. However, the
statutory auditor of the company, is of the view that the company is not legally required to conduct
cost audit. Now, the Managing Director is in dilemma about the requirement of cost audit.
Being an expert in cost records and audit rules, you are required to guide in this regard.
Ans.: Applicability of Provisions related to Cost Records and Audit:
Provisions relating to cost records and audit are governed by section 148 of the Companies Act, 2013
read with the Companies (Cost Records and Audit) Rules, 2014.
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, required to include cost records in their
books of account. However, the requirement for cost audit under these rules shall not be applicable to
a company which is covered under Rule 3, and,
(i) whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue;
(ii) which is operating from a special economic zone; or
(iii) which is engaged in generation of electricity for captive consumption through Captive
Generating Plant.
In the given case, Electro Ltd. is engaged in generation of electricity for captive consumption through
Captive Generating Plant. Electro Ltd. is not required to conduct cost audit as it is falling under the
exemption criteria.
Conclusion: The opinion of statutory auditor of the company regarding non-applicability of cost audit
is correct and the management should follow the same.
Q.40 Pearl Ltd. is an exporter of precious and semi-precious stones. The turnover of the company is ₹ 150
crores, out of which ₹ 105 crores are from export business and remaining ₹ 45 crores from domestic
sales. Amount received from export business is all in foreign currency. Directors of Pearl Ltd. is of
the opinion that cost audit is not applicable to their company as maximum revenue has been
generated from export business. Give you opinion. [May 19 – New Syllabus (4 Marks), MTP-Oct. 21]

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Chapter 6 Company Audit
Ans.: Applicability of Cost Audit:
• Provisions relating to cost audit are governed by section 148 of the Companies Act, 2013 read
with the Companies (Cost Records and Audit) Rules, 2014.
• Rule 4 of Companies (Cost Records and Audit) Rules, 2014 requires audit of cost records in case of
non-regulated sector industries if annual turnover from all products and services in immediately
preceding financial year is ₹ 100 Cr. or more and the turnover of individual product or service is
₹ 35 Cr. or more.
• Rule 4 further provides that requirement of cost audit shall not apply to a company whose
revenue from exports, in foreign exchange, exceeds 75% of its total revenue.
• In the present case, the turnover of the company is ₹ 150 crores, out of which ₹ 105 crores are
from export business and remaining ₹ 45 crores from domestic sales. Amount received from
export business is all in foreign currency. Revenue from exports in foreign exchange amounts to
70% of total revenue.
Conclusion: Opinion of the Directors that cost audit is not applicable to their company as maximum
revenue has been generated from export business is not valid as total revenue from exports in foreign
exchange is less than 75% of total revenue. Hence company is required to get its cost records audited.
(It is assumed that figures of revenue are given for immediately preceding financial year.)
Note: Suggested Answer of ICAI refer Rule 3 instead of Rule 4. Rule 3 is related to applicability of
cost records. Provisions related with Cost Audit are covered in Rule 4.

6.8 – Branch Audit

Q.41 A Ltd. is a Chennai based company. The total turnover of the company is ₹ 10 crores for the year
2022-23. The company has a branch office at an area which was recently affected by flood. The
transportation services are not available due to destruction caused by flood. The branch office
recorded turnover of ₹ 1,50,000 in the Financial Year 2022-23. No audit of branch has been carried
out. The statutory auditor of the company has made no reference of the above branch in his report.
Comment.
Ans.: Requirement of 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 or by any other person
qualified for appointment as an auditor of the company, 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, if any office is described by the company as branch office, the company has to get its
branch audited by a person specified u/s 143(8).
• In case accounts of the branch has not been audited, company’s auditor is required to mention this
fact in the audit report and deal appropriately.
Conclusion: Company’s auditor is required to state the fact of non-audit of branch office in his report
and deal appropriately.
Q.42 Bhishm Limited decided to appoint Mr. Rajvir, Chartered Accountant, as the branch auditor for the
audit of its Lucknow branch accounts for the year 2022-23. The decision to appoint branch auditor
was taken by way of Board Resolution in the meeting of Board of Directors of the company, held in
April 2022, subject to shareholders’ approval in AGM of the company scheduled to be held in June

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Company Audit Chapter 6
2022. Meanwhile, the Principal Auditor of the company raised an objection that the branch auditor
cannot be appointed without his consent. Advise, whether the objection raised by company auditor
is valid. [RTP-Nov. 19]
Ans.: Appointment of Branch Auditor:
• As per Sec. 143(8) of the Companies Act, 2013, 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.
• In the instant case, Bhishm Limited decided to appoint Mr. Rajvir, Chartered Accountant, as the
branch auditor for the audit of its Lucknow branch accounts and the decision to appoint branch
auditor was taken by way of Board Resolution in the meeting of Board of Directors of the
company subject to shareholders’ approval in AGM of the company.
Conclusion: Objection raised by company auditor is not valid as per section 143(8) of the Companies
Act, 2013 and the Board has authority to appoint branch auditor but should be approved by
shareholders in General Meeting.

6.9 – Accounts of Companies (Sections 128, 129, 130, 131, 133, 134)
Q.43 M/s. ALM Ltd. is into the business of trading of toys since 2001. The company was performing well
till year 2016 and after that sales started showing downward trend. The Company had borrowed
working capital funds from LP Bank Ltd. On 01.08.2022, account of the borrower was classified as
NPA. Bank appointed forensic auditor, to identify, if any diversion of funds is there or not. Forensic
auditor confirmed the diversion of funds. Matter went to the court of law and company was asked to
recast its financial statements for the last 5 years. Management contended that Companies Act, 2013
does not allow recasting for more than three preceding financial years. Do you agree with the views
of the management? [July 21 – New Syllabus (5 Marks), MTP-Oct. 22]
Ans.: Reopening of Accounts on Court’s or Tribunal Order:
• Sec. 130 of Companies Act, 2013 deals with the provisions relating to reopening of books of account
and recasting of financial statements.
• A company shall not re-open its books of account and not recast its financial statements, unless an
application in this regard is made by the C.G., the Income-tax authorities, the SEBI, any other
statutory regulatory body or authority or any person concerned and an order is made by a court of
competent jurisdiction or the Tribunal to the effect that:
(i) the relevant earlier accounts were prepared in a fraudulent manner; or
(ii) the affairs of the company were mismanaged during the relevant period, casting a doubt on
the reliability of financial statements.
• In accordance with sub-section (3) of Sec. 130, no order shall be made u/s 130(1) in respect of re-
opening of books of account relating to a period earlier than 8 financial years immediately
preceding the current financial year:
Provided that where a direction has been issued by the C.G. under the proviso to sub-section (5) of
section 128 for keeping of books of account for a period longer than eight years, the books of
account may be ordered to be re-opened within such longer period.
• In the given case, company was asked to recast its financial statements for the last 5 years.
Conclusion: Management contention that Companies Act, 2013 does not allow recasting for more than
3 preceding financial years is not valid.

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Chapter 6 Company Audit
Q.44 What constitutes a “true and fair view is the matter of an auditor's judgment in particular
circumstances of a case.” Do you agree? Enlist the requirements you as an auditor will observe to
ensure true and fair view. [Dec. 21 – Old Syllabus (5 Marks), MTP-Sep. 22]
Ans.: Significance of True and Fair:
• SA 700 “Forming an Opinion and Reporting on Financial Statements”, requires the auditor to form
an opinion on the F.S. based on an evaluation of the conclusions drawn from the audit evidence
obtained; and express clearly that opinion through a written report that also describes the basis
for the opinion. The auditor is required to express his opinion on the F.S. that it gives a true and
fair view in conformity with the accounting principles generally accepted in India
(a) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 20XX;
(b) in the case of the Statement of Profit and Loss, of the profit/ loss for the year ended on that
date; and
(c) in the case of the Cash Flow Statement, of the cash flows for the year ended on that date.
• In the context 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 C.G.
modifying the disclosure requirements. Therefore, 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. If certain information is vital for presenting a true and fair view, the accounts
should disclose it even though there may not be a specific legal provision to do so.
• Thus, what constitutes a ‘true and fair’ view is the matter of an auditor’s judgment in the particular
circumstances of a case. In more specific terms, to ensure true and fair view, an auditor has to see:
(1) that the assets are neither undervalued or overvalued, according to the applicable accounting
principles;
(2) no material asset is omitted;
(3) the charge, if any, on assets are disclosed;
(4) material liabilities should not be omitted;
(5) the statement of profit and loss discloses all the matters required to be disclosed by Part II of
Schedule III;
(6) the balance sheet has been prepared in accordance with Part I of Schedule III;
(7) accounting policies have been followed consistently; and
(8) all unusual, exceptional or non-recurring items have been disclosed separately.
Q.45 Dharam & Karam Company Ltd. had prepared its financial statements for the financial year 2022-23
which were approved by the Board of Directors of the company and thereafter they were signed by
the Chairperson of the company as authorized by the Board, as well as by its CEO, CFO and CS,
respectively. Also, its board report was signed by its Managing Director as well as by an Executive
Director. You are required to comment whether financial statements and the Board’s report of the
company have been signed by the persons mandatorily required to sign, as prescribed by the
relevant Act. [MTP-April 22]

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Ans.: Signing of Financial Statements:
• As per Sec. 134 of the Companies Act, 2013, the financial statements, including consolidated
financial statements, if any, shall be approved by the Board of Directors before they are signed on
behalf of the Board atleast:
▪ by the Chairperson of the Company where he is authorized by the Board or
▪ by two directors out of which one shall be Managing Director, if any, and
▪ the Chief Executive Officer, if he is a director in the company,
▪ the Chief Financial Officer, and
▪ the Company Secretary of the Company, wherever they are appointed, or
in the case of One Person Company, only by one director, for submission to the auditor for his
report thereon.
• The Board’s report shall be signed by its chairperson of the company if he is authorised by the
Board and where he is not so authorised, shall be signed by at least two directors, one of whom
shall be a Managing Director.
• Here, Dharam and Karam Company Ltd. had prepared its financial statements for the financial year
2021-22 which were approved by the Board of Directors of the company and thereafter they were
signed by the Chairperson of the company as authorised by the Board, as well as by its CEO, CFO
and CS, respectively. Also, its board report was signed by its Managing Director as well as by an
Executive Director.
Conclusion: Financial statements and the Board’s report of the Dharam and Karam Company Ltd.
have been signed in accordance with Sec. 134 of the Companies Act, 2013.

6.10 – National Financial Reporting Authority (NFRA)

Q.46 M/s. PC & Co., Chartered Accountants are the statutory auditors of various categories of companies
and bodies corporate. In exercise of the powers conferred under sub-sections (2) and (4) of section
132, of the Companies Act, 2013 the Central Government made the National Financial Reporting
Authority Rules, 2018 (NFRA Rules) (MCA Notification dated 13 November, 2018). The audit firm
seeks your guidance on the applicability of those categories of companies and bodies corporate
which are covered by NFRA Rules. [Nov. 20 – New Syllabus (5 Marks)]
Or
You are doing audit of unlisted public limited company, Perfect Limited. As per NFRA Rules, 2018,
NFRA has power to monitor and enforce compliance with accounting standards and auditing
standards, oversee the quality of service under sub-section (2) of Sec. 132 or undertake
investigation under sub-section (4) of such section, of the auditors. Discuss about the class of
companies and bodies corporate, where NFRA is applicable. [July 21 – Old Syllabus (5 Marks)]
Ans.: Companies and bodies corporate which are covered by NFRA Rules:
As per Rule 3 of NFRA Rules, 2018, NFRA shall have power to monitor and enforce compliance with
accounting standards and auditing standards, oversee the quality of service u/s 132(2) or undertake
investigation u/s 132(4) of the auditors of the following class of companies and bodies corporate:
(a) companies whose securities are listed on any stock exchange in India or outside India;
(b) unlisted public companies:
• having paid-up capital of not less than ₹ 500 crores or
• having annual turnover of not less than ₹ 1000 crores or

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Chapter 6 Company Audit
• having, in aggregate, outstanding loans, debentures and deposits of not less than ₹ 500
crores
as on the 31st March of immediately preceding financial year;
(c) insurance companies, banking companies, companies engaged in the generation or supply of
electricity, companies governed by any special Act for the time being in force or bodies
corporate incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f) of section 1
(4) of the Companies Act, 2013;
(d) any body corporate or company or person, or any class of bodies corporate or companies or
persons, on a reference made to the NFRA by the Central Government in public interest; and
(e) a body corporate incorporated or registered outside India, which is a subsidiary or associate
company of any company or body corporate incorporated or registered in India as referred to in
clauses (a) to (d) above, if the income or net-worth of such subsidiary or associate company
exceeds 20% of the consolidated income or consolidated net-worth of such company or the
body corporate, as the case may be, referred to in clauses (a) to (d) above.

6.11 – Salient Features of Audit of Limited Liability Partnerships (LLP Audit)

Q.47 MKc LLP is a newly set up LLP (Limited Liability Partnership). The operations of the LLP have been
picking up and management is currently in the process of setting up processes and procedures in
place. As per the understanding of the management of the LLP, its accounts would not be required to
be audited mandatory because of its operations but still the management has decided that they
would get the accounts audited voluntarily. In this regard, the management would like to
understand some of the aspects which they should consider not only limited to audit but also about
the maintenance of books of account as per the relevant laws. Please advise. [RTP-May 19]
Ans.: Provisions relating to accounts and audit in case of LLP:
(a) Books of Account to be maintained by a LLP:
• As per Sec. 34 of LLP Act, 2008, LLP shall maintain such proper books of account as may be
prescribed relating to its affairs for each year of its existence. Books may be maintained on
cash basis or accrual basis and according to double entry system of accounting. Books shall
be maintained at registered office for such period as may be prescribed.
• As per Rule 24 of LLP Rules, 2009, the books of account shall contain:
(a) particulars of all sums of money received and expended by the LLP and the matters in
respect of which the receipt and expenditure takes place;
(b) a record of the assets and liabilities of the LLP;
(c) statements of cost of goods purchased, inventories, WIP, finished goods and cost of
goods sold; and
(d) any other particulars which the partners may decide.
• The books of account which a LLP is required to keep shall be preserved for eight years
from the date on which they are made.
(b) Statutory Provisions as to Audit of LLP:
As per Sec. 34 of LLP Act, 2008, accounts of LLP shall be audited in accordance with such rules as
may be prescribed.
Rule 24 of LLP Rules, 2009 provides the following in relation to audit:

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Company Audit Chapter 6
• Requirement of Audit: A LLP whose turnover does not exceed, in any financial year ₹ 40
Lacs, or whose contribution does not exceed ₹ 25 Lacs shall not be required to get its
accounts audited. If partners of such LLP decide to get the accounts of such LLP audited, the
accounts shall be audited in accordance with these rules.
• Eligibility for auditor: A person shall not be qualified for appointment as an auditor of a
LLP unless he is a Chartered Accountant in practice.
• Period of Appointment: Auditor of a LLP shall be appointed for each financial year of the
LLP for auditing its accounts.
• Appointment of auditor by designated partner: The designated partners may appoint an
auditor:
(a) at any time for the first financial year but before the end of the first financial year,
(b) at least 30 days prior to the end of each financial year (other than the first financial
year),
(c) to fill a casual vacancy in the office of auditor, including in the case when the turnover
or contribution of a LLP exceeds the limits, or
(d) to fill-up the vacancy caused by removal of an auditor.
• Appointment of auditor by partner: Partners may appoint an auditor where the
designated partners have power to appoint and have failed to appoint.
• Tenure of Auditor: Auditor shall hold office in accordance with the terms of his or their
appointment and shall continue to hold such office till the period the new auditors are
appointed, or they are reappointed.

6.12 - Guidance Note on Internal Financial Control over Financial Reporting

Q.48 Explain the terms:
(i) ‘Internal Financial Control’ and
(ii) ‘Internal Financial Control’ over ‘Financial Reporting’. [Nov. 18-New Syllabus (6 Marks)]
Ans.: Internal Financial Control and Internal Financial Control over Financial Reporting:
(i) Internal Financial Control:
Explanation to Sec. 134(5) of Companies Act, 2013 defines the term Internal Financial Controls
as the policies and procedures adopted by the company for ensuring:
• Orderly and efficient conduct of its business, including adherence to Company’s policies,
• Safeguarding of its assets,
• Prevention and detection of frauds and errors,
• Accuracy and completeness of the accounting records, and
• Timely preparation of reliable financial information.
(ii) Internal Financial Control over Financial Reporting:
Guidance Note on Internal Financial Control over Financial Reporting provides the guidance as
to the concept of Internal financial control over financial reporting. Accordingly,
• Internal Financial Control over Financial Reporting is a Process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.

6.30
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Chapter 6 Company Audit
• A Company’s internal financial control over financial reporting includes those policies and
procedures which pertain to the maintenance of the records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company.
• It provides reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statement in accordance with generally accepted accounting
principles, and those receipts and expenditures of the company are being made only in
accordance with authorizations of management and director of the company.
• It provides reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a material effects of
the financial statement.
Q.49 Mr. K has been appointed as statutory auditor of SK Limited for issuing an audit opinion on
financial statements and Internal Controls over Financial Reporting (ICFR) for the year ended
March 31, 2023 under the Companies Act, 2013. Guide Mr. K to prepare a checklist in the form of
questions for testing internal control over cash and bank balances. When forming an opinion on
ICFR is it necessary for Mr. K to test the transactions only at the balance sheet date?
[May 22 (5 Marks)]
Ans.: Check list for testing internal control over cash and bank balances:
A check list consists of set of questions to be answered by the audit staff. Checklist for the testing of
internal control over cash and bank balances may set the following questions:
Have you checked that the cashier-
(1) is not responsible for opening the incoming mails;
(2) does not authorise any of the ledgers;
(3) does not authorise any expenditure or receipt;
(4) does not sign cheques;
(5) takes his annual leave regularly;
(6) inks and balances the cash book everyday;
(7) verifies physical cash balance with the book figure daily at the end of the day;
(8) prepares monthly bank reconciliation statement;
(9) holds no other funds or investment;
(10) holds no unnecessary balance in hand;
(11) does not pay money without looking into compliance with proper procedure and due
authorisation; and
(12) has tendered proper security or has executed a fidelity bond?
Testing of transactions for the purpose of forming opinion on ICFR:
• Auditors will have to report whether a company has an adequate ICFR system in place and
whether the same was operating effectively as at the balance sheet date. In practice, this will
mean that when forming its audit opinion on ICFR, the auditor will surely test transactions
during the financial year just ended and not just as at the balance sheet date, though the extent of
testing at or near the balance sheet date may be higher.
• If control issues or deficiencies are identified during the interim period and are remediated
before the balance sheet date, then the auditor may still be able to express an unqualified
opinion on the ICFR.

6.31
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Company Audit Chapter 6
6.13 - Miscellaneous
Q.50 M/s. IT Limited has prepared the financial statements for the year 2022-23 and mentioned in the
significant accounting policies that depreciation on tangible fixed assets is provided on the straight-
line method over the useful lives of the assets as estimated by the management. The company has
ignored the useful lives of assets mentioned in Schedule II of the Companies Act, 2013. As statutory
auditor of the company how would you deal with this? [Nov. 20 – Old Syllabus (5 Marks)]
Ans.: Consideration of useful lives estimated by management:
• Schedule II to the Companies Act, 2013 defines the useful life of an asset is the period over which
an asset is expected to be available for use by an entity or the number of production or similar
units expected to be obtained from the asset by the entity.
• The useful life of an asset shall not be longer that the useful life specified in the Part C of Schedule
II. If, however where a company uses a different useful life justification for the difference shall be
disclosed in the financial statement with justification supported by technical device.
• In the present case, auditor is required to examine the appropriateness of disclosures made in the
financial statements with respect to difference in estimated useful life. If appropriate not given in
the financial statements, auditor need to qualify his report stating the appropriate facts.
Conclusion: Company may use different useful lives, but disclosure is required in financial statements
with justification supported by technical advice. If the justification has not been provided then the
auditor of the company shall suggest to the management for the same and if the management refuses,
the auditor should qualify his report accordingly.
Q.51 Beneath Minerals Limited is a Public-Sector company engaged in extraction of minerals from land. It
has to pump out water in the first layer of the soil if the minerals are to be excavated. The company
pumps out water and diverts the water through a water course constructed by it to nearby villages
and the water is allowed to be used by villagers for drinking purposes. The cost of construction of
water course amounted to ₹ 5.25 crores and the company had disclosed this amount as CSR
expenses in the statement of profit and loss. Comment. [May 18 – New Syllabus (5 Marks)]

Ans.: Treatment of expenses in normal course of business as CSR Expense:

• The Board of directors of every company referred to in Sec. 135(1), shall ensure that the company
spends, in every financial year, at least 2% of the average net profits of the company made during
the three immediately preceding financial years, in pursuance of its Corporate Social
Responsibility Policy.
• For this purpose, Schedule VII of Companies Act, 2013 prescribes the activities which may be
included in CSR Activities. Ministry of Corporate Affairs also time to time, through various
notifications provide clarification as to what kind of expenses will be covered in CSR activities.
• However, any expense which is incurred by a company in the normal course of its business
activities cannot be considered as CSR Expense.
• In the present case, company pump out the water from the soil and construct a water course so as
to divert the water to nearby villages and water is being used by villagers for drinking purposes.
This kind of expenditure cannot be treated as expenditure incurred for CSR as the expense is
being incurred as incidental to its business activities.
Conclusion: Though expenditure incurred in arranging drinking facilities qualifies as CSR expense,
but any expenditure incurred in the normal course of business activity is not classified as CSR
Expense. In the present case, pumping out the water is an essential part of business activity and for its
disposal, a water course is being constructed. So, expenditure cannot be classified as CSR Expense and
hence auditor should state the fact in the report and qualify the report.
Note: Alternative answer is possible with different assumptions.

6.32
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 6 Company Audit
Q.52 William & Sons Limited is well-known in the hospitality and the entertainment industry with their
chain of hotels, travel agencies etc.
They arrange packaged tours for customers both in India and abroad.
A snapshot of their financials for the previous year ended 31st March, 2023 is given below:

Particulars Amount in Remarks

INR Mios

Share Capital 5000 Includes fully convertible preference share

capital (before 2022) of INR 2000 Mio

Reserves & surplus 200 Includes revaluation reserve of INR 100 Mio

External commercial 8800 No cover through hedging

borrowing

Current Assets 2200 Primarily receivables from travel companies who

were enjoying credit terms from the company

Current Liabilities 6550 Represents payments to creditors and banks

Property, Plant and Equipment 11750 Goodwill has arisen based on the acquisition of
(including Goodwill of INR hotels
2200 Mio)

Their business has been severely impacted by COVID-19 pandemic during the period April to June
2021 and the Company has to submit its audited financial statements for the quarter ended 30 June
2021 to its investors. What are the key considerations to be taken into account whilst auditing the
financial statements of the Company? [Nov. 20 – Old Syllabus (5 Marks)]

Ans.: Key Audit Considerations to be taken into account whilst auditing the financial statements:
The financial statements have various items which would have been affected by the outbreak of
COVID-19. In addition to the detailed list of items of financial statements mentioned in the situation,
specific accounting issues could arise in the following areas:
1. Share Capital:
• Status of conversion of Preference Share Capital and implication.
2. Reserve and Surplus:
• 50% of the reserve is revaluation reserve which is not free reserve.
3. External Commercial borrowing:
• Repayment capacity.
• Forex impact.
• Any restructuring/change in the terms of repayments to be checked.
4. Current Assets:
• Expected credit losses on the receivables considering the industry in which the company
operates. In the instant case current assets are primarily receivable from travel companies
who were enjoying credit terms from the company and impact of Covid-19 on travel agency
needs assessment.
• Inventory valuation, if any inventory is lying with the company.
• Current ratio assessment.

6.33
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Company Audit Chapter 6
5. Current liabilities:
• Repayment capacity.
• Liquidity position to be analysed.
6. Goodwill:
• Impairment assessment.
7. Property, Plant and Equipment:
• Impairment assessment.
• Change in useful lives/ residual values.
In the given situation, on account of COVID-19 which has been prevailing, the liquidity position of
the Company is under distress. The auditor is required to discuss with the management as to how
they are perceiving current and the near future position and thereafter assess the effect of
estimation uncertainty or the risk assessment and audit evidence supporting these accounting
estimates and related disclosures that may be affected by the impact of COVID-19 on the business of
the entity and the economic environment. After assessment of the entire condition, the auditor may
discuss about the going concern position of the company. The auditor is also required to ensure
disclosures to be given in the financial statements are as per ICAI advisory.

6.34
By: CA. Pankaj Garg
 By: CA. Pankaj Garg

7 Audit Reports
Marks Distribution of Past Exams
6

4
Marks

0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 4 0 5 0 0 0 0 0 0 0 0

*From May 2019, Marks are given only for descriptive questions.

7.1 - Audit Reports

Q.1 Distinguish between Notes on Accounts and Qualifications.

Ans.: Notes on Accounts vs. Qualifications:

Notes on Accounts Qualifications

Notes represents management’s stand on a matter Qualification represents auditor disagreement

and assessment on all matters involving difference on the matters with Management.
of opinion between them and the auditors.

Notes of a qualificatory nature appear in the Qualifications are stated by auditor in the
accounts and forms part of Financial Statements. auditor’s report.

Management may insist upon the auditor for not Auditor needs to exercise his professional
modifying his audit opinion considering the judgment to determine whether disclosures in
management has disclosed full facts and the notes alone would suffice or a qualification
assessment of the matter through notes on the F.S. is needed in audit report.

Notes on accounts includes information which is Qualification must be expressed by the Auditor
necessary to make the financial statements in a clear and unambiguous manner.
understandable by the users.
.

7.1
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit Reports Chapter 7
7.2 - Report vs. Certificate
Q.2 Write a short note on Certificate for Special Purpose vs. Audit Report.
Ans.: Report and Certificate:
Audit Report: An audit report is a formal statement usually made after an enquiry, examination or
review of specified matters under report and includes the reporting auditor’s opinion thereon.
While issuing an audit report, auditor is responsible to ensure that his opinion is in due accordance
with facts, and that it is arrived at by the application of due care and skill.
Meaning of Certificate: A certificate is a written confirmation of the accuracy of the facts stated
therein and does not involve any estimate or opinion. Such certificates are often required by
Government authorities in support of statements or other information prepared by an enterprise.
Such certificates represent that the auditor has verified certain figures and is satisfied about their
accuracy.
Report Certificate
It is an expression of opinion on true and fair It is a confirmation of correctness and
view of financial statements and books of accuracy of subject matter for which
account. certificate is being issued.
Report is based on practitioner professional Certificate is based on actual facts and figures.
judgment.
Scope of audit is wide and generally covers an Scope of certificate is narrow and restricted to
opinion on complete set of financial statements. subject matter only.
Audit report is generally issued annually as per Certificates are issued as per the specific
the requirements of statute. requirements of law.
Auditor’s responsibility in case any misstatement In case of wrong certification, auditor is held
is not being identified, is subject to his liable irrespective of due diligence.
negligence in performance of his duties.

Q.3 What are the contents of reports and certificates for special purposes.
Ans.: Contents of Report and Certificates for Special Purposes:
In some cases, contents of Reports and Certificates are specified by law and cannot be changed.
However, in other cases, reporting auditor is free to draft his report or certificate in a manner he likes.
While drafting such report or certificate, the auditor should consider the following:
(a) Identification of specific elements, accounts or items covered by the report or certificate.
(b) Stating the manner in which the audit was conducted, e.g., by the application of generally
accepted auditing practices, or any other specific tests.
(c) Limitation on scope, if any, should be clearly mentioned.
(d) Fundamental Assumptions on which the special purpose statement is based should be clearly
indicated.
(e) Information and explanations obtained during the course of work should be included.
(f) The title of the report or certificate should clearly indicate its nature.
(g) Extent to which reliance has been placed on the report of other auditor, who have carried out
audit of general purpose financial statements.
(h) Where a report requires the interpretation of statute, the reporting auditor should clearly
indicate the fact that he is merely expressing his opinion in the matter.

7.2
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 7 Audit Reports
(i) An audit report or certificate should ordinarily be a self-contained document and should not
confine itself to a mere reference to another report or certificate.
(j) Extent of responsibility assumed by the reporting auditor should be clearly indicated.
Q.4 Draft an audit report under following circumstances:
(i) Under the Payment of Bonus Act, 1965, a ‘report’ on the computation of bonus payables.
(ii) Auditor’s Report in accordance with Regulation 55 of the SEBI (Mutual Fund) Regulations, 1996.
[May 15 (4 Marks)]
Ans.: Draft Audit Report Under the Payment of Bonus Act, 1965, a ‘report’ on the computation of
bonus payables.
“We have reviewed the figures in the above computation in comparison with the books and records
produced to us, the audit of which has already been completed by us and report that subject to the
notes given on face of the computation in our opinion, and to the best of our knowledge and belief and
according to the information and explanation given to us, the above computation is in due accordance
therewith and has been made on a basis reasonably consistent with the provisions of the Payment of
Bonus Act, 1965.”
Place: For AB & Co.
Date: Chartered Accountants
Auditor’s Report in accordance with Regulation 55 of the SEBI (Mutual Fund) Regulations,
1996.
All Mutual funds shall be required to get their accounts audited in terms of a provision to that effect in
their trust deeds. The Auditor’s Report shall form a part of the Annual Report.
The auditor shall state whether:
1. He has obtained all information and explanations which, to the best of his knowledge and belief,
were necessary for the purpose of his audit.
2. The Balance Sheet and the Revenue Account are in agreement with the books of account of the
fund.
The auditor shall give his opinion as to whether:
1. The Balance Sheet gives a true and fair view of the scheme-wise state of affairs of the fund as at the
balance sheet date, and
2. The Revenue Account gives a true and fair view of the scheme-wise surplus/deficit of the fund for
the year/period ended at the balance sheet date.

7.3 - Miscellaneous
Q.5 Distinguish: Reasonable assurance engagement from limited assurance engagement.
[May 18 – New Syllabus (4 Marks)]
Or
List out the key differences between “Reasonable Assurance” and “Limited Assurance” engagements.
[Nov. 18 - Old Syllabus (4 Marks)]
Ans.: Limited and Reasonable Assurance:
• Guidance Note on Reports or certificates for special purpose defines the term assurance
engagement as “An engagement in which a practitioner aims to obtain sufficient appropriate
evidence in order to express an opinion/conclusion, designed to enhance the degree of confidence

7.3
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit Reports Chapter 7
of the intended users, other than the responsible party about the subject matter information (that
is, the outcome of the measurement or evaluation of an underlying subject matter against
criteria)”.
• Each assurance engagement is classified on two dimensions: either a reasonable assurance
engagement or a limited assurance engagement.
• Reasonable assurance engagement: An assurance engagement in which the practitioner reduces
engagement risk to an acceptably low level in the circumstances of the engagement, as the basis
for the practitioner’s opinion. The practitioner’s opinion is expressed in a form that conveys the
practitioner’s opinion on the outcome of the measurement or evaluation of the underlying subject
matter against the criteria.
• Limited assurance engagement: An assurance engagement in which the practitioner reduces
engagement risk to a level that is acceptable in the circumstances of the engagement but where
that risk is greater than for a reasonable assurance engagement, as the basis for expressing a
conclusion in a form that conveys whether, based on the procedures performed and evidence
obtained, a matter(s) has(have) come to the practitioner’s attention to cause the practitioner to
believe that the subject matter information is materially misstated.
• The NTE of procedures performed in a limited assurance engagement is limited compared with
that necessary in a reasonable assurance engagement but is planned to obtain a level of assurance
that is, in the practitioner’s professional judgment, meaningful.
Q.6 A professional accountant is often required to give certificates or report for special purposes
required by various authorities and statute and he needs to take careful evaluation of such
engagement. However, issuing such special purpose certificates or reports has some inherent
limitations which could limit his review and evaluation. Enumerate some of the limitations
associated with such special purpose report or certificates. [May 19 - New Syllabus (4 Marks)]
Ans.: Inherent Limitations of Engagement:
Whenever a practitioner is required to give a “certificate” or a “report” for special purpose, the
practitioner needs to undertake a careful evaluation of the scope of the engagement, i.e., whether the
practitioner would be able to provide reasonable assurance or limited assurance on the subject
matter. A practitioner is expected to provide either a reasonable assurance or a limited assurance,
since it is difficult to reduce engagement risk to zero due to inherent limitations.
The inherent limitations could arise from:
(a) the nature of financial reporting;
(b) the use of selective testing;
(c) the inherent limitations of internal controls;
(d) the fact that much of the evidence available to the practitioner is persuasive rather than
conclusive;
(e) the nature of procedures to be performed in a specific situation;
(f) the use of professional judgment in gathering and evaluating evidence and forming conclusions
based on that evidence;
(g) in some cases, the characteristics of the underlying subject matter when evaluated or measured
against the criteria; and
(h) the need for the engagement to be conducted within a reasonable period of time and at a
reasonable cost.

7.4
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 7 Audit Reports
Q.7 XYZ Ltd. has significant operations in a foreign country. Due to civil and political unrest in that
country physical verification of inventory and fixed assets could not carried out and you are not in a
position to obtain audit evidence through other audit procedures also. The value of fixed assets and
inventory forms part of 80% of the asset value of the company. As the auditor of XYZ Ltd. what
factors do you consider in your reporting responsibility. Also draft a suitable report that will be
incorporated in the main audit report (Reporting under CARO need not be considered).
Ans.: Factors to be considered in Audit reporting;
Auditor is required to consider the following factors:
1. Inventories and the Fixed Assets constitute 80% of the assets and hence having a pervasive effect.
2. Auditor is not being able to attend physical verification of the inventories and fixed assets due to
civil and political unrest in the foreign country, where the inventory and fixed assets are located.
3. Auditor failed to obtain proper and sufficient audit evidence, even by alternative audit
procedures.
Relevant Draft to be incorporated in the main audit report:
“Our responsibility is to express an opinion on these financial statements based on our audit in
accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India.
Because of the matters described in the Basis for Disclaimer of Opinion paragraph, however, we were
not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.
Basis for Disclaimer of Opinion
We were appointed as auditors of the Company and we report that we could not observe the counting
of physical inventories and physical verification of fixed assets due to civil and political unrest in
foreign country where the company has significant operation. We were also unable to satisfy
ourselves by alternative means concerning the inventory quantities and fixed assets of the company
held at March 31st 20XX, which are stated in the Balance Sheet at ₹ XXX and ₹ XXX respectively.
Disclaimer of Opinion
Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph,
we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion. Accordingly, we do not express an opinion on the financial statements.
Report on Other Legal and Regulatory Requirements
As required by section 143(3) of the Companies Act, 2013, we report that:
As described in the Basis for Disclaimer of Opinion paragraph, we were unable to obtain all the
information and explanations which to the best of our knowledge and belief were necessary for the
purpose of our audit.

7.5
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit Reports Chapter 7

7.6
By: CA. Pankaj Garg
 By: CA. Pankaj Garg

8 CARO, 2020
Marks Distribution of Past Exams
6

4
Marks

0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 0 5 0 0 4 0 0 0 5 5 5

*From May 2019, Marks are given only for Descriptive Questions.
8.1 - Applicability of CARO, 2020
Q.1 Astha Pvt. Ltd. has fully paid capital of ₹ 140 lakhs. During the year, the company had borrowed ₹ 15
lakhs each from a bank and a financial institution independently. It has the turnover (Net of GST
₹ 50 lakhs which is credited to a separate account) of ₹ 475 lakhs during the immediate preceding
financial year. Will Companies (Auditor’s Report) Order, 2020 be applicable to Astha Pvt. Ltd.?
Ans.: Applicability of CARO over a Private Company:
• The Companies (Auditor’s Report) Order, 2020, exempts a Small Company as defined in Sec. 2(85)
of the Companies Act, 2013.
• As per Sec. 2(85) of Companies Act, 2013 read with Rule 2(1)(t) of the Companies (Specification of
Definitions Details) Rules, 2014 as amended by Companies (Specification of Definition Details)
Amendment Rules, 2022 w.e.f. 15.09.2022, small company means a company, other than a public
company:
(i) paid-up share capital of which does not exceed ₹ 4 crore; and
(ii) turnover of which as per its last profit and loss account for the immediately preceding
financial year does not exceed ₹ 40 crore.
• In the present case, both paid-up capital and turnover of the company is within the threshold limits
as specified above, hence Astha Pvt. Ltd. will be classified as a small company.
Conclusion: CARO is not applicable over Astha Pvt. Ltd. as it is a small company.
Q.2 E-Tech Pvt. Ltd., which has an aggregate outstanding loan of ₹ 20 lakhs from Banks and ₹ 30 lakhs
from Financial Institutions, defaulted in repayment thereof to the extent of 50%. The company holds
that it being a private limited company, the Companies (Auditor’s Report) Order, 2020 is not
applicable.

8.1
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
CARO, 2020 Chapter 8
You are required to state the list of companies to which CARO is not applicable and state how would
you deal with the given situation as an auditor of the company.
Ans.: Applicability of CARO, 2020:
• The Companies (Auditor’s Report) Order (CARO), 2020, exempts private limited companies, not
being a subsidiary or holding of a public company, from its application which fulfils all the
following conditions:
(i) its paid-up capital and reserves are not more than ₹ 1 Cr. as on Balance Sheet date, and
(ii) its total borrowings any bank or financial institution are not more than ₹ 1 cr. at any point of
time during the financial year; and
(iii) its total revenue as disclosed in Schedule III (including revenue from discontinuing
operations) does not exceed ₹ 10 Cr. during the financial year as per the financial statements.
• In the instant case the total borrowings do not exceed ₹ 100 Lakhs during the year, reporting under
CARO is not required.
Conclusion: Contention of the E-Tech Pvt. Ltd., is correct that CARO, 2020 will not be applicable on it
as outstanding loan from banks and financial institution in aggregate does not exceeds ₹ 1 Cr.
Note: It is assumed here that company is not a small company within the meaning of Sec. 2(85)
of Companies Act, 2013.
Q.3 A Pvt. Ltd., had issued shares (fully paid-up) of ₹ 80 lakhs, had borrowed ₹ 60 lakhs each from 2
financial institutions and its turnover (Net of excise ₹ 100 lakhs which is credited to a separate
account) is ₹ 950 lakhs during immediately preceding financial year. Will Companies (Auditor’s
Report) Order, 2020 (CARO) be applicable to A Pvt. Ltd.?
Ans.: Applicability of CARO, 2020:
• The Companies (Auditor’s Report) Order, 2020, exempts a Small Company as defined in Sec. 2(85)
of the Companies Act, 2013.
• As per Sec. 2(85) of Companies Act, 2013 read with Rule 2(1)(t) of the Companies (Specification of
Definitions Details) Rules, 2014 as amended by Companies (Specification of Definition Details)
Amendment Rules, 2022 w.e.f. 15.09.2022, small company means a company, other than a public
company:
(i) paid-up share capital of which does not exceed ₹ 4 crore; and
(ii) turnover of which as per its last profit and loss account for the immediately preceding
financial year does not exceed ₹ 40 crore.
• In the present case, both paid-up capital and turnover of the company is within the threshold limits
as specified above, hence A Pvt. Ltd. will be classified as a small company.
Conclusion: CARO is not applicable over A Pvt. Ltd. as it is a small company.
Q.4 As an auditor, how would you deal with the following: L Private Ltd., which has outstanding loan of
more than ₹ 100 lakhs from Financial Institution defaulted in repayment thereof to the extent of
50%. The company holds that it being a private limited company, the Companies (Auditor’s Report)
Order (CARO) is not applicable.
Ans.: Applicability of CARO, 2020:
• The Companies (Auditor’s Report) Order (CARO), 2020, exempts private limited companies, not
being a subsidiary or holding of a public company, from its application which fulfils all the
following conditions:
(i) its paid-up capital and reserves are not more than ₹ 1 Cr. as on Balance Sheet date, and
(ii) its total borrowings any bank or financial institution are not more than ₹ 1 Cr. at any point of
time during the financial year; and

8.2
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 8 CARO, 2020
(iii) its total revenue as disclosed in Schedule III (including revenue from discontinuing
operations) does not exceed ₹ 10 Cr. during the financial year as per the financial statements.
• In the instant case the total borrowings exceed ₹ 100 Lakhs out of which company defaults in
repayment to the extent of 50%. As borrowings exceeds ₹ 1 Cr. during the year, reporting under
CARO is required.
• Para 3(ix) of CARO, 2020 requires the auditor to comment whether the company has defaulted in
repayment of loans or other borrowings or in the payment of interest thereon to any lender, if yes,
the period and amount of default to be reported.
Conclusion: Contention of L Pvt. Ltd. is not correct as borrowings from financial institution exceeds
₹ 1 Cr. and auditor is required to report the period and amount of default in repayment of dues under
Para 3(viii) of CARO, 2020.
Note: It is assumed here that company is not a small company within the meaning of Sec. 2(85)
of Companies Act, 2013.
Q.5 T Pvt. Ltd.’s paid-up Capital & Reserves are less than ₹ 1 cr. and it has no outstanding loan exceeding
₹ 1 Cr. from any bank or financial institution. Its sales for the immediately preceding financial year
was ₹ 12 crores before deducting Trade discount ₹ 20 lakhs and Sales returns ₹ 1.90 Cr. The services
rendered by the company amounted to ₹ 20 lakhs. The company contends that reporting under
Companies (Auditor’s Report) Order (CARO) is not applicable. Discuss.
Ans.: Applicability of CARO, 2020:
• The Companies (Auditor’s Report) Order, 2020, exempts a Small Company as defined in Sec. 2(85)
of the Companies Act, 2013.
• As per Sec. 2(85) of Companies Act, 2013 read with Rule 2(1)(t) of the Companies (Specification of
Definitions Details) Rules, 2014 as amended by Companies (Specification of Definition Details)
Amendment Rules, 2022 w.e.f. 15.09.2022, small company means a company, other than a public
company:
(i) paid-up share capital of which does not exceed ₹ 4 crore; and
(ii) turnover of which as per its last profit and loss account for the immediately preceding
financial year does not exceed ₹ 40 crore.
• In the present case, both paid-up capital and turnover of the company is within the threshold limits
as specified above, hence A Pvt. Ltd. will be classified as a small company.
Conclusion: CARO is not applicable over T Pvt. Ltd. as it is a small company.
Q.6 A Private Limited company reports the following position as at end of current financial year:
Paid-up capital 60 Lakhs
Revaluation reserves 20 Lakhs
Capital reserves 22 Lakhs
P & L A/c (Dr. Balance) 4 Lakhs
The management of the company contends that CARO, 2020 is not applicable to it.
Ans.: Applicability of CARO, 2020:
• The Companies (Auditor’s Report) Order, 2020, exempts a Small Company as defined in Sec. 2(85)
of the Companies Act, 2013.
• As per Sec. 2(85) of Companies Act, 2013 read with Rule 2(1)(t) of the Companies (Specification of
Definitions Details) Rules, 2014 as amended by Companies (Specification of Definition Details)
Amendment Rules, 2022 w.e.f. 15.09.2022, small company means a company, other than a public
company:

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CARO, 2020 Chapter 8
(i) paid-up share capital of which does not exceed ₹ 4 crore; and
(ii) turnover of which as per its last profit and loss account for the immediately preceding
financial year does not exceed ₹ 40 crore.
• In the present case, paid-up capital is within the threshold limits as specified above.
Conclusion: Assuming that turnover of the company for immediately preceding financial year does
not exceed ₹ 40 crore, CARO is not applicable over A Pvt. Ltd. as it will be covered within the
exceptions being a small company.
Q.7 Under CARO, 2020, how as a statutory auditor would you comment on the following: X Pvt. Ltd. is a
subsidiary of a listed entity. The management of the company believes that since X Pvt. Ltd. is a
private company and satisfies all conditions under CARO, 2020, reporting under CARO is not
applicable.
Ans.: Applicability of CARO, 2020:
• The Companies (Auditor’s Report) Order (CARO), 2020, applies to all companies including foreign
companies except certain companies which are specifically exempted.
• CARO, 2020 exempts private limited companies not being a subsidiary or holding of a public
company, from its application which fulfils certain conditions.
• In the present case M/s X Pvt. Ltd. is a subsidiary of a listed entity and its management believes
that the company satisfies all conditions as required under CARO, 2020.
Conclusion: Exemption from CARO is not available to a private company which is a subsidiary of a
public company. Hence contention of the management that company being a private limited company
and satisfies all the conditions required for exemption, is not correct.
Q.8 H Private Ltd. (not a small company) had taken overdrafts from two banks with a limit of ₹ 40 lakh
each against the security of fixed deposit it had with those banks and an unsecured overdraft from a
financial institution of ₹ 36 lakh. The said loans were outstanding as at end of current financial year.
The paid-up capital and reserves of the company as at the end of financial year was ₹ 80 lakh and its
revenue for the immediately preceding financial year was ₹ 6 crores. The management of the
company is of the opinion that CARO, 2020 is not applicable to it because turnover and paid up
capital were within the limits prescribed and loans taken against the fixed deposits cannot be
considered. The company further contended that loan limit is to be reckoned per bank or financial
institution and not cumulatively. Comment.
Ans.: Applicability of CARO, 2020:
• The Companies (Auditor’s Report) Order, 2020, exempts a Small Company as defined in Sec. 2(85)
of the Companies Act, 2013.
• As per Sec. 2(85) of Companies Act, 2013 read with Rule 2(1)(t) of the Companies (Specification of
Definitions Details) Rules, 2014 as amended by Companies (Specification of Definition Details)
Amendment Rules, 2022 w.e.f. 15.09.2022, small company means a company, other than a public
company:
(i) paid-up share capital of which does not exceed ₹ 4 crore; and
(ii) turnover of which as per its last profit and loss account for the immediately preceding
financial year does not exceed ₹ 40 crore.
• In the present case, both paid-up capital and turnover of the company is within the threshold limits
as specified above, hence A Pvt. Ltd. will be classified as a small company.
Conclusion: CARO is not applicable over H Private Ltd. as it is a small company.

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Chapter 8 CARO, 2020
8.2 - Matters to be Reported under CARO, 2020
Q.9 X Ltd. closed its manufacturing operations and sold all its manufacturing fixed assets during the
current financial year. However, it intends continue its operations as a trading company. In respect
of other fixed assets, the company carried out a physical verification as at the end of current
financial year and found a material discrepancy to the tune of ₹ 1 lakh, which was written off and is
disclosed separately in the profit and loss account. Kindly incorporate the above in your audit
report.
Ans.: Reporting w.r.t. Fixed Assets:
• Para 3(i) of CARO, 2020 requires the auditor to comment whether the property, plant and
equipment have been physically verified by the management at reasonable intervals; whether any
material discrepancies were noticed on such verification and if so, whether the same have been
properly dealt with in the books of account.
• SA 570 “Going Concern” requires the auditor to perform appropriate procedures so as to ensure
appropriateness of going concern assumption.
• In the present case, X Ltd. had closed its manufacturing operations and sold all its manufacturing
fixed assets, but it intends continue its operations as a trading company. Hence auditor is required
to examine management plans for continuation of the company and appropriateness of going
concern assumption by performing appropriate procedures.
• Further, in respect of other fixed assets, company has carried out physical verification and found a
material discrepancy of ₹ 1 Lakh which was written off and disclosed separately in the profit and
loss account. In respect of this, auditor should incorporate the below mentioned para in his
report:
“As per AS-1, “Disclosure of Accounting Policies”, “the enterprise is normally viewed as a going
concern, that is as continuing its operation for the foreseeable future. It is assumed that the
enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the
scale of its operations.” Although the company has disposed off its manufacturing fixed assets
during the financial year ending on 31-03-2021, it is still a going concern in the form of a trading
company.
We also report that on physical verification of other fixed assets, a material discrepancy to the
tune of ₹ 1 Lakh was noticed and that the same has been properly dealt with in the books of
account”.
Q.10 Under CARO, 2020, as a statutory auditor, how would you report: NSP Limited has its factory
building, appearing as fixed assets in its financial statements in the name of one of its director who
was overlooking the manufacturing activities.
Ans.: Audit procedures w.r.t. reporting over title deeds of immovable properties under CARO:
• Para 3(i)(c) of CARO, 2020 requires the auditor to comment whether the title deeds of all the
immovable properties (Other than properties where the company is the lessee and the lease
agreements are duly executed in favour of the lessee) disclosed in the financial statements are held
in the name of the company.
• The Order is silent as to what constitutes ‘title deeds’. In general, title deeds mean a legal deed or
document constituting evidence of a right, especially to the legal ownership of the immovable
property.
• Title deeds of the immovable property may be Registered sale deed/transfer deed/conveyance
deed, etc. of land, land & building together, etc. purchased, allotted, transferred by any person
including any government, government authority/body/agency/corporation, etc. to the company.

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• If title deeds are not held in name of the company, details thereof to be provided in the below
mentioned format:
Description Gross Held in Whether Period held – Reason for not
of Property carrying name promoter, indicate being held in
value of director or their range, where name of
relative or appropriate company*
employee

*Also indicate if in dispute.

Q.11 ABC Ltd. owns a piece of Land and Building situated at IP road, Mumbai which was purchased before
30 years. The title deeds for the same are deposited with State Bank of India for obtaining credit
facilities by the company.
As the statutory auditor of the company, what are the audit procedures to be followed and what is
the reporting under CARO, 2020?
Ans.: Audit procedures w.r.t. reporting over title deeds of immovable properties under CARO:
• Para 3(i)(c) of CARO, 2020 requires the auditor to comment whether the title deeds of all the
immovable properties (Other than properties where the company is the lessee and the lease
agreements are duly executed in favour of the lessee) disclosed in the financial statements are held
in the name of the company.
• The Order is silent as to what constitutes ‘title deeds’. In general, title deeds mean a legal deed or
document constituting evidence of a right, especially to the legal ownership of the immovable
property.
• Title deeds of the immovable property may be Registered sale deed/transfer deed/conveyance
deed, etc. of land, land & building together, etc. purchased, allotted, transferred by any person
including any government, government authority/body/agency/corporation, etc. to the company.
• Where the title deeds of the immovable property have been mortgaged with the Banks/ Financial
Institutions, etc., for securing the borrowings and loan raised by the company, a confirmation
about the same should be sought from the respective institution to this effect. The auditor may also
consider verifying this information from the online records, if available, of the relevant State.
• If title deeds are not held in name of the company, details thereof to be provided in the below
mentioned format:
Description of Gross Held Whether Period held – Reason for
Property carrying in promoter, director indicate not being
value name or their relative or range, where held in name
of employee appropriate of company*

*Also indicate if in dispute.

Q.12 The Property, Plant and Equipment of Amir Ltd. included ₹ 25.75 crores of earth removing machines
of outdated technology which had been retired from active use and had been kept for disposal after
knock down. These assets appeared at residual value and had been last inspected ten years back. As
an Auditor, what may be your reporting concern in view of CARO, 2020 on matters specified above?
[MTP-April 21]

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Chapter 8 CARO, 2020
Ans.: Reporting w.r.t. Fixed Assets:
• Para 3(i) of CARO, 2020 requires the auditor to comment:
 whether the property, plant and equipment 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.
• In the present case, the Property, Plant and Equipment of Amir Ltd. included ₹ 25.75 crores of
earth removing machines of outdated technology which had been retired from active use and had
been kept for disposal after knock down. These assets appeared at residual value and had been last
inspected ten years back.
• Inspection of abovementioned machine was done 10 years back. Though it is a retired machine,
however value is ₹ 25.75 crores which is a significant amount, requires physical verification at
regular intervals.
Conclusion: Auditor is required to state the fact about discrepancies in system of physical verification
of machineries held for disposal.
Q.13 As the statutory auditor of B Ltd. to whom CARO, 2020 is applicable, how would you report in the
following situations: Physical verification of only 50% (in value) of items of inventory has been
conducted by the company. The balance 50% will be conducted in next year due to lack of time and
resources.
Ans.: Physical verification of Inventory:
• Para 3(ii) of CARO, 2020 requires the auditor to state in his report whether physical verification of
inventory has been conducted at reasonable interval by the management and whether, in the
opinion of the auditor, the coverage and procedure of such verification by the management is
appropriate.
• Physical verification of inventory is the responsibility of the management which should verify all
material items at least once in a year and more often in appropriate cases.
• What constitutes “reasonable intervals” depends on circumstances of each case. The periodicity of
the physical verification of inventories depends upon the nature of inventories, their location and
the feasibility of conducting a physical verification. The management of a company normally
determines the periodicity of the physical verification of inventories considering these factors.
• Normally, wherever practicable, all the items of inventories should be verified by the management
of the company at least once in a year.
• The auditor in order to satisfy himself about verification at reasonable intervals should examine
the adequacy of evidence and record of verification.
• In the given case, physical verification of 50% of the items has not been conducted by the
management during the year.
Conclusion: Auditor should point out the fact regarding inadequacies in the physical verification
procedures of inventory in his report.
Q.14 Mr. Arjun was appointed as the engagement partner on behalf of Bhism & Co., a Chartered
Accountant Firm, for conducting statutory audit assignment of Sinwar Ltd., unlisted public company.
Mr. Brijesh, one of the senior engagement team members, was given the responsibility to audit the
matters as per the requirements of CARO, 2020 and in that connection, he made the following
observations, that may be relevant for reporting as per the said Order:

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CARO, 2020 Chapter 8

Sr. No. Observations

(a) One of the Plant and Equipment taken on a lease (‘right of use’ asset) by Sinwar Ltd. was
revalued based on the valuation by a registered valuer and the net carrying value of
Plant and Equipment in aggregate was changed from ₹ 4 crore to ₹ 4.45 crore.
(b) During the year under consideration, cash credit limit of ₹ 5.5 crore was sanctioned to
Sinwar Ltd. by DMC Bank based on the security of current assets which was reduced to ₹
4.5 crore after 6 months. In this connection, quarterly returns have been filed by the
company with the DMC bank which are in agreement with Books of Account.
You are required to examine the contention of Mr. Brijesh regarding reporting of the above
observations in accordance with CARO, 2020. [RTP-May 22]
Ans.: Reporting requirements under CARO, 2020:
(a) As per Para 3(i)(d) of CARO, 2020, the auditor is required to report whether the company has
revalued its Property, Plant and Equipment (including Right of Use assets) or intangible assets or
both during the year and, if so, whether the revaluation is based on the valuation by a Registered
Valuer; specify the amount of change, if the change is 10% or more in the aggregate of the net
carrying value of each class of Property, Plant and Equipment or intangible assets.
In the given situation, Sinwar Ltd. has revalued one of the Plant and Equipment taken on a lease
(‘right of use’ asset) based on the valuation by a registered valuer. The amount of change in the
value of such Plant and Equipment is ₹ 45 lakh. As the net carrying value of Plant and Equipment
in aggregate was changed from ₹ 4 crore to ₹ 4.45 crore i.e. change was 10% or more.
Conclusion: Auditor is required to report the amount of change of ₹ 45 lakh in accordance with
Para 3(i)(d) of CARO, 2020.
(b) As per Para 3(ii)(b) of CARO, 2020, the auditor is required to report whether during any point of
time of the year, the company has been sanctioned working capital limits in excess of ₹ 5 crores, in
aggregate, from banks or financial institutions on the basis of security of current assets; whether
the quarterly returns or statements filed by the company with such banks or financial institutions
are in agreement with the books of account of the Company, if not, give details.
In the given situation, Sinwar Ltd. has been sanctioned a cash credit limit of ₹ 5.5 crores by DMC
Bank during the year under consideration, which is exceeding the prescribed limit of ₹ 5 crores
based on the security of current assets. Further, quarterly returns have also been filed by the
company with the DMC bank in this connection which is in agreement with Books of Account.
Conclusion: Auditor is required to report the working limit sanctioned to Sinwar Ltd. and
disagreement of quarterly statements with the books of account.

Q.15 Jam Private Limited was engaged in business of manufacture of Cycles. CA Roy was appointed as a
Statutory Auditor of the Company for the financial year 2021-22. During the year under audit, Jam
Private Limited obtained working capital facilities from ABC Bank Limited for ₹ 10 crore
hypothecating the Stock of goods as primary security. On inquiry CA Roy was informed by
management that stock statements are furnished periodically to ABC Bank Limited and the details of
submission of quarterly stock statement are as follows:

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Chapter 8 CARO, 2020
Period of Stock Value as per Books of Stock Value as per quarterly statement
Quarter Account as at the end of the submitted to ABC bank limited as at
quarter (₹ in Crore) the end of quarter (₹ in Crores)
Q1-2021-22 11.50 14.00
Q2-2021-22 14.75 17.00
Q3-2021-22 11.50 14.00
Q4-2021-22 15.25 15.25
The management of Jam Private Limited did not disclose the above variations in Notes to accounts
forming part of financial Statements of the Company for the year 2021-22. The management replied
that there are no variations as on the Balance sheet date and further they are of the view that stock
statement furnished to bank is only a formality and computed arbitrarily only for the purpose of
securing higher drawing power and hence statutory auditors need not be bothered.
Is the contention of the management valid? As a Statutory Auditor how CA Roy should deal and
discuss the disclosure/reporting requirements if any, as per the Companies Act, 2013 and CARO,
2020. [May 22 (5 Marks); MTP-March 23]
Ans.: Reporting requirements under Companies Act, 2013 and CARO, 2020
• As per Schedule III of the Companies Act, 2013, where the Company has borrowings from banks or
financial institutions on the basis of security of current assets, it shall disclose the following:
(a) whether quarterly returns or statements of current assets filed by the Company with banks or
financial institutions are in agreement with the books of account.
(b) if not, summary of reconciliation and reasons of material discrepancies, if any to be adequately
disclosed. w.r.t. Inventories.
• Clause (b) of Para 3(ii) of CARO, 2020 requires the auditor to report whether during any point of
time of the year, the company has been sanctioned working capital limits in excess of ₹ 5 crore, in
aggregate, from banks or financial institutions on the basis of security of current assets; whether
the quarterly returns or statements filed by the company with such banks or financial institutions
are in agreement with the books of account of the Company, if not, give details.
• In the given case, company has obtained working capital facilities from ABC Bank Limited for ₹ 10
crore hypothecating the stock of goods as primary security. Quarter-wise stock statements filed by
the company with the banks are not in agreement with the books of account.
Conclusion: Contention of the management that there are no variations as on the Balance sheet date
and statutory auditors need not be bothered is not correct. Such variations need to be disclosed in
Notes to Accounts forming part of financial statements and also need to be reported by auditor under
CARO, 2020. CA. Roy should report the differences as per the Companies Act, 2013 and CARO 2020 as
follows:
Stock value as per Stock value as per quarterly Variation
Book Accounts statement Submitted to ABC
(₹ in Crore) Bank Ltd. (₹ in Crore)

Q-1 11.50 14.00 Excess reporting of stock to

Bank by 2.50 crore
Q-2 14.75 17.00 Excess reporting of stock to
Bank by 2.25 crore
Q-3 11.50 14.00 Excess reporting of stock to bank
by 2.50 crore
.

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CARO, 2020 Chapter 8
Q.16 In the course of audit of Y Ltd., as the auditor of the company you observe the following: The
company has advanced a loan to a firm in which a director was interested at a rate lower than the
prevailing market rate as well as there was no agreement on terms of repayment.
How auditor will report in CARO, 2020?
Ans.: Reporting requirement under CARO, 2020:
• Para 3(iii)(a) of CARO, 2020 requires the auditor to report whether during the year the company
has provided loans or advances in the nature of loans, or stood guarantee, or provided security to
any other entity, if so, indicate the aggregate amount during the year, and balance outstanding at
the balance sheet date with respect to such loans or advances.
• Para 3(iii)(b) of CARO, 2020, requires the auditor to report whether the terms and conditions of
the grant of all loans and advances in the nature of loans and guarantees provided are not
prejudicial to the company’s interest.
• In the present case, company has granted a loan to a firm in which a director is interested, the
terms and conditions of which are prejudicial to the company interest, hence auditor may report as
under:
“According to the information and explanations given to us and based on the audit procedures
conducted by us, we are of the opinion that the terms and conditions of loans granted by the
company to a firm in which a director of the company is interested, (total loan amount granted
₹ ________ and balance outstanding as at balance sheet date ₹ ______) are prejudicial to the company’s
interest on account of the fact that the loans have been granted at an interest rate of ____% per
annum which is significantly lower than the cost of funds to the company and also lower than the
prevailing yield of government security close to the tenor of the loan”.
• Pare 3(iii)(f) of CARO, 2020 requires the auditor to report whether the company has granted any
loans or advances in the nature of loans either repayable on demand or without specifying any
terms or period of repayment, if so, specify the aggregate amount, percentage thereof to the total
loans granted, aggregate amount of loans granted to Promoters, related parties as defined in Sec.
2(76) of the Companies Act, 2013.
Q.17 H Ltd. granted unsecured loan of ₹ 1 crore @ 15% p.a. to two of its subsidiaries during the current
Financial Year. Before the year end both the companies repaid the loan. The management of H Ltd. is
of the opinion that since no balance is outstanding as at the end of financial year, these loans are not
required to be reported in CARO, 2020. Comment and draft a suitable report.
Ans.: Reporting requirement under CARO, 2020:
• Para 3(iii)(a) of CARO, 2020 requires the auditor to report whether during the year the company
has provided loans or advances in the nature of loans, or stood guarantee, or provided security to
any other entity, if so, indicate the aggregate amount during the year, and balance outstanding at
the balance sheet date with respect to such loans or advances.
• Para 3(iii)(b) of CARO, 2020, requires the auditor to report whether the terms and conditions of
the grant of all loans and advances in the nature of loans and guarantees provided are not
prejudicial to the company’s interest.
• Guidance Note on CARO, 2020 as issued by ICAI states that it may so happen that a party might
have taken a loan/advance in nature of loan from a company and repaid it during the same
financial year. Therefore, while examining the loans, the auditor should also take into
consideration the loans/advances in nature of loan transactions that have been squared-up during
the year and report such transactions under this clause.

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Chapter 8 CARO, 2020
• In the given case, H Ltd. has granted unsecured loan of ₹ 1 crore @15% p.a. to two of its
subsidiaries during the current financial year. During the year, both the companies have repaid its
loan. Therefore, the auditor need to consider the transaction and comment as follows:
“The Company has granted loan of ₹ 1 Crore @ 15% p.a. to 2 of its subsidiaries during the current
financial year. The maximum amount involved during the year was ₹ 1 crore and the year-end
balance of such loans was Nil”.
Q.18 As a Company auditor you noticed that there is an inter-corporate loan granted by the company.
What are the reporting requirements as regard the matters concerning terms of interest on the
inter-corporate loan?
Ans.: Reporting requirements as to inter-corporate loan granted by the company:
As per Para 3(iv) of CARO, 2020, the auditor is required to report, in respect of loans, investments,
guarantees, and security whether provisions of Sections 185 and 186 of the Companies Act, 2013 have
been complied with. If not, provide details thereof. For this purpose of ensuring compliance of Sec.
186, the auditor should:
• Obtain the details of, loans given to any person or other body corporate, guarantee given or
security provided in connection with a loan to any other body corporate or person and securities
acquired of any other body corporate by way of subscription, purchase or otherwise, made during
the year as well as the outstanding balances as at the beginning of the year.
• Check whether rate of interest is not lower than the prevailing yield of one-year, three-year, five-
year or ten-year government security closest to the tenor of the loan granted.
• Check if the company is in default in the repayment of any deposits accepted or in payment of
interest thereon, then the company is not allowed to give any loan or guarantee or any security or
an acquisition till such default is subsisting.
• Non-compliance of Sec. 186 with respect to interest on the inter-corporate loan may be reported
incorporating following details:
Sl. Non-compliance of Section 186 Remarks,
No. Name of Amount Balance as at if any
Company/Party Involved Balance
Sheet Date
1 Loan given at rate of
interest lower than
prescribed
2 Any other default
.

Q.19 CARO, 2020 requires the auditor of the company to report whether maintenance of cost records has
been specified by the Central Government under section 148 of the Companies Act, 2013 and
whether such accounts and records have been so made and maintained.
You are required to briefly explain the audit procedure to be followed by the auditor and suggest the
reporting pattern.
Ans.: Reporting requirement under CARO, 2020:
• Para 3(vi) of CARO, 2020 requires the auditor to comment “whether maintenance of cost records
has been specified by the CG u/s 148(1) of the Companies Act, 2013 and whether such accounts
and records have been so made and maintained”.

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CARO, 2020 Chapter 8
• The word “made” applies in respect of cost accounts (or cost statements) and the word
“maintained” applies in respect of cost records relating to materials, labour, overheads, etc.
• The auditor has to report under the clause irrespective of whether a cost audit has been ordered
by the Central Government.
• The auditor should obtain a written representation from the management stating:
(a) whether cost records are required to be maintained for any product(s) or services of the
company u/s 148 of the Act, and the Companies (Cost Records and Audit) Rules, 2014; and
(b) whether cost accounts and records are being made and maintained regularly.
• The auditor should also obtain a list of books/records made and maintained in this regard.
• The Order does not require a detailed examination of such records. The auditor should,
therefore, conduct a general review of the cost records to ensure that the records as prescribed
are made and maintained. He should, of course, make such reference to the records as is
necessary for the purposes of his audit.
• It is necessary that the extent of the examination made by the auditor is clearly brought out in
his report. The following wording is, therefore, suggested:
“We have broadly reviewed the books of account maintained by the company pursuant to the
Rules made by the Central Government for the maintenance of cost records under section 148 of
the Act, and are of the opinion that prima facie, the prescribed accounts and records have been
made and maintained.”
Q.20 During the course of Audit of M/s CT Ltd., it has noticed that ₹ 2.00 lakhs of employee contribution
and ₹ 9.50 lakhs of employer contribution towards employee state insurance contribution have been
accounted in the books of account in respective heads. Whereas, it was found that ₹ 4.00 lakhs only
have been deposited with ESIC department during the year. The Finance Manager informed that
auditor that due to financial crunch they have not deposited the amount due, but will deposit the
amount overdue along with interest as and when financial position improves. Comment as a
statutory auditor.
Ans.: Reporting Requirement under CARO w.r.t. payment of statutory dues:
• Para 3(vii)(a) of CARO, 2020 requires the auditor to comment whether the company is regular in
depositing undisputed statutory dues including GST, Provident Fund, Employees State Insurance
(ESI), Income-tax, Sales-tax, Wealth tax, Service tax, Duties of Customs, Duty of Excise, Value Added
Tax, cess and any other statutory dues with the appropriate authorities and if not, the extent of the
arrears of outstanding statutory dues as at the last day of the financial year concerned for a period
of more than six months from the date they became payable shall be indicated.
• SA 250 “Consideration of Laws and Regulations in an audit of financial statements”, also requires
the auditor to obtain sufficient appropriate audit evidence regarding compliance with the
provisions of those laws and regulations generally recognised to have a direct effect on the
determination of material amounts and disclosures in the financial statements.
• A company is required to deposit provident fund and Employees State Insurance dues to
appropriate authorities with in the period prescribed under the EPF Act and the Rules governing it.
• In the present case company is not regular in depositing the provident Fund/ESI Contributions.
The reason put forward by the Chief Accountant that the amount has not been deposited due to
financial problems faced by the Company is no excuse for not remitting the PF/ESI Contributions.
Conclusion: Non-payment of PF/ESI contribution needs to be disclosed by the auditor in his audit
report as per requirement of Para 3(vii)(a) of CARO, 2020.

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Chapter 8 CARO, 2020
Q.21 As a Statutory Auditor, how would you deal with the following: PQR Ltd. has not deposited Provident
Fund contribution of ₹ 10 lakhs with the authorities till the year-end.
Ans.: Reporting Requirement under CARO w.r.t. payment of statutory dues:
• Para 3(vii)(a) of CARO, 2020 requires the auditor to comment whether the company is regular in
depositing undisputed statutory dues including GST, Provident Fund, Employees State Insurance
(ESI), Income-tax, Sales-tax, Wealth-tax, Service-tax, Duties of Customs, Duty of Excise, Value
Added Tax, cess and any other statutory dues with the appropriate authorities and if not, the
extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned
for a period of more than six months from the date they became payable shall be indicated.
• SA 250 “Consideration of Laws and Regulations in an audit of financial statements, also requires
the auditor to obtain sufficient appropriate audit evidence regarding compliance with the
provisions of those laws and regulations generally recognised to have a direct effect on the
determination of material amounts and disclosures in the financial statements.
• A company is required to deposit provident fund and Employees State Insurance dues to
appropriate authorities within the period prescribed under the EPF Act and the Rules governing it.
• In the present case company is not regular in depositing the provident Fund.
Conclusion: Non-payment of PF needs to be disclosed by the auditor in his audit report as per
requirement of Para 3(vii)(a) of CARO, 2020.
Q.22 Comment on the following: Is the company regular in depositing undisputed statutory dues
including GST, Provident Fund, Employees State Insurance, Income tax, Sales tax, Wealth tax,
Customs duty, Excise duty, Value Added Tax, Cess and any other statutory dues with the appropriate
authorities and if not, the extent of arrears of outstanding statutory dues as at the last day of the
financial year concerned for a period of more than six months from the date they became payable
shall be indicated by the auditor.
Ans.: Reporting on Regularity of payment of statutory dues:
• Para 3(vii)(a) of CARO, 2020 requires the auditor to comment:
(i) whether the company is regular in depositing undisputed statutory dues including GST,
Provident Fund, Employees State Insurance, Income tax, Sales tax, Service tax, Duties of
Customs, duty of Excise, Value Added Tax, Cess and any other statutory dues with the
appropriate authorities, and
(ii) if not, the extent of arrears of outstanding statutory dues as at the last day of the financial
year concerned for a period of more than six months from the date they became payable shall
be indicated by the auditor.
• Implication of Para 3(vii)(a) are as follows:
(i) Auditor is required to comment upon regularity in depositing undisputed statutory dues.
(ii) Payment includes all statutory dues payable by the company. The amount payable will
include the interest/penalty payable under the respective laws.
(iii) If the company is not regular in depositing the undisputed statutory dues the auditor is
required to state the extent of outstanding statutory dues as at the last day of the financial
year from a period of more than six months from the date they became payable.
(iv) The auditor has to get a written representation from the management indicating the details of
disputed claims, undisputed but have remained outstanding for more than six months and a
statement as to the completeness of the information provided by the management.

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CARO, 2020 Chapter 8
Q.23 Big and Small Ltd. received a show cause notice from GST department intending to levy a demand of
₹ 25 lakhs in December 2022. The company replied to the above notice in January 2023 contending
that it is not liable for the levy. No further action was initiated by the GST department upto the
finalization of the audit for the year ended on 31st March, 2023. As the auditor of the company, what
is your role in this?
Ans.: Reporting in case of Statutory dues:
• Para 3(vii)(a) of CARO, 2020 requires the auditor to comment whether the company is regular in
depositing undisputed statutory dues including GST, Provident Fund, Employees State Insurance
(ESI), Income-tax, Sales-tax, Wealth-tax, Service-tax, Duties of Customs, Duty of Excise, Value
Added Tax, cess and any other statutory dues with the appropriate authorities and if not, the
extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned
for a period of more than six months from the date they became payable shall be indicated.
• As per Para 3(vii)(b) of CARO, 2020, where statutory dues referred above have not been deposited
on account of any dispute, then the amounts involved and the forum where dispute is pending shall
be mentioned.
• A mere representation to the Department shall not constitute the dispute.
• In the present case issuance of show cause notice by GST deptt. does not tantamount to demand
payable by the Company. Inasmuch as the Company has replied to the notice and no further
correspondence was received from the deptt., it has to be construed that there is no demand.
Conclusion: The auditor needs not to report on this.
Q.24 XYZ Pvt. Ltd. has submitted the financial statements for the current financial year for audit. The
audit assistant observes and brings to your notice that the company’s records show following dues:
• Income Tax relating to Assessment Year 2017-18 ₹ 125 lakhs – Appeal is pending before Hon’ble
ITAT since 30-9-2018.
• Customs duty ₹ 85 lakhs – Demand notice received on 15-9-2022 but no action has been taken to
pay or appeal.
As an auditor, how would you bring this fact to the members?
Ans.: Reporting under CARO w.r.t. Statutory Dues:
• Para 3(vii)(a) of CARO, 2020 requires the auditor to comment whether the company is regular in
depositing undisputed statutory dues including GST, Provident Fund, Employees State Insurance
(ESI), Income-tax, Sales-tax, Wealth-tax, Service-tax, Duties of Customs, Duty of Excise, Value
Added Tax, cess and any other statutory dues with the appropriate authorities and if not, the
extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned
for a period of more than six months from the date they became payable shall be indicated.
• As per Para 3(vii)(b) of CARO, 2020, where statutory dues referred above have not been deposited
on account of any dispute, then the amounts involved and the forum where dispute is pending shall
be mentioned.
• The auditor should also obtain a management representation about the disputed dues, the
amounts involved and the forum where the dispute is pending. The auditor should carry out
necessary audit procedures to verify the information provided by the management.
• In the present case, there is Income Tax demand of ₹ 125 Lakhs and the company has gone for an
appeal, it should be brought to notice of members by reporting under Para 3(vii)(b) of CARO, 2020
as below:

8.14
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Chapter 8 CARO, 2020
Sl. Name of the Statute Nature of Amount Period to Forum where
No. Dues (in which amount dispute is
Lakhs) relates pending
1 Income-tax Act, 1961 Income Tax 125.00 AY 2017-18 ITAT
• In reference to demand notice received for Custom Duty of ₹ 85 Lakhs on 15.09.2022 for which
company has not taken any action and is outstanding for more than 6 months, it leads to the
irregularity which should be brought to notice of members by reporting under Para 3(vii)(a) of
CARO, 2020.
Q.25 As an auditor, how will you report under CARO in each of the following situation?
(i) Since more than seven months, payment of electricity bills to company established under
statute is outstanding.
(ii) The company had imported goods 5 years back and were placed in bonded warehouse till the
end of financial year under Audit. The company has not paid import duty as goods have not
been removed from such warehouse. The company has also not paid rent and interest
expenditure payable on the amount of custom duty.
(iii) The company has received income tax assessment order along with demand notice from
Assessing officer. The company has not paid dues payable as the same is not acceptable to the
company. The company has neither preferred appeal against the order nor an application for
rectification of mistake has been made. The company has just merely represented to the
Assessing Officer.
(iv) The company in view of voluminous pay-roll data consistently follows the method of making
lump sum deposit of estimated amount of ESI collections and adjust the excess or deficit against
next following months’ deposit and the difference of the said amount always remains
insignificant. [Jan. 21 – Old Syllabus (5 Marks)]
Ans.: Reporting under CARO:
Clause (vii)(a) of Para 3 of CARO, 2016 requires the auditor to state in his report whether the
company is regular in depositing undisputed statutory dues including provident fund, Employees'
State Insurance, Income-tax, Sales-tax, Services tax, Duty of Customs, Duty of Excise, Value Added
Tax, cess and any other statutory dues to the appropriate authorities and if not, the extent of the
arrears of outstanding statutory dues as on the last day of the financial year concerned for a period of
more than 6 months from the date they became payable, shall be indicated.
It is important to mention that any sum, which is to be regularly paid to an appropriate authority
under a statute (whether Central, State or Local or Foreign) applicable to the company, should be
considered as a “statutory due” for the purpose of this clause. In other words, obligation to pay a
statutory due is created or arises out of a statute, rather than being based on an independent
contractual or legal relationship.
Conclusion: Based on the above stated provisions, following conclusions may be drawn:
(i) Any sum payable to an electricity company as electricity bill would not constitute a statutory
due as dues has arisen on account of contract of supply of goods or services between the parties.
Thus, reporting under CARO is not required for electricity dues.
(ii) In case of imported goods placed in a bonded warehouse, the payment of import duty is to be
made when the goods are removed from the bonded warehouse. However, till the time the
importer opts to remove the goods from the warehouse, the importer is required to incur the
rent and interest expenditure on the amount of customs duty payable. Since the payment of the

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CARO, 2020 Chapter 8
custom duty is not due in the current case, the question of regularity does not arise in respect of
custom duty.
Interest and rent that are required to be incurred u/s 61 of the Customs Act, 1962 would come
under other statutory dues and the auditor would have to examine and comment upon the
regularity of the company in depositing such interest and rent.
(iii) In relation to income tax assessment order received by the company along with demand notice,
the auditor is required to check whether time limit for filing the appeal or application for
rectification of mistake has expired or not. In case such time limit has expired, disputed amount
will become undisputed statutory due (as mere representation to the concerned Department
shall not be treated as a dispute).
Auditor is also required to ascertain whether such dues are outstanding for a period of more
than 6 months from the date they became payable. Accordingly, after ensuring the above, if the
statutory dues are outstanding for more than 6 months the auditor is required to report the
same under clause (vii)(a) of CARO.
However, in case the statutory dues are not outstanding for a period of more than 6 months
from the date they became payable the auditor is not required to report the same under CARO.
(iv) If the method as stated in the question is consistently followed and the difference between the
total dues and the lumpsum deposit is not significant, it need not be considered that dues have
not been regularly deposited and no unfavourable comment is necessary. Thus, no reporting is
required for the same under CARO.
Q.26 OK Ltd. has taken a term loan from a nationalized bank in 2017 for ₹ 200 lakhs repayable in five
equal instalments of ₹ 40 lakhs from 31st March, 2018 onwards. It had repaid the loans due in 2018
& 2019, but defaulted in 2020, 2021 & 2022. As the auditor of OK Ltd. what is your responsibility
assuming that company has sought reschedulement of loan?
Ans.: Reporting w.r.t. repayment of dues:
• As per Para 3(ix)(a) of CARO, 2020 auditors of a company are required to comment in his report
whether the company has defaulted in repayment of loans or other borrowings or in the payment
of interest thereon to any lender, if yes, the period and amount of default to be reported as per the
format below:
Nature of borrowing, Name Amount not Whether No. of days Remarks,
including debt of paid on due principal delay or if any
securities lender* date or interest unpaid

*Lender-wise details to be provided in case of defaults to banks, financial institutions and

Government.
• As per the general instructions for preparation of Balance Sheet, provided under Schedule III to the
Companies Act, 2013, terms of repayment of term loans and other loans is required to be disclosed
in the notes to accounts. It also requires disclosure of period and amount of continuing default as
on the balance sheet date in repayment of loans and interest, separately in each case.
• Submission of application for reschedulement/restructuring does not mean that no default has
occurred.
• In this case OK Ltd. has defaulted in repayment of dues for three years. Application for
rescheduling will not change the default position.
Conclusion: The auditor has to report in his audit report that the Company has defaulted in its
repayment of dues to the bank to the extent of ₹ 120 lakhs.

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Chapter 8 CARO, 2020
Q.27 R Ltd. as at 31st March 2023 defaulted in the repayment of interest and principal due to a financial
institution. The due date was 28th February 2023. However, the defaulted amount was paid on 5th
April 2023. The company’s management is of the opinion that since the default is set right before the
audit completion these need not be reported in CARO, 2020. Comment and draft a suitable report.
Ans.: Reporting w.r.t. repayment of dues:
• As per Para 3(ix)(a) of CARO, 2020 auditors of a company are required to comment in his report
whether the company has defaulted in repayment of loans or other borrowings or in the payment
of interest thereon to any lender, if yes, the period and amount of default to be reported as per the
format below:
Nature of borrowing, Name Amount not Whether No. of days Remarks,
including debt of paid on due principal delay or if any
securities lender* date or interest unpaid

*Lender-wise details to be provided in case of defaults to banks, financial institutions and

Government.
• As per the general instructions for preparation of Balance Sheet, provided under Schedule III to the
Companies Act, 2013, terms of repayment of term loans and other loans is required to be disclosed
in the notes to accounts. It also requires disclosure of period and amount of continuing default as
on the balance sheet date in repayment of loans and interest, separately in each case.
• In the given case, company has defaulted in repayments of dues to a financial institution during the
financial year 2022-23 which remain outstanding as at March 31, 2023. However, the company has
settled the total outstanding dues including interest in April, 2023 but, the dues were outstanding
as at March 31, 2023.
Conclusion: The auditor is required to state in his report the default of the company in respect of
repayment of its dues and report as under:
“The company has defaulted in repayment of principal and interest to the financial institution
amounted to ₹ ………, that become due on 28th Feb., 2023. However, the outstanding sum was settled
by the company on 5th April, 2023”.
Q.28 Under CARO how, as a statutory auditor how would you comment on the following: A Term Loan was
obtained from a bank for ₹ 75 lakhs for acquiring R&D equipment, out of which ₹ 12 lakhs were used
to buy a car for use of the concerned director, who was overlooking the R&D activities.
Ans.: Utilisation of Term Loans:
• Para 3(ix)(c) of CARO, 2020 requires the auditor to comment whether term loans were applied for
the purpose for which the loans were obtained; if not, the amount of loan so diverted and the
purpose for which it is used may be reported.
• For this purpose, auditor should examine the terms and conditions of the term loan with the actual
utilisation of the loans. If the auditor finds that the fund has not been utilized for the purpose for
which they were obtained, the report should state the fact.
• In the instant case, term loan was taken for the purpose of purchase of Research & Development
equipment, but a part of it has been utilized for purchase of vehicle for the use of Director.
• Purchase of vehicle for use by Director who was incharge of the R&D activities, cannot be
considered as purchase of Research & Development equipment.

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CARO, 2020 Chapter 8
Conclusion: Auditor is required to report the fact in his audit report. Reporting may be as follows:
In our opinion and according to the information and explanations given to us, the Company has
utilized the money raised by the term loans during the year for the purposes for which they were
raised, except for:
Nature of the Name of Amount Purpose for Purpose for Remarks
fund raised the lender diverted which amount which amount
was sanctioned was utilised

Q.29 As a Statutory Auditor, how would you deal with the following: LM Ltd. had obtained a Term Loan of
₹ 300 lakhs from a bank for the construction of a factory. Since there was a delay in the construction
activities, the said funds were temporarily invested in short term deposits.
Ans.: Utilisation of Term Loans:
• Para 3(ix)(c) of CARO, 2020 requires the auditor to comment whether term loans were applied for
the purpose for which the loans were obtained; if not, the amount of loan so diverted and the
purpose for which it is used may be reported.
• For this purpose, auditor should examine the terms and conditions of the term loan with the actual
utilisation of the loans. If the auditor finds that the fund has not been utilized for the purpose for
which they were obtained, the report should state the fact.
• As per Guidance Note on CARO, 2020, during construction phase, companies, generally,
temporarily invest the surplus funds to reduce the cost of capital or for other business reasons.
However, subsequently the same are utilised for the stated objectives. In such cases, the auditor
should mention the fact that pending utilisation of the term loan for the stated purpose, the funds
were temporarily used for the purpose other than for which the loan was sanctioned but were
ultimately utilised for the stated end-use.
• In the instant case, term loan was taken for the purpose of construction of a factory, but said funds
were invested in short term deposits due to delay in construction activities.
Conclusion: Auditor is required to report the fact that the pending utilisation of term loan, the funds
are temporarily invested in short term deposits, in his audit report as per requirement of paragraph
3(ix)(c) of CARO, 2020.
Q.30 During the financial year ended on 31.03.2023, LM Private Limited had borrowed from a
Nationalized Bank, a term loan of ₹ 120 lakhs consisting of ₹ 100 lakhs for purchase of a machinery
for the new plant and ₹ 20 lakhs for erection expenses. As on the date of 31st March, 2023, the total
of capital and free reserves of the Company was ₹ 50 lakhs and turnover for the year 2022-23 was
₹ 750 lakhs. The Bank paid ₹ 100 lakhs to the vendor of the Company for the supply of machinery on
31.12.2022. The machinery had reached the yard of the Company. On 28.02.2023, the Company had
drawn the balance of loan viz. ₹ 20 lakhs to the credit of its current account maintained with the
Bank and utilized the full amount for renovating its administrative office building. The machinery
had been kept as capital stock under construction. Comment as to reporting issues, if any, that the
Auditor should be concerned with for the financial year ended on 31.03.2023, in this respect.
Ans.: Reporting as to mis-utilisation of Term Loans:
• Reporting under CARO, 2020 is applicable in case of a private limited company if the total
borrowings exceed ₹ 1 Cr. from any bank or financial institution at any point of time during the
financial year.

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Chapter 8 CARO, 2020
• Para 3(ix)(c) of CARO, 2020 requires the auditor to comment whether term loans were applied for
the purpose for which the loans were obtained; if not, the amount of loan so diverted and the
purpose for which it is used may be reported.
• In the present case, LM Private Limited had borrowed from a Nationalized Bank, a term loan of
₹ 120 lakhs consisting of ₹ 100 lakhs for purchase of a machinery for the new plant and ₹ 20 lakhs
for erection expenses. The Bank paid ₹ 100 lakhs to the vendor of the Company for the supply of
machinery on 31.12.2022. The machinery had reached the yard of the Company. On 28.02.2023,
the Company had drawn the balance of loan viz. ₹ 20 lakhs to the credit of its current account
maintained with the Bank and utilized the full amount for renovating its administrative office
building.
• Auditor of LM Private Limited is under obligation to report on matters covered under CARO, 2020
as total borrowings exceed ₹1 Cr. LM Private Limited had taken term loan for erection purposes,
but utilized the funds for renovation of administrative office building.
Conclusion: As per requirement of Para 3(ix)(c) of CARO, 2020, auditor is required to report the fact
that out of the term loan obtained for machinery purchase and erection, ₹ 20 Lakhs was not utilized
for the purpose of erection of machinery.
Q.31 Gautam Limited had borrowed ₹ 1,000 crore from XYZ Bank, the principal of which was repayable
after 5 years and interest was payable at the end of each year. For 4 years, Gautam Limited paid the
interest amount on time. Gautam Limited defaulted the 5th instalment of interest payment and
principal which was due on June 30, 2022. On March 31, 2023, Gautam Limited approached XYZ
bank and MNO bank to restructure the existing liability. As a result, the existing principal and
outstanding and overdue interest was restructured into a new loan amounting to ₹ 1,100 crore. The
management did not provide any disclosure for the default on the loan on the belief that the old loan
ceased to exist and the new loan has maturity after 5 years.
During the statutory audit for the financial year 2022-23, KP & Co. identified this transaction and
obtained the relevant documents and understanding. Based on the underlying documents, it was
identified that the said restructuring agreement was approved and signed on April 8, 2023, by both
of the banks. As a result, on March 31, 2023, the restructuring was still not approved.
In the light of the above scenario, kindly guide the statutory auditors in the reporting of this
transaction. [RTP-Nov. 22]
Ans.: Reporting w.r.t. repayment of dues:
• As per Para 3(ix)(a) of CARO, 2020 auditors of a company are required to comment in his report
whether the company has defaulted in repayment of loans or other borrowings or in the payment
of interest thereon to any lender, if yes, the period and amount of default to be reported as per the
format below:
Nature of borrowing, Name Amount not Whether No. of days Remarks,
including debt of paid on due principal delay or if any
securities lender* date or interest unpaid

*Lender-wise details to be provided in case of defaults to banks, financial institutions and

Government.
• In the given case, the company Gautam Limited defaulted in payment of the principal amount of
the loan due of ₹ 1000 crore on 30 June 2022 and the interest instalment of ₹ 100 crore. The said
default continued till the end of the year and on 8 April 2023, a restructuring agreement was

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CARO, 2020 Chapter 8
signed by the banks and company for restructuring the outstanding loan. Moreover, no disclosure
was provided by the company with respect to the said matter.
Conclusion: Auditor is required to report under Clause (ix) of Para 3 of CARO, 2020, i.e., whether the
company has defaulted in repayment of loans or other borrowings or in the payment of interest
thereon to any lender, if yes, then provide the details of the period and the amount of default.
Also, the auditor needs to consider the impact of such non-disclosure and the non-compliance with
the FRF and accordingly the auditor needs to either issue a qualified opinion or an adverse opinion as
per SA 705.
Q.32 As a statutory auditor, how would you report on the following under CARO: ABC Pvt. Ltd. is a
manufacturer of jewellery. A senior employee of the Company informed you that the Company does
not properly disclose the purity of gold used on the jewellery.
Ans.: Reporting under CARO w.r.t. Fraud:
• Para 3(xi) of CARO, 2020 requires the auditor to comment whether any fraud by the company or
any fraud on the Company has been noticed or reported during the year; If yes, the nature and the
amount involved is to be indicated.
• In the present case if purity of gold is not properly disclosed on the jewellery it amounts to
defrauding the customers. It implies that the management is deceiving customers to obtain an
illegal advantage.
• As per SA 240 “The Auditor’s responsibilities in relation to an audit of Financial Statements” the
auditor is concerned with fraudulent acts that cause a material misstatement in financial
statements. Hence as long as books of account are not falsified arising out of difference in the
purity of gold, i.e., actual cost of the gold and the sale price of gold, it has no implication for the
auditor.
Conclusion: From the view point of reporting on frauds under CARO, 2020, there is no implication for
misstatement in the financial statements. Hence, no reporting is necessary for non-proper disclosure
of purity of gold on the jewellery.
Q.33 What are the reporting requirements in the audit report under the Companies Act, 2013/CARO,
2020 for the following situations?
(a) A fraud has been committed against the company by an officer of the company.
(b) A fraud has been committed against the company by a vendor of the company.
(c) The company has committed a major fraud on its customer and the case is pending in the court.
(d) A fraud has been reported in the cost audit report but not noticed by statutory auditors in his
audit.
Ans.: Reporting under Companies Act, 2013/CARO, 2020 w.r.t. Fraud:
• Section 143(12) of Companies Act, 2013 requires that 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 may be prescribed. For this purpose, Rule 13 prescribes the
amount of ₹ 1 Cr. or more.
• However, in case of a fraud involving lesser than the specified amount, i.e. below ₹ 1 Cr., the
auditor shall report the matter to the audit committee constituted u/s 177 or to the Board in
other cases within such time and in such manner as may be prescribed.

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Chapter 8 CARO, 2020
• Para 3(xi) of CARO, 2020 requires the auditor to comment whether any fraud by the company or
any fraud on the Company has been noticed or reported during the year; If yes, the nature and
the amount involved is to be indicated.
• Accordingly, reporting requirements will be:
Sl. Situation Reporting under Reporting under CARO,
No. Companies Act, 2013 2020
1 A fraud has been committed Reporting required to Nature of Fraud and
against the company by an C.G. if amount of fraud amount involved need to
officer of the company. exceeds ₹ 1 Cr. be reported under Para
3(xi).
2 A fraud has been committed No reporting required. Nature of Fraud and
against the company by a amount involved need to
vendor of the company. be reported under Para
3(xi).
3 Company has committed a Effect of such fraud on Nature of Fraud and
major fraud on its customer financial statements amount involved need to
and the case is pending in need to be reported. be reported under Para
the court. 3(xi).
4 A fraud has been reported Effect of such fraud on Para 3(xi) requires
in the cost audit report but financial statements reporting of fraud that has
not noticed by statutory need to be reported. been noticed or reported
auditors in his audit. during the year.
.

Q.34 CARO, 2020 has made several significant changes and has introduced many new reporting
requirements vis-à-vis CARO, 2016.
In view of the above, describe the relevant clause relating to Nidhi Companies – compliance with net
owned funds to deposit requirements and the relevant provisions.
What audit procedures are to be adopted for verification and reporting on the same?
Ans.: Clause relating to Nidhi Companies under CARO, 2020:
Clause (xii) of Para 3 of CARO, 2020 requires the auditor to report certain matters relating to Nidhi
Companies. The matters on which auditor is required to report are:
• Whether the Nidhi Company has complied with the Net Owned Fund to Deposits in the ratio of
1:20 to meet out the liability;
• Whether the Nidhi Company is maintaining 10% unencumbered term deposits as specified in the
Nidhi Rules, 2014 to meet out the liability; and
• Whether there has been any default in payment of interest on deposits or repayment thereof for
any period and if so, the details thereof;
Audit Procedures for Verification and Reporting:
• Ministry of Corporate Affairs on 31st March 2014, vide its Notification No. GSR 258(E) notified the
‘Nidhi Rules, 2014’, which came into force on the first day of April 2014.
• As per Rule 3(d) Net Owned Funds are defined as the aggregate of paid-up equity share capital
and free reserves as reduced by accumulated losses and intangible assets appearing in the last
audited balance sheet. However, the amount representing the proceeds of issue of preference
shares, shall not be included for calculating Net Owned Funds.

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CARO, 2020 Chapter 8
• A Nidhi company can accept fixed deposits, recurring deposits and savings deposits from its
members in accordance with the directions notified by the Central Government. The aggregate of
such deposits is referred to as “deposit liability”.
• The auditor should ask the management to provide the computation of the deposit liability and
net owned funds on the basis of the requirements mentioned above. This would enable him to
verify that the ratio of deposit liability to net owned funds is in accordance with the requirements
prescribed in this regard.
Q.35 In the course of audit of MM Ltd., your audit team has identified the following matter:
All amount of ₹ 4 Lakhs per month for the marketing services rendered is paid to M/s. MG
Associates, a partnership firm in which Director of MM Ltd. is also a managing partner, with a profit
sharing ratio of 30%. Based on an independent assessment, the consideration paid is higher than the
arm's length pricing by ₹ 1.50 Lakhs per month. Whilst the transaction was accounted in the
financial statements based on the amounts paid, no separate disclosure has been made in the notes
forming part of the accounts.
Give your comments for reporting under CARO. [Nov. 20 – New Syllabus (4 Marks)]
Ans.: Reporting of Related Party Transactions under CARO:
• Clause (xiii) of Para 3 of CARO, 2020, requires the auditor to report whether all transactions with
the related parties are in compliance with sections 177 and 188 of Companies Act, 2013 where
applicable and the details have been disclosed in the Financial Statements etc., as required by the
applicable accounting standards.
• Therefore the duty of the auditor, under this clause is to report:
(i) Whether all transactions with the related parties are in compliance with sections 177 and
188 of the Companies Act, 2013.
(ii) Whether related party disclosures as required by relevant Accounting Standards (AS 18, as
may be applicable) are disclosed in the financial statements.
• In the given case, MG Associates is a related party and also rendering marketing services to MM
Ltd. in return of Consideration of ₹ 4 Lakhs which is related party transaction. No separate
disclosure has been made in the notes to accounts in this context, which was required to be made.
In view of above, Auditor shall report as under:
1. Nature of the related party relationship and the underlying transaction: MG Associates is a
partnership firm in which Director of MM Ltd. is also a managing partner, with a profit sharing
ratio of 30%. Payment of ₹ 4 Lakhs to MG Associates is a related party transaction.
2. Amount involved is consideration for the Marketing services rendered by MG Associates (₹ 4
Lakhs p.m.) is higher than the arm’s length pricing by ₹ 1.50 Lakhs p.m. (₹ 18 Lakhs p.a.)
Q.36 RNT Ltd. has entered into non-cash transactions with Mr. Ram, son of one of the directors of the
company, which is an arrangement by which the RNT Ltd. is in process to acquire assets for
consideration other than cash. Under CARO, 2020, as a statutory auditor, how would you report?
Ans.: Reporting under CARO, 2020:
• Para 3(xv) of CARO, 2020 requires the auditor to comment “whether the company has entered
into any non-cash transactions with directors or persons connected with him and if so, whether
provisions of Section 192 of Companies Act, 2013 have been complied with”.
• Section 192 of the Companies Act, 2013 deals with restriction on non-cash transactions involving
directors or persons connected with them. The section prohibits the company from entering into
following types of arrangements unless it meets the conditions laid out in the said section:

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Chapter 8 CARO, 2020
(i) An arrangement by which a director of the company or its holding, subsidiary or associate
company or a person connected with such director acquires or is to acquire assets for
consideration other than cash, from the company.
(ii) An arrangement by which the company acquires or is to acquire assets for consideration
other than cash, from such director or person so connected.
• The reporting requirements under this clause are in two parts. The first part requires the auditor
to report on whether the company has entered into any non-cash transactions with the directors
or any persons connected with such director/s. The second part of the clause requires the auditor
to report whether the provisions of section 192 of the Act have been complied with. Therefore,
the second part of the clause becomes reportable only if the answer to the first part is in
affirmative.
• Suggested paragraph on reporting:
“According to the information and explanations given to us, the Company has entered into non-cash
transactions with one of the directors/person connected with the director during the year, by the
acquisition of assets by assuming directly related liabilities, which in our opinion is covered under the
provisions of Section 192 of the Act, and for which approval has not yet been obtained in a general
meeting of the Company”.
Q. SPM Ltd., about to complete fifty years of age since its incorporation in the F.Y 2023-2024, decided
36A during the F.Y. 2022-23 to upgrade its registered office at an important location in Mumbai city. As
part of planned package, it decided to acquire a land very adjacent to the site of registered office,
which had been owned by Mr. Parry who is a director of the Company. Since he was reluctant to part
with the ownership, he had been persuaded to convey the property in favour of the company in
exchange of a site owned by the company located at the next street to the street where the registered
office is situated, which is 1.50 times larger in area than that of the site owned by the director
adjacent to the Registered office. Happier with what he was offered in negotiation, Mr. Parry agreed
for transferring the property in favour of the company in a deed of exchange duly executed by
authorized persons of the Board, and Mr. Parry. The registration formalities were completed by 31st
December, 2022. Assuming that you are the engagement partner for the audit of the accounts of the
company for the financial year ended on 31st March, 2023, give a list of additional audit procedures
and reporting requirements, if any, that this transaction might trigger in your audit.
[May 23 (5 Marks)]
Ans.: Reporting under CARO, 2020:
• Para 3(xv) of CARO, 2020 requires the auditor to comment “whether the company has entered into
any non-cash transactions with directors or persons connected with him and if so, whether
provisions of Section 192 of Companies Act, 2013 have been complied with”.
• Reporting requirements under this clause are in two parts. The first part requires the auditor to
report on whether the company has entered into any non-cash transactions with the directors or
any persons connected with such director/s. The second part of the clause requires the auditor to
report whether the provisions of section 192 of the Act have been complied with. Therefore, the
second part of the clause becomes reportable only if the answer to the first part is in affirmative.
• For reporting on the first part of this clause, the starting point of the auditor’s procedures could be
obtaining a management representation as to whether the company has undertaken any non-cash
transactions with the directors or persons connected with the directors. The auditor would need
to corroborate the management representation with sufficient appropriate audit evidence.

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CARO, 2020 Chapter 8
• The second part of this clause requires the auditor to report whether the company has complied
with the provisions of section 192 in this regard. Section 192(1) and (2) of the Act envisage the
following compliances in respect of such transactions:
(i) The company should have obtained a prior approval for such arrangement by a resolution
in the general meeting.
(ii) If the concerned Director or connected person is a director of the company’s holding
company, the latter too should have obtained a similar prior approval for the arrangement
by a resolution at its general meeting.
(iii) Notice for approval of the resolution should contain details of the arrangement along with
the value of assets involved duly calculated by a registered valuer.
• The auditor should check compliance with section 192(2) of the Act and verify the notice of the
general meeting that it includes particulars of arrangement along with the value of the assets
involved in such arrangements. The said value should be calculated by the register valuer in
compliance of Companies (Registered Valuers and Valuation) Rules, 2017.
Suggested paragraph on reporting:
According to the information and explanations given to us, the Company has entered into non-cash
transactions with one of the directors/persons connected with the director during the year, by the
acquisition of assets by assuming directly related liabilities, which in our opinion is covered under the
provisions of Section 192 of the Act, and for which approval has not yet been obtained in a general
meeting of the Company.
In case the said non-cash transactions are entered into by the company after obtaining prior approval
of shareholders in the general meeting, then, such factual position giving details of approval must be
disclosed.
Q.37 You are appointed as the Auditor of XMP Pvt. Ltd. for financial year 2022-23 after the resignation of
RS & Co. Chartered Accountants, as statutory auditor of the company. RS & Co., had certain concerns
on the accounting matters of the company, leading to change of auditors. All the compliances u/ss
139 & 140 are made by the company with regard to resignation and appointment.
During the course of audit, it came to your notice that a survey has been conducted on December 7,
2022 by the Income Tax Department and department has unearthed unrecorded sales of ₹ 5 lakhs
which had been made in cash on different dates during the year 2021-22. XMP Pvt. Ltd. has
purchased gold from such collections and these transactions are not recorded. Company
surrendered and disclosed these transactions before the assessing officer and paid taxes thereon.
However, company has not recorded those transactions in books of account even after surrender
before Income Tax authorities.
You want to report the above matters in CARO, but the management requested you not to report
them. Comment with respect to auditor's response to the management and his reporting
requirements to the shareholders. [Nov. 22 (5 Marks)]
Ans.: Considerations of issues raised by outgoing auditor:
• Clause (xviii) of Para 3 of CARO, 2020 requires the auditor to report whether there has been any
resignation of the statutory auditors during the year, if so, whether the auditor has taken into
consideration the issues, objections or concerns raised by the outgoing auditors.
• The incoming auditor should consider the reasons for resignation. The incoming auditor should
also refer to last audit/review report issued by the outgoing auditor to understand the
modifications, if any, in the audit/review report.

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Chapter 8 CARO, 2020
• Clause (viii) of Paragraph 3 of CARO, 2020 requires the auditor to report whether any transactions
not recorded in the books of account have been surrendered or disclosed as income during the
year in the tax assessments under the Income Tax Act, 1961, if so, whether the previously
unrecorded income has been properly recorded in the books of account during the year.
• In the given case outgoing auditor, RS & Co. had certain concerns on the accounting matters of the
company, leading to change of auditors. Further incoming auditor came to notice that there were
unrecorded cash sales of ₹ 5 lakhs during the year 2021-22 and purchased gold; company
surrendered and disclosed these transactions before the assessing officer and paid taxes thereon.
However, company has not recorded those transactions in books of account even after surrender
before Income Tax authorities. Management requested auditor not to report the matters.
Conclusion: Management request cannot be accepted. Auditor is under a duty to report the matter
under Clauses (viii) and (xiii) of Para 3 of CARO, 2020. In addition, auditor is required to determine
the impact of undisclosed transactions on the financial statements of current year and make suitable
modifications in audit report as per requirements of SA 705.
Q.38 Whilst the Audit team has identified various matters, they need your advice to include the same in
your audit report in view of CARO, 2020:
(a) The long-term borrowings from the parent has no agreed terms and neither the interest nor the
principal has been repaid so far. [MTP-Nov. 21]
(b) The Company is in the process of selling its office along with the freehold land available at
Chandigarh and is actively on the lookout for potential buyers. Whilst the same was purchased
at ₹ 25 Lakhs in 2008, the current market value is ₹ 250 Lakhs.
This property is pending to be registered in the name of the Company, due to certain procedural
issues associated with the Registration though the Company is having a valid possession and
has paid its purchase cost in full. The Company has disclosed this amount under Fixed Assets
though no disclosure of non-registration is made in the notes forming part of the accounts.
[MTP-Oct. 21]
(c) An amount of ₹ 3.25 Lakhs per month is paid to M/s. WE CARE Associates, a partnership firm,
which is a 'related party' in accordance with the provisions of the Companies Act, 2013 for the
marketing services rendered by them. Based on an independent assessment, the consideration
paid is higher than the arm's length pricing by ₹ 0.25 Lakhs per month. Whilst the transaction
was accounted in the financial statements based on the amounts' paid, no separate disclosure
has been made in the notes forming part of the accounts highlighting the same as a 'related
party' transaction. [MTP-Oct. 19, MTP-Nov. 21]
(d) The Internal Auditor of the Company has identified a fraud in the recruitment of employees by
the HR department wherein certain sums were alleged to have been taken as kickback from the
employees for taking them on board with the Company. After due investigation, the concerned
HR Manager was sacked. The amount of such kickbacks is expected to be in the range of ₹ 12
Lakhs. [MTP-March 19, Oct. 21., RTP-May 19]
Ans.: Reporting under CARO, 2020:
(a) Auditor is required to report the matter as per Para 3(xiii) of CARO, 2020 which requires him to
report “whether all transactions with the related parties are in compliance with sections 177
and 188 of Companies Act, 2013 where applicable and the details have been disclosed in the
Financial Statements etc., as required by the applicable accounting standards”.

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CARO, 2020 Chapter 8
(b) Auditor is required to report the matter as per Para 3(i)(c) of CARO, 2020 which requires him
to report, “whether the title deeds of all the immovable properties disclosed in the financial
statements are held in the name of the company. If title deeds are not held in name of the
company, details thereof to be provided in the below mentioned format:
Description Gross Held in Whether Period held – Reason for
of Property carrying name of promoter, indicate not being
value director or range, where held in name
their relative appropriate of company*
or employee

*Also indicate if in dispute.

(c) Auditor is required to report the matter as per Para 3(xiii) of CARO, 2020 which requires him to
report “whether all transactions with the related parties are in compliance with sections 177
and 188 of Companies Act, 2013 where applicable and the details have been disclosed in the
Financial Statements etc., as required by the applicable accounting standards”.
Reporting is required, as one of related party transaction amounting ₹ 3.25 lakhs per month i.e.
in lieu of marketing services has been noticed of which amount ₹ 0.25 lakh per month is
exceeding the arm’s length price has not been disclosed highlighting the same as related party
transactions as per AS 18.
(d) Auditor is required to report the matter as per Para 3(xi) of CARO, 2020 which requires him to
report, “whether any fraud by the company or any fraud on the Company has been noticed or
reported during the year; If yes, the nature and the amount involved is to be indicated.”
Reporting is required, as a fraud has been identified in recruitment of employees by the HR
Department wherein certain sums were alleged to have been taken as kickback from the
employees of company amounting to ₹ 12 lakhs approx.
Q.39 LIU Private Limited is a company based out of Mumbai. The company had an authorised capital of ₹
200 lakh and paid-up capital plus reserves of ₹ 95 lakh as of 31st March. During the audit for the
year ended 31st March 202X, the auditor M/s Y&S Associates noted the following points:
(i) On 15th December, the company had total bank borrowings of ₹ 75 lakh. On the said date, the
company received a new loan of ` 30 lakh for a new project that was to be developed. However,
the project was shelved on 17th December due to technical reasons, and the whole loan was
paid on the same date.
(ii) During the financial year, a new proceeding was initiated against the company for holding a
benami property worth ₹ 2.5 crore. However, the company's legal team had advised that the
case would not withstand the law and would be dismissed during the hearing in April of next
financial year.
(iii) The company had incurred a cash loss of ₹ 39 lakh during the financial year compared to a
cash profit of ₹ 15 lakh in the previous financial year. The total turnover of the company for the
financial year was ₹ 45 Crore.
During the year, the Y&S Associates had offered to resign from acting as the company's auditors.
However, they later decided to postpone their resignation to the following year. At the conclusion of
the audit, there was a difference of opinion between two articled assistants (Jack & Jill), who were

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Chapter 8 CARO, 2020
assigned to the engagement, concerning disclosing the points mentioned above in the Companies
(Auditor's Report) Order 2020. Jack was of the opinion that the proceeding initiated under Benami
Property Act need not be disclosed since the expert legal team had informed them that the case
would not withstand the law. However, he insisted that the cash loss shall be disclosed along with
the amount. Jill was of the opinion that CARO is not at all applicable to the company, hence nothing
needs to be reported. They both approached the firm's partners (Mr. Y & Mr. S) to resolve their
argument. Mr Y supported Jack's viewpoint & Mr S supported Jill's viewpoint. Now, both partners
approached their Senior Partner to get clarification on the same. As a Senior Partner, kindly clarify
the correct disclosure requirement. [RTP-May 23]
Ans.: Applicability of CARO, 2020:
CARO 2020 is applicable to every company, including a foreign company, except,
(i) a banking company;
(ii) an insurance company;
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company and a small company; 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 ₹ 1 crore as on the balance sheet
date and which does not have total borrowings exceeding ₹ 1 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 ₹ 10 crore during the financial year as per the financial statements.
In the given case, though LIU is a private company, and its paid-up capital is less than ₹ 1 crore as on
the balance sheet date, it is to be noted that for the period 15th December to 17th December, the total
borrowings of the company had exceeded ₹ 1 crore (75 lakh + 30 lakh). The borrowings are less than
₹ 1 crore as of the balance sheet date and the authorised capital is ₹ 200 lakh, are irrelevant to the
current scenario. Also, the turnover of the company was greater than ₹ 40 crore. Hence, CARO 2020 is
applicable to LIU Private Limited.
Reporting requirements under CARO, 2020:
(i) As per Para 3(i)(e) of CARO 2020, auditor shall report whether any proceedings have been
initiated or pending against the company for holding any benami property under the Benami
Transactions (Prohibition) Act, 1988 and rules made thereunder, if so, whether the company
has appropriately disclosed the details in its financial statements.
In the given situation, a new proceeding was initiated against the company for holding a
benami property worth ₹ 2.5 crores during the financial year. However, the company's legal
team had advised that the case would not withstand the law and would be dismissed during the
hearing, which would be held in April of the next financial year.
Therefore, the above observation of a new proceeding initiated against the company for
holding a benami property worth ₹ 2.5 crores need to be disclosed as per Para 3(i)(e) of CARO
2020.
(ii) As per Para (xvii) of CARO 2020, auditor shall include a statement on whether the company has
incurred cash losses in the financial year and in the immediately preceding financial year, if so,
state the amount of cash losses.

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CARO, 2020 Chapter 8
In the given situation, the company incurred a cash loss of ₹ 39 lakh during the financial year.
Hence, a cash loss of ₹ 39 lakh during the financial year need to be reported as per clause (xvii)
of para 3 of CARO 2020.
(iii) As per clause (xviii) of para 3 of CARO 2020, the auditor shall include a statement on whether
there has been any resignation of the statutory auditors during the year, if so, whether the
auditor has taken into consideration the issues, objections or concerns raised by the outgoing
auditors.
In the instant case, there has been no resignation made by the statutory auditors during the
financial year. The mere fact that Y&S Associates were thinking of resigning does not matter in
the current scenario, and hence this clause shall not be applicable in the given situation.

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9 Audit of Consolidated Financial Statements

Marks Distribution of Past Exams
6

4
Marks

0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 4 5 0 0 5 0 5 0 4 0 5

*From May 2019, Marks are given only for descriptive questions.

9.1 – Concept of Consolidated Financial Statements

Q.1 Write short note on: Responsibility of holding company for preparation of Consolidated Financial
Statements. [RTP-Nov. 21]
Ans.: Responsibility of holding company for preparation of Consolidated Financial Statements:
As per section 129(3) of the Companies Act, 2013, where a company has one or more subsidiaries, it
shall, in addition to F.S. provided u/s 129(2), prepare a consolidated financial statement of the
company and of all the subsidiaries in the same form and manner as that of its own which shall also
be laid before the AGM of the company along with the laying of its F.S. u/s 129(2).
The responsibility for the preparation and presentation of consolidated financial statements, among
other things, is that of the management of the parent. This includes:
(a) identifying components, and including the financial information of the components to be
included in the consolidated financial statements;
(b) where appropriate, identifying reportable segments for segmental reporting;
(c) identifying related parties and related party transactions for reporting;
(d) obtaining accurate and complete financial information from components;
(e) making appropriate consolidation adjustments;
(f) Harmonisation of accounting policies and accounting framework; and
(g) GAAP conversion, where applicable.
Apart from the above, the parent ordinarily issues instructions to the management of the component
specifying the parent’s requirements relating to financial information of the components to be
included in the consolidated financial statements.

9.1
By: CA. Pankaj Garg
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Audit of Consolidated Financial Statements Chapter 9
The instructions ordinarily cover the accounting policies to be applied, statutory & other disclosure
requirements applicable to the parent, including the identification of and reporting on reportable
segments, and related parties & related party transactions, and a reporting timetable.
Q.2 M & B Investments Ltd. is a company having paid up share capital of ₹ 1 Crore. It has a subsidiary,
Investors Fund Management Ltd., major business of M & B Investments Ltd. is to pool money from
investors on a collective basis and invest this money in various funds. This company pooled ₹ 10
Crores from a number of clients, which represent the Company's shareholders.
While auditing books of account of M & B Investments Ltd. CA. X observed that whole amount of
₹ 10 Crores pooled has been invested in shares and debentures of various companies and profit
earned due to appreciation of the prices of these shares has been distributed to various
shareholders of the company.
Now, CA. X raised an issue while auditing financial statements of M & B Investments Ltd. whether
the consolidated financial statements are required as per Sec. 129(3) of the Companies Act,
2013? Analyse the above issue and give your opinion.
[Dec. 21 – New Syllabus (5 Marks), RTP-Nov. 22]
Ans.: Requirement of Consolidated Financial Statements:
• As per section 129(3) of the Companies Act, 2013, where a company has one or more subsidiaries,
it shall, in addition to F.S. provided u/s 129(2), prepare a consolidated financial statement of the
company and of all the subsidiaries in the same form and manner as that of its own which shall
also be laid before the AGM of the company along with the laying of its F.S. u/s 129(2).
• As per para 31 of Ind As 110, an investment entity shall not consolidate its subsidiaries. Instead, an
investment entity shall measure an investment in a subsidiary at fair value through profit or loss in
accordance with Ind AS 109 (Financial Instruments).
• However as per Para 33, parent of an investment entity shall consolidate all entities that it
controls, including those controlled through an investment entity subsidiary, unless the parent
itself is an investment entity.
• An investment entity is an entity that:
(a) obtains funds from one or more investors for the purpose of providing those investor(s) with
investment management services;
(b) commits to its investor(s) that its business purpose is to invest funds solely for returns from
capital appreciation, investment income, or both; and
(c) measures and evaluates the performance of substantially all of its investments on a fair value
basis.
Conclusion: Considering that M & B Investments Ltd. is an investment entity, it is exempted from the
consolidation provisions by virtue of Para 33 of Ind AS 110.

9.2 – Auditor’s Considerations while auditing CFS

Q.3 You have been appointed to audit consolidated financial statements of Xerna Ltd. for the financial
year 2022-23 while vouching, you observed that Intra Group Transactions have not been
eliminated.
You are, therefore, required to guide the management by explaining what are current period
adjustments and list out the same.
Ans.: Current Period Consolidation Adjustment
These are those adjustments which are made in the accounting period for which Consolidated
Financial Statements are prepared.

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Chapter 9 Audit of Consolidated Financial Statements
These adjustments primarily relate to elimination of intra-group transactions and account balances
including:
(a) intra-group interest paid and received or management fees, etc.;
(b) unrealised intra-group profits on assets acquired/transferred from/to other subsidiaries;
(c) intra-group indebtedness;
(d) adjustments relating to harmonising the different accounting policies being followed by the
parent and its components;
(e) adjustments to the F.S. (of the parent and the components being consolidated) for recognized
subsequent events or transactions that occur between the balance sheet date and the date of
the auditor’s report on the consolidated F.S. of the group.
(f) adjustments for the effects of significant transactions or other events that occur between date
of components balance sheet and not already recognised in its F.S. and the date of the auditor’s
report on the group’s consolidated F.S. when the financial statements of the component to be
used for consolidation are not drawn upto the same balance sheet date as that of the parent;
(g) In case of a foreign component, adjustments to convert a component’s audited F.S. prepared
under the component’s local GAAP to the GAAP under which the consolidated F.S. are prepared.
(h) determination of movement in equity attributable to the minorities interest since the date of
acquisition of the subsidiary.
(i) adjustments of deferred tax on account of temporary differences arising out of elimination of
profit and losses resulting from intra-group transactions and undistributed profits of the
component in case of consolidated F.S. prepared under Ind AS.
Q.4 Write short note on: Permanent Consolidation adjustments.
Ans.: Permanent Consolidation Adjustments:
Permanent consolidation adjustments are those adjustments that are made only on the first occasion
or subsequent occasions in which there is a change in the shareholding of a particular entity which is
consolidated. These adjustments are:
(i) Determination of Goodwill or Capital Reserve as per applicable AS.
(ii) Determination of the amount of equity attributable to minority.
Verification Points
• Auditor should verify that the adjustment of goodwill or capital reserve and minority interest
have been made appropriately.
• The auditor should pay particular attention to the determination of pre-acquisition reserves of
the components. Date(s) of investment in components assumes importance in this regard.
• Examine whether the pre-acquisition reserves have been allocated appropriately between the
parent and the minority of the subsidiary.
• Verify the changes that might have taken place in permanent consolidation adjustments on
account of subsequent acquisition of shares in the components, disposal of the components in
the subsequent years.
Q.5 Parent Ltd. acquired 51% shares of Child Ltd. during the year ending 31.3.2022. During the
financial year 2022-23 the 20% shares of Child Ltd. were sold by Parent Ltd. Parent Ltd. while
preparing the financial statement for the year ending 31.3.2022 and 31.3.2023 did not consider the
financial statements of Child Ltd. for consolidation. As a statutory auditor how would you deal with
it?

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Audit of Consolidated Financial Statements Chapter 9
Ans.: Auditor’s duties in case of exclusion of subsidiaries/associates in consolidation:
• As per section 129(3) of the Companies Act, 2013, where a company has one or more
subsidiaries, it shall, in addition to F.S. provided u/s 129(2), prepare a consolidated F.S. of the
company and of all the subsidiaries in the same form and manner as that of its own which shall
also be laid before the AGM of the company along with the laying of its F.S. u/s 129(2).
• As per Rule 6 of Companies (Accounts) Rules, 2014, the consolidation of financial statements of
the company shall be made in accordance with the provisions of Schedule III to the Act and the
applicable AS. However, a company which is not required to prepare consolidated financial
statements under the Accounting Standards, it shall be sufficient if the company complies with
provisions on consolidated financial statements provided in Schedule III of the Act.
• As per AS 21 “Consolidated Financial Statements” consolidation of a subsidiary is not required if
the relationship of parent with the subsidiary is intended to be temporary or subsidiary operate
under sever long term restrictions which significantly impair its ability to transfer funds to the
parent.
• Where an enterprise owns majority of voting power by virtue of ownership of the shares of
another enterprise and all the shares are acquired & held exclusively with a view to their
subsequent disposal in the near future, the control by the first mentioned enterprise would be
considered temporary and the investments in such subsidiaries should be accounted for in
accordance with AS 13 “Accounting for Investments”.
• The auditor should satisfy himself that the exclusion made by the management falls within these
two categories.
• As per Ind AS 110, there is no such exemption for ‘temporary control’, or “for operation under
severe long-term funds transfer restrictions” and consolidation is mandatory for Ind AS compliant
financial statement in this case.
• In the given case, Parent Ltd. has acquired 51% shares of Child Ltd. during the year ending
31.3.2021 and sold 20% shares during the year 2021-22. Parent Ltd. did not consolidate the
financial statements of Child Ltd. for the year ending 31.3.2021 and 31.3.2022.
Conclusion: The intention of Parent Ltd. is quite clear that the control in Child Ltd. is temporary as
the former company disposed off the acquired shares in the next year of its purchase.
Parent Ltd. is not required to prepare consolidated F.S. as per AS 21. However, for compliance of Sec.
129(3), Parent Ltd. is required to made disclosures in the F.S. as per the provisions provided in
Schedule III to the Companies Act, 2013.
However, if the Parent Ltd is required to prepare its financial statements under Ind AS, it shall have
to prepare CFS in accordance with Ind AS 110 as exemption for ‘temporary control’, or “for operation
under severe long-term funds transfer restrictions” is not available under Ind AS 110.
Q.6 H Ltd. owns 55% voting power in S Ltd. It however holds and discloses all the shares as "Stock-in-
trade" in its accounts. The shares are held exclusively with a view to their subsequent disposal in
the near future. H Ltd. represents that while preparing Consolidated Financial Statements, S Ltd.
can be excluded from the consolidation. As a Statutory Auditor, how would you deal?
Ans.: Consolidation of Financial Statement:
• As per section 129(3) of the Companies Act, 2013, where a company has one or more
subsidiaries, it shall, in addition to F.S. provided u/s 129(2), prepare a consolidated F.S. of the
company and of all the subsidiaries in the same form and manner as that of its own which shall
also be laid before the AGM of the company along with the laying of its F.S. u/s 129(2).

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Chapter 9 Audit of Consolidated Financial Statements
• As per Rule 6 of Companies (Accounts) Rules, 2014, the consolidation of financial statements of
the company shall be made in accordance with the provisions of Schedule III to the Act and the
applicable AS. However, a company which is not required to prepare consolidated financial
statements under the Accounting Standards, it shall be sufficient if the company complies with
provisions on consolidated financial statements provided in Schedule III of the Act.
• AS 21 “Consolidated Financial Statements”, there could be two reasons for exclusion of a
subsidiary, associate or jointly controlled entity:
(a) The relationship of parent with the subsidiary, associate or jointly controlled entity is
intended to be temporary, or
(b) The subsidiary, associate or joint venture operates under several long-term restrictions
which significantly impair its ability to transfer funds to the parent.
The auditor should satisfy himself that the exclusion made by the management falls within these
two categories.
• As per Ind AS 110, there is no such exemption for ‘temporary control’, or “for operation under
severe long-term funds transfer restrictions” and consolidation is mandatory for Ind AS compliant
financial statement in this case.
• In the present case, H Ltd. intention is to dispose off the shares in the near future as shares are
being held as stock-in-trade and it is quite clear that the control is temporary.
Conclusion: H Ltd. is not required to consolidate as per requirement of AS 21. However, for the
compliance of provisions related to consolidation of financial statements given under Section 129(3)
of the Companies Act, 2013 read with Companies (Accounts) Rules, 2014, H Ltd. is required to
consolidate the financial statements as per the provisions on consolidated financial statements
provided in Schedule III to the Act.
However, if R Ltd. is required to prepare its financial statements under Ind AS, it shall have to prepare
Consolidated Financial Statements in accordance with Ind AS 110 as exemption for ‘temporary
control’ is not available under Ind AS 110.
Q.7 B Ltd. is the Subsidiary company of A Ltd. ABC & Associates has been appointed as auditor of A Ltd.
for the Financial year 2022-23 and XYZ & Associates has been appointed as auditor of B Ltd. for the
year 2022-23. Explain the role of ABC & Associates and XYZ & Associates as auditors of the parent
company and subsidiary respectively. [MTP-March 23]
Ans.: Role of Auditor of Parent Company and Subsidiary company:
SA 600 “Using the work of Another Auditor” establishes the standard when an auditor, reporting on
the financial statements of a group (consolidated financial statements), uses the work of another
auditor on the financial information of one or more components included in the financial statements
of the entity. SA 600 requires that there should be sufficient liaison between the principal auditor
and the other auditor.
Accordingly, role of auditor of parent company and subsidiary are as follows:
Role of Auditor of Parent Company: (ABC & Associates- Auditor of Parent Company):
(i) It is necessary to issue written communication(s) as a principal auditor to the other auditor.
(ii) The principal auditor should advise the other auditor of any matters that come to his attention
that he thinks may have an important bearing on the other auditor’s work.
(iii) When considered necessary by him, the principal auditor may require the other auditor to
answer a detailed questionnaire regarding matters on which the principal auditor requires
information for discharging his duties.

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Audit of Consolidated Financial Statements Chapter 9
Role of Other Auditor (XYZ & Associates- Auditor of Subsidiary Company):
(i) The other auditor, knowing the context in which his work is to be used by the principal auditor,
should co-ordinate with the principal auditor. For example, by bringing to the principal
auditor’s immediate attention to any significant findings requiring to be dealt with at entity
level, adhering to the time-table for audit of the component, etc.
(ii) He should ensure compliance with the relevant statutory requirements.
(iii) The other auditor should respond to the questionnaire sent by Principal Auditor on a timely
basis.
Q.8 You are appointed as an auditor of Nawab Limited, a listed company which is a main supplier to the
UK building and construction market. With a turnover of ₹ 2.9 billion, the company operates
through 11 business units and has nearly 180 branches across the countries.
As an auditor, how will you draft the report in case:
(a) When the Parent’s Auditor is also the Auditor of all its Components?
(b) When the Parent’s Auditor is not the Auditor of all its Components?
(c) When the Component(s) Auditor Reports on Financial Statements under an Accounting
Framework Different than that of the Parent?
(d) When the Component(s) Auditor Reports under an Auditing Framework Different than that of
the Parent?
(e) Where the financial statements of one or more components are not audited?
[MTP-April 18, May 20, Nov. 21; RTP-Nov. 18, May 22]
Ans.: Reporting Considerations
(a) Parent Auditor is also the auditor of all of its components
• Auditor should issue an audit report expressing opinion whether the consolidated financial
statements give a true and fair view of the state of affairs of the Group as on balance sheet
date and as to whether consolidated profit and loss statement gives true and fair view of
the results of consolidated profit or losses of the Group for the period under audit.
• Where the consolidated financial statements also include a cash flow statement, the auditor
should also give his opinion on the true and fair view of the cash flows presented by the
consolidated cash flow statements.
• Auditor of Parent should report whether principles and procedures for preparation and
presentation of consolidated F.S. as laid down in the relevant AS(s) have been followed. In
case of any deviation, the auditor should make adequate disclosure in the audit report so
that users of the consolidated F.S. are aware of such deviation.
(b) Parent’s Auditor is not the Auditor of all of its components
• If the parent’s auditor is not the auditor of the components included in the consolidated
F.S., the auditor of the consolidated F.S. should also consider the requirement of SA 600.
• If the parent’s auditor decides that he will make reference to the audit of the other auditors
in the report as required by SA 706, he should disclose clearly the portion of the F.S.
audited by the other auditor(s). This may be done by stating the amount or % age of total
assets and total revenue of subsidiary(s) included in consolidated F.S. not audited by him.
• It is to be noted that reference in the report of the auditor of consolidated F.S. to the fact
that part of the audit of the group was made by other auditor(s) is not to be construed as a

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Chapter 9 Audit of Consolidated Financial Statements
qualification of the opinion but rather as an indication of the divided responsibility
between the auditors of the parent and its subsidiaries.
(c) Component Auditor Reports on F.S. under an Accounting Framework different than that
of the Parent
• When a component’s F.S. are prepared under an accounting framework that is different
than that of the framework used by the parent in preparing group’s consolidated F.S., the
parent’s management perform a conversion of the components’ audited F.S. from the
framework used by the component to the framework under which the consolidated F.S. are
prepared.
• The conversion adjustments are audited by the principal auditor to ensure that the
financial information of the component(s) is suitable and appropriate for the purposes of
consolidation.
• Alternatively, component may prepare financial statements on the basis of the parent’s
accounting policies, as outlined in the group accounting manual. The local component
auditor can then audit and issue an audit report on the components F.S. prepared in
accordance with “group accounting policies”.
• The Principal auditor can then decide whether or not to rely on the components’ audit
report and make reference to it in the auditor’s report on the consolidated financial
statements.
(d) Component Auditor Reports under an Auditing Framework Different than that of the
Parent
• Audits of F.S., including consolidated F.S., are performed under auditing standards
generally accepted in India.
• In order to maintain consistency of the auditing framework and to enable the parent
auditor to rely and refer to the other auditor’s audit report in their audit report on the
consolidated F.S., the components’ F.S. should also be audited under a framework that
corresponds to Indian Auditing Standards.
(e) Components Not Audited
• F.S. of all components included in consolidated F.S. should be audited or subjected to audit
procedures. Such audits and audit procedures can be performed by the auditor reporting
on the consolidated F.S. or by the components’ auditor.
• Where the F.S. of one or more components continues to remain unaudited, the auditor
reporting on the consolidated F.S. should consider unaudited components in evaluating a
possible modification to his report on the consolidated F.S.
• The evaluation is necessary because the auditor has not been able to obtain sufficient
appropriate audit evidence in relation to such consolidated amounts/balances.
• Auditor should evaluate both qualitative and quantitative factors on the possible effect of
such amounts remaining unaudited when reporting on the consolidated F.S. using the
guidance provided in SA 705, “Modifications to the Opinion in the Independent Auditor’s
Report”.
Q.9 Deluxe Ltd. holds the ownership of 51% of voting power and control over Executive Ltd. Holding
company have prepared the consolidated financial statement as required by Sec. 129 of the
Companies Act, 2013. What will be your objective, as an Auditor, in the audit of such Consolidated
Financial Statement? [May 18 – Old Syllabus (4 Marks)]

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Audit of Consolidated Financial Statements Chapter 9
Ans.: Objectives of Auditor while auditing the Consolidating Financial Statements:
The auditor of the CFS is responsible for expressing an opinion on whether the CFS are prepared, in
all material respects, in accordance with the FRF under which the parent prepares the CFS.
Therefore, the auditor's objectives in an audit of CFS are:
(a) to satisfy himself that the consolidated financial statements have been prepared in accordance
with the requirements of applicable financial reporting framework;
(b) to enable himself to express an opinion on the true and fair view presented by the consolidated
financial statements;
(c) to enquire into the matters as specified in section 143(1) of the Companies Act, 2013;
(d) to report on the matters given in the clauses (a) to (i) of section 143(3) of the Companies Act,
2013; for other matters under section 143(3)(j) read with rule 11 of the Companies (Audit and
Auditors) Rules, 2014; and
(e) The auditor should also validate the requirement of preparation of CFS for the company as per
applicable FRF.
Q.10 H Co. Ltd., is a holding company with two subsidiaries R Co. Ltd. and S Co. Ltd., The H Co. Ltd., adopts
straight line method of depreciation for its assets whereas S Co. Ltd., follows written down value or
diminishing value method. Though R Co. Ltd., follows straight line method of depreciation, it does
not give effect to component accounting of depreciation in respect of high value assets, while
consolidating the financials of the R Co. Ltd., and S Co. Ltd., with those of H Co. Ltd., determine the
possible issue that you have to ensure for compliance in the light of above facts.
[May 18 – New Syllabus (5 Marks)]
Ans.: Consolidated Financial Statements:
• In preparing consolidated financial statements, the financial statements of the parent and its
subsidiaries are combined on a line by line basis by adding together like items of assets,
liabilities, income and expenses.
• Consolidated financial statements are prepared using uniform accounting policies for like
transactions. If a member of the group uses different accounting policies, appropriate
adjustments are made to its financial statements when they are used in preparing the
consolidated financial statements. If it is not practicable to use uniform accounting policies in
preparing the consolidated financial statements, that fact should be disclosed together with the
proportions of the items in the consolidated financial statements to which the different
accounting policies have been applied.
• As per paras 60 and 61 of Ind AS 16, ‘Property, Plant and Equipment’, a change in the method of
depreciation shall be accounted for as a change in an accounting estimate as per Ind AS 8,
‘Accounting Policies, Changes in Accounting Estimates and Errors’. Therefore, the selection of the
method of depreciation is an accounting estimate and not an accounting policy.
• Therefore, there can be different methods of estimating depreciation for property, plant and
equipment, if their expected pattern of consumption is different. The method once selected in
the individual financial statements of the subsidiary should not be changed while preparing the
consolidated financial statements.
• Accordingly, in the given case, the property, plant and equipment of S Co. Ltd. (subsidiary
company) may be depreciated using WDV method and property, plant and equipment of parent
company may be depreciated using SLM, if such method closely reflects the expected pattern of
consumption of future economic benefits embodied in the respective assets.

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Chapter 9 Audit of Consolidated Financial Statements
• However, under the provisions of Companies Act, 2013 and as per requirement of AS 10,
component accounting of depreciation is mandatory. Auditor should insist the parent company
to ask R Co. Ltd. (subsidiary company) to give effect to component accounting of depreciation
before consolidation of financial statements.
Q.11 H Limited is an investment company preparing its Financial Statements in accordance with Ind AS.
The company obtains funds from various investors and commits its performance for fair return and
capital appreciation to its investors. During the year under audit, it had been observed that the
company had invested 25% in S1 Ltd., 50% in S2 Ltd. and 60% in S3 Ltd. of the respective share
capitals of the Investee Companies. When checking the investment schedule of the company, an
issue cropped as to whether there would arise any need to consolidate accounts of any such
investee companies with those of H Limited in accordance with Section 129(3) of the companies
Act, 2013 which contains no exclusion from consolidation. Analyse the issues involved and give
your views. [Nov. 18-New Syllabus (5 Marks)]
Ans.: Auditor’s duties in case of exclusion of subsidiaries/associates in consolidation:
• As per section 129(3) of the Companies Act, 2013, where a company has one or more
subsidiaries, it shall, in addition to F.S. provided u/s 129(2), prepare a consolidated F.S. of the
company and of all the subsidiaries in the same form and manner as that of its own which shall
also be laid before the AGM of the company along with the laying of its F.S. u/s 129(2).
• As per Rule 6 of Companies (Accounts) Rules, 2014, the consolidation of financial statements of
the company shall be made in accordance with the provisions of Schedule III to the Act and the
applicable AS. However, a company which is not required to prepare consolidated financial
statements under the Accounting Standards, it shall be sufficient if the company complies with
provisions on consolidated financial statements provided in Schedule III of the Act.
• As per Para 31 of Ind-AS 110, an investment entity shall not consolidate its subsidiaries. Instead,
an investment entity shall measure an investment in a subsidiary at fair value through profit or
loss in accordance with Ind AS 109 (Financial Instruments). As per Para 33, parent of an
investment entity shall consolidate all entities that it controls, including those controlled
through an investment entity subsidiary, unless the parent itself is an investment entity.
• An investment entity is an entity that(a) obtains funds from one or more investors for the
purpose of providing those investor(s) with investment management services; (b) commits to its
investor(s) that its business purpose is to invest funds solely for returns from capital
appreciation, investment income, or both; and (c) measures and evaluates the performance of
substantially all of its investments on a fair value basis.
• In the given case H Limited is an investment company preparing its Financial Statements in
accordance with Ind AS. Company had invested 25% in S1 Ltd., 50% in S2 Ltd. and 60% in S3
Ltd. of the respective share capitals of the Investee Companies.
Conclusion: H Ltd. is not required to consolidate accounts of investee companies as provided under
Para 31 of Ind-AS 110. However, company is required to comply with the provisions on consolidated
financial statements as provided in Schedule III.
Q.12 What is meant by “Group financial statements”? Give reference of relevant Auditing Standard and
issues addressed concerning the audit of Group financial statements.
[Nov. 18 – Old Syllabus (4 Marks)]
Ans.: Meaning of Group Financial Statements:
• Group Financial Statements also known as Consolidated financial statements are the financial
statements of a group presented as those of a single entity.

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Audit of Consolidated Financial Statements Chapter 9
• Group financial statements are presented for a Group of entities under the control of a Parent.
• A group comprises a parent and its subsidiaries. A parent is an entity that has one or more
subsidiaries. Group financial statements are presented, to the extent possible, in the same format
as adopted by the parent for its separate Financial Statements.
• AS-21 and Ind AS-110 lays down principles and procedures for preparation and presentation of
Consolidated Financial Statements.
Relevant Auditing Standard: Refer answer of Q. No. 7.
Q.13 R Ltd. owns 51% voting power in S Ltd. It however, holds and discloses all the shares as “Stock-in-
trade” in its financial statements since the shares are held exclusively with a view to their
subsequent disposal in the near future. R Ltd. represents that while preparing Consolidated
Financial Statements, S Ltd. can be excluded from the consolidation. As the Statutory Auditor of R
Ltd., how would you deal when the consolidated financial statements are to be drawn up in
compliance with Ind AS. [May 19 – Old Syllabus (4 Marks)]
Or
M Ltd. acquired 51% shares of S Ltd. on 1.4.2021 and sold 25% of these shares during the financial
year 2022-23. M Ltd. did not prepare Consolidated Financial Statements for the financial year 2022-
23 on the plea that the control was only temporary. Do you agree with the view of M Ltd.? Decide,
assuming that M Ltd. is required to prepare its financial statements under Ind AS.
[Nov. 19 – Old Syllabus (4 Marks)]
Ans.: Consolidation of financial statements:
• As per section 129(3) of the Companies Act, 2013, where a company has one or more
subsidiaries, it shall, in addition to F.S. provided u/s 129(2), prepare a consolidated F.S. of the
company and of all the subsidiaries in the same form and manner as that of its own which shall
also be laid before the AGM of the company along with the laying of its F.S. u/s 129(2).
• As per Rule 6 of Companies (Accounts) Rules, 2014, the consolidation of financial statements of
the company shall be made in accordance with the provisions of Schedule III to the Act and the
applicable AS. However, a company which is not required to prepare consolidated financial
statements under the Accounting Standards, it shall be sufficient if the company complies with
provisions on consolidated financial statements provided in Schedule III of the Act.
• There is no exemption for ‘temporary control’, or “for operation under severe long-term funds
transfer restrictions” in Ind AS 110 and consolidation is mandatory for Ind AS compliant
financial statement in this case.
• Ind AS 110 states that “Consolidation of an investee shall begin from the date the investor
obtains control of the investee and cease when the investor loses control of the investee”.
Conclusion: Auditor should ask the management for the consolidation of S Ltd. for the period that
begin from the date the M Ltd. obtains control of the S Ltd. and cease when the M Ltd. loses control of
the S Ltd. If Consolidation not made, auditor should modify the audit report on Consolidated
Financial Statements.
Q.14 ALM Associates has been appointed as auditor of M/s Harry Ltd. which acquired 55% shares in M/s
Sam Ltd. on 15th October, 2022. During audit of Harry Ltd. the auditors found that the company
have not prepared consolidated financial statements because on the date of acquisition the fair
value of certain assets & liabilities has not been ascertained which is significant and are accounted
for on estimated basis only. Help ALM Associates in framing opinion paragraph of audit report.
[May 19 – New Syllabus (4 Marks)]

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Chapter 9 Audit of Consolidated Financial Statements
Ans.: Consolidation of financial statements:
• As per section 129(3) of the Companies Act, 2013, where a company has one or more
subsidiaries, it shall, in addition to F.S. provided u/s 129(2), prepare a consolidated F.S. of the
company and of all the subsidiaries in the same form and manner as that of its own which shall
also be laid before the AGM of the company along with the laying of its F.S. u/s 129(2).
• As per Rule 6 of Companies (Accounts) Rules, 2014, the consolidation of financial statements of
the company shall be made in accordance with the provisions of Schedule III to the Act and the
applicable AS. However, a company which is not required to prepare consolidated financial
statements under the Accounting Standards, it shall be sufficient if the company complies with
provisions on consolidated financial statements provided in Schedule III of the Act.
• In the present case, during audit, auditors found that the company have not prepared
consolidated financial statements because on the date of acquisition the fair value of certain
assets & liabilities has not been ascertained which is significant and are accounted for on
estimated basis only.
Conclusion: Consolidation is mandatory, auditor is required to state the fact in auditor report on
standalone financial statements.
Note: Answer given in the Suggested answer of ICAI is entirely different covering therein the
draft of Adverse opinion and Basis for Adverse opinion.
Author’s view: It is not necessary that auditor of standalone financial statements should be
appointed as auditor of consolidated financial statements, so while auditing standalone
financial statements, auditor is not required to modify the opinion on standalone financial
statements on the ground of non-consolidation. Further, when consolidated F.S. are not
available, how the auditor is issuing report on consolidated financial statements (It is specified
in the suggested answer - Opinion Section – the accompanying consolidated financial
statements do not give a true and fair view)
Q.15 CA. Vimal is the auditor of Excellent Ltd., a parent company which presents Consolidated Financial
Statements. The management of Excellent Ltd. has provided the list of the components included in
the Consolidated Financial Statements. As an auditor of Consolidated Financial Statements, CA.
Vimal has to verify that all the components have been included in the Consolidated Financial
Statements and review the information provided by the management in identifying the
components. State the procedures to be followed by CA. Vimal in respect of completeness of this
information. [Nov. 20 – New Syllabus (5 Marks); RTP-May 23]
Ans.: Auditor’s procedures in Auditing the consolidation:
(a) The auditor should obtain a list of subsidiaries, associates & joint ventures included in CFS.
(b) The auditor should review the information provided by the management of the parent
identifying the subsidiaries, associates and joint ventures.
(c) The auditor should verify that all the subsidiaries, associates and joint venture have been
included in the consolidated financial statements.
(d) In respect of completeness of this information, the auditor should perform the following
procedures:
• review his working papers for the prior years for the known subsidiaries, associates and
joint ventures;
• review the parent’s procedures for identification of subsidiaries and joint ventures;
• review the investments to determine the shareholding in other entities;
• review the joint venture and other relevant agreements entered into by the parent;

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Audit of Consolidated Financial Statements Chapter 9
• review the statutory' records maintained by the parent, for example register required
under section 186 of the Companies Act, 2013.
(e) The auditor should also identify the changes in the shareholding that might have taken place
since the last audit.
Q.16 Before commencing an audit of consolidated financial statements, the auditor should plan his work
to enable him to conduct and effective audit in an efficient and timely manner. What are the
important aspects that an auditor should consider in audit plan? [Jan. 21 – Old Syllabus (5 Marks)]
Ans.: Planning the audit of CFS:
• Before commencing an audit of consolidated financial statements, the auditor should plan his work
to enable him to conduct an effective audit in an efficient and timely manner.
• The auditor should make plans, among other things, for the following:
(a) understanding of the group structure and group-wide controls including assessment of
Information Technology (IT) system and related general and applications IT related controls
(manual and automated) for consolidation process;
(b) understanding of accounting policies of the parent and its components as well as of the
consolidation process including the process of translation of F.S. of foreign components;
(c) determining and programming the NTE of the audit procedures to be performed based on the
assessment of the risk of material misstatement in the consolidation process;
(d) determining the extent of use of other auditor’s work in the audit; and
(e) coordinating the work to be performed.
Q.17 JRS Limited holds the majority ownership of R Ltd. & K Ltd. S Ltd. is an intermediate subsidiary of
JRS Limited in Surat. The JRS Limited presents the consolidated financial statements for audit
purposes to MMT & Co. As a statutory auditor of MMT & Co. obtain a listing of all the components
and verify that all the components included in financial statements unless any component meet
criterion for exclusion. Explain any two reasons which are considered by MMT & Co. for exclusion of
components from the consolidated financial statements and reporting of reasons of exclusion
thereof. [Jan. 21 – New Syllabus (5 Marks)]
Ans.: Exclusion of Components from the Consolidated F.S.
• As per Para 11 of AS 21, “Consolidated Financial Statements”, subsidiary should be excluded from
consolidation when:
(a) control is intended to be temporary because the subsidiary is acquired and held exclusively
with a view to its subsequent disposal in the near future; or
(b) it operates under severe long-term restrictions which significantly impair its ability to
transfer funds to the parent.
• As per Para 31 of Ind-AS 110, an investment entity shall not consolidate its subsidiaries. Instead,
an investment entity shall measure an investment in a subsidiary at fair value through profit or
loss in accordance with Ind AS 109 (Financial Instruments).
Reporting of reasons of exclusion:
• Where a subsidiary or an associate or a jointly controlled entity is excluded from the consolidated
financial statements, the auditor should examine the reasons for exclusion.
• In the case of an entity which is excluded from consolidation on the ground of temporary
relationship, the auditor should verify that the intention of the parent, to dispose the subsidiary,
investment in associate or interest in jointly controlled entity, in the near future, existed at the
time of acquisition of the subsidiary, making investment in associate or jointly controlled entity.

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Chapter 9 Audit of Consolidated Financial Statements
• The auditor should satisfy himself that the exclusion made by the management falls within the
exceptions covered in Para 11 of AS 21 or Para 31 of Ind-AS 110, as the case may be.
• The auditor should also verify that the reasons for exclusion are given in the consolidated financial
statements.
Q.18 RAO & Co., a Chartered Accountant Firm, is appointed as the principal auditor of a listed company,
Triumph Ltd. Figures of income and net-worth of five out of seven components of Triumph Ltd.,
which are its unlisted subsidiaries, is tabulated below for the immediate preceding financial year
along with the consolidated amount:
Particulars Consolidated Components
‘A’ ‘B’ ‘C’ ‘D’ ‘E’
Income 300 35 10 70 65 20
Net Worth 800 40 20 140 180 50
The remaining two components i.e., Component ‘F’ & Component ‘G’ of Triumph Ltd. were
unaudited. According to Mr. RAO, the engagement partner, Component ‘F’ is material to the
consolidated financial statements whereas Component ‘G’ is not material to consolidated financial
statements and this fact has also been discussed in writing with those charged with governance of
Triumph Ltd. and it will also form part of report as a ‘Key audit matter’ in accordance with SA 701.
What shall be the audit consideration in relation to reporting in case of unaudited components of
Triumph Ltd. by RAO & Co. and how RAO & Co. as a principal auditor shall report in case of
Component ‘F’ & Component ‘G’, respectively? [MTP – March 21, April 22]
Ans.: Audit consideration in relation to reporting in case of unaudited components:
• Generally, the financial statements of all components included in consolidated financial statements
should be audited or subjected to audit procedures in the context of a multi-location group audit.
Such audits and audit procedures can be performed by the auditor reporting on the consolidated
financial statements or by the components’ auditor.
• Where the financial statements of one or more components continue to remain unaudited, the
auditor reporting on the consolidated financial statements should consider unaudited components
in evaluating a possible modification to his report on the consolidated financial statements. The
evaluation is necessary because the auditor (or other auditors, as the case may be) has not been
able to obtain sufficient appropriate audit evidence in relation to such consolidated
amounts/balances. In such cases, the auditor should evaluate both qualitative and quantitative
factors on the possible effect of such amounts remaining unaudited when reporting on the
consolidated financial statements using the guidance provided in SA 705, “Modifications to the
Opinion in the Independent Auditor’s Report”.
• In the given situation, two out of seven components of Triumph Ltd. have remained unaudited
where Component ‘F’ is material and Component ‘G’ is not material to the consolidated financial
statements. Since Component ‘F’ is material, therefore, it may be assumed that reporting of Key
Audit Matter in accordance with SA 701 is being done for Component ‘F’ and not for Component
‘G’.
• Thus, in case of Component ‘F’, the Principal Auditor needs to consider its impact on the auditor’s
opinion on the consolidated financial statements of the group, in terms of the principles laid down
in SA 705, Modifications to the Opinion in the Independent Auditor’s Report. Whereas in case of
Component ‘G’, the principal auditor should make appropriate reporting under the “Other Matters”
paragraph, pursuant to SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs, in
the Independent Auditor’s Report.

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Audit of Consolidated Financial Statements Chapter 9
Q.19 A Ltd. holds the ownership of 10% of voting power and control over the composition of Board of
Directors of B Ltd. While planning the statutory audit of A Ltd., what factors would be considered by
you as the statutory auditors of A Ltd. for the audit of its consolidated financial statements
prepared under Ind AS? [MTP-April 21]
Ans.: Special considerations in case of entities controlling the composition of Board of Directors of
others:
• Ownership of voting power is not necessary to control the other enterprise. Control may be
exercised by controlling the composition of the Board of Directors (in the case of a company) or
corresponding governing body (in the case of any other enterprise) with a view to obtain
economic benefits.
• In this case, Atishaya Ltd. holds only 10% of the voting power but has control over the
composition of the Board of Directors of Neenu Ltd. In such a case, Atishaya Ltd. shall be
considered as a parent of Neenu Ltd. and, therefore, it would consolidate Neenu Ltd. in its
consolidated financial statements as a subsidiary.
• The auditor should verify Atishaya Ltd. management’s assessment of having control in Neenu
Ltd. despite having only 10% voting power as per the requirements of Ind AS 110. Auditor would
need to verify as to how Atishaya Ltd. controls the composition of the Board of Directors or
corresponding governing body of Neenu Ltd.
• There can be various means by which such kind of control can be established. In this regard, the
auditor may verify the minutes of Board meetings, shareholder agreement entered into by the
parent, agreements with Neenu Ltd. to which the parent might have provided any technology or
know how, enforcement of statute, etc.
• Further, the auditor should verify that the adjustments warranted by Ind AS 110 have been made
wherever required and have been properly authorised by the management of the parent. The
preparation of consolidated financial statements gives rise to permanent consolidation
adjustments and current period consolidation adjustments. The auditor should make plan,
among other things, for the understanding of accounting policies of the Atishaya Ltd. and Neenu
Ltd. and determining and programming the nature, timing, and extent of the audit procedures to
be performed etc.
• Further, the duties of an auditor with regard to reporting of transactions with any other related
parties are given in SA 550 on Related Parties. As per SA 550 on, “Related Parties”, the auditor
should review information provided by the management of the entity identifying the names of all
known related parties. A person or other entity that has control or significant influence, directly
or indirectly through one or more intermediaries, over the reporting entity are considered as
Related Party.
• In forming an opinion on the financial statements, the auditor shall evaluate whether the
identified related party relationships and transactions have been appropriately accounted for
and disclosed in accordance with Ind AS 110 and Schedule III and whether the effects of the
related party relationships and transactions prevent the financial statements from achieving true
and fair presentation (for fair presentation frameworks) or cause the financial statements to be
misleading (for compliance frameworks).
Q.20 The adjustments required for preparation of consolidated financial statements are made in
memorandum records kept for the purpose, by the Parent. The auditor should review the
memorandum records to verify the adjustment entries made in the preparation of consolidated
financial statements. Elucidate the other points, apart from reviewing the memorandum records,
the auditor should verify while consolidation of adjustments for current period.
[July 2021 – Old Syllabus (5 Marks)]

9.14
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 9 Audit of Consolidated Financial Statements
Ans.: Verification of Current Period Consolidation Adjustment:
Adjustments required for preparation of consolidated F.S. are made in memorandum records kept for
the purpose by the parent. Auditor should review these records to verify the adjustment entries made
in the preparation of consolidated F.S. Besides reviewing the memorandum records, the auditor
should verify the following:
(a) Elimination of intra group transactions and account balances;
(b) Preparation of consolidated F.S. using uniform accounting policies for like transactions;
(c) Adequate disclosures have been made in the consolidated F.S. of application of different
accounting policies if it was impracticable to harmonize them.
(d) Adjustments made to harmonise the different accounting policies including adjustments made
by management to convert a component’s F.S. prepared under the component’s GAAP to the
GAAP under which the consolidated F.S. are prepared;
(e) Calculation of minorities/non-controlling interest;
(f) Adjustments relating to deferred tax on account of temporary differences arising out of
elimination of profit and losses resulting from Inter-group transactions;
(g) Income and expenses of the subsidiary are included in consolidated F.S. from the date it gains
control until the date when the entity ceases to control the subsidiary.
Q.21 CA H was appointed as a Statutory Auditor of MNL Limited, a listed company, which has three
subsidiaries namely M Ltd., N Ltd., L Ltd. and also 15 branches across India. Auditors are duly
appointed for the subsidiaries and branches as well. With regard to the determination of
materiality during the audit of consolidated financial statements, what should be the
considerations of CA H? How he should deal in his report if there are observations (for instance
modification and/or emphasis of matter in accordance with SA 705/706) made by component
auditors? [May 22 (5 Marks)]
Ans.: Considerations with regard to determination of Materiality during audit of CFS:
In carrying out the audit of the standalone financial statements, the computation of materiality for the
purpose of issuing an opinion on the standalone financial statements of each component would be
done component-wise on a standalone basis. However, with regard to determination of materiality
during the audit of Consolidated Financial Statements (CFS), the auditor should consider the
following:
(i) Auditor is required to compute the materiality for the group as a whole. This materiality
should be used to assess the appropriateness of the consolidation adjustments (i.e. permanent
consolidation adjustments and current period consolidation adjustments) that are made by the
management in the preparation of CFS.
(ii) The principal auditor can also use the materiality computed on the group level to determine
whether the component's financial statements are material to the group to determine whether
they should scope in additional components, and consider using the work of other auditors as
applicable.
(iii) The principal auditor also computes materiality for each component and communicates to the
component auditor, if he believes is required for true and fair view on CFS.
(iv) The principal auditor also obtains certain confirmations from component auditor like
independence, code of ethics, certain information required for consolidation and disclosure
requirements etc.

9.15
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit of Consolidated Financial Statements Chapter 9
While considering the observations (for instance modification and/or EOM/other matter in
accordance with SA 705/706) of the component auditor in his report on the standalone financial
statements, the parent auditor should comply with the requirements of SA 600. Therefore, the
concept of materiality would be considered while considering the observations of the component
auditor.
Q.22 T Ltd. is holding 68% share of B Ltd, 51% share of C Ltd. RS & Co. Chartered Accountants are the
statutory auditors of T Ltd. MN & Co. Chartered Accountants are the statutory auditors of B Ltd. and
C Ltd. MN & Co have qualified the report of B Ltd. due to material discrepancies in standalone
financial statement. While framing the opinion on Consolidated Financial Statement of T Ltd., RS &
Co. (Principal Auditor) have ignored the qualification of B Ltd. considering it not material at Group
Level. Comment. [MTP-Oct. 22]
Ans.: Considerations with regard to determination of Materiality during audit of CFS:
Refer Explanation covered in answer of Q. No.21.
RS & Co. cannot ignore the qualification of B Ltd. while framing the opinion on consolidated financial
statements of T Ltd.
Q.23 ABC Limited holds 51% equity of BBB Limited, 63% equity of TTT Limited. There are different
information and explanations which are disclosed by the respective companies in the notes to their
financial statements. At time of consolidation, management of ABC Limited has consolidated all the
information and explanations disclosed in the notes as well. The principal auditor is of the view
that only those information and explanations should form part of the notes to the consolidated
financial statements which are relevant at group level. Please mention any five aspects which are
given in the notes to the separate financial statements of the parent and the subsidiaries, need not
be included in the consolidated financial statements. [Nov. 22 (5 Marks)]
Ans.: Aspects given in the notes to the separate F.S. of the parent and the subsidiaries that need not
be included in the consolidated F.S.:
In case of companies, certain information given in the notes to the separate financial statements of
the parent and/or the subsidiary, need not be included in the consolidated financial statements:
(i) Source from which bonus shares are issued, e.g., capitalisation of profits or reserves or from
securities premium account.
(ii) Disclosure of all unutilised monies out of the issue indicating the form in which such unutilised
funds have been invested.
(iii) Disclosure required under MSME Development Act, 2006.
(iv) A statement of investments (whether shown under “financial assets or non-financial assets as
stock-in-trade) separately classifying trade investments and other investments, showing the
names of the bodies corporate (indicating separately the names of the bodies corporate under
the same management) in whose shares or debentures, investments have been made
(including all investments, whether existing or not, made subsequent to the date as at which
the previous balance sheet was made out) and the nature and extent of the investment so made
in each such body corporate.
(v) Value of imports calculated on C.I.F. basis by the company during the financial year in respect
of:
(a) raw materials;
(b) components and spare parts;
(c) capital goods.

9.16
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 9 Audit of Consolidated Financial Statements
(vi) Expenditure in foreign currency during the financial year on account of royalty, know-how,
professional and consultation fees, interest, and other matters.
(vii) Value of all imported raw materials, spare parts and components consumed during the
financial year and the value of all indigenous raw materials, spare parts and components
similarly consumed and the percentage of each to the total consumption.
(viii) The amount remitted during the year in foreign currencies on account of dividends, with a
specific mention of the number of non-resident shareholders, the number of shares held by
them on which the dividends were due and the year to which the dividends related.
(ix) Earnings in foreign exchange classified under the following heads, namely:
(a) export of goods calculated on F.O.B. basis;
(b) royalty, know-how, professional and consultation fees;
(c) interest and dividend;
(d) other income, indicating the nature thereof. However, notwithstanding the above, the
auditor needs to ensure compliance with disclosure requirements of applicable
accounting standards and other applicable laws for consolidated financial statements.

9.17
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit of Consolidated Financial Statements Chapter 9

9.18
By: CA. Pankaj Garg
 By: CA. Pankaj Garg

10 Audit of Dividends

Marks Distribution of Past Exams

4.5
4
3.5
3
Marks

2.5
2
1.5
1
0.5
0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 0 4 0 0 0 0 0 0 0 0 0

*From May 2019, Marks are given only for descriptive questions.
Q.1 While adopting the accounts for the year, the Board of Directors of Prima Ltd., decided to consider
the Interim Dividend declared @ 12% as final dividend and did not consider transfer of profit to
Reserves. As a statutory auditor, how would you deal with this?
Ans.: Declaration of Interim Dividend:
• As per Sec. 2(35) of Companies Act, 2013 dividend includes interim dividend. Therefore, the
procedures which are applicable to final dividend also applies to any interim dividend.
• As per Sec. 123(3) of Companies Act, 2013 the Board of Directors of a company may declare
interim dividend during any financial year or any time during the period from closure of financial
year till holding of AGM
(a) out of the surplus in the profit and loss account, or
(b) out of profits of financial year in which such interim dividend is sought to be declared, or
(c) out of profits generated in the financial year till the quarter preceding the date of
declaration of the interim dividend.
In case the company has incurred loss during the current financial year up to the end of the
quarter immediately preceding the date of declaration of interim dividend, such interim dividend
shall not be declared at a rate higher than the average dividends declared by the company during
the immediately preceding three financial years.
• As per Sec. 123(4) of Companies Act, 2013 amount of dividend including interim dividend shall be
deposited in a separate bank account within five days from the date of declaration of such
dividend.
• The provisions contained in sections 123, 124, 125, 126 and 127 shall, as far as may be, also apply
to any interim dividend.

10.1
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit of Dividends Chapter 10
• First proviso to Section 123(1) provides that a company may, before the declaration of any
dividend in any financial year, transfer such percentage of its profit for that financial year as it may
consider appropriate to the reserves of the company. Therefore, company is not mandatorily
required to transfer the profit to the reserves, it is an option available to the company to transfer a
percentage of profit to reserves.
Conclusion: Assuming that the company has complied with the depreciation requirement, the interim
dividend can be declared without transferring profits to reserves.
Q.2 A company has paid interim dividend at 10% based on its half-yearly performance while at the end
of the year suffered a net loss. How you will deal with the matter in your audit report as a statutory
auditor?
Ans.: Payment of Interim Dividend:
• As per Sec. 2(35) of Companies Act, 2013 dividend includes interim dividend. Therefore, the
procedures which are applicable to final dividend also applies to any interim dividend.
• Section 123(1) of the Companies Act, 2013 provides that dividend cannot be declared or paid by a
company for any financial year except out of profits of the company for that year arrived at after
providing for depreciation in accordance with the provisions of Section 123(2), or out of the
profits or the company for any previous financial year or years arrived at after providing for
depreciation in the manner aforementioned and remaining undistributed, or out of both.
• In the present case, the company has suffered a net loss at the end of the year, which signifies that
the directors have not calculated the performance of the company about the second half of the
year accurately.
• Hence, if the company had a sufficient balance in the P & L Account as at the beginning of the year,
the interim dividend paid may be adjusted against the same. In this situation, auditor need not
report anything.
• However, if balance in P & L A/c was not available, the dividend may also be paid out of reserves,
subject to compliance of conditions as prescribed in Companies (Declaration and Payment of
Dividend) Rules, 2014. If, however, there is no balance in the profit and loss account nor any
reserves were available, the dividend would be clearly paid out of capital.
Conclusion: Assuming that there is no balance in the profit & loss account nor any reserves were
available, auditor need to qualify his report mentioning the fact that the dividend having been paid out
of capital.
Q.3 For the year ended on 31st March, 2023, P Ltd. proposed to pay a dividend of 25% on its equity
shares and it further proposed to transfer 20% of Net profit for that year after tax to its reserves. Its
auditor objected to the same stating that 10% is the maximum permissible limit to transfer to
reserves.
Ans.: Transfer to Reserve:
• Section 123(1) of the Companies Act, 2013 provides that dividend cannot be declared or paid by a
company for any financial year except out of profits of the company for that year arrived at after
providing for depreciation in accordance with the provisions of Section 123(2), or out of the
profits or the company for any previous financial year or years arrived at after providing for
depreciation in the manner aforementioned and remaining undistributed, or out of both.
• First proviso to Section 123(1) provides that a company may, before the declaration of any
dividend in any financial year, transfer such percentage of its profit for that financial year as it may
consider appropriate to the reserves of the company. Therefore, company is not mandatorily

10.2
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 10 Audit of Dividends
required to transfer the profit to the reserves, it is an option available to the company to transfer a
percentage of profit to reserves.
• In the present case, P Ltd. has proposed to pay a dividend of 25% on its equity shares and a
transfer of 20% of Net profit to its reserves.
Conclusion: Assuming that the company has complied with the depreciation requirement, the
dividend can be declared by transferring any amount of profits to reserves.
Q.4 As a statutory auditor, how would you deal with the following: ABC Ltd. having a paid-up capital of
₹ 1 crore earned as total net profit of ₹ 1 crore for the years 2019-20 to 2021-22. The Company did
not declare any dividend nor transferred any amount to Reserves for these years. The entire profit
was retained in the Profit & Loss Account.
In 2022-23, the company made a profit of ₹ 20 lacs. The company also proposed in 2022-23 to
declare dividend @ 25% of capital out of accumulated profits.
Ans.: Declaration of Dividends:
• Section 123(1) of the Companies Act, 2013 provides that dividend cannot be declared or paid by a
company for any financial year except out of profits of the company for that year arrived at after
providing for depreciation in accordance with the provisions of Section 123(2), or out of the
profits or the company for any previous financial year or years arrived at after providing for
depreciation in the manner aforementioned and remaining undistributed, or out of both.
• First proviso to Section 123(1) provides that a company may, before the declaration of any
dividend in any financial year, transfer such percentage of its profit for that financial year as it may
consider appropriate to the reserves of the company. Therefore, company is not mandatorily
required to transfer the profit to the reserves, it is an option available to the company to transfer a
percentage of profit to reserves.
• In the present case company earns a profit of ₹ 20 Lacs, but wants to declare dividend @ 25%, of
capital that amounts to ₹ 25 Lacs. The deficiency of ₹ 5 Lacs may be paid out of accumulated
profits.
Conclusion: The company is well within its power and right to declare the dividend of ₹ 25 lacs for the
year 2022-23.
Q.5 AARK Ltd. is a large-sized listed company having annual turnover of INR 4000 crores. The company
also has a plan to get listed on New York Stock Exchange next year. The company has paid good
amount of dividend during the year to its shareholders which is significantly higher as compared to
earlier years. The statutory auditors would like to focus on this aspect at the time of their statutory
audit.
Please advise the relevant procedures that the statutory auditors should perform in respect of this
area. [RTP-May 19]
Ans.: Steps for verification of dividend:
To ensure that dividend is paid out of profits, auditor should take the following steps:
(i) Ensure that all the rules and regulations concerning the declaration or payment of dividends
have been complied with.
(ii) Ensure that the dividends have been declared or paid only out of distributable profit i.e. profits
for the current year for which dividend is declared, or accumulated profits of the previous years,
or money provided by the Central or State Government as per Sec. 123(1) of the Companies Act,
2013.

10.3
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit of Dividends Chapter 10
(iii) In case of inadequacy or absence of profits in any financial years, if dividend has been paid out of
accumulated profits, earned by it in previous years and transferred to the reserves, verify that
the rules related to such distribution has been complied.
(iv) Verify that the dividend recommended by the Board has been approved by the members at the
AGM.
(v) Verify that the dividend has been transferred to the separate scheduled bank account within 5
days from the declaration of such dividend as required by Sec. 123(4) of the Companies Act,
2013.
(vi) Verify that the dividend has been paid within 30 days from the declaration. If in case the
dividend has not been claimed or paid within 30 days from the declaration, verify that the
unpaid or unclaimed dividend amount has been transferred to a special account called unpaid
dividend account as per Sec. 124(1) of the Companies Act, 2013.
(vii) Verify that the company has prepared a statement within a period of 90 days of making any
transfer of an amount to the Unpaid Dividend Account containing the specified particulars, and
have placed it on the website of the company, if any, and also on any other website approved by
the C.G. for this purpose as required under Sec. 124(2) of the Companies Act, 2013.
(viii) Verify that, if any money transferred to Unpaid Dividend Account has remained unpaid or
unclaimed for a period of 7 years from the date of such transfer then, whether it has been
transferred by the company along with interest accrued, if any, thereon to the Investor
Education and Protection Fund established u/s 125(1) of the Companies Act, 2013 and a
statement regarding such transfer has also been sent to the authority which administers such
fund.
(ix) In case the company has outsourced the activity to the Service Organisation, check that all the
compliances with laws, regulations, accounting and disclosure related to the dividends have
been made appropriately.
(x) If dividends are declared after the balance sheet date but before the F.S. are approved for issue,
check that the dividends have not been recognised as a liability as per AS 4 and Ind AS 10, but
whether a disclosure of the same has been made in the notes.
Q.6 As a statutory auditor of the company, comment on the following: For the year ended 31st March
2023, the financial statements of A (Pvt.) Ltd. were adopted on 30th April, 2023. At this meeting, the
directors proposed a dividend for the year 2022-23 of 25% on the equity share capital amounting to
₹ 10 Lacs. No entry was passed for the proposed dividend in the books of the company, since in the
view of the directors the same was not required as per Schedule III.
Ans.: Non-Provisions for proposed dividends:
• Schedule III requires disclosure of the amount of dividend proposed to be distributed to equity
and preference shareholders for the period and the related amount per share to be disclosed
separately. It also requires separate disclosure of the arrears of fixed cumulative dividends on
preference shares.
• As per AS-4, “Contingencies and Events Occurring after the Balance Sheet Date” there are events
which, although they take place after the balance sheet date, are sometimes reflected in the
financial statements because of statutory requirements or because of their special nature. For
example, if dividends are declared after the balance sheet date but before the financial
statements are approved for issue, the dividends are not recognised as a liability at the balance

10.4
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 10 Audit of Dividends
sheet date because no obligation exists at that time unless a statute requires otherwise. Such
dividends are disclosed in the notes.
• In the present case, no entry was passed for proposed dividend.
Conclusion: Contention of the management not to provide dividend is correct.
Q.7 The Board of Directors of ACP Ltd. has recommended the dividend of 15% on paid up share capital of
₹ 450 crores for the year ended 31st March, 2022, at their meeting held on 1st of May, 2022 when the
accounts for the financial year 2021-22 were approved. The Board of Directors when they met on 7th
July, 2022 for the review of first Quarter accounts, the Board has decided to rescind their decision to
recommend dividend.
The notice for AGM to be held on 14.8.2022 was sent on 15th July, 2022 without any recommendation
of dividend.
At the AGM the members asked the management how they can rescind the declaration of dividend
once recommended. Comment. [May 16 (4 Marks), MTP-Aug. 18]
Ans.: Revocation of recommended Dividend:
• As per Regulation 80 of Table F of schedule I of the Companies Act, 2013, the company in general
meeting may declare dividends, but no dividend shall exceed the amount recommended by the
Board.
• Section 123 of the Companies Act, 2013, provides that the dividend shall be declared or paid by a
company for any financial year out of the profits of the company for that year arrived at after
providing for depreciation in prescribed manner.
• As per Sec. 127 of Companies Act, 2013, dividend after declaration has to be paid or warrant in
respect thereof has to be posted within 30 days from the date of declaration.
• Dividend once declared, becomes a debt against the company and cannot be revoked except in
certain situations.
• In the present case, the decision for revocation of dividend arrived before its declaration in
General meeting.
Conclusion: Board of directors are well within their powers to rescind the dividend which is
recommended earlier, but not yet declared in the AGM.
Q.8 ABC Limited is in the practice of maintaining consistent dividend payment over a minimum of 14%.
The Financial year 2021-22 was so very bad for the company that it was not possible for the company
to maintain the payment of consistent dividend as above. The Management, being hopeful of
recovery of its performance in next year, felt that the depreciation of the year to the extent of 75%
alone be charged to the statement of profit and loss and the remaining 25% be kept in a separate
account code in the balance sheet – ‘Debit Balances Adjustable against Revenue Account’. The
Management was of the view that it would be in fair practice of accounting if the depreciation for
asset is charged before the expiry of the lifes of assets and the amount parked in asset code as above
would unfailingly be adjusted to Revenue before the close of next financial year anyway. Analyse the
issues involved and state how the Auditor should decide on this matter.
[Nov. 18-New Syllabus (5 Marks), MTP-Oct. 20]
Ans.: Declaration of Dividend without providing the depreciation:
• Sec. 123(1) of Companies Act, 2013 provides that, no dividend shall be declared or paid by a
company for any financial year except out of the profits of the company for that financial year
arrived at after providing for depreciation in accordance with the provisions of Sec. 123(2).

10.5
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit of Dividends Chapter 10
• Sec. 123(2) provides that depreciation shall be provided to in accordance with the provisions of
Schedule II.
• As per Schedule II to the Companies Act, 2013 depreciation is to be charged over useful lives of
the assets. Useful life of an asset is the period over which an asset is expected to be available for
use by an entity or the number of production or similar units expected to be obtained from the
asset by the entity. The useful life of an asset shall not be longer that the useful life specified in
the Part C of Schedule II. If, however where a company uses a different useful life justification for
the difference shall be disclosed in the financial statement with justification supported by
technical advice.
• In the present case, company in order to maintain consistency in payment of dividend is willing
to charge 75% of the depreciation to the statement of profit and loss and the remaining 25% be
kept in a separate account code in the balance sheet – ‘Debit Balances Adjustable against Revenue
Account’.
Conclusion: Management view is not correct as dividend can be paid only out of profits that is arrived
at after providing the depreciation.
Auditor should ensure the compliance of provisions of section 123 and Schedule II. In case the
management does not comply with the provisions and does not charge the 100% depreciation the
auditor shall suggest the management for the same and if management refuses, the auditor should
qualify his report accordingly.

10.6
By: CA. Pankaj Garg
 By: CA. Pankaj Garg

11 Audit Committee & Corporate Governance

Marks Distribution of Past Exams
7

4
Marks

0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 4 4 6 5 5 5 0 5 5 0 0

*From May 2019, Marks are given only for descriptive questions.
11.1 - Corporate Governance
Q.1 Write short note on: Matters addressed in SEBI (LODR) Regulations, 2015 regarding Corporate
Governance. [Nov. 15 (4 Marks)]
Ans.: Corporate Governance:
• Corporate Governance can be defined as “the formal system of accountability and control for
ethical and socially responsible organisational decisions and use of resources”.
• Corporate Governance is the system by which companies are directed and governed by the
management in the best interests of the stakeholders and others ensuring better management,
greater transparency and timely financial reporting.
• Responsibility to ensure corporate Governance rests with the Board of Directors.
• In India, the legal framework of Corporate Governance is contained in Sec. 177 of the Companies
Act, 2013 (relating to Audit Committee) and Chapter IV (Regulation 17 to Regulation 27) of SEBI
(LODR) Regulations, 2015.
• Chapter IV of SEBI (LODR) Regulations, 2015 deals with the below mentioned matters so as to
ensure corporate governance framework more effective -
(a) Board of Director including its composition, independent director, non-executive director
etc.
(b) Provisions regarding composition and functioning of Audit Committee.
(c) Provisions regarding setting up and role of Nomination and Remuneration Committee.
(d) Provisions regarding setting up and role of Stakeholder Relationship Committee.
(e) Provisions regarding setting up and role of Risk Management Committee.
(f) Vigil Mechanism.

11.1
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit Committee & Corporate Governance Chapter 11
(g) Related party Transaction.
(h) Management of subsidiary companies.
(i) Obligations w.r.t. Independent Directors.
(j) Obligations w.r.t. directors and senior management.
(k) Others as specified in Part E of Schedule II (Discretionary).

11.2 - Audit Committee (Sec. 177 of Companies Act, 2013)

Q.2 Write short note on: Requirement for Audit Committee as per Companies Act, 2013.
[Nov. 17 (4 Marks)]
Ans.: Constitution of Audit Committee:
Section 177(1) of Companies Act, 2013 read with Rule 6 of Companies (Meetings of Board and its
Powers) Rules, 2014 requires Board of Directors of every listed public company and below
mentioned class of companies to constitute an Audit Committee -
(i) all public companies with a paid-up capital of ₹ 10 Cr. or more;
(ii) all public companies having turnover of ₹ 100 Cr. or more;
(iii) all public companies, having in aggregate, outstanding loans or debentures and deposits
exceeding ₹ 50 crore or more.
Explanation to Rule 6 provides that the paid-up share capital or turnover or outstanding loans,
debentures and deposits, as the case may be, as existing on the date of last audited Financial
Statements shall be taken into account.
Functions of Audit Committee:
Every Audit Committee shall act in accordance with the terms of reference specified in writing by the
Board which shall, inter alia, include:
(i) the recommendation for appointment, remuneration and terms of appointment of auditors;
(ii) review and monitor the auditor’s independence and performance, and effectiveness of audit
process;
(iii) examination of the financial statement and the auditors’ report thereon;
(iv) approval or any subsequent modification of transactions of the company with related parties;
(v) scrutiny of inter-corporate loans and investments;
(vi) valuation of undertakings or assets of the company, wherever it is necessary;
(vii) evaluation of internal financial controls and risk management systems;
(viii) monitoring the end use of funds raised through public offers and related matters.

11.3 - Audit Committee (Regulation 18 of SEBI (LODR) Regulations, 2015)

Q.3 Audit Committee of XYZ Limited has conducted 4 meetings in 2022-23, i.e. June 15, 2022, Oct. 18,
2022, Feb. 10, 2023 and March 10, 2023. Does it comply with provisions of conducting meeting?
Ans.: Meetings of the Audit Committee:
• As per Regulation 18 of SEBI (LODR) Regulations, 2015, the audit committee should meet at least 4
times in a year and not more than 120 days shall elapse between two meetings.
• In the given case, audit committee of XYZ Limited has conducted 4 meetings in 2022-23, i.e. June
15, 2022, October 18, 2022, February 10, 2022 and March 10, 2023. It does not comply with
provisions because time gap between June 15 and October 18 is more than 120 days i.e. 125 days.

11.2
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 11 Audit Committee & Corporate Governance
Conclusion: XYZ Ltd. has not complied with provisions of Regulation 18 of SEBI (LODR) Regulations,
2015 as gap between two meetings of audit committee is more than 120 days. Auditor is required to
make a suitable qualified statement in the Auditors’ Certificate, in respect of compliance of
requirements of corporate governance.
Q.4 State the main features of the qualified and independent Audit Committee set up under regulation
18 of SEBI (LODR) Regulations, 2015.
Ans.: Features of Qualified and Independent Audit Committee as per Regulation 18 of SEBI (LODR)
Regulations, 2015:
(a) The audit committee shall have minimum 3 directors as members. Atleast two-thirds of the
members of audit committee shall be independent directors.
In case of a listed entity having outstanding Superior Rights (SR) equity shares, the audit
committee shall only comprise of independent directors.
(b) All members of audit committee shall be financially literate and at least one member shall have
accounting or related financial management expertise.
(c) The Chairperson of the Audit Committee shall be an independent director.
(d) The Chairperson of the Audit Committee shall be present at AGM to answer shareholder queries.
(e) The audit committee at its discretion shall invite the finance director or head of the finance
function, head of internal audit and a representative of the statutory auditor and any other such
executives, to be present at the meetings of the committee.
(f) The Company Secretary shall act as the secretary to the committee.
Q.5 Mr. ‘U’, a respectable Chartered Accountant of international repute was requested by one of the
major corporate in India to join its Board and also as a Chairman of Audit Committee. He expressed
his apprehensions that he is not having the requisite experience. Mr. ‘U’ seeks your view on the
responsibility of Audit Committees vis-à-vis the review of Financial Statements.
Ans.: Responsibility of Audit Committee vis-a-vis the review of Financial statement:
As per Regulation 18 of SEBI (LODR) Regulations, 2015, audit committee is required to review with
management the annual financial statements before submission to the Board, focusing primarily on:
1. Matters required to be included in the Director’s Responsibility Statement to be included in the
Board’s report in terms of Sec. 134(3)(c) of the Companies Act, 2013.
2. Changes, if any, in accounting policies and practices and reasons for the same.
3. Major accounting entries involving estimates based on the exercise of judgment by management.
4. Significant adjustments made in the financial statements arising out of audit findings.
5. Compliance with listing and other legal requirements relating to financial statements.
6. Disclosure of any related party transactions.
7. Qualifications in the draft audit report.
Q.6 Comment on the following in the light of certificate of compliance of conditions of Corporate
Governance to be issued for a listed company where the Board consists of 10 directors including a
non-executive director as its chairman and further:
(i) There were 5 audit committee meetings held during the year as follows: 01/04/2022,
01/06/2022, 01/09/2022, 03/01/2023, 25/03/2023.
(ii) There are 4 independent directors. One of them resigned on 25/05/2022. A new independent
director was appointed on 01/09/2022.

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(iii) The chairman of Audit Committee did not attend the Annual General meeting held on
14/09/2022.
(iv) The internal audit reports were obtained by Audit Committee on quarterly basis. Quarter 1
internal audit report commented on certain serious irregularities as regards electronic online
auction of scrap. The agenda of Audit Committee did not deliberate or take note of the issue.
(v) There is no women director. [Nov. 18-Old Syllabus (4 Marks)]
Ans.: Compliance of conditions as to Corporate Governance:
• Regulation 18 of SEBI (LODR) Regulations, 2018, among other things provides the followings:
(a) The audit committee shall have minimum 3 directors as members. Two-thirds of the members
of audit committee shall be independent directors.
(b) The Chairperson of the Audit Committee shall be an independent director. The Chairperson of
the Audit Committee shall be present at AGM to answer shareholder queries.
(c) The audit committee should meet at least 4 times in a year and not more than 120 days shall
elapse between two meetings.
(d) Audit committee must mandatorily review certain aspects including therein is the Internal
audit reports relating to internal control weaknesses.
• Regulation 17(1) of the SEBI (LODR) Regulations, 2015 provides the following:
(a) The Board of Directors of the company shall have an optimum combination of executive and
non-executive directors with at least one woman director and not less than 50% of the Board
of Directors comprising non-executive directors.
(b) Where the Chairperson of the Board is a non-executive director, at least 1/3rd of the Board
should comprise independent directors and in case the company does not have a regular non-
executive Chairman, at least half of the Board should comprise independent directors.
• Regulation 25 of the SEBI (LODR) Regulations, 2015 provides that an independent director who
resigns or is removed from the board of the listed entity shall be replaced by a new independent
director at the earliest but not later than 3 months from the date of such vacancy.
• Accordingly, while issuing certificate of Corporate Governance, auditor is required to make the
following modifications:
(i) Gap between meetings held on 01.09.2022 and 03.01.2023 is more than 120 days.
(ii) Casual vacancy in the office is independent director was filled up after the period prescribed
under Regulation 25.
(iii) Chairman was mandatorily required to attend AGM, which he did not.
(iv) Internal audit report was not reviewed by the audit committee.
(v) There is no woman director in the company.
Q.7 List few documents that require mandatory review by Audit Committee.
[Nov. 18-New Syllabus (5 Marks)]
Ans.: Mandatory Review Area of Audit Committee:
1. Management discussion and analysis of financial condition and results of operations;
2. Management letters/letters of internal control weaknesses issued by the statutory auditors;
3. Internal audit reports relating to internal control weaknesses;
4. The appointment, removal and terms of remuneration of the Chief Internal Auditor; and
5. Statement of deviations:

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(a) Quarterly statement of deviation(s) including report of monitoring agency, if applicable
submitted to stock exchange.
(b) Annual statement of funds utilised for purposes other than those stated in offer
document/prospectus.
Q.8 D Ltd., a company incorporated in India has six members in its Audit Committee. Due to
recessionary conditions in India the revenue of the company is going down and there is showdown
in other activities of the company. Therefore, it is expected that there would not be significant work
for members of the Audit Committee.
Considering the overall recession in the company and the economy, the members of the Committee
decided unanimously to meet only once at the year end. They reviewed monthly information system
of the company and found no errors.
As an auditor of D Limited would you consider the decision taken by the Audit Committee to hold the
meeting once in a year, is complying with Listing Obligation and Disclosure Requirements (LODR)?
Also state the quorum requirements for such meetings. [Nov. 19 – New Syllabus (5 Marks)]
Ans.: Validity of Audit committee decisions w.r.t. meetings and review area:
Regulation 18 of SEBI (LODR) Regulations, 2015, among other things, requires the followings:
• The audit committee should meet at least 4 times in a year and not more than 4 months shall
elapse between two meetings.
• Audit committee should mandatorily review certain areas like management discussion and
analysis, letters of internal control weaknesses, internal audit reports etc.
• In the present case, members of audit committee decided to meet only once in a year and review
only the monthly information system which does not meet the requirement of regulation 18 of
SEBI (LODR) Regulations, 2015 as stated above.
Conclusion: Decision taken by audit committee to conduct meeting once in a year and review of only
monthly information system is not in line with the requirements of Regulation 18 of SEBI (LODR)
Regulations, 2015.
Note: Information to be reviewed mandatorily is covered in Q. No. 7.
Quorum requirements of meetings of audit committee: The quorum shall be either 2 members or
1/3 of the members of the audit committee whichever is greater, but there should be a minimum of
two independent members present.
Q.9 Mr. BK, Partner in M/s. BK and Associates, as part of their audit presentation to the Audit Committee
of M/s. XYZ Limited, a listed company, highlighted the following:
• Difficulties faced during the audit
• Disagreements with the management
• Management Letter Points
• Draft Management Representation letter to be provided by the Company in connection with the
audit.
Some of the Audit Committee members were not happy with the above presentation and asked Mr.
BK to take it back and submit directly to the Board. They believe that Audit Committee is not the
forum for discussing such problems and this has to be sorted out between auditors and the
management. Please comment on the above. [Nov. 20 – Old Syllabus (5 Marks)]
Ans.: Mandatory Review Areas of Audit Committee:
• As per SA 260 “Communication with TCWG,” statutory auditor is having an obligation to bring
certain matters to the attention of TCWG, which inter alia includes aspects such as -

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(a) Difficulties faced by them during the audit.
(b) Disagreements with the management.
(c) Management Letter Points.
(d) Draft Management Representation letter to be provided by the Company in connection with
the audit.
• Further, the Audit Committee is also having an obligation to mandatorily review certain areas
before providing their recommendations/inputs to the board. Given below are the areas required
to be mandatorily reviewed by the ACM in the case of listed companies.
(i) Management discussion and analysis of financial condition and results of operations;
(ii) Management letters/letters of internal control weaknesses issued by the statutory auditors;
(iii) Internal audit reports relating to internal control weaknesses.
• The auditor should further ascertain whether the Management Discussion and Analysis report
includes discussion on the matters stipulated. Where certain deficiencies or adverse findings are
noted by the Audit Committee, the auditor will be required to see that these have been suitably
dealt with by the management in the report on corporate governance.
• In the instant case, Mr. BK, Partner in M/s BK and Associates highlighted the facts such as
difficulties faced during the audit, disagreements with the management, managements letters
points and draft management letters to be provided by the Company in connection with the audit.
However, some of the audit committee members were not happy and as according to them audit
committee is not the forum for discussing such problems.
Conclusion: Contention of those audit committee members regarding problems to be sorted out
between auditors and the management is not in order as Audit Committee is required to mandatorily
review the same in accordance with Schedule II of SEBI (LODR) Regulations, 2015.

11.4 - Matters covered by SEBI (LODR) Regulations, 2015

Q.10 The Board of Directors of PQR Ltd. have laid down the code of conduct for all Board members and
senior management. The auditor is provided with the annual compliance affirmations received from
the Board members and explained that since there has been no change in the composition of the
senior management, the previous year’s affirmations may be considered valid. Is the contention of
the Company valid?
Ans.: Compliance of LODR Regulations as to provisions relating with Code of Conduct:
• As per Regulation 26(3) of SEBI (LODR) Regulations, 2015, all Board members and senior
management personnel have to affirm compliance with the code on an annual basis.
• In the given case, the auditor is provided with the annual compliance affirmations received from
the Board members and explained that since there has been no change in the composition of the
senior management, the previous year’s affirmations may be considered valid.
Conclusion: Decision to consider the previous year’s affirmations from the senior management
personnel as valid is not in line with the SEBI (LODR) Regulations.
Q.11 RST Ltd. has established a vigil mechanism to enable its directors and employees to report genuine
concerns and seek protection against victimization. The details of the mechanism are available on
the company intranet which is accessible by the directors and employees. Are the measures taken
by the Company in line with the LODR Regulations?

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Ans.: Compliance of LODR Regulations as to provisions relating with Vigil Mechanism:
• As per Regulation 22 of the SEBI (LODR) Regulations, 2015, the vigil mechanism can be used by
directors, employees and any other person.
• For this purpose, Regulation 46 of the SEBI (LODR) Regulations, 2015 requires the details of
establishment of such mechanism to be disclosed by the company on its website and in the Board
Report.
• In the given case, details of the mechanism are available on the company intranet which is
accessible by the directors and employees.
Conclusion: By only providing the details in the intranet, the Company has failed to meet the LODR
Regulations.
Q.12 Genuine Ltd. has established the Internal Complaints Committee under the Sexual Harassment of
Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (‘POSH Act’). The details
(names, email addresses and contact numbers) of the Committee members are available on the
company intranet which is accessible by all employees. However, no disclosure regarding number of
complaints pertaining to sexual harassment of women at workplace is being made. Are the
measures taken by the Company adequate?
Ans.: Disclosures in relation to the Sexual Harassment of Women at Workplace:
• As per Schedule V of SEBI (LODR) Regulations, 2015, in relation to the Sexual Harassment of
Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, following should be
disclosed in the section on Corporate Governance of the Annual Report:
(a) number of complaints filed during the financial year
(b) number of complaints disposed of during the financial year
(c) number of complaints pending as on end of the financial year.
• In the given case, details (names, email addresses and contact numbers) of the Committee
members are available on the company intranet which is accessible by all employees. However, no
disclosure regarding number of complaints pertaining to sexual harassment of women at
workplace is being made.
Conclusion: By only providing the details in the intranet, the Company has failed to meet the
disclosure requirements of Schedule V of SEBI (LODR) Regulations, 2015.
Q.13 Write short note on: Content of Management Discussion and Analysis.
Ans.: Management Discussion and Analysis:
Schedule V of SEBI (LODR) Regulations, 2015 requires that a Management Discussion and Analysis
should form part of the Annual Report to the shareholders. This Management Discussion & Analysis
should include discussion on the following matters within the limits set by the company’s competitive
position:
1. Industry structure and developments.
2. Opportunities and Threats.
3. Segment-wise or product-wise performance.
4. Outlook.
5. Risks and concerns.
6. Internal control systems and their adequacy.
7. Discussion on financial performance with respect to operational performance.

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8. Material developments in Human Resources/Industrial Relations front, including number of
people employed.
9. Details of significant changes (i.e. change of 25% or more as compared to the immediately
previous financial year) in key financial ratios, along with detailed explanations therefor,
including:
• Debtors Turnover
• Inventory Turnover
• Interest Coverage Ratio
• Current Ratio
• Debt Equity Ratio
• Operating Profit Margin (%)
• Net Profit Margin (%), or
• Sector-specific equivalent ratios, as applicable.
10. Details of any change in Return on Net Worth as compared to the immediately previous financial
year along with a detailed explanation thereof.
Q.14 M/s All-in-one Limited is a large-sized listed Indian company with focus on design and delivery of
custom made information Technology applications for various business entities in India and abroad.
The management wants to know whether they are required to constitute Risk Management
committee as per SEBI (LODR) Regulations, 2015 and if so, required, what should be its
composition? Advise. [May 18 – New Syllabus (4 Marks)]
Ans.: Requirement and Composition of Risk Management Committee:
As per Regulation 21 of SEBI (LODR) Regulations, 2015 requires the board of directors of companies
to constitute a Risk Management Committee.
Composition of Risk Management Committee:
(a) The Risk Management Committee shall have minimum 3 members with majority of them being
members of the BOD, including at least 1 independent director and in case of a listed entity
having outstanding SR equity shares, at least 2/3rd of the Risk Management Committee shall
comprise independent directors.
(b) The Chairperson of the Risk Management Committee shall be a member of the Board of
Directors and senior executives of the listed entity may be members of the committee.
(c) The risk management committee shall meet at least twice in a year.
(d) The quorum for a meeting of the Risk Management Committee shall be either 2 members or
1/3rd of the members of the committee, whichever is higher, including at least 1 member of the
board of directors in attendance.
(e) The meetings of the risk management committee shall be conducted in such a manner that on a
continuous basis not more than 182 days shall elapse between any two consecutive meetings.
(f) The Board of Directors shall define the role and responsibility of the Risk Management
Committee and may delegate monitoring and reviewing of the risk management plan to the
committee and such other functions as it may deem fit and such function shall specifically cover
cyber security.
(g) It may be noted that the role and responsibilities of the Risk Management Committee shall
mandatorily include the performance of functions specified in Part D of Schedule II.
(h) The provisions of this regulation shall be applicable to top 1000 listed entities, determined on
the basis of market capitalisation, as at the end of the immediate previous financial year.

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(i) The Risk Management Committee shall have powers to seek information from any employee,
obtain outside legal or other professional advice and secure attendance of outsiders with
relevant expertise, if it considers necessary.
Q.15 A listed entity has to obtain a compliance certificate from either the statutory auditors or practicing
company secretaries regarding compliance of conditions of corporate governance and annex it to
the Directors’ Report. Discuss some situations which may require an adverse or qualified statement
in respect of the above certificate. [Nov. 19 – Old Syllabus (5 Marks)]
Ans.: Circumstances requiring adverse or qualified statement in Auditor’s certificate in respect of
compliance of requirements of corporate governance:
1. The number of non-executive directors is less than 50% of the strength of Board of directors.
2. A qualified and independent audit committee is not set up.
3. The chairman of the audit committee is not an independent director.
4. The audit committee does not meet four times a year.
5. The necessary powers in terms of SEBI (LODR) Regulations, 2015 have not been vested by the
Board in the audit committee.
6. The time gap between two Board meetings is more than four months.
7. A director is a member of more than ten committees across all companies in which he is a
director.
8. The information of quarterly results is neither put on the company’s website nor sent in a form
so as to enable the Stock Exchange on which the entity’s securities are listed to enable such
Stock Exchange to put it on its own website.
9. The power of share transfer is not delegated to an officer or a committee or to the registrar and
share transfer agents.
Q.16 The Directors and senior management of a listed company of which you are the statutory auditor,
want to know their obligations under the SEBI Regulations in regard to Board or Non-Executive
Directors. (mention any Five). [May 19 – Old Syllabus (5 Marks)]
Ans.: Obligations of Directors and Senior Management under SEBI (LODR) Regulations, 2015:
(1) Regulation 17(2): The Board shall meet at least 4 times a year, with a maximum time gap of
120 days between any two meetings.
(2) Regulation 17(3): The Board shall periodically review compliance reports pertaining to all
laws applicable to the listed entity, prepared by the listed entity as well as steps taken by the
listed entity to rectify instances of non-compliances.
(3) Regulation 17(3): The Board shall satisfy itself that plans are in place for orderly succession
for appointment to the Board and senior management.
(4) Regulation 17A: A person shall not be a director in more than 7 listed entities:
Provided that a person shall not serve as an independent director in more than 7 listed
entities.
(5) Regulation 25: An independent director shall be held liable, only in respect of such acts of
omission or commission by the listed entity which had occurred with his knowledge and with
his consent or where he had not acted diligently with respect to the provisions contained in
these regulations.
(6) Regulation 26(1): A director shall not be a member in more than 10 committees or act as
chairperson of more than 5 committees across all listed entities in which he is a director.
(7) Regulation 26(2): Every director shall inform the listed entity about the committee positions
he or she occupies in other listed entities and notify changes as and when they take place.

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(8) Regulation 26(4): Non-executive directors shall disclose their shareholding in the listed entity
in which they are proposed to be appointed as directors, in the notice to the general meeting
called for appointment of such director.
(9) Regulation 26(5): Senior management shall make disclosures to the board relating to all
material, financial and commercial transactions, where they have personal interest that may
have a potential conflict with the interest of the listed entity at large.
Q.17 You have been appointed as an auditor of M/s Real Ltd. in which total number of directors in the
board is 9. As an auditor, state the points to be considered in verification of composition of Board
under regulation 17 of the SEBI (LODR) Regulations, 2015. [May 19 – New Syllabus (6 Marks)]
Ans.: Verification regarding composition of Board of Directors:
(i) Ascertain whether, the Board comprises an optimum combination of executive and non-
executive directors, with at least one woman director and not less than 50% of members of
Board comprising non-executive directors.
The minutes of the Board meetings may be verified to ascertain whether a director is an
executive director or a non-executive director.
(ii) Verify that no listed entity shall appoint a person or continue the directorship of any person as
a non-executive director who has attained the age of 75 years unless a special resolution is
passed to that effect, in which case the explanatory statement annexed to the notice for such
motion shall indicate the justification for appointing such a person.
(iii) Verify that where the Chairperson of the Board is a non-executive director and at least 1/3rd of
the Board comprises of independent directors.
In case the listed entity does not have a regular non-executive Chairperson, at least ½ of the
Board should comprise of independent directors.
(iv) Verify that the board of directors of the top 2000 listed entities shall comprise of not less than 6
directors.
(v) In case of listed company having outstanding SR equity shares, the auditor shall check that at
least half of the board of directors comprises of independent directors.
(vi) Ensure the followings:
• Approval of shareholders for appointment of a person on the Board of Directors or as a
manager is taken at the next general meeting or within a time period of 3 months from the
date of appointment, whichever is earlier.
• Appointment or a re-appointment of a person, including as a MD or a WTD or a manager,
who was earlier rejected by the shareholders at a general meeting, shall be done only with
the prior approval of the shareholders.
• Explanatory statement annexed to the notice to the shareholders, for considering the
appointment or re-appointment of such a person earlier rejected by the shareholders shall
contain a detailed explanation and justification by the NRC and the Board of directors for
recommending such a person for appointment or re-appointment.
(vii) Auditor may also examine the annual disclosure submitted by the directors to the Board.
(viii) Auditor should also verify that independent non-executive director, apart from receiving
remuneration, should not have any material pecuniary relationship with the listed entity, its
holding, subsidiary or associate company, or their promoters, or directors, during the two
immediately preceding financial years or during the current financial year.

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Q.18 M/s FCA & Associates, Chartered Accountants is one of the leading auditing firms in Guwahati. The
firm received an assignment to examine the compliance conditions [as stated in SEBI (LODR)
Regulations, 2015] of corporate governance by ABC Ltd., a listed entity with no outstanding SR
equity shares. The firm had made the following observations:
Observation No. 1: Mr. Fine, one of the Director of the Company, also the Chairman of the
Stakeholder Relationship Committee, was acting as the audit committee Chairman in 4 other listed
companies as well & 1 private company, simultaneously.
Observation No. 2: The Nomination & Remuneration Committee consisted of 6 members, which
regularly met once in two years.
Observation No. 3: The Risk Management Committee consisted of 9 directors, out of which, the
number of independent directors is the majority, but it was less than two thirds of the total strength.
Which among the above three observations made by the auditor of ABC Ltd. should be reported by
M/s. FCA & Associates? [RTP-Nov. 20]
Ans.: Reporting on Corporate Governance Requirements:
• Observation No. 1:
As per Regulation 26 of SEBI (LODR) Regulations, 2015 a director cannot be a chairman in more
than 5 committees across all listed entities. However, for the purpose of reckoning the limit under
this Regulation, chairmanship of committees in a private company shall be excluded.
In this case, since Mr. Fine is the Chairman of audit committee in ABC Ltd. and Chairman in 4 other
listed companies, there is no violation of the limit specified under the Regulation 26. Accordingly,
this observation need not be reported by the auditor.
• Observation No. 2:
As per Regulation 19 of SEBI (LODR) Regulations, 2015, every listed entity should have a
Nomination & Remuneration Committee, which shall meet at least once in a year.
In the given case the committee met once in 2 years. Accordingly, this observation needs to be
reported by the auditor.
• Observation No. 3:
As per Regulation 21 of SEBI (LODR) Regulations, 2015 in case of a listed entity having
outstanding SR equity shares, at least two thirds of Risk Management Committee shall comprise of
independent directors.
In the given case, ABC Ltd. does not have outstanding SR equity shares. Accordingly, this
observation need not be reported by the auditor.
Conclusion: Only observation 2 will be reported.
Q.19 BG Limited is a large-sized listed company. The Board of directors have constituted Nomination and
Remuneration committee comprising of non-executive and independent directors. The management
seeks your advice on the composition and role of the committee. Elucidate the composition and role
of Nomination and Remuneration committee as per SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015. [Nov. 20 – New Syllabus (5 Marks)]
Ans.: Composition and Role of Nomination and Remuneration Committee:
Regulation 19 of SEBI (LODR) Regulations, 2015 provides the requirements relating with the
Nomination and Remuneration Committee.
Composition of Nomination and Remuneration Committee:
(1) The board of directors shall constitute the nomination and remuneration committee as follows:
(a) the committee shall comprise of atleast three directors;

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(b) all directors of the committee shall be non-executive directors; and
(c) at least 2/3rd of the directors shall be independent directors.
(2) The Chairperson of the nomination and remuneration committee shall be an independent
director:
Provided that the chairperson of the listed entity, whether executive or non-executive, may be
appointed as a member of the Nomination and Remuneration Committee and shall not chair
such Committee.
Role of Nomination and Remuneration Committee:
The role of the nomination and remuneration committee is specified in Part D of the Schedule II.
Accordingly, role of Nomination and Remuneration Committee shall be:
(1) Formulation of the criteria for determining qualifications, positive attributes and independence
of a director and recommend to the board a policy relating to, the remuneration of the directors,
KMP and other employees;
(2) For every appointment of an independent director, the NRC shall evaluate the balance of skills,
knowledge and experience on the Board and on the basis of such evaluation, prepare a
description of the role and capabilities required of an independent director. The person
recommended to the Board for appointment as an independent director shall have the
capabilities identified in such description. For the purpose of identifying suitable candidates, the
Committee may:
• use the services of an external agencies, if required;
• consider candidates from a wide range of backgrounds, having due regard to diversity; and
• consider the time commitments of the candidates.
(3) Formulation of criteria for evaluation of performance of independent directors and the board;
(4) Devising a policy on diversity of board;
(5) Identifying persons who are qualified to become directors and who may be appointed in senior
management in accordance with the criteria laid down, and recommend to the board of directors
their appointment and removal;
(6) Whether to extend or continue the term of appointment of the independent director, on the
basis of the report of performance evaluation of independent directors.
(7) Recommend to the board, all remuneration, in whatever form, payable to senior management.
Q.20 A certificate of compliance of conditions of corporate governance has been issued by CEO of VAM Ltd.
In the context of internal control, which points you as an auditor would like to ensure and examine
in the said compliance certificate? [Jan. 21 – Old Syllabus (5 Marks)]
Ans.: CEO Certification:
The CEO and the CFO shall certify to the Board that they accept responsibility for establishing and
maintaining internal controls for financial reporting and that they have evaluated the effectiveness of
the internal control systems and they have disclosed to the auditors, deficiencies in the design or
operation of internal controls, if any, of which they are aware and the steps they have taken or
propose to take to rectify these deficiencies.
In the context of internal controls, the auditor should ensure that -
• The management has instituted an internal control framework with respect to financial reporting
controls. The framework should be examined in the context of the documentation created for each
significant process in terms of the related risk and mitigating control;

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• He has further examined whether the assessment process followed for evaluation of controls is
reasonable and there is a process by which significant deficiencies as well as steps taken to correct
them is communicated to the Audit Committee and to the auditors;
• He should also examine whether a process exists in the listed entity whereby all significant
changes in the accounting policies and in the system of internal controls are communicated to the
Audit Committee and the auditors.
• The auditor should examine the adequacy of the process followed for issuing the Compliance
Certificate and should review the same in regard to matters stated above and the consideration of
the same by the Audit Committee. For this purpose, he should refer to the minutes of the Audit
Committee meetings.
• In situations where negative or adverse comments or exclusions/disclaimers are contained in the
Compliance Certificate, the auditor should take cognizance of the same in the Audit Report and/or
the certificate of compliance of conditions of corporate governance.
Q.21 LDH Ltd., a company incorporated in India and listed on a recognized stock exchange in India has
entered into various related parties transactions during the financial year. You are required to
answer the following keeping in mind the Listing Obligations and Disclosure Requirements (LODR)
on corporate Governance.
(i) Who should sign the report of material transactions with related parties?
(ii) What type of transactions and policy are required to be disclosed in relation to related party
transactions?
(iii) Whether disclosures of related party transactions on consolidated financial statements are
required to be made? If yes, what are the guidelines?
[Jan. 21 – New Syllabus (5 Marks), MTP-March 22]
Ans.: Related Party Disclosures:
Provisions related with Related Party Transactions are covered under regulations 23, 27, 46 and
Schedule V of SEBI (LODR) Regulations, 2015. Accordingly,
(i) As per Regulation 27 of SEBI (LODR) Regulations, 2015, report of material transactions with
related parties shall be signed either by the compliance officer or the chief executive officer of
the listed entity.
(ii) As per Schedule V of SEBI (LODR) Regulations, 2015, listed entity shall disclose transactions of
the listed entity with any person or entity belonging to the promoter/promoter group which
hold(s) 10% or more shareholding in the listed entity, in the format prescribed in the relevant
accounting standards for annual results.
(iii) As per Regulation 23 of SEBI (LODR) Regulations, 2015, disclosures of related party transactions
on consolidated financial statements are required to be made. The listed entity shall submit
within 15 days from the date of publication of its standalone and consolidated financial results
for the half year, disclosures of related party transactions, in the format specified by the Board
and publish the same on its website.
Provided further that the listed entity shall make such disclosures every six months on the date
of publication of its standalone and consolidated financial results with effect from April 1, 2023.
Q.22 RAO & Co., a Chartered Accountant Firm, is appointed as the principal auditor of a listed company,
Triumph Ltd.
Figures of income and net worth of 5 out of 7 components of Triumph Ltd., which are its unlisted
subsidiaries, is tabulated below for the immediately preceding financial year along with the
consolidated amount:

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Audit Committee & Corporate Governance Chapter 11
Particulars Consolidated (₹ in crores)
Components
‘A’ ‘B’ ‘C’ ‘D’ ‘E’
Income 300 35 10 70 65 20
Net Worth 800 40 20 140 180 50
Which of the components of Triumph Ltd. can be termed as “material subsidiary” and in the board of
which of the unlisted subsidiaries at least one independent director of Triumph Ltd. needs to be
appointed or would be appointed? [MTP-March 21, April 22]
Ans.: Determination of Status of Material Subsidiary:
• As per Regulation 16(c) of the SEBI (LODR) Regulations, 2015, “material subsidiary” shall mean a
subsidiary, whose income or net worth exceeds 10% of the consolidated income or net worth
respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.
• Regulation 24(1) of the SEBI (LODR) Regulations, 2015, provides that at least one independent
director on the board of directors of the listed entity shall be a director on the board of directors
of an unlisted material subsidiary, whether incorporated in India or not.
• For the purposes of Regulation 24(1), notwithstanding anything to the contrary contained in
regulation 16, the term “material subsidiary” shall mean a subsidiary, whose income or net worth
exceeds 20% of the consolidated income or net worth respectively, of the listed entity and its
subsidiaries in the immediately preceding accounting year.
• On the basis of above provisions, following information is tabulated as below:
Particulars Share in Consolidated Income Share in Consolidated Net Worth
Component ‘A’ 11.67% 5%
Component ‘B’ 3.33% 2.5%
Component ‘C’ 23.33% 17.5%
Component ‘D’ 21.67% 22.5%
Component ‘E’ 6.67% 6.25%
Conclusion: From the above discussion, following conclusions may be drawn:
• Component ‘A’, Component ‘C’ and Component ‘D’, respectively, can be termed as “material
subsidiary” as their shares in either consolidated Income or net worth exceeds 10%.
• At least one independent director from the board of directors of Triumph Ltd. shall be appointed
or would have been appointed on the board of Component ‘C’ and Component ‘D’, respectively, as
their shares in either consolidated income or net worth exceeds 20%.
Q.23 BN Limited is a listed entity having two subsidiaries namely BUS Limited and ROBUS Limited. Both
the subsidiaries are unlisted and are incorporated in Australia. The consolidated net worth of BN
Limited and its subsidiaries is ₹ 350 crore (including net worth of BUS Limited and ROBUS Limited
₹ 36 crore & ₹ 80 crore respectively) in the immediately preceding year. On observing this fact, your
senior manager advises you to inform the management of BN Limited to make certain changes in the
board of directors of both the subsidiaries, in accordance with the LODR regulation 24(1). Comment.
[MTP – April 21]

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Chapter 11 Audit Committee & Corporate Governance
Ans.: Management of Subsidiary Companies:
• As per Reg. 24(1) of SEBI (LODR) Regulations, 2015, at least one independent director on the
board of directors of the listed entity shall be a director on the board of directors of the unlisted
material subsidiary, whether incorporated in India or not.
• For this purpose, notwithstanding anything to the contrary contained in Regulation 16, the term
‘material subsidiary’ means a subsidiary, whose income or net worth exceeds 20% of the
consolidated income or net worth respectively, of the listed entity and its subsidiaries in the
immediately preceding accounting year.
• In the given case, the fact that both the subsidiaries are unlisted and incorporated outside India is
irrelevant. From the above case we have the following details:
20% of consolidated net worth of BN Limited = 350 × 20% = ₹ 70 crore.
Net worth of BUS Limited = ₹ 36 crore.
Net worth of ROBUS Limited = ₹ 80 crore.
• Accordingly, it is clear that out of the two subsidiaries, the net worth of only one subsidiary (i.e.
ROBUS Limited) exceeds 20% of the consolidated net worth of BN Limited and all its subsidiaries.
Conclusion: Change in the composition of board of directors needs to be made only for ROBUS
Limited and not for both the subsidiaries. Thus, contention of senior manager regarding change in
composition of board of directors in BUS Limited is not in order as per Regulation 24(1). However,
change in composition of board of director is required for ROBUS Limited.
Further, as per Regulation 24(1) of SEBI (LODR) Regulations, 2015 one of the independent directors
present in the board of director of BN Limited should also be made as a director in the board of
directors of ROBUS Limited.
Q.24 You have been appointed as a statutory auditor of ABC Ltd., a listed company. As an auditor, state the
points to be considered by you in verification of approval of remuneration to directors of ABC Ltd.
under Regulation 17(6) of the Securities and Exchange Board of India (Listing Obligations and
Disclosure Requirements) Regulations, 2015. [July 21 – Old Syllabus (5 Marks)]
Ans.: Verification of approval of Remuneration of Directors [Regulation 17(6)]:
Following points to be considered regarding verification of approval of remuneration to directors of
ABC Ltd., under Regulation 17(6) of Securities and Exchange Board of India (Listing Obligations and
Disclosure Requirements) Regulations, 2015:
(1) The auditor should ascertain from the minutes of the Board of Directors’ meetings, shareholders’
meetings, relevant agenda papers, notices, explanatory statements etc., whether the
remuneration of non-executive directors has been decided by the Board of Directors after
receiving prior approval of the shareholders in the general meeting;
(2) The approval of shareholders by special resolution shall be obtained every year, in case the
annual remuneration payable to a single non-executive director exceeds 50% of the total annual
remuneration payable to all non-executive directors, giving details of the remuneration thereof.
(3) The auditor should refer to the Articles of Association of the company, wherever applicable;
(4) The auditor is required to examine the Report of the Board of Directors on corporate governance
to be included in the annual report of the company and ascertain whether the same contains the
disclosures with respect to remuneration of directors and compensation to non-executive
directors. The auditor should correlate this data with that contained in the financial statements.
(5) Where application of this clause requires the value of ESOP to be determined, the services of
expert may have to be utilized. In this regard, reference may be made to SA 620 dealing with
“Using the Work of an Auditor’s Expert”.

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Audit Committee & Corporate Governance Chapter 11
Q.25 Kayask Ltd. is a public company which got listed on BSE and NSE in the F.Y. 2015-16 and is amongst
the top 500 listed entities on the basis of market capitalization. JP Bhuj & Co., a CA firm, has been
appointed as its statutory auditor for the F.Y. 2022-23.
Mr. Pankaj Bhuj was assigned its audit as an engagement partner and he was verifying the
composition of the Board of Director because of some changes in the same. The present composition
of the Board of Kayask Ltd. is as follows:
(1) There are 9 directors out of which there are 4 non-executive directors and 3 independent
directors. The board has only one woman director and she is an executive director.
(2) Mr. Madhusudan Mehra has been appointed as the non-executive chairperson of the Board. He
is brother-in-law of the Managing Director of Kayask Ltd.
Whether present composition of the board of Kayask Ltd. complies with the requirement of the
provisions of SEBI (LODR) Regulations, 2015? [RTP-Nov. 21]
Ans.: Verification of Composition of Board:
• Regulations 17 and 17A of the SEBI (LODR) Regulations, 2015 deals with the provisions relating
to composition of Board of Directors. In accordance with these regulations, the auditor should
ascertain the followings:
(1) Whether, throughout the reporting period, the Board of Directors comprises an optimum
combination of executive and non-executive directors, with at least one woman director and
not less than 50% of the Board of Directors comprising non-executive directors.
(2) Whether the Board of directors of the top 1000 listed entities shall have at least one
independent woman director.
(3) Where the Chairperson of the Board is a non-executive director, at least one-third of the
Board should comprise of independent directors and in case the company does not have a
regular non-executive Chairman, at least half of the Board should comprise independent
directors:
Provided that where the regular non-executive chairperson is a promoter of the listed entity
or is related to any promoter or person occupying management positions at the level of
board of director or at one level below the board of directors, at least half of the board of
directors of the listed entity shall consist of independent directors.
As per the term “relative” defined under the Companies Act, 2013 – Brother-in-law i.e. sister’s
husband is not included.
• In the given case, Kayask Ltd. is a public company which got listed on BSE and NSE in the F.Y.
2015-16 and is amongst the top 500 listed entities on the basis of market capitalization. The
present composition of the board of Kayask Ltd. includes 9 directors out of which there are 4 non-
executive directors and 3 independent directors. The board has only one woman director and she
is an executive director. In addition, Chairperson of the Board Mr. Madhusudan Mehra is brother-
in-law of the Managing Director of Kayask Ltd. and has been appointed as the non-executive
Chairperson.
• In view of Regulations 17 and 17A of the SEBI (LODR) Regulations, 2015 there should at least 5
non-executive directors & 3 Independent directors as its Chairperson is a non-executive director.
• Further as the company is amongst the top 500 listed entities, at least one independent woman
director should be there in its board.
Conclusion: Present composition of the board of Kayask Ltd. does not comply with the requirement
of the provisions of SEBI (LODR) Regulations, 2015 as the woman director should be an independent
director and there should be 5 non-executive directors.

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Chapter 11 Audit Committee & Corporate Governance
Q.26 CA. Pradeep is appointed auditor of Delicious Foods Ltd. (DFL) a listed company to audit the
financial statements for the year ended 31st March 2022. Paid-up share capital of DFL is ₹ 5.97 Cr.
While auditing director's remuneration CA. Pradeep observed that Mr. Srinivas Gupta has been
appointed as an independent director. Mr. Srinivas Gupta is holding shares of ₹ 8,95,500 in DFL and
his wife is holding shares of ₹ 2,98,500 in the same company.
CA. Pradeep raised an objection on the appointment of independent director, but other directors
explained that holding of shares by Mr. Srinivas is less than the prescribed limit hence, he is eligible
to be appointed as independent director, how will CA. Pradeep deal with this situation and how will
he report this issue? [Dec. 21 – New Syllabus (5 Marks)]
Ans.: Eligibility of a person to be considered as independent director:
• Regulation 16(1)(b) of SEBI (LODR) Regulations, 2015 defines the term independent director. In
Accordance with these regulations a person cannot be considered as independent director if he
holds together with his relatives 2% or more of the total voting power of the company.
• In the present case Mr. Srinivas Gupta is holding shares of ₹ 8,95,500 in DFL and his wife is
holding shares of ₹ 2,98,500 in the same company. Paid-up share capital of DFL is ₹ 5.97 Cr. Total
shareholding of Mr. Srinivas together with the relatives is 2% of total voting power hence, he
cannot be considered as independent director.
Conclusion: CA Pardeep should inform the management that Mr. Srinivas cannot be considered as
independent director and should specifically mention in his report about the disqualification of
appointment as independent director of Mr. Srinivas. He should mention name of the disqualified
director, date of disqualification and reasons of disqualifications in his audit report.
Q.27 Aadi Nath & Associates have been appointed as Statutory Auditor of Shikhar Ltd. for the F.Y 2020-21.
Shikhar Ltd. enters into frequent business transactions with the entities belonging to promoter and
promoter group. The company is a listed entity and has to submit a compliance certificate to the
stock exchange. The auditors seek your guidance on the disclosure requirements in respect of
related party transactions as per SEBI (LODR) Regulations, 2015 on Corporate Governance. Explain.
[RTP-May 22]
Ans.: Related Party Disclosure [Regulations 23, 27, 46 and Schedule V]:
(a) Regulation 23: Listed entity shall submit within 15 days from the date of publication of its
standalone and consolidated financial results for the half year, disclosures of related party
transactions, in the format specified by the Board and publish the same on its website:
Provided further that the listed entity shall make such disclosures every six months on the date of
publication of its standalone and consolidated financial results with effect from April 1, 2023.
(b) Regulation 27: The listed entity shall submit a quarterly compliance report on corporate
governance in the format as specified by the Board from time to time to the recognised stock
exchange(s) within 21 days from the end of each quarter.
Details of all material transactions with related parties shall be disclosed therein.
The report shall be signed either by the compliance officer or the chief executive officer of the listed
entity.
(c) Regulation 46: The company shall disclose the policy on dealing with related party transactions on
its website and a web link thereto shall be provided in the Annual Report.
(d) Schedule V: The listed entity shall disclose the transactions with any person or entity belonging to
the promoter/promoter group which hold(s) 10% or more shareholding in the listed entity, in the
format prescribed in the relevant accounting standards for annual results.

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Audit Committee & Corporate Governance Chapter 11
Q.28 Comment on the following in the light of certificate of compliance of conditions of Corporate
Governance to be issued under SEBI (LODR) Regulations, 2015, for a Listed Company (one among the
top 1000 listed companies) where the Board consists of 20 directors with a Non-executive director
as its Chairman and further-
(i) One Non-executive Director has attained the age of 70 years;
(ii) One of the Directors is a director in eight other listed entities;
(iii) The Managing Director is serving as Independent Director in four listed entities of which one
entity's equity shares are not listed on a Stock exchange;
(iv) The Non-executive Chairman is the promoter of the Listed Entity which has nine Independent
Directors;
(v) One Independent Director has been serving as Independent Director in eight listed entities of
which equity shares are listed on a Stock Exchange. [May 22 (5 Marks); MTP-March 23]
Ans.: Composition of BOD and Obligations of directors under SEBI (LODR) Regulations, 2015:
(i) As per Regulation 17(1), no listed entity shall appoint a person or continue the directorship of
any person as a non-executive director who has attained the age of 75 years unless a special
resolution is passed to that effect, in which case the explanatory statement annexed to the
notice for such motion shall indicate the justification for appointing such a person. In the given
case, one non-executive director has attained the age of 70 years, hence there is no
contravention.
(ii) As per Regulation 17A, a person shall not be a director in more than 7 listed entities. In the
given case, one of the directors in the company is a director in eight other listed entities. Hence
a contravention of Regulation 17A arises in this case.
(iii) As per Regulation 17A, any person who is serving as a whole-time director/managing director
in any listed entity shall serve as an independent director in not more than 3 listed entities
(whose equity shares are listed on a stock exchange). In the given case, managing director of
the company is serving as Independent Director in 4 listed entities of which one entity's equity
share are not listed on a Stock exchange. Hence Regulation 17A is complied with, in this case.
(iv) As per Regulation 17, where the regular non-executive chairperson is a promoter of the listed
entity, at least half of the board of directors of the listed entity shall consist of independent
directors. In the given case, the Non-executive Chairman is the promoter of the Listed entity
which has Nine Independent Directors. As the number of independent directors is less than
50% of strength of BOD, Regulation 17 has not been complied with in this regard.
(v) As per Regulation 17A, a person shall not serve as an independent director in more than 7
listed entities. In the given case, one Independent Director has been serving as Independent
Director in 8 listed entities. Hence a contravention of Regulation 17A arises in this case.
Q. Write a short note on: Role of the Risk Management Committee. [RTP-May 23]
28A Ans.: Role of the Risk Management Committee:
The role of the Risk Management Committee shall, inter alia, include the following:
(1) To formulate a detailed risk management policy which shall include:
(a) A framework for identification of internal and external risks specifically faced by the listed
entity, in particular including financial, operational, sectoral, sustainability (particularly,
ESG related risks), information, cyber security risks or any other risk as may be determined
by the Committee.

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Chapter 11 Audit Committee & Corporate Governance
(b) Measures for risk mitigation including systems and processes for internal control of
identified risks.
(c) Business continuity plan.
(2) To ensure that appropriate methodology, processes and systems are in place to monitor and
evaluate risks associated with the business of the Company;
(3) To monitor and oversee implementation of the risk management policy, including evaluating the
adequacy of risk management systems;
(4) To periodically review the risk management policy, at least once in two years, including by
considering the changing industry dynamics and evolving complexity;
(5) To keep the board of directors informed about the nature and content of its discussions,
recommendations and actions to be taken;
(6) The appointment, removal and terms of remuneration of the Chief Risk Officer (if any) shall be
subject to review by the Risk Management Committee.

11.5 – Miscellaneous
Q.29 Statutory auditor of ABC Limited has resigned on July 10, 2022. Whether he shall be liable for
issuing limited review report for quarter ended June 30, 2022.
Ans.: Obligations of Statutory Auditor in case of resignation:
• As per the directions given by SEBI through its circular, all listed entities/material subsidiaries
while appointing/re-appointing an auditor shall ensure compliance with certain conditions.
• One of such condition is that if the auditor resigns within 45 days from the end of a quarter of a
financial year, then the auditor shall, before such resignation, issue the limited review/audit
report for such quarter.
• In the given situation, statutory auditor of ABC Limited has resigned on July 10, 2022.
Conclusion: Auditor would be liable for issuing limited review report for quarter ended June 30,
2022 because time gap between June 30, 2022 and July 10, 2022 is less than 45 days.
Q.30 PQR, auditor of XYZ Limited has signed limited review report of 2nd and 3rd quarter. Whether
auditor is liable to issue limited review report of 4th quarter before resignation?
Ans.: Obligations of Statutory Auditor in case of resignation:
• As per the directions given by SEBI through its circular, all listed entities/material subsidiaries
while appointing/re-appointing an auditor shall ensure compliance with certain conditions.
• One of such condition is that if the auditor has signed the limited review/audit report for the first
three quarters of a financial year, then the auditor shall, before such resignation, issue the limited
review/audit report for the last quarter of such financial year as well as the audit report for such
financial year.
• In the given situation, PQR, auditor of XYZ Limited has signed limited review report of 2nd and 3rd
quarter.
Conclusion: Auditor is not liable to issue limited review report of 4th quarter because he has not
signed limited review report of first 3 quarters.
Q.31 Mr. Ibrahim was appointed as statutory auditor of New Limited and Old Limited. Both the
Companies were having their base in Chennai they had recently listed their shares on the Stock
Exchange. For the financial year 2022-23, Mr. Ibrahim had signed limited review reports for each

11.19
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Audit Committee & Corporate Governance Chapter 11
quarter, till the quarter ended 31st December 2022 for both the companies. Owing to his personal
commitments and increased workload, he tendered his resignation to M/s New Limited on 30th
January 2023 and asked the Company to appoint another auditor to issue audit report for the
remaining quarter and the FY 2022-23 as a whole. But the management of the Company did not
accept the same.
Mr. Ibrahim continued to as act as auditor for M/s Old limited. During the 1st week of March 2023,
Mrs. W (wife of Mr. Ibrahim) had borrowed a sum of ₹ 6 lakh from the Company for her personal
use. Having come to know about this, Mr. Ibrahim immediately informed the management that he
had been disqualified to act as auditor and told them that he won’t issue audit report for last
quarter. But management of the Company argued that it’s the legal responsibility of Mr. Ibrahim to
do the same.
Whether contention of management of New Limited and Old Limited is justified in asking Mr.
Ibrahim to issue audit report for the last quarter and the FY 2022-23 as a whole, despite his
resignation? Discuss. [RTP-May 21, MTP-Nov. 21, Sep. 22]
Ans.: Obligations of Statutory Auditor in case of resignation:
• As per the directions given by SEBI through its circular, all listed entities/material subsidiaries
while appointing/re-appointing an auditor shall ensure compliance with certain conditions.
• One of such condition is that if the auditor has signed the limited review/audit report for the first
three quarters of a financial year, then the auditor shall, before such resignation, issue the limited
review/audit report for the last quarter of such financial year as well as the audit report for such
financial year. However, in case the auditor is rendered disqualified due to operation of any
condition mentioned in Section 141 of the Companies Act, 2013, then the provisions of this
Circular shall not apply.
• In the given case, Mr. Ibrahim was appointed as statutory auditor of two listed entities i.e., New
Limited and Old Limited. For the financial year 2022-23, Mr. Ibrahim had signed limited review
reports for first three quarter i.e., till the quarter ended 31st December 2022 for both the
companies. Owing to his personal commitments and increased workload, he resigned from New
Limited and asked the Company to appoint another auditor to issue audit report for the remaining
quarter and audit report for the FY 2022-23. Further, Mr. Ibrahim immediately informed the
management of Old Limited that he had been disqualified to act as auditor and told them that he
won’t issue audit report for last quarter as Mrs. W (wife of Mr. Ibrahim) had borrowed a sum of
₹ 6 lakh from the Company for her personal use.
Conclusion: Based on the aforesaid discussion, following conclusions may be drawn:
(a) Mr. Ibrahim is required to issue the audit report for the last quarter and audit report for the year
2022-23 for New Limited as he has issued audit report for the first three quarters.
(b) Mr. Ibrahim is not required to issue the audit report for remaining quarter and audit report for
the year 2022-23 as a whole for Old Limited as he is disqualified under section 141 of Companies
Act.
Accordingly, contention of Management of New Limited is correct and tenable for issuing the audit
report for remaining quarter and audit report for financial year 2021-22 however, contention of
management of Old Limited is not correct regarding the legal responsibility of Mr. Ibrahim to issue
audit report for remaining quarter and for the whole year.

11.20
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12 Liabilities of Auditor
Marks Distribution of Past Exams
6

4
Marks

0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 0 4 0 0 0 0 0 0 4 0 5

*From May 2019, Marks are given only for descriptive questions
12.1 - Civil and Criminal Liabilities under Companies Act, 2013
Q.1 Indicate the precise nature of auditor’s liability for a misstatement that had occurred in the
prospectus issued by the company.
Ans.: Liability of auditor for making untrue statements:
• Criminal liability for misstatement in prospectus: Sec. 34 of Companies Act, 2013 provides that
where any prospectus is issued or circulated or distributed, which includes any statement which is
untrue or misleading in form or context in which it is included or where any inclusion or omission
of any matter is likely to mislead, then every person who authorises the issue of such prospectus
shall be liable u/s 447 (fraud).
• Civil liability for misstatement in prospectus: Sec. 35 of Companies Act, 2013 provides that
where a person has subscribed for securities of a company acting on any statement included, or
the inclusion or omission of any matter, in the prospectus which is misleading and has sustained
any loss or damage as a consequence thereof, the company and every person who is a director of
the company at the time of the issue of the prospectus; has authorised himself to be named and is
named in the prospectus as a director of the company, or has agreed to become such director,
either immediately or after an interval of time; is a promoter of the company; has authorised the
issue of the prospectus; and is an expert, shall, be liable to pay compensation to every person who
has sustained such loss or damage.
• Punishment for Fraud: Sec. 447 of Companies Act, 2013 provides that, any person who is found
to be guilty of fraud, involving an amount of at least ₹ 10 lakh or 1% of the turnover of the
company, whichever is lower shall be punishable with imprisonment for a term which shall not be
less than 6 months but which may extend to 10 years and shall also be liable to fine which shall not

12.1
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Liabilities of Auditor Chapter 12
be less than the amount involved in the fraud, but which may extend to 3 times the amount
involved in the fraud.
Where the fraud involves an amount less than ₹ 10 lakh or 1% of the turnover of the company,
whichever is lower, and does not involve public interest, any person guilty of such fraud shall be
punishable with imprisonment for a term which may extend to 5 years or with fine which may
extend to ₹ 50 lakh or with both.
It is also provided that where the fraud in question involves public interest, the term of
imprisonment shall not be less than 3 years.
Q.2 Mr. X, a young chartered accountant, wants to start practice and he required your advice, among
other things, on criminal liabilities of an auditor under the Companies Act, 2013. Kindly guide him.
Ans.: Criminal Liabilities under Companies Act, 2013:
• Criminal liability for misstatement in prospectus: Sec. 34 of Companies Act, 2013 provides that
where any prospectus is issued or circulated or distributed, which includes any statement which is
untrue or misleading in form or context in which it is included or where any inclusion or omission
of any matter is likely to mislead, then every person who authorises the issue of such prospectus
shall be liable u/s 447 (fraud).
• Punishment for false statement: Sec. 448 of Companies Act, 2013 provides that if in any return,
report, certificate, financial statement, prospectus, statement or other document required by, or
for, the purposes of any of the provisions of this Act or the rules made thereunder, any person
makes a statement, (a) which is false in any material particulars, knowing it to be false; or (b)
which omits any material fact, knowing it to be material, he shall be liable under section 447.
• Punishment for fraud: Sec. 447 of Companies Act, 2013 provides that, any person who is found to
be guilty of fraud, involving an amount of at least ₹ 10 lakh or 1% of the turnover of the company,
whichever is lower shall be punishable with imprisonment for a term which shall not be less than
6 months but which may extend to 10 years and shall also be liable to fine which shall not be less
than the amount involved in the fraud, but which may extend to 3 times the amount involved in the
fraud.
Where the fraud involves an amount less than ₹ 10 lakh or 1% of the turnover of the company,
whichever is lower, and does not involve public interest, any person guilty of such fraud shall be
punishable with imprisonment for a term which may extend to 5 years or with fine which may
extend to ₹ 50 lakh or with both.
It is also provided that where the fraud in question involves public interest, the term of
imprisonment shall not be less than 3 years.
Q.3 A Chartered Accountant in practice has been appointed as an auditor of a company which raised
finance from the capital market on the basis of a prospectus issued a few years back. The main object
for raising the finance was specified to be setting up a project on information technology. The
company advanced the sum so raised to various firms and private companies in which the directors
of the company were a partner or a director respectively. These parties had no standing whatsoever
with information technology. In the Balance Sheet, these advances appeared as a current asset under
the head “Short-term Loans and Advances – unsecured, considered good”. There was no mention to
the notes to accounts about nature and purpose of such advances; and the auditor has issued routine
audit report without any qualifications. On the very next day to the issuance of audit report, the
directors and their related parties gone disappeared. The company, in which the auditor was
conducting audit, has just vanished. You are required to state whether the auditor will be held guilty
for professional misconduct? Is there any liability subsists under any law?

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Chapter 12 Liabilities of Auditor
Ans.: Auditor’s negligence in performance of duties:
• Clause 7 of Part I of Second Schedule to the CA Act, 1949 provides that a CA in practice will be
deemed to be guilty of professional misconduct if he does not exercise due diligence in
performance of his duties or is grossly negligent while performing his duties.
• Schedule III to the Companies Act, 2013 requires specific disclosure of loans and advances due by
directors or other officers of the company or any of them either severally or jointly with any other
person or amounts due by firms or private companies respectively in which any director is a
partner or a director or a member.
• As per Section 188 of the Companies Act, 2013, no company shall enter into any contract or
arrangement with a related party with respect to sale, purchase or supply of any goods or
materials, except with the consent of the Board of Directors given by a resolution at a Board
Meeting. Section 184 requires disclosure of interest by director and also lays down the procedure
to be followed in this regard. Section 189 of the Companies Act, 2013 requires that every company
shall keep one or more registers in which particulars of all contracts or arrangements, to which
Section 184 or Section 188 applies, shall be entered separately.
• In the given case, the company has advanced the sum to the parties that are related to the
Directors of the company and showed the same under the head “Short-term Loans and Advances –
unsecured, considered good” rather than specific disclosure under the notes to accounts. The
auditor of the company also issued clean audit report without any qualifications. It appears that
the auditor did not perform his duties properly.
Conclusion: Auditor is guilty of professional misconduct under Clause 7 of part I of Second Schedule
to CA Act, 1949 and is also liable to be punished u/s 147 of Companies Act, 2013, due to non-
observance of compliance of Schedule III and Sections 184, 188 and 189 of Companies Act, 2013.
Q.4 Indicate the precise nature of auditor's liability in the following situation: Certain weaknesses in the
internal control procedure in the payment of wages in a large construction company were noticed by
the statutory auditor who in turn brought the same to the knowledge of the Managing Director of the
company. In the subsequent year huge defalcation came to the notice of the management. The origin
of the same was traced to the earlier year. The management wants to sue the auditor for negligence
and also plans to file a complaint with the Institute.
Ans.: Liabilities of auditor:
• SA 265 on “Communicating Deficiencies in Internal Control to TCWG and Management” requires
the auditor to determine whether, on the basis of the audit work performed, he has identified one
or more deficiencies in internal control. If one or more deficiencies in internal control has been
identified, he shall determine whether, such deficiencies individually or in combination constitute
significant deficiencies. Significant deficiencies are required to be communicated in writing to
TCWG and management on a timely basis.
• In the given case, certain weaknesses in the internal control procedure in the payment of wages in
a large construction company were noticed by the statutory auditor and brought the same to the
knowledge of the Managing Director of the company. In the subsequent year, a huge defalcation
took place, the ramification of which stretched to the earlier year. The management of the
company desires to sue the statutory auditor for negligence.
• The precise nature of auditor's liability in the case can be ascertained on the basis of the following
considerations:
(a) Whether the defalcation emanated from the weaknesses noticed by the statutory auditor, the
information regarding which was passed on to the management; and

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(b) Whether the statutory auditor properly and adequately extended the audit programme of the
previous year having regard to the weaknesses noticed.
• If circumstances indicate the possible existence of fraud or error, the auditor should consider the
potential effect of the suspected fraud or error on the financial information. If the auditor believes
the suspected fraud or error could have a material effect on the financial information, he should
perform such modified or additional procedures as he determines to be appropriate. Thus,
normally speaking, as long as the auditor took due care in performing the audit work, he cannot be
held liable.
• The fact that the matter was brought to the notice of the managing director may be a good defence
for the auditor as well. In Kingston Cotton Mills Ltd., it was held that it is the duty of the auditor to
probe into the depth only when his suspicion is aroused. The statutory auditor, by bringing the
weakness to the notice of the managing director had alerted the management which is judicially
held to be primarily responsible for protection of the assets of the company and can put forth this
as defence against any claim arising subsequent to passing of the information to the management.
Q.5 Indicate the precise nature of auditor's duties in the following situation: Based upon the legal
opinion of a leading advocate, X Ltd. made a provision of ₹ 5 crores towards Income Tax liability. The
assessing authority has worked out the liability at ₹ 15 crores. It is observed that the opinion of the
advocate was inconsistent with legal position with regard to certain revenue items.
Ans.: Auditor’s liabilities in case of short provisions:
• SA 500 on "Audit Evidence” requires that auditor to perform appropriate procedures while using
the work of management expert as audit evidence. Before relying on expert’s opinion, the auditor
should have seen that opinion given by the expert is prima facie appropriate and acceptable.
• In the present case, opinion of the management expert was inconsistent with legal position with
regard to certain items. It is, perhaps, quite possible that auditor did not seek reasonable
assurance as to the appropriateness of the source data, assumptions and methods used by the
expert properly.
• SA 500 requires that auditor to resolve the inconsistency by discussion with the management and
the expert. In case, the expert’s work does not support the related representation in the financial
information, the inconsistency in legal opinions could have been detected by the auditor if he had
gone through the same. This seems apparent having regard to wide difference in the liability
worked out by the assessing authority.
Conclusion: Auditor should reject the opinion and insisted upon making proper provision.
Q.6 State the nature of liability as provided in the Companies Act, 2013 of an auditor for not
appropriately dealing with a misstatement appearing in audited financial statements or a false
statement in Audit Report. [Nov. 18 - Old Syllabus (4 Marks)]
Or
What will be the liability of Mr. X, an auditor in the following situation: As an auditor, not
appropriately dealing with a misstatement appearing in financial statements amounting to ₹ 9.84
lakhs. Misstatement does not involve public interest. [Dec. 21 - Old Syllabus (3 Marks)]
Ans.: Auditor’s Liability for not appropriately dealing with a misstatement appearing in audited
financial statements or a false statement in Audit Report:
• Sec. 448 of Companies Act, 2013 provides that if in any return, report, certificate, financial
statement, prospectus, statement or other document required by, or for, the purposes of any of
the provisions of this Act or the rules made thereunder, any person makes a statement,

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Chapter 12 Liabilities of Auditor
(a) which is false in any material particulars, knowing it to be false; or
(b) which omits any material fact, knowing it to be material,
he shall be liable under section 447.
• Punishment for fraud: Sec. 447 of Companies Act, 2013 provides that, any person who is found
to be guilty of fraud, involving an amount of at least ₹ 10 lakh or 1% of the turnover of the
company, whichever is lower shall be punishable with imprisonment for a term which shall not
be less than 6 months but which may extend to 10 years and shall also be liable to fine which shall
not be less than the amount involved in the fraud, but which may extend to 3 times the amount
involved in the fraud.
Where the fraud involves an amount less than ₹ 10 lakh or 1% of the turnover of the company,
whichever is lower, and does not involve public interest, any person guilty of such fraud shall be
punishable with imprisonment for a term which may extend to 5 years or with fine which may
extend to ₹ 50 lakh or with both.
Q.7 As a part of the listing process, M/s Sun Ltd. prepared and issued its prospectus to the public. The top
executives thought that pending litigation against the company (which would cause a cash outflow of
₹ 1.25 crores) may affect the demand for share applications. Due to this, they omitted the fact, for the
well-being of the company. Mr. A, who was well aware of this matter had authorised himself to be
named in the prospectus as a director. However, Mr. A was a little reluctant, so he informed and
agreed that he shall become such director after an interval of some time. Unfortunately, after a few
days, but before joining of Mr. A as director, this matter got leaked and several subscribers sustained
losses. Mr. A is now defending himself stating that he is currently not holding the director's post
hence no action can be taken against him. Analyse and Comment on the situation.
[MTP – Oct. 21; May 23 (5 Marks)]
Ans.: Damages for negligence:
• Sec. 35 of Companies Act, 2013 provides that where a person has subscribed for securities of a
company acting on any statement included, or the inclusion or omission of any matter, in the
prospectus which is misleading and has sustained any loss or damage as a consequence thereof,
the company and every person who is a director of the company at the time of the issue of the
prospectus; has authorised himself to be named and is named in the prospectus as a director of
the company, or has agreed to become such director, either immediately or after an interval of
time; is a promoter of the company; has authorised the issue of the prospectus; and is an expert,
shall, be liable to pay compensation to every person who has sustained such loss or damage.
• Further, as per Sec. 447 of the Companies Act, 2013, without prejudice to any liability including
repayment of any debt under this Act or any other law for the time being in force, any person who
is found to be guilty of fraud (involving an amount of at least ₹ 10 lakh or 1% of the turnover of the
company, whichever is lower) shall be punishable with imprisonment for a term which shall not
be less than 6 months but which may extend to 10 years and shall also be liable to fine which shall
not be less than the amount involved in the fraud, but which may extend to 3 times the amount
involved in the fraud. It may be noted that where the fraud in question involves public interest, the
term of imprisonment shall not be less than 3 years.
Conclusion: Mr. K is liable for punishment even though he is currently not a director in the company
as per Sec. 35 of the Companies Act, 2013. He shall be liable to punishment as per Sec. 447 as he was
aware of the litigation against the company which may cause outflow of ₹ 1 crore which may affect
the demand for share application and had also authorized himself to be named in the prospectus as
director.

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Liabilities of Auditor Chapter 12
12.2 - Liabilities under Income-tax Act, 1961

Q.8 What are the liabilities of a Chartered Accountant under Income-tax Act, 1961 for furnishing an
incorrect statement in any report or certificate required to be submitted by him under the Act?
[Nov. 18 - New Syllabus (4 Marks)]
Ans.: Liabilities of a Chartered Accountant under Income-tax Act, 1961 for furnishing an incorrect
statement in any report or certificate:
Liabilities u/s 271J: Sec. 271J of the Income-tax Act, 1961 provides that where the Assessing Officer
or the Commissioner (Appeals), in the course of any proceedings under this Act, finds that an
accountant or a merchant banker or a registered valuer has furnished incorrect information in any
report or certificate furnished under any provision of this Act or the rules made thereunder, the
Assessing Officer or the Commissioner (Appeals) may direct that person to pay a penalty of ₹ 10,000
for each such report or certificate.
Liabilities u/s 278: Refer Answer of Q. No. 9
Q.9 What will be the liability of Mr. X, an auditor in the following situation: Mr. X has appeared before
the Income Tax Authorities as an authorized representative of his Auditee and submitted to
the Income Tax Authorities a false declaration. [Dec. 21 – Old Syllabus (2 Marks); MTP-April 23]
Ans.: Liabilities under Income Tax Act, 1961:
Section 278 of Income Tax Act, 1961 (Liability for submission of false information): Any
person who acts or induces, in any manner another person to make and deliver to the Income Tax
Authorities a false account, statement, or declaration relating to any income chargeable to tax which
he knows to be false or does not believe to be true is punishable:
(i) in a case where the amount of tax, penalty or interest which would have been evaded, if the
declaration, account or statement had been accepted as true, or which is wilfully attempted to
be evaded, exceeds ₹ 25 Lakhs, with rigorous imprisonment for a term which shall not be less
than 6 months but which may extend to 7 years and with fine;
(ii) in any other case, with rigorous imprisonment for a term which shall not be less than 3 months
but which may extend to 2 years and with fine.
Q.10 CA K, a Practicing Chartered Accountant, was appointed as Authorized Representative by GKR
Limited to appear before National e-assessment centre in the matter of its Faceless Income tax
proceedings for the Assessment year 2020-21. While preparing a reply in response to the notice for
the Scrutiny Assessment, CA K observed that there were certain trade payables and loan creditors
which were not in existence but was fabricated by the management of GKR Limited. Though CA K
knew these accounts were fabricated, he still submitted those false accounts to the National
faceless e-assessment centre. What are the liabilities of CA K under the Income Tax Act, 1961?
[May 22 (4 Marks)]
Ans.: False Declaration as Authorized Representative:
• In connection with proceedings under the Income-tax Act, 1961, a Chartered Accountant often acts
as the authorized representative of his clients and attends before an Income-tax Authority or the
appellate tribunal.
• Any person who acts or induces, in any manner another person to make and deliver to the Income-
tax Authorities a false account, statement, or declaration, relating to any income chargeable to tax
which he knows to be false or does not believe to be true will be liable u/s 278 of the Income-tax
Act, 1961.

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Chapter 12 Liabilities of Auditor
• Further, in case of submission of any information which is false and which the Chartered
Accountant either knows or believes to be false or untrue, he would be liable to rigorous
imprisonment which may extend to 7 years (in other cases 2 years) and/or to a fine.
• In the instant case, Mr. K, a chartered accountant was appointed as authorize representative by
GKR Limited to appear before National E-Assessment Centre in the matter of its faceless Income-
tax proceeding. While preparing a reply in response to the notice for the scrutiny assessment, CA.
K, submitted false accounts to the National Faceless E-Assessment Centre, knowingly that certain
trade payables and loan creditors accounts were not in existence and were fabricated by
Management.
Conclusion: Based on the above stated provisions, CA. K would be liable u/s 278 of the Income-tax
Act, 1961.
Q.11 In assessment procedure of M/s Cloud Ltd., Income Tax Officer observed some irregularities.
Therefore, he started investigation of Books of Account audited and signed by Mr. Old, a practicing
Chartered Accountant. While going through books he found that M/s Cloud Ltd. used to maintain
two sets of Books of Account, one is the official set and other is covering all the transactions. Income
Tax Department filed a complaint with the Institute of Chartered Accountants of India saying Mr.
Old had negligently performed his duties. Comment. [MTP-Sep. 22]
Ans.: Liabilities of Auditor:
• It is the auditor’s responsibility to audit the statement of accounts and prepare tax returns on the
basis of books of account produced before him. After being satisfied with the books and
documents produced to him, he can give his opinion on the basis of those documents only by
exercising requisite skill and care.
• In the present case, Income tax Officer observed some irregularities during the assessment
proceeding of M/s Cloud Ltd. Therefore, he started investigation of books of account audited and
signed by Mr. Old, a practicing Chartered Accountant. While going through the books, he found
that M/s Cloud Ltd. Used to maintain two sets of Books of Account, one is the official set and other
is covering all the transactions. Income Tax Department filed a complaint with the ICAI saying Mr.
Old had negligently performed his duties.
• Mr. Old, the auditor was not under a duty to prepare books of account of assessee and he should,
of course, neither suggest nor assist in the preparations of false accounts. He is responsible for the
books produced before him for audit. He completed his audit work with official set of books only.
Conclusion: As Mr. Old, performed the auditing with due skill and diligence; and, therefore, no
question of negligence arises. It is the duty of the Department to himself investigate the truth and
correctness of the accounts of the assessee.

12.3 – Miscellaneous
Q.12 Write a short note on - Auditor’s liability in case of unlawful acts or defaults by clients.
Ans.: Auditor’s liability in case of unlawful acts of the client:
The Institute has recommended following course of action for a member when he is not directly
involved in tax frauds committed by his clients, but he discovers such fraud in the course of his
professional work:
(a) Member is under no obligation to inform income tax authorities about taxation frauds.

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Liabilities of Auditor Chapter 12
(b) If the fraud relates to accounts or tax matters of the client for past years for which the client was
not represented by the member, client should be advised to disclose. The member may however
continue to act for the client in respect of current matters, but at the same time he is also
required to ensure that the past fraud does not in any way affect the current tax matters.
(c) If the fraud relates to past years accounts examined and reported by the member himself, on the
basis of which the tax assessment in the past has been made, he should advise the client for a
disclosure. In case the client refuses, he should disassociate himself from the case and make a
report to authorities that the accounts examined by him previously are unreliable on account of
some information obtained later. (Details of information should not be communicated)
(d) In case of suppression of current accounts, the client should be advised to make a full disclosure.
If he refuses, the accountant should make a complete reservation is his report and disassociate
himself with return.
(e) If the services are dispensed with before completion of the assignment, there is no further duty
to disclose.

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 By: CA. Pankaj Garg

13 Internal Audit
Marks Distribution of Past Exams
4.5
4
3.5
3
Marks

2.5
2
1.5
1
0.5
0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 0 4 0 0 0 0 0 0 4 0 0

*From May 2019, marks are given only descriptive questions

Requirements of Internal Audit and Conduct of Internal Audit

Q.1 JKH Pvt. Ltd. who is into the business of imparting coaching to CA students did not appoint any
internal auditor for the year ended 31st March, 2023. As on 31st March, 2022, the company had
paid up capital of ₹ 50 lakhs and reserves of ₹ 10 crores. Its turnover for the 3 years preceding the
year ended 31st March, 2023 was ₹ 75 crores, ₹ 145 crores and ₹ 260 crores respectively. As an
auditor of the company for the year ended 31st March, 2023, how would you deal with the above?
Ans.: Applicability of Provisions of Internal Audit:
As per section 138 of the Companies Act, 2013, read with rule 13 of Companies (Audit and Auditors)
Rules, 2014 every private company shall be required to appoint an internal auditor or a firm of
internal auditors, having-
(i) turnover of ₹ 200 crores or more during the preceding financial year; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding ₹ 100
crores or more at any point of time during the preceding financial year:
As per Para 3(xiv) of CARO, 2020, auditor is required to report (a) whether the company has an
internal audit system commensurate with the size and nature of its business; (b) whether the reports
of the Internal Auditors for the period under audit were considered by the statutory auditor.
In the instant case, JKH Pvt. Ltd. is having turnover of ₹ 260 crores during the preceding financial year
which is more than two hundred crore rupees.
Conclusion: Company has the statutory liability to appoint an Internal Auditor and mandatorily
conduct internal audit.
If the company does not have an internal audit system, statutory auditor is required to state the facts
in his report under CARO, 2020.

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Internal Audit Chapter 13
Q.2 WWF Ltd. is a public company having ₹ 40 lacs paid up capital in previous financial year which
raised to ₹ 60 lacs in current financial year under audit. The company had turnover of previous
three consecutive financial years being ₹ 49 crores, ₹ 145 crores and ₹ 150 crores. During the
previous year, WWF Ltd. borrowed a loan from a public financial institution of ₹ 110 crores but
squared up ₹ 20 crores by the year end. The company does not have any internal audit system. In
view of the management, internal audit system is not mandatory. Comment.
Ans.: Applicability of Internal Audit:
As per Section 138 of Companies Act, 2013, such class or classes of companies as may be prescribed
shall be required to appoint an internal auditor. As per Rule 13 of Companies (Accounts) Rules, 2014,
following companies must have internal auditor:
1. every listed company;
2. every unlisted public company having-
(i) paid up share capital of ₹ 50 Cr. or more during the preceding financial year; or
(ii) turnover of ₹ 200 Cr. or more during the preceding financial year; or
(iii) outstanding loans or borrowings from banks or public financial institutions exceeding
₹ 100 Cr. or more at any point of time during the preceding financial year; or
(iv) outstanding deposits of ₹ 25 Cr. or more at any point of time during the preceding financial
year; and
3. every private company having-
(i) turnover of ₹ 200 Cr. or more during the preceding financial year; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding
₹ 100 Cr. or more at any point of time during the preceding financial year.
As per Para 3(xiv) of CARO, 2020, auditor is required to report (a) whether the company has an
internal audit system commensurate with the size and nature of its business; (b) whether the reports
of the Internal Auditors for the period under audit were considered by the statutory auditor.
In the present case, WWF Ltd. had borrowed a loan from a public financial institution for ₹ 110 Cr.
hence the company must have an internal audit system.
Conclusion: Management contention that internal audit system is not mandatory is not correct.
If the company does not have an internal audit system, statutory auditor is required to state the facts
in his report under CARO, 2020.
Q.3 AB Pvt. Ltd. company having outstanding loans or borrowings from banks exceeding one hundred
crore rupees wants to appoint internal auditor. Please guide him who can be appointed as internal
auditor and what would be reviewed by him.
Ans.: Who can be appointed as Internal Auditor:
As per Section 138 of the Companies Act, 2013, every private limited company is required to have
internal audit system if its outstanding loans or borrowings from banks or public financial
institutions exceed ₹ 100 Cr. at any point of time during the preceding financial year. In present case,
AB Pvt. Ltd. is under compulsion to conduct internal audit, as its loans or borrowings exceed ₹ 100 Cr.
As per Section 138, the internal auditor 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 companies. The internal auditor may or
may not be an employee of the company.
Work to be reviewed by Internal Auditor:
As per SA 610 “Using the work of Internal Auditor” the activities of the internal audit function may
include one or more of the following:

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Chapter 13 Internal Audit
1. Activities Relating to Governance: Internal audit function may assess the governance process
in its accomplishment of objectives on ethics and values, accountability and communicating risk
to appropriate areas of the organization.
2. Activities Relating to Risk Management: Internal audit function may assist the entity by
identifying and evaluating significant exposures to risk and contributing to the improvement of
risk management and internal control (including effectiveness of the financial reporting
process).
3. Evaluation of internal control: Internal audit function may be assigned specific responsibility
for reviewing controls, evaluating their operation and recommending improvements thereto.
4. Examination of financial and operating information: Internal audit function may be assigned
to review the means used to identify, recognize, measure, classify and report financial and
operating information, and to make specific inquiry into individual items, including detailed
testing of transactions, balances and procedures.
5. Review of operating activities: The internal audit function may be assigned to review the
economy, efficiency and effectiveness of operating activities, including non-financial activities of
an entity.
6. Review of compliance with laws and regulations: Internal audit function may be assigned to
review compliance with laws, regulations and other external requirements, and with
management policies and directives and other internal requirements.
Q.4 XYZ Yarns Ltd. is a manufacturing company engaged in manufacturing of different types of yarns.
Its annual turnover is ₹ 100 Crores and net profit ₹ 10 crores. It has two manufacturing units.
Company is facing difficulties in maintaining adequate system of internal control. Company wants
to appoint Internal Auditor who would help in the above task and also various other functions
including compliance. In view of above, you are required to explain the main responsibility of
Internal Auditors.
Ans.: Responsibilities of Internal Auditor:
(i) To maintain adequate system of internal control by a continuous examination of accounting
procedures, receipts and disbursements and to provide adequate safeguards against
misappropriation of assets.
(ii) To operate independently of the accounting staff and must not in any way divest himself of any
of the responsibilities placed upon him.
(iii) To observe unusual facts and circumstances and bring them to notice of management.
(iv) To appraise policies and procedures prevailing in the entity and bring to the notice of
management any deficiencies, wherever these require to be corrected.
(v) To perform his work with independence. He need to associate closely with management and his
knowledge must be kept up to date by his being kept informed about all important occurrences
and events affecting the business, as well as the changes that are made in business policies.
Q.5 M/s. ME Ltd. is a manufacturing Company of M/s. Bars and Rods. The turnover of the company for
financial year 2021-22 was ₹ 870 crores. The audit committee has appointed M/s. MK Associates,
Chartered Accountants as an internal auditor of the company for the financial year 2022-23. As an
auditor of ME Ltd., draw out the internal audit plan specifying coverage of area.
Ans.: Internal Audit Plan specifying the coverage of Area:
While drawing internal audit plan, following specific areas may be covered:
1. Terms of audit engagement and scope of internal audit as determined by audit committee.
2. Nature and timing of reports and other communications.

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Internal Audit Chapter 13
3. Legal or statutory requirements.
4. Accounting policies adopted by the client and changes made therein.
5. New accounting or auditing pronouncements and their impact on the entity.
6. Identification of significant audit areas.
7. Setting up of materiality levels for purpose of audit.
8. Circumstances requiring special attention, such as the possibility of material error or fraud or
related party transactions.
9. Degree of reliance to be placed on accounting system and internal control.
10. Nature, form and extent of audit evidence to be obtained.
11. Nature, timing and extent of procedures to be performed.
12. Use of expert’s work.
13. Establishing and coordinating staffing requirements.
14. Attending the inventory count.
15. Method of physical verification of cash and investment.
16. Verification of Assets and Liabilities.
17. Compliance of laws and Regulations.
Q.6 Internal auditor makes an appraisal of organization structure to ensure that it is in harmony with
the objectives of the entity, besides checking of financial transactions and operational activities of
the entity. Elaborate. [Nov. 18 – New Syllabus (4 Marks)]
Ans.: Appraisal of Organisational Structure by Internal auditor:
The internal auditor should conduct an appraisal of the organisation structure to ascertain
• whether it is in harmony with the objectives of the enterprise and
• whether the assignment of responsibilities is in consonance therewith.
For this purpose, internal auditor should:
(a) Review the manner in which the activities of the enterprise are grouped for managerial control so
as to find out whether responsibility and authority are in harmony with the grouping pattern.
(b) Examine the organisation chart to find out whether the structure is simple and economical and
that no function enjoys an undue dominance over the others.
(c) Ensure that the responsibilities of managerial staff at headquarters do not overlap with those of
chief executives at operating units.
(d) Examine the reasonableness of the span of control of each executive (the number of sub-
ordinates that an executive controls). He should examine whether there is a unity of command
i.e., whether each person reports only to one superior.
(e) Evaluate the process of managerial development in the enterprise.
Q.7 One of the independent directors sought information regarding the appointment of internal
auditors for following Group Companies in accordance with the Companies Act, 2013 of which
certain Financial Information are given below:
Figures are in (₹) crore and correspond to the previous year.
Name Nature Equity Share Turnover Loan from Public
Capital Bank and PFI Deposits
AADI Ltd. Listed 100 190 50 24
AJIT Ltd. Unlisted Public 60 190 50 24
NEMI Ltd. Unlisted Private 60 190 50 -

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Chapter 13 Internal Audit
You are required to evaluate the requirements of the Companies Act, 2013 regarding the
appointment of internal Auditors for the Group Companies. Discuss. [RTP-May 22]
Ans.: Applicability of Internal Audit:
• As per Sec. 138 of the Companies Act, 2013 read with Rule 13 of Companies (Accounts) Rules,
2014, following class of companies 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 ₹ 50 crores or more during the preceding financial year; or
(2) turnover of ₹ 200 crores or more during the preceding financial year; or
(3) outstanding loans or borrowings from banks or public financial institutions exceeding
₹ 100 crores or more at any point of time during the preceding financial year; or
(4) outstanding deposits of ₹ 25 crores or more at any point of time during the preceding
financial year; and
(C) every private company having-
(1) turnover of ₹ 200 crores or more during the preceding financial year; or
(2) outstanding loans or borrowings from banks or public financial institutions exceeding
₹ 100 crores or more at any point of time during the preceding financial year.
• In the given situation, AADI Ltd. is a listed company. As per Sec. 138 of the Companies Act, 2013,
every listed company is required to appoint an internal auditor or a firm of internal auditors.
Thus, in view of the above, AADI Ltd. is required to appoint an internal auditor.
• Further, AJIT Ltd. is unlisted public company. The company is having ₹ 60 crores as equity share
capital which is exceeding the prescribed limit of ₹ 50 crores. Thus, AJIT Ltd. is required to appoint
an internal auditor.
• NEMI Ltd. is unlisted private company and having ₹ 60 crore as equity share capital, ₹ 190 crore
as turnover and ₹ 50 crore loan from Bank and PFI. All the limits are below the prescribed limit
for a private company. Therefore, NEMI Ltd. is not required to appoint an internal auditor.
Q.8 ABC Pvt. Ltd. was involved in the business of manufacturing pipes and holdings. For financial year
2021-22 the company had the following turnover from its various segments and product:
Segment Name Turnover Profit
Steel / Iron Pipe Manufacturing 140 Crore 10 Crore
Holdings and Civil Structure Accessories 25 Crore 50 Lakh
PVC / Yellow Pipe Manufacturing 65 Crore 8 Crore
During Financial Year 2022-23, the company’s performance was considerably lower compared to
FY 2021-22 due to competition and high prices.
Turnover and Profit of the company for FY 2022-23 is given hereunder:
Segment Name Turnover Profit
Steel / Iron Pipe Manufacturing 60 Crore 2 Crore
Holdings and Civil Structure Accessories 15 Crore 35 Lakh
PVC / Yellow Pipe Manufacturing 35 Crore 3 Crore
The company was fully financed through its own capital during both years. Kindly assess whether
the company was required to appoint internal auditor as per section 138 read with Rule 13 of the
Companies (Accounts) Rules, 2014 for FY 2022-23. [MTP-Oct. 22]

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Ans.: Applicability of Internal Audit:
• As per Sec. 138 of the Companies Act, 2013, such class or classes of companies as may be
prescribed shall be required to appoint an internal auditor, who shall either be a chartered
accountant or a cost accountant, or such other professional as may be decided by the Board to
conduct an internal audit of the functions and activities of the company.
• As per Rule 13 of the Companies (Accounts) Rules, 2014, the following class of companies shall be
required to appoint an internal auditor which may be either an individual or a partnership firm or
a body corporate, namely:
(A) every listed company;
(B) every unlisted public company having-
(i) paid up share capital of ₹ 50 crores or more during the preceding financial year; or
(ii) turnover of ₹ 200 crores or more during the preceding financial year; or
(iii) outstanding loans or borrowings from banks or public financial institutions exceeding
₹ 100 crores or more at any point of time during the preceding financial year; or
(iv) outstanding deposits of ₹ 25 crores or more at any point of time during the preceding
financial year; and
(C) every private company having-
(i) turnover of ₹ 200 crores or more during the preceding financial year; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding
₹ 100 crores or more at any point of time during the preceding financial year.
• In the given situation, the company is a private limited company having turnover of ₹ 230 Crore in
FY 2021-22 and ₹ 110 Crore in FY 2022-23. As per Rule 13, every private company with a turnover
of ₹ 200 crore or more during the preceding financial year must appoint an internal auditor who
may be either an individual, a partnership firm or a body corporate.
Conclusion: As turnover of the company for the FY 2021-22 exceeds ₹ 200 crore, company is
required to appoint internal auditor for the FY 2022-23.

Miscellaneous Question
Q.9 The Managing Director of X Ltd. is concerned about high employee attrition rate in his company. As
the internal auditor of the company, he requests you to analyze the cause for the same. What
factors would you consider in such analysis? [May 13 (4 Marks), MTP-May 20]
Ans.: The factors responsible for high employee attrition rate are as under:
1. Job Stress & work life imbalance
2. Wrong policies of the Management
3. Unbearable behaviour of Senior Staff
4. Safety factors
5. Limited opportunities for promotion
6. Low monetary benefits
7. Lack of labour welfare schemes
8. Whether the organization has properly qualified and experienced personnel for the various
levels of works?
9. Is the number of people employed at various work centres excessive or inadequate?
10. Does the organization provide facilities for staff training so that employees and workers keep
themselves abreast of current techniques and practices?

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14 Management and Operational Audit

Marks Distribution of Past Exams

6

4
Marks

0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 4 5 0 0 5 0 5 0 4 0 5
*From May 2019, Marks are given only for subjective questions.

14.1 - Management Audit

Q.1 M/s ABC & Co., Chartered Accountants have been approached by PQR Ltd., a company engaged in
iron and steel manufacturing industry. The company has been facing following operational issues:
(a) Penal interest for delayed payments to the overseas vendors despite having enough cash
flows; and
(b) Despite having regular production and enough inventory, delays in shipping the final goods to
the customers leading to its deteriorating vendor rating.
As a partner of M/s ABC & Co., through detailed discussion with the Senior Manager of PQR Ltd., you
have concluded that all these delays are because of long decision-making cycles in the company. As
a consultant to the Company, would you recommend Management Audit or Operational Audit?
Ans.: Selection among Management Audit & Operational Audit:
• Management audit is concerned with the “Quality of managing”, whereas operational audit
focuses on the “Quality of operations”.
• Management audit is the “Audit of management” while the operational audit is the “Audit for the
management”. The focus of Management Audit is on “Quality of Decision Making” rather than the
effectiveness or efficiency of operations.
• The basic difference between the two audits, then, is not in method, but in the level of appraisal.
In a management audit, the auditor is to make his tests to the level of top management, its
formulation of objectives, plans and policies and its decision making. It is not that he just verifies
the operations of control and procedures and fulfilment of plans in conformity with the
prescribed policies.
• Since, the delays in payments and consequent penal interest payments and the delays in shipping
and the consequent deteriorating vendor ratings are happening because of the delays in decision-

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making process of the management. Therefore, it appears that this is not just an internal control
or operational issue but an issue of management process.
Conclusion: Management audit would be recommended in this case.
Q.2 The PQR Ltd. has come across many instances where it could buy products at lesser cost than the
actual procurement price it paid. The management believes that the adequate purchase policy is in
place including the requirements of three quotations from registered vendors, appropriate vendor
vetting and rating mechanism, however, the on-ground implementation of the purchase policy
might be defective. Further, it has observed that there might be some employees involved in
choosing the higher cost vendors as well. The company approaches you to advise the type of audit it
should get done: Management or Operational. Please advise through a comparison between both
the audits. [MTP-Oct. 21]
Ans.: Selection among Management Audit & Operational Audit:
• Management audit is concerned with the “Quality of managing”, whereas operational audit
focuses on the “Quality of operations”.
• Management audit is the “Audit of management” while the operational audit is the “Audit for the
management”. The focus of Management Audit is on “Quality of Decision Making” rather than the
effectiveness or efficiency of operations.
• The basic difference between the two audits, then, is not in method, but in the level of appraisal.
In a management audit, the auditor is to make his tests to the level of top management, its
formulation of objectives, plans and policies and its decision making. It is not that he just verifies
the operations of control and procedures and fulfilment of plans in conformity with the
prescribed policies.
• Since it is not the Management’s Decisions that are creating the operational bottlenecks. The
Purchase Policy and Procedure seem to be in place, the missing part is the operational
implementation by the process employees.
Conclusion: Operational Audit is recommended in this case.
Q.3 Write short note on: Management Audit Questionnaire.
[Nov. 18 – Old Syllabus (4 Marks), RTP-Nov. 22]
Ans.: Management Audit Questionnaire:
A management audit questionnaire is an important tool for conducting the management audit.
Through these questionnaires auditors make an inquiry into important facts by measuring current
performance.
Objective of Management Audit Questionnaire:
• Comprehensive and Constructive examination of an organisation’s management and its
assigned tasks.
• Appraisal of management actions in accomplishing the organisation’s objectives.
• Highlight weaknesses and deficiencies of the organisation.
• Review of management functions of planning, organising, directing and controlling.
• Evaluation of effectiveness of decision-making process in accomplishing the organisation
objectives.
Working: There are three possible answers to the management audit questions - “Yes”, “No” and
“N.A.”. “Yes” answer indicates that the specific area or function under study is functioning in an
acceptable manner; no written explanation is needed in that case. “No” answer indicates
unacceptable performance and requires explanation in writing. Those questions that are not
applicable and should be ignored in the audit are checked in the “N.A.” column.

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Importance: Management Audit Questionnaire not only serves as a management tool to analyse the
current situation; but also, it enables the management auditors to identify the elements that are
causing organisational difficulties and deficiencies.
Q.4 Somi-Kraft Paper Ltd. is a Public Limited company. There is a proper system of Operational Audit in
the company. You as an advisor to the company have suggested desirability of Management Audit.
Management is of the strong opinion that there is no difference between management audit and
Operational Audit. Elaborate. [July 21 – Old Syllabus (5 Marks)]
Ans.: Management Audit and Operational Audit:
• Management audit and Operational Audit are complementary and supplementary to one
another. Management audit is concerned with the quality of managing, whereas operational
audit is concerned with the quality of operations.
• The basic difference between the two audits, is not in method, but in the level of appraisal. In
management audit, the auditor evaluates decisions taken at the level of top management w.r.t.
formulation of objectives, plans and policies whereas in operational audit auditor evaluates
effectiveness, efficiency and economy of operations under management’s control along with
recommendations for improvement.
• In addition to what would normally be covered in an operational audit, management audit would
also encompass the relevance and effectiveness of the aims, duties and decisions of management
at various levels. Every aspect of the functions of Board of Directors should be in conformity
with the objects set out in the constituting document.
Conclusion: From the above discussion which recognises management audit and operational audit
as two identifiable exercises having a large area of overlapping jurisdiction, it may be convenient to
consider them together to avoid duplication; and for this purpose, the expression “management and
operational audit” may be acceptable as a management audit which includes within its scope all the
elements of operational auditing.
Q.5 Moksh Ltd. is a manufacturing company and started its business in the year 2000. The net profit
after tax of the company was 15% up to the financial year 2020-21, but for the financial years 2021-
22 and 2022-23 the company’s profit declined even when there was increase in the sales and
production of goods by the company. So, the management of AS Ltd. felt a need to get the
management audit conducted with the objective of detecting and overcoming current managerial
deficiencies. Briefly discuss the steps to prepare the management audit report. [MTP-March 22]
Or
MBP Ltd. is into the footwear manufacturing business and started its operations in the year 2015.
For the last two financial years, the company's profit declined even when there was an increase in
the sales and production of goods by the company. So, the management of MBP Ltd. felt a need to
assess how well their team is applying its strategies and resources. They appointed Mr. Pal to
conduct the management audit with the objective of detecting and overcoming current managerial
deficiencies. After completing the management audit Mr. Pal is in the process of drafting the final
management audit report. Briefly discuss the steps to be taken into consideration by him in
preparing the management audit report. [May 23 (5 Marks)]
Ans.: Steps to Prepare the Management Audit Report:
(1) Planning the Audit Report: Before starting the report, the auditor should ask himself, “What
need to be told the reader about this audit”. This will enable him to communicate effectively.
(2) Supporting information: The management auditor should supplement his report with
appropriate audit evidence which sufficiently and convincingly supports the conclusions.

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(3) Preparing draft report: Before writing the final report, the auditor should prepare a draft
report. This would help him in finding out the most effective manner of presenting his report. It
would also indicate whether there is any superfluous information or a gap in reasoning.
(4) Writing and issuing the final report: The final report should be written only when the auditor
is completely satisfied with the draft report. The head of the management auditing department
may review and approve the final report. Before issuing the final report, the auditor should
discuss conclusions and recommendations at appropriate levels of management. The report
should be duly signed and dated.
(5) Follow-up of the audit report: The management auditor should review whether follow-up
action is taken by management on the basis of his report. If no action is taken within a
reasonable time, he should draw management’s attention to it.
(6) Action/Response of Management on Audit Report: Where management has not acted upon
his suggestions or not implemented his recommendations, the auditor should ascertain the
reasons thereof. In cases where he finds that non-implementation is due to a gap in
communication, he should initiate further discussions to bridge such gaps. The actions and
responses to the Management Audit Report reflect management’s attitude to the audit. In any
case, the auditor to retain the usefulness of the audit function should ascertain from the
management, preferably in writing, the reasons for non-implementation. It is possible that
because of change in circumstances, the audit observation did not require any action on the part
of the management. The auditor should satisfy himself on the appropriateness of such reasons as
well to close the issue.

14.2 - Behavioural Aspects related with Management Audit

Q.6 The management auditor has to analyse the nature and causes of behavioural problems in the
discharge of the review function and to arrive at possible solutions to overcome these problems. As
a management auditor of Real Limited, how will you demonstrate in arriving at a solution to
behavioural problems and create an atmosphere of trust and friendliness, so that audit reports will
be understood in their proper perspective? [Nov. 20 – New Syllabus (5 Marks)]
Ans.: Solutions to behavioural problems in management audit:
To arrive at a solution to behavioural problems and create an atmosphere of trust and friendliness, so
that audit reports will be understood in their proper perspective, there is a need to demonstrate to
the extent possible that:
1. the audit is part of an overall programme mandated by higher- level authority to meet higher-
level organizational needs for both protection and maximum constructive benefit.
2. the objective of the review is to provide maximum service in all feasible managerial dimensions.
3. the review will be conducted with minimum interference with regular operations of the
operating personnel.
4. the responsible officers will be kept fully informed and have an opportunity to review findings
and recommendations before any audit report is formally released.
In addition to the abovementioned points, management auditor also need to focus on the followings:
1. Constructive criticism - It is essential that the auditor should concentrate only on constructive
criticism. He should also make obvious in his report the value of his comments in tangible terms.
2. Reporting methods - To achieve this objective, the auditor has to make a concerted effort to
convey effectively his role by adopting a friendly but firm tone in his report. The reports should
concentrate on areas which need improvement rather than listing inefficiencies and deficiencies in
performance of the auditee.

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3. Participative approach - It is well established that auditor’s reports have better acceptability if
the improvements suggested are discussed with those who have to implement them and made to
feel that they have participated in the recommendations made for improvements.
Q.7 XYZ Limited is manufacturer of soaps and cosmetics having business operations in Delhi. XYZ
Limited is planning to expand its operations across India. Before expansion, the top management of
XYZ Limited is willing to appoint CA T for conducting Management Audit of XYZ Limited. However,
the top management of XYZ Limited is afraid that Management Audit may lead to the breeding of
antagonism on the part of the Company. The top management of XYZ Limited approached CA T and
requested to explain them the causes of antagonism. Help CA T. [May 22 – New Syllabus (4 Marks)]
Ans.: Causes of antagonism:
The management auditor is expected to evaluate the effectiveness of controls, there is an instinctive
reaction from the auditee that the report of the auditor may affect them.
There is a fear that the action taken based on the management audit report may create their
incompetent impression on the top management. Therefore, the management audit may lead to the
breeding of antagonism on the part of the auditees. The causes of antagonism are as follows:
(i) Fear of criticism stemming from adverse audit findings.
(ii) Fear of changes in day-to-day working habits because of changes resulting from audit
recommendations.
(iii) Punitive action by superiors prompted by reported deficiencies.
(iv) Insensitive audit practices - reports which are overly critical, reports which focus on deficiencies
only, the air of mystery cloaking some audits, and the perception that auditors gain personally
from reporting deficiencies.
(v) Hostile audit style: a cold and distant aspect is a lack of understanding of the auditee’s
problems, an absence of empathy, an air of smugness or superiority, an excessive concentration
on insignificant errors, a prosecutional tone when asking questions, and a greater concern with
parading defects than helping constructively to improve conditions.

14.3 - Operational Audit

Q.8 What are the types of Operational Audits?

Ans.: Meaning and Types of Operational Audit:

Operational Audit is the review and appraisal of operations of an organization conducted by
competent independent person. It analyse the regular operations like production, purchase, sales etc.
to check whether they are in tune with company’s policies, objectives and goals or not. It focuses
more on Qualitative aspects of operations rather than regular accounting aspects.
Types of Operational Audit:
1. Functional Audits: A functional audit deals with one or more functions in an organization, for
example, the payroll function for a division or for the company as a whole. A functional audit
has the advantage of permitting specialization by auditors. They can more efficiently spend all
their time auditing in that area. A disadvantage of functional auditing is the failure to evaluate
interrelated functions.
2. Organizational Audits: An operational audit deals with an entire organizational units, such as
a department, branch, or subsidiary. It emphasizes how efficiently and effectively functions
interact. The plan of organization and the methods to coordinate activities are especially
important in this type of audit.

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3. Special Assignments: In operational auditing, special assignments arise at the request of
management, for example, investigating the possibility of fraud in a division, making
recommendations for reducing the cost of a manufactured product, etc.
Q.9 Briefly explain the objectives of Operational Audit.

Ans.: Objectives of Operational Audit:

1. Appraisal of Controls: Operational auditing deals with the administrative controls and its
purpose is to determine whether the controls are adequate.
2. Evaluation of performance: In the task of performance evaluation, an operational auditor is
heavily dependent upon availability of acceptable standards. The operational auditor cannot be
expected to possess technical background in so many diverse technical fields obtaining even in
one enterprise.
3. Appraisal of objectives and plans: In performance appraisal, the operational auditor is
basically concerned not so much with how well technically the operations are going on, but with
accumulating information and evidence to measure the effectiveness, efficiency and economy
with which the operations are being carried on.
4. Appraisal of organisational structure: In evaluating organisational structure, the operational
auditor should consider whether the structure is in conformity with the management objectives
and it is drawn up on the basis of matching of responsibility and authority.
Q.10 Mr. 'P' have been appointed as operational auditor of M/s. Books & Magazine Ltd. and observed a
totalling error in invoice of ₹ 1,000. He has not taken care of the same saying that this is out of
scope of his work. Comment.
Ans.: Scope of Operational Audit:
• Operational Audit is the review and appraisal of operations of an organization conducted by
competent independent person. It analyse the regular operations like production, purchase,
sales etc. to check whether they are in tune with company’s policies, objectives and goals or not.
It focuses more on Qualitative aspects of operations rather than regular accounting aspects.
• In carrying out his work, operational auditor will have to exercise judgment to evaluate evidence
in connection with the situations and issues; he will have to get the assistance of norms and
standards in every operating field to be able to objectively judge a situation.
• To a financial auditor, a loss of ₹ 1,000 caused by a wrong totalling of invoice is important, but
for an auditor engaged in the review of operations, it does not assume so much importance. But
simultaneously, it should not be assumed, that, an operational auditor is not concerned with the
financial aspects of transaction and controls.
Conclusion: Contention of operational auditor that totalling error in invoice of Rs. 1,000 is out of
scope is not correct as operational audit is being carried out to ensure that all the management
functions like planning, organizing, staffing, directing and controlling are working effectively and
efficiently. Such kind of error is very much in scope because such an existence of error indicates that
control system (controlling function) is not sound.
Q.11 The main objective of operational auditing is to verify the fulfilment of plans, and sound business
requirements. While in financial auditing, the concentration is more in the financial and accounting
areas to ensure that possibilities of loss, wastage and fraud are minimized or removed.
In the light of above, state the major differences between Financial and Operational Auditing.

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Ans.: Financial Auditing vs. Operational Auditing:
Financial Auditing Operational Auditing
Purpose It concerned with the opinion that whether It emphasizes on effectiveness and
the historical information recorded is efficiency of operations for future
correct or not performance.
.. Area It is restricted to the matters directly It covers all the activities that are
affecting the appropriateness of the related to efficiency and effectiveness
presented financial statements of business operations.
Reporting Financial audit report is sent to all stock Operational audit report is primarily
holders, bankers and other persons having for the management.
interest in the organization.
End Task Financial audit reports the findings to the Operational audit is not limited to the
persons as its end objectives. reporting only, but includes sugges-
tions for improvements also.
.

Q.12 Write short note on: Operational auditing arose from the need of managers responsible for areas
beyond their direct supervision.
Ans.: Need of Operational Audit:
• Operational auditing arose from the need of managers responsible for areas beyond their direct
observation to be fully, objectively and currently informed about conditions in the units under
control.
• Traditional sources of information remain inadequate for an effective management of the
company where the management is at a distance from actual operations due to layers of
delegation of responsibility, separating it from actualities in the organisation.
• Operational audit as a specialised management information tool fill the void that conventional
information sources fail to fill. Conventional sources of management information are
departmental managers, routine performance report, internal audit reports, and periodic special
investigation and survey. These conventional sources fail to provide information for the best
direction of the departments all of whose activities do not come under direct observation of
managers.
• Operational auditing has filled a very significant vacuum; it has come to provide the management
with inexpensive, continuous and objective appraisal of activities, operations and controls to
inform the management about achievement of standards and, if otherwise, to inform the
management about what has gone wrong and how it has gone wrong. Also, it enlightens the
management about possible dangers, constraints and opportunities that may be of immense value
to the management.
Q.13 In evaluating the organisational structure of a company, what aspects may be considered by the
operational auditor to achieve his objectives? [May 18 – Old Syllabus (4 Marks)]
Ans.: Appraisal of Organisational Structure:
Organisational structure is an important area for appraisal by operational auditor as it provides the
line of relationships and delegation of authority and tasks. In evaluating organisational structure, the
operational auditor should consider the following:
(i) Whether the organizational structure is in conformity with the management objectives
(ii) Whether it is drawn up on the basis of matching of responsibility and authority.

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(iii) Whether the line of responsibility from the top to the bottom is clearly discernible from the
structure?
(iv) Whether the delegation of responsibility and authority at each stage is clear and overlapping
are avoided?
Q.14 The Operational audit is carried out effectively when the operational auditor responds with
positive traits in a scenario which is blended with behavioural issues. Explain few positive traits
that help to conclude an Operational Audit, a success. [May 18 – New Syllabus (4 Marks)]
Ans.: Positive traits of an Operational Auditor: Refer answer of Q. No. 16
Q.15 Many modern enterprises have become huge and sophisticated. This has resulted in
decentralisation of their activities and different type of audits. You are required to explain the
difference to the management:
(i) Internal & Operational Audit.
(ii) Management Audit & Operational Audit.
(iii) Financial Audit & Operational Audit. [RTP-Nov. 18]
Ans.: (i) Internal Audit & Operational Audit:
Internal Auditing Operational Auditing
It is concerned with determining whether It is concerned with the review and appraisal
other internal controls are well designed and of operations of an organization carried on
in place by a competent independent person
It is a part of internal control system It is not a part of internal control
It is an protective function i.e. to safeguard It is an constructive function i.e. to provide
the assets of the enterprise. suggestions for improvement
It is primarily concerned with financial It analyses all aspects of operations whether
accounting and internal control they are in tune with management policies,
objectives and Goals
It focuses more on quantitative aspects It mainly deals with qualitative aspects
(ii) Management Audit & Operational Audit: Refer Answer of Q. No. 4.
(iii) Financial Audit & Operational Audit: Refer Answer of Q. No. 11.
Q.16 Employees of GIG Ltd. have to travel frequently for business purposes, so the company entered into
a contract with a Simony Travels Ltd. for managing booking, cancellation and other services
required by their employees. As per contract terms, Simony travels has to raise its monthly bills for
the tickets booked or cancelled during the period and the same are paid by GIG Ltd. within 15 days
of the bill date. The bills raised by Simony travels were of huge amount, so the management of GIG
Ltd. decided to get an audit conducted of the process followed for booking/cancellation of tickets
and verify the accuracy of bills raised by the travel agency. Which audit do you feel the management
should opt for? Also briefly discuss the qualities the auditor should possess for such audit.
[RTP-May 19; MTP-Sep. 22]
Or
Write a short note on: Qualities of Operational Auditor. [RTP-May 23]
Ans.: Audit Requirement for verification of bill raised by travel agency:
In the case mentioned in the question, management should opt for operational audit. Operational
auditor will ensure verification of effectiveness, efficiency and economy of operations done by the
Simony travels for the organisation.

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Qualities an operational auditor should possess:
The operational auditor should possess some very essential personal attributes to be effective in his
work. Such personal attributes comprise of:
1. Operational auditor should be more inquisitive as, his knowledge ordinarily would be scanty in
areas beyond accounting and finance.
2. Operational auditor is required to visualise whether simpler alternative means are available to do
a particular work. He should ask the who, why, how of everything.
3. Operational Auditor should possess an attitude of skepticism. He should try to see everything as
to whether particular operational aspects properly fit in the business frame and organisational
policy.
4. He should imbibe a constructive approach rather than a fault-finding approach and should give a
feeling that his efforts are to help attaining an improved operation and not merely fault finding. If
the auditor succeeds in giving a feeling of help and assistance through constructive criticism, he
will be able to obtain co-operation of the persons who are involved in the operations.
5. He should try to develop a team comprised of people of different backgrounds.
Q.17 Perfect Steel Ltd. has reported a higher turnover of ₹ 560 crores in the year 2021-22 as compared
to earlier years but its sales return has also increased to 10% from only 4% upto the last year. The
management is concerned about the high sales returns and feels a need to get the operational audit
done for sales and production department of the company. The company is also having an internal
audit system in the company. Elaborate the possible reason/s, why management is getting
operational audit done when internal audit has already been done for both the departments by
stating the shortcomings of conventional information sources. [RTP-Nov. 19]
Ans.: Need of Operational Audit:
The need for operational auditing has arisen due to the inadequacy of traditional sources of
information for an effective management of the company where the management is at a distance
from actual operations due to layers of delegation of responsibility, separating it from actualities in
the organisation.
Operational audit as a specialised management information tool fill the void that conventional
information sources fail to fill. Conventional sources of management information are departmental
managers, routine performance report, internal audit reports, and periodic special investigation and
survey. These conventional sources fail to provide information for the best direction of the
departments all of whose activities do not come under direct observation of managers.
The shortcomings of these sources can be stated as under:
(i) Executives and managers are too pre-occupied with implementation of plans and achieving of
targets. They are left with very little time to collect information and locate problems. They may
come across problems that have come to surface but they are hardly aware of problems that are
brewing and potential.
(ii) Managers or their aides are generally relied upon for transmitting information than for booking
for information or for analysing situations.
(iii) The information that is transmitted by managers is not necessarily objective - often it may be
biased for various reasons.
(iv) Conventional internal audit reports are often routine and mechanical in character and have a
definite leaning towards accounting and financial information. They are also historical in
nature.

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Management and Operational Audit Chapter 14
(v) Other performance reports contained in the annual audited accounts and the routine reports
prepared by the operating departments have their own limitations. The annual audited
accounts are good as far as an overall evaluation is concerned in monetary terms.
(vi) Operations of controls in a satisfactory manner cannot be relied upon to bring to light the
environmental conditions. Controls are specific and their satisfactory operation is related to the
specific situation under control. Also monitoring of the breakdown or non-operation of controls
is a periodic phenomenon.
(vii) Surveys and special investigations, no doubt, are very useful but these are at the best occasional
in character. Also, they are costly, time consuming and keep the departmental key personnel
busy during the period they are on. These are basically an attempt to carry out a post-mortem
rather than to enlighten the management about the ways on improvement or for better
performance or to give a signal for dangers and disasters to come.

14.4 - Review of Systems and Procedures

Q.18 “In reviewing any System or Procedure, the management auditor must concern himself with its
purpose as well as its design.” Elucidate how you as a management auditor will study system and
procedural functions? [Jan. 21 – Old Syllabus; Dec. 21 – Old Syllabus (5 Marks)]
Ans.: Review of Systems and Procedures:
In reviewing any system or procedure, the management auditor must concern himself with its
purpose as well as its design and then he must decide on its merits as the best serving the interests of
the enterprise. A poor system or procedure may prevent the carrying out of the policy for which it
was intended. A system may have outgrown its usefulness. The end result of a system or a procedure
may be loose and may require improvement. In the study of the systems and procedural functions, the
auditor should ask himself:
1. Is the function properly located in the organisation?
2. Do the staff personnel have the necessary training and experience to perform the work?
3. Has a definite programme been established and has been taken for its attentive accomplishment?
4. Is productivity satisfactory?
Q.19 CA Gudia has been appointed as Management Auditor of XYZ Ltd. The principle reason for her
appointment is that current managerial decisions are not up to the mark, especially in relation to
investments made by the Company. The Company is going to make huge investments in one of the
ventures identified. Management Auditor was required to ensure that systems and procedures of
Company are working effectively and meeting the requirements. What aspects should be considered
by CA Gudia to determine that the systems and procedures are meeting current requirements?
[July 21 – New Syllabus (5 Marks)]
Ans.: Aspects to be considered to evaluate the systems and procedures:
To determine whether the system or procedure is meeting current requirements, the following
among other things should be considered:
1. Is the system or procedure designed to promote the achievement of the company’s objectives,
and is it accomplished effectively?
2. Does the system or procedure operate within the framework of the organisational structure?
3. Does the system or procedure adequately provide methods of control in order to obtain
maximum performance with the least expenditure of time and effort?

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Chapter 14 Management and Operational Audit
4. Do the routines designated in the system or procedures indicate performance in a logical
sequence?
5. Does the system or procedure provide the means for effective coordination between one
department and another?
6. Have all required functions been established?
7. Has the necessary authority been designated to carry out responsibilities?
8. Can any changes be made to improve effectiveness?

14.5 - Miscellaneous Questions

Q.20 The Board of Directors of XYZ Ltd. is concerned with decreasing operating efficiency in material
consumption. As an Auditor entrusted with investigating the causes for this poor state, what may be
the areas of your focus in this respect. [Nov. 18 – New Syllabus (5 Marks)]
Ans.: Focus Area while investigating the causes of decreasing operating efficiency in material
consumption:
To determine the reasons for decreasing efficiency in material consumption, the auditor is required to
understand the manufacturing operations from the initial stage of purchase of materials, issue of
material, consumption of material and conversions into finished goods. For this purposes, auditor
may focus on following aspects:
1. Obtain a list of raw materials used in the production process mentioning therein the names and
detailed characteristics of each raw material.
2. Ascertain the basis of computation of normal wastage figures and its consistency as compared to
previous months.
3. Obtain internal control reports, in respect of manufacturing costs incurred with reference to
predetermined standards or budgets.
4. Examine the stock records so as to determine the raw material purchased, material issued to
production.
5. Examine the production records so as to determine the material received from the stores and
actual material consumed in the production and waste produced in the production process.
6. Study the Maintenance Programme of machinery to ensure that the machinery does not
consume more raw material and quality of goods manufacture is not of sub-standard nature.
7. Ascertain whether employees engaged in production are properly trained and working
efficiently.
8. Determine the existence and effectiveness of quality control techniques employed in the entity.
9. Examine inventory controls in respect of storage, pilferage, issues etc.
10. Obtain a statement showing break up of wastage figures in storage, handling and production for
the period under reference and compare the results of the analysis for each of the month.
11. Consider the existence of following situations that may also cause the abnormal wastage:
(a) Purchase of poor quality of raw materials.
(b) Machinery breakdown or power failure.
(c) High rate of rejections of finished goods
(d) Deterioration of raw material lying in godowns.
(e) Abnormal wastages in storage and handling.
(f) Commencing new production line.

14.11
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Management and Operational Audit Chapter 14
Q.21 XYZ, a manufacturing unit does not accept the recommendations for improvements made by the
Operational Auditor. Suggest an alternative way to tackle the hostile management.
[MTP-Oct. 20, March 23]
Ans.: Way to tackle the Hostile Management:
• To tackle the hostile management, auditor is advised to follow participative approach. In this
approach the auditor discusses the ideas for improvements with those managers that have to
implement them and make them feel that they have participated in the recommendations made
for improvements.
• This approach encourages the auditee to develop a friendly attitude towards the auditors and
look forward to their guidance in a more receptive fashion.
• The proposed recommendations are discussed with the auditee and modifications as may be
agreed upon are incorporated in the operational audit report.
• With this attitude of the auditor, it becomes absolutely easy to implement the proposed
suggestions as the auditee themselves take initiative for implementing and the auditor do not
have to force any change on the auditee.
Q.22 The Marketing Department of ISHITA Ltd. has been consistently showing a lower performance
whereas the cost of the department is increasing in spurts over the years. The management believes
that since the marketing department is under a regular radar of the CFO, an audit might result in the
employee hostility. Also, an operational audit of Marketing Department was done two years back
however, the recommendations of the previous audit were not followed by the concerned
employees. Please advise the management if another audit is the solution and whether only one-
time operational audit is enough? Further, advise on the ways to deal with the employee hostility.
[MTP – March 21, April 22]
Ans.: Frequency of Operational Audit:
• Operational audit is not one time activity. It should be viewed as a continuous improvement cycle.
All the significant operations must be subjected to the scrutiny of operational audit, at least, once
in three years. Therefore, the operational audit should be done in the current scenario.
Dealing with employee hostility:
• To deal with the employee hostility the participative approach of the audit should be adopted.
• In this approach the auditor discusses the ideas for improvements with those managers that have
to implement them and make them feel that they have participated in the recommendations made
for improvements. By soliciting the views of the operating personnel, the operational audit
becomes a co-operative enterprise.
• This participative approach encourages the auditee to develop a friendly attitude towards the
auditors and look forward to their guidance in a more receptive fashion. When the participative
method is adopted then the resistance to change becomes minimal, feelings of hostility disappear
and gives room for feelings of mutual trust. Team spirit is developed. The auditors and the auditee
together try to achieve the common goal. The proposed recommendations are discussed with the
auditee and modifications as may be agreed upon are incorporated in the operational audit report.
With this attitude of the auditor, it becomes absolutely easy to implement the proposed
suggestions as the auditee themselves take initiative for implementing and the auditor does not
have to force any change on the auditee.

14.12
By: CA. Pankaj Garg
 By: CA. Pankaj Garg

15 Audit under Fiscal Laws

Marks Distribution of Past Exams

9
8
7
6
Marks

5
4
3
2
1
0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 5 5 4 4 0 8 8 5 5 4 8

*From May 2019, Marks are given only for descriptive questions.
15.1 - Tax Audit u/s 44AB
Q.1 Examine the applicability of tax audit provisions in the following cases:
(a) DB Pvt. Ltd. has total turnover of ₹ 10.25 crore for the FY 2022-23.
(b) ABC & Co. (a partnership firm) engaged in trading of electronic goods is expecting a turnover of
₹ 165 lacs for the FY 2022-23. (Assume the firm would not be able to ensure that the aggregate
of all amounts received including amount received for sales, turnover or gross receipts during
the previous year, in cash, does not exceed 5% of the said amount and aggregate of all payments
made including amount incurred for expenditure, in cash, during the previous year does not
exceed 5% of the said payment).
(c) Mr. Anand Khater, a Commission Agent is expecting commission receipts of ₹ 137 lacs during
the FY 2022-23 (Assume he would not be able to ensure that the aggregate of all amounts
received including amount received for sales, turnover or gross receipts during the previous
year, in cash, does not exceed 5% of the said amount and aggregate of all payments made
including amount incurred for expenditure, in cash, during the previous year does not exceed
5% of the said payment).
(d) Mr. Vishal Raka, owning an Agency of Samsung Mobile for the city of Pune and expects the
turnover of ₹ 87 lacs during the FY 2022-23.
Ans.: Applicability of Tax Audit:
(a) DB Pvt. Ltd. has to conduct the Audit of Books of Account u/s 44AB of the Act for the FY 2022-23
as the turnover exceeds ₹ 10 crores.
(b) Sec. 44AD would be applicable to Partnership Firm. Thus, ABC & Co. can declare the minimum
profit @ 8% of the turnover as its turnover during the PY 2022-23 is not expected to exceed ₹ 2

15.1
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
crores. If the firm do not opt for presumptive income scheme under section 44AD, it has to get
books of account audited u/s 44AB of the Act.
(c) Though Sec. 44AD is applicable to an Individual, it is not applicable to Commission income. In the
given case, since, Mr. Anand earns the commission income, he cannot take the benefit of Sec.
44AD. His total turnover during the FY 2022-23 in respect of commission income is expected to
exceed ₹ 1 crore, he would have to get his books of account audited u/s 44AB of the Act.
(d) Though Sec. 44AD is applicable to an Individual, it is not applicable to Commission income. In the
given case, since, Mr. Vishal earns the commission income, he cannot take the benefit of Sec.
44AD. His total turnover during the FY 2022-23 in respect of commission income is not expected
to exceed ₹ 1 crore, therefore, he need not get his books of account audited u/s 44AB of the Act.
Q.2 A Co-operative society having receipts over ₹ 2 crores have appointed Mr. D as the statutory auditor.
Mr. D is eligible to do the same under the state Co-operative Societies Act. Mr. D is not a chartered
accountant. Mr. D is also appointed to conduct the tax audit of the society u/s 44AB of the Income-
tax Act, 1961. Comment.
Ans.: Tax Audit Report in case of Co-operative society:
• Proviso to Sec. 44AB of Income-tax Act, 1961 lays down that where the accounts of an assessee are
required to be audited by or under any other law, it shall be sufficient compliance with the
provisions of this section, if such person get the accounts of such organisation audited under such
other law before the specified date and furnishes by that date, the report of the audit as required
under such other law and a further report by an Accountant in the form prescribed under this
section.
• The term “accountant” as defined under section 288 under the Income-tax Act, 1961 means a
chartered accountant within the meaning of the Chartered Accountants Act, 1949, who holds a
valid certificate of practice.
• Accordingly, the person who is not a Chartered Accountant as mentioned in the question, though
is eligible to act as auditor of Cooperative Society under the Co-operative Societies Act, 1912, but
is not eligible to carry out tax audit under Section 44AB of the Income-tax Act, 1961.
Conclusion: Audit report by a person other than Chartered Accountant cannot be furnished as tax
audit report under Section 44AB of the Income-tax Act, 1961.
Q.3 Mr. X deals in a commodity and purchase and sales of that commodity is ultimately settled otherwise
than by the actual delivery. During the financial year 2022-23 he purchased the commodity worth ₹
95 Lacs and sold the same commodity for ₹ 104 Lacs and the contract was settled otherwise than by
the actual delivery. X seeks your advice whether he is liable for tax audit u/s 44AB of the Income Tax
Act.
Ans.: Liability for Tax Audit in case of Speculative Transactions:
• Mr. X deals in commodity as a speculator. A speculative transaction means a transaction in which a
contract for the purchase or sale of any commodity, including stocks and shares, is periodically or
ultimately settled otherwise than by the actual delivery.
• As such, in such transaction the difference amount is ‘turnover’. In the given case the difference of
₹ 104 lacs and ₹ 95 lakhs i.e., ₹ 9 Lakhs is the turnover.
• In such transactions though the contract notes are issued for full value of the purchases or sales,
but the entries in the books of account are made only for the differences.
Conclusion: Mr. X is not liable for Tax audit u/s 44AB of the Income-tax Act, 1961.

15.2
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 15 Audit under Fiscal Laws
Q.4 Mr. A engaged in business as a sole proprietor presented the following information to you for the FY
2022-23. Turnover made during the year ₹ 1124 lacs. Goods returned in respect of sales made
during FY 2021-22 is ₹ 20 lacs not included in the above. Cash discount allowed to his customers ₹ 1
lac for prompt payment. Special rebate allowed to customer in the nature of trade discount ₹ 5 lacs.
Kindly advise him whether he has to get his accounts audited u/s 44AB of the Income-tax Act, 1961.
Ans.: Computation of Turnover for the purpose of determining requirement of Tax Audit:
As per section 44AB of the Income-tax Act, 1961, audit is required in case of every person carrying on
business, if his total sales, turnover or gross receipts in business exceed ₹ 1 crore and in case of every
person carrying on a profession, if his gross receipts from profession exceed ₹ 50 lakhs in any previous
year.
However, in the case of a person whose aggregate of all amounts received including amount received
for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said
amount and aggregate of all payments made including amount incurred for expenditure, in cash,
during the previous year does not exceed 5% of the said payment, the limit of ₹ 1 crore shall change to
₹ 10 crores.
As per Guidance Note on Tax Audit issued by the ICAI, the following points merit consideration for the
purpose of computing turnover:
(i) Discount allowed in the sales being in the nature of trade discount will be deducted from the
turnover.
(ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a
financing charge and hence should not be deducted from the turnover.
(iii) Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade
discount.
(iv) Price of goods returned should be deducted from the turnover even if the returns are from the
sales made in the earlier year/s.
Accordingly, the turnover of Mr. A may be computed as under:
Recorded turnover during the year ₹ 11,24,00,000
Less: Trade discount (5,00,000)
Sales Return (20,00,000)
Effective turnover ₹ 10,99,00,000
Conclusion: As the effective turnover of Mr. A is more than ₹ 10 Crore, the provisions related to tax
audit are applicable to Mr. A.
Q.5 Comment with respect to computation of total sales, turnover or gross receipts in business
exceeding the prescribed limit under section 44AB of Income-tax Act, 1961.
(i) Discount allowed in the sales invoice
(ii) Cash discount
(iii) Price of goods returned related to earlier year
(iv) Sale proceeds of fixed assets.
Ans.: Computation of Total Sales:
(i) Discount allowed in the sales invoice: Deducted from turnover as it reduces the sale price.
(ii) Cash discount: Not to be deducted being in the nature of financing charge.
(iii) Price of goods returned related to earlier year: Deducted from turnover.
(iv) Sale proceeds of fixed assets: Will not form part of turnover as these are not held for resale.

15.3
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
Q.6 M/s. SB & Co. has been appointed as tax auditor under section 44AB of Income-tax Act, 1961 by
Woodcraft Interior Consultants, a professional partnership firm, having turnover ₹ 11.25 Crores.
M/s RS & Co. are the statutory auditors of the firm but they are unable to give their report on the
financial statements of the firm. M/s. SB & Co., have, however, completed their tax audit and want to
issue their reports. Comment.
Ans.: Tax Audit Report in case of Partnership firm assessee:
• Proviso to Sec. 44AB of Income-tax Act, 1961 lays down that where the accounts of an assessee are
required to be audited by or under any other law, it shall be sufficient compliance with the
provisions of this section, if such person get the accounts of such organisation audited under such
other law before the specified date and furnishes by that date, the report of the audit as required
under such other law and a further report by an Accountant in the form prescribed under this
section.
• There is no statutory requirement of audit of a firm under the provisions of Partnership Act, 1932.
So, appointment of two auditors one as tax auditor and another as statutory auditor does not
appears to be correct.
• It is also provided u/s 44AB that the tax auditor should report whether in his opinion the
particulars in respect of Form 3CD are true and correct. The audit report is in the form of 3CA if
accounts are being examined under the requirements of provisions of any other Act, otherwise
report should be in Form 3CB.
• In the present case, assessee is a partnership firm and appoints separate persons as tax auditor
and statutory auditor. Statutory auditor is not able to give their report on financial statements of
firm.
Conclusion: Form No. 3CA requires the tax auditor to enclose a copy of the audit report conducted by
the statutory auditor. Where the report of the statutory auditor is not available for whatever reasons,
it will be possible for the tax auditor to give his report in Form No. 3CB and to certify the relevant
particulars in Form No. 3CD.
Note: There is no requirement of statutory audit under Partnership Act, 1932. Hence while
answering the question, this fact also needs to be stated.
Q.7 Mr. PK is conducting the Tax audit u/s 44AB of the Income-tax Act, 1961 of MG Ltd. for the year
ended 31st March, 2023. There is a difference of opinion between Mr. PK and the Management in
respect of certain information to be furnished in Form No. 3CD. As a tax auditor, Mr. PK has to report
whether the statement of particulars in Form 3CD are true and correct and the same is to be
annexed to the report in Form No. 3CA. Advise on the matters to be considered by Mr. PK while
furnishing the particulars in Form No. 3CD. [Nov. 19 – New Syllabus (4 Marks)]
Ans.: Form 3CD - Considerations for auditor while furnishing particulars in Form 3CD:
While furnishing the particulars in Form No. 3CD it would be advisable for the tax auditor to consider
the following:
1. If a particular item of income/expenditure is covered in more than one of the specified clauses,
care should be taken to make a suitable cross reference to such items at the appropriate places.
2. If there is any difference in the opinion of the tax auditor and that of the assessee in respect of
any information furnished in Form No. 3CD, the tax auditor should state both the view points and
also the relevant information in order to enable the tax authority to take a decision in the matter.
3. If any particular clause in Form No. 3CD is not applicable, he should state that the same is not
applicable.

15.4
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 15 Audit under Fiscal Laws
4. In computing the allowance or disallowance, he should keep in view the law applicable in the
relevant year, even though the form of audit report may not have been amended to bring it in
conformity with the amended law.
5. In case the prescribed particulars are given in part to the tax auditor or relevant form is
incomplete and the assessee does not give the information against all or any of the clauses, the
auditor should not withhold the entire audit report. In such a case, he can qualify his report on
matters in respect of which information is not furnished to him.
6. The information in Form No. 3CD should be based on the books of account, records, documents,
information and explanations made available to the tax auditor for his examination.
7. In case the auditor relies on a judicial pronouncement, he may mention the fact as his
observations in Form No. 3CA or Form No. 3CB, as the case may be.
Q.8 Mr. A engaged in business as a sole proprietor presented the following information to you for the FY
2022-23. Turnover expected to be made during the year ₹ 1024 lacs. Goods returned in respect of
sales made during FY 2021-22 is ₹ 20 lacs not included in the above. Cash discount allowed to his
customers ₹ 1 lac for prompt payment. Special rebate allowed to customer in the nature of trade
discount ₹ 5 lacs. Further, the aggregate of all amounts received including amount received for sales,
turnover or gross receipts during the previous year, in cash, does not exceed five per cent of the said
amount and aggregate of all payments made including amount incurred for expenditure, in cash,
during the previous year does not exceed 5% of the said payment. Kindly advise him whether he has
to get his accounts audited u/s 44AB of the Income-tax Act, 1961. [MTP – March 21]
Ans.: Turnover limit for the purpose of Tax Audit:
The following points merit consideration as stated in the Guidance note on Tax Audit issued by the
ICAI:
(i) Price of goods returned should be deducted from the figure of turnover even if the return are
from the sales made in the earlier years.
(ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a
financing charge and is not related to turnover. The same should not be deducted from the
figure of turnover.
(iii) Special rebate allowed to a customer can be deducted from the sales if it is in the nature of
trade discount.
Applying the above stated points to the given problem,
1. Total Turnover 1024 Lac
2. Less –(i) Goods Returned 20 Lac
(ii) Special rebate allowed to customer in the nature of trade discount 5 Lac
would be deducted
Balance 999 Lac
Since the aggregate of all amounts received including amount received for sales, turnover or gross
receipts during the previous year, in cash, does not exceed 5% of the said amount and aggregate of all
payments made including amount incurred for expenditure, in cash, during the previous year does
not exceed 5% of the said payment, limit for tax audit is ₹ 10 crores.
Conclusion: A would not be required to get his accounts audited u/s 44AB of the Income-tax Act,
1961 as ₹ 999 lac is below prescribed tax audit limit i.e. ₹ 10 crores.

15.5
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
Q.9 Concession Ltd. is engaged in the business of manufacturing of threads. The company recorded the
turnover of ₹ 10.13 crore during the financial year 2022-23 before adjusting the following:
Discount allowed in the Sales Invoice ₹ 8,20,000
Cash discount (other than allowed in Cash memo/ sales invoice) ₹ 9,20,000
Trade discount ₹ 2,90,000
Commission on Sales ₹ 6,00,000
Sales Return (F.Y. 2021-22) ₹ 1,60,000
Sale of Investment ₹ 6,60,000
You are required to ascertain the effective turnover to be considered for the prescribed limit of tax
audit and guide the company whether the provisions relating to tax audit applies.
[MTP-March 19, Nov. 21]
Ans.: Computation of Turnover for the purpose of determining requirement of Tax Audit:
As per section 44AB of the Income-tax Act, 1961, audit is required in case of every person carrying on
business, if his total sales, turnover or gross receipts in business exceed ₹ 1 crore and in case of every
person carrying on a profession, if his gross receipts from profession exceed ₹ 50 lakhs in any
previous year.
However, in the case of a person whose aggregate of all amounts received including amount received
for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said
amount and aggregate of all payments made including amount incurred for expenditure, in cash,
during the previous year does not exceed 5% of the said payment, the limit of ₹ 1 crore shall change
to ₹ 10 crores.
As per Guidance Note on Tax Audit issued by the ICAI, the following points merit consideration for
the purpose of computing turnover:
(i) Discount allowed in the sales being in the nature of trade discount will be deducted from the
turnover.
(ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a
financing charge and hence should not be deducted from the turnover.
(iii) Special rebate allowed to a customer can be deducted from the sales if it is in the nature of
trade discount. If it is in the nature of commission on sales, the same cannot be deducted from
the figure of turnover.
(iv) Price of goods returned should be deducted from the turnover even if the returns are from the
sales made in the earlier year/s.
(v) Sale proceeds of any shares, securities, debentures, etc., held as investment will not form part
of turnover. However, if the shares, securities, debentures etc., are held as stock-in-trade, the
sale proceeds thereof will form part of turnover.
Accordingly, the turnover of concession limited may be computed as under:
Recorded turnover during the year ₹ 10,13,00,000
Less: Discount allowed in the Sales Invoice (8,20,000)
Trade discount (2,90,000)
Sales Return (1,60,000)
Effective turnover ₹ 10,00,30,000
Conclusion: As the effective turnover of Concession Ltd. is more than ₹ 10 Crore, the provisions
related to tax audit are applicable to the company.

15.6
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 15 Audit under Fiscal Laws
Q.10 UT & Co. is a Chartered Accountant Firm, that provides consultancy services. Recently, it got queries
from different clients with respect to applicability of tax audit provisions to their businesses.
In response to such queries, UT & Co., asked from them details such as turnover, total receipts and
total payments made during the year respectively along with mode of receipt/payment, whether
filing return of Income under normal tax provisions or presumptive tax provisions such as sections
44AD, 44AE, etc.
So, in the trailing mail, UT & Co., got the aforesaid details from different clients, which it classified
into following categories for ease of framing an opinion, as follows:
Client Turnover % of Cash % of Cash Remarks
Sr. No. (₹ in crore) Receipts in Payments in
Total Total
Receipts Payments
1 9.5 5% 5% Has been filing return as per the regular
provisions of income tax.
2 1.8 7% 4% Has declared business income as per
presumptive taxation under section 44AD of
the Income-tax Act, 1961.
3 0.85 6% 4% Has declared business income as per
presumptive taxation under section 44AD of
the Income-tax Act, 1961 during last 2
previous years but during current previous
year has declared income lower than as per
section 44AD and the total income is less
than basic exemption limit.
4 3.2 8% 6% Has declared business income as per
presumptive taxation under section 44AE of
the Income-tax Act, 1961 during last 4
previous years but during current previous
year has declared income lower than as per
section 44AE and the total income is less
than basic exemption limit.
On behalf of UT & Co., please provide your opinion, along with reasons, as a consultant in case of
aforesaid clients that whether tax audit is applicable to them or not? [RTP-Nov. 21]
Ans.: Applicability of Tax Audit:
Client Opinion Reason
Sr. No. (Tax Audit
applicable or
not)
1 No As the turnover is upto ₹ 10 crore, Cash Receipts and Cash Payments
are upto 5% of total receipts & total payments, respectively, and has
been filing return as per the regular provisions of income tax, so tax
audit is not applicable.
.

15.7
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
.

2 No Even though turnover exceeds ₹ 1 crore and Cash Receipts are

greater than 5% of Total Receipts but as the business income has
been declared as per presumptive taxation under section 44AD of the
Income-tax Act, 1961, so tax audit is not applicable.
3 No Even though business income as per presumptive taxation u/s 44AD
of the Income-tax Act, 1961 has been declared during last 2 previous
years but has not been declared during the current previous year but
as the total income is less than basic exemption limit, so tax audit is
not applicable.
4 Yes Has been declaring total income as per presumptive taxation u/s
44AE of the Income-tax Act, 1961 during last 4 previous years but
during current previous year has declared income lower than as per
section 44AE, so tax audit is applicable.

Q.11 Billimoria & Billimoria, a partnership firm, is engaged in providing engineering consultancy
services to insurance corporates in automobile sector. The firm conducts risk inspection of vehicles
and submit their reports to insurance companies. Both the partners are Chartered Engineers. The
Firm is one of your regular tax audit clients. The following information is culled out from the
account books of the company for financial year 2022-23 by the firm:
Particulars ₹ in Crore
Turnover 8.50
Receipt on account of sales/debtors 6.00
Cash receipt from debtors 0.10
Expenditure during year 7.00
Cash expenditure 0.21
Cash loan repayment 0.05
The partner of said firm informs you that due to changes in income-tax laws, their firm is not liable
for audit under section 44AB of Income tax Act (commonly called as tax audit). How would you deal
with the matter? Is contention of partner in accordance with law? [RTP-Nov. 22]
Ans.: Applicability of tax audit:
• As per Sec. 44AB(a) of the Income Tax Act, 1961, a person carrying on business shall get his
accounts audited if his total sales, turnover or gross receipts exceed ₹ 1 crore in any previous year.
• However, this limit was enhanced to ₹ 10 crore in the following case where:
(i) aggregate of all amounts received including amount received for sales, turnover or gross
receipts during the previous year, in cash, does not exceed 5% of the said amount; and
(ii) aggregate of all payments made including amount incurred for expenditure, in cash, during
the previous year does not exceed 5% cent of the said payment.
• As per Sec. 44AB(b) of the Income Tax Act, 1961, in case of profession, every person shall get his
accounts audited, if his gross receipts in profession exceed ₹ 50 lakh.
• The above said firm is engaged in providing engineering consultancy services to insurance
corporates. Hence, the benefit of enhanced threshold limit is not available to persons engaged in

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Chapter 15 Audit under Fiscal Laws
professional activities. The information regarding cash receipt and payment although falling
within 5% of total receipts/payments is not relevant in the instant case.
Conclusion: Contention of partner is not correct, and firm is required to get its accounts audited
under income tax law.

15.2 - Methods of Accounting & ICDSs (Sec. 145)

Q.12 CA Sumati has been appointed as a tax auditor under section 44AB of the Income-tax Act, 1961, of
M/s Pal & Company, a partnership firm, following cash basis of accounting. CA Sumati made the
qualification that ICDS were not followed by the entity while maintaining books of account.
Whether qualification made by CA Sumati is correct? Explain the provisions of the applicability of
ICDS with reference to Sec. 145(2) of the Income-tax Act, 1961. [RTP-May 22]
Ans.: Applicability of ICDS with reference to Sec. 145(2) of Income-tax Act, 1961
• Sec. 145(2) empowers the Central Government to notify in the Official Gazette from time to time,
Income Computation and Disclosure Standards (ICDSs) are to be followed by any class of assessees
or in respect of any class of income.
• Accordingly, the C.G. had, in the exercise of the powers conferred u/s 145(2), notified ten ICDSs to
be followed by all assessees (other than an individual or a HUF who is not required to get his
accounts of one previous year audited in accordance with the provisions of Sec. 44AB), following
the mercantile system of accounting, for the purposes of computation of income chargeable to
income-tax under the head “Profits and gains of business or profession” or “Income from other
sources” from the A.Y. 2017-18.
• All the notified ICDSs are applicable for computation of income chargeable under the head “Profits
and gains of business or profession” or “Income from other sources” and not for the purpose of
maintenance of books of account. In the case of conflict between the provisions of the Income‐tax
Act, 1961 and the notified ICDSs, the provisions of the Act shall prevail to that extent.
• In the given situation, Sumati has been appointed as a tax auditor of M/s Pal & Company, a
partnership firm, following the cash basis of accounting. CA Sumati made the qualification that
ICDS were not followed by the entity while maintaining books of account. In view of the above
provisions, it is clear the ICDS is applicable on a mercantile system of accounting, and it is only for
the purpose of computation of income chargeable to income tax under the head “Profits and Gains
of business or profession” or “Income from other sources” and not for the maintenance of books of
account.
Conclusion: Qualification made by CA. Sumati is not correct.

15.3 - Form 3CD

Q.13 You are appointed as tax auditor of Mr. X a practicing advocate in Agra. During the previous year he
collected GST of ₹ 7 lakhs but utilized for personal use. The department issued a show cause notice
to him why the tax collected by him is not deposited to the Government account. He appeared
before the department and stated his inability to pay the sum due to financial crisis. The
proceedings are still pending. Mr. X requests you not to disclose his GST registration details while
filling particulars to be furnished in Form No. 3CD. As a tax auditor how would you deal with this?
[May 16 (4 Marks)]

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By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
Ans.: Reporting Requirement of Form 3CD:
• Clause (4) of Form 3CD, requires tax auditor to mention the registration number or any other
identification number, if any, allotted, in case the assessee is liable to pay indirect taxes like
excise duty, service tax, sales tax, GST, customs duty etc. Auditor is required to furnish the details
of registration numbers as provided to him by the assessee.
• The reporting is however, to be done in the manner or format specified by the e-filing utility in
this context. The information may be obtained and maintained in the following format:
S. Relevant Indirect Tax Place of Business/profession/ Registration/
No. Law which requires service unit for which registration Identification
registration is in place/or has been applied for number

• In the present case Mr. X has defaulted in payment of GST for the previous year. Consequently,
the department issued a show cause notice for such non-payment of tax. The arguments are still
going on between the department and assessee. He also restrained his tax auditor from
disclosing GST registration details in tax audit report.
Conclusion: Instruction of Mr. X is not acceptable as clause 4 of Form 3CD requires tax auditor to
furnish the details of registration number or other identification number of assessee, if assessee is
required to pay indirect taxes like excise duty, service tax, GST etc.
Q.14 Arihant Pvt. Ltd. is engaged in the business of providing corporate/professional training programs.
It has an annual turnover of ₹ 74 crore. The Company is subject to tax audit for which the work has
been started by the tax auditor. For the financial year ending 31 March 2023, the Company applied
for GST registration for 5 new locations for which registration certificates have not yet been
received by the Company. However, the registration number is available on the portal of relevant
authority which can be verified by checking the details of the Company. In this case what should be
the audit procedures to verify this registration number? [RTP – May 21]
Ans.: Reporting of Registration Number under Indirect Taxes in Form 3CD:
Clause 4 of Form No. 3CD requires the tax auditor to ensure whether the assessee is liable to pay
indirect tax like excise duty, service tax, sales tax, GST tax, custom duty, etc. If yes, the registration
number or GST number or any other identification number allotted for the same need to be
furnished.
Therefore, the auditor is primarily required to furnish the details of registration numbers as
provided to him by the assessee. The reporting is required to be done in the manner or format
specified by the e-filing utility in this context.
In the given case, Arihant Pvt. Ltd. is engaged in the business of providing corporate/professional
training programs. The Company is subject to tax audit. For the financial year ending 31 March 2022,
the Company applied for GST registration for 5 new locations for which registration certificates have
not yet been received by the Company. However, the registration number is available on the portal of
relevant authority.
Tax auditor should verify the registration number for the locations for which registration certificates
have not been received from online portal of the relevant authority.
The auditor should also ensure that the details furnished while checking the registration number
pertains to the company only. If the company has filed any returns for these locations, the auditor

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Chapter 15 Audit under Fiscal Laws
should enquire for the same from the management and should check those returns to verify the
correctness of the registration numbers. In addition, the auditor should also obtain specific
representation in respect of this point from the management.
Q.15 BB Ltd., a non-resident company, is engaged in the business of extraction of mineral oils, having
turnover of ₹ 20 lakhs during the financial year 2022-23. The company claims that its profits and
gains chargeable to tax under the head "Profits & gains of business or profession" is lower than the
deemed income chargeable under section 44BB of the Income-tax Act, 1961. Therefore, it decided
to get its accounts audited under section 44AB of the Income-tax Act, 1961. Discuss reporting
requirement of Form 3CD in this behalf.
Ans.: Reporting Requirement of Form 3CD:
• BB Ltd., is a non-resident company which is engaged in the business of extraction of mineral oils,
hence, its income is chargeable in accordance with the provisions of section 44BB of the Income-
tax Act, 1961. But as the company is claiming lower income in comparison to deemed income u/s
44BB, provisions of Sec. 44AB in relation to audit has to be complied with.
• Clause (8) of Form 3CD, requires tax auditor to mention the relevant clause of section 44AB
under which the audit has been conducted. Accordingly, auditor is required to mention clause
(c) of Sec. 44AB which requires tax audit.
• Further, as per Clause (12) of Form 3CD, if the profit and loss account of the assessee includes
any profits and gains assessable on presumptive basis, the tax auditor has to indicate the amount
and the relevant sections.
Conclusion: Under Clause 8, auditor is required to indicate the relevant clause of section 44AB under
which audit is to be conducted and in addition under clause 12, auditor is required to indicate the
amount of profits of business covered u/s 44BB and the relevant section.
Q.16 ABC Ltd., is consistently following accounting standards as required u/s 133 of the Companies Act,
2013. During your tax audit u/s 44AB of the Income-tax Act, 1961, the board of directors informed
you that profits of the company is properly arrived at and the ASs applicable to it have been
followed consistently and as such, there need not be any adjustments to be made as per ICDS
notified u/s 145 of Income-tax Act, 1961. Based on the requirement of Law in this regard, examine
the validity of the stand of management in this regard. [May 18–New Syllabus (5 Marks)]
Ans.: Reporting for Adjustment to be made to the Profits or Loss for complying with ICDSs:
• Central Government has, in exercise of the powers conferred u/s 145(2) of Income-tax Act, 1961,
notified ten Income Computation and Disclosure Standards (ICDSs) to be followed by all
assessees (other than an individual or a HUF who is not required to get his accounts of one
previous year audited in accordance with the provisions of Sec. 44AB), following the mercantile
system of accounting, for the purposes of computation of income chargeable to income-tax under
the head “Profits and gains of business or profession” or “Income from other sources”.
• Clause 13(d) of Form No. 3CD of the tax audit report requires the tax auditor to state whether
any adjustment is required to be made to the profits or loss for complying with the provisions of
income computation and disclosure standards notified under section 145(2) of the Income-tax
Act, 1961.
• Further, the tax auditor is also required to report under Clause 13(e), if answer to Clause 13(d)
above is in the affirmative i.e. the auditor is required to give details of such adjustments as
follows:

15.11
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
Increase in Decrease in Net Effect
Profit (₹) Profit (₹) (₹)
ICDS I Accounting Policies

ICDS II Valuation of Inventories

ICDS III Construction Contracts
ICDS IV Revenue Recognition
ICDS V Tangible Fixed Assets
ICDS VI Changes in Foreign Exchange Rates
ICDS VII Governments Grants
ICDS VIII Securities
ICDS IX Borrowing Costs
ICDS X Provisions, Contingent Liabilities &
Contingent Assets
Total
Conclusion: Contention of the management that they are following Accounting Standards and
need not to make any adjustments as per ICDS, is not correct. Thus, ABC Ltd. is required to adjust
the profits in compliance with ICDS.
Q.17 As an auditor of a partnership firm under section 44AB of the Income-tax Act, 1961, how would you
report on the following: Technical support is received from Mr. DND, a non-resident for installation
of a new machinery. He has raised invoice dated 01/05/2022 in USD equivalent to ₹ 5,00,000. The
entire dues are cleared through appropriate banking channel on 25/06/2022.
[July 21 – Old Syllabus (2 Marks)]
Ans.: Reporting requirements of adjustments in profit and loss account:
Technical support received from Mr. DND, a non-resident, is for installation of new machinery and
therefore, it would have been capitalized as the cost of machinery. It is assumed that amount paid
through bank was after complying with TDS requirements.
Therefore, the tax auditor will report the same in accordance with Clause 13(f) of Form 3CD i.e.,
Disclosure as per ICDS.
S. No. ICDS Disclosure
ICDS V Tangible Fixed Assets. Addition of ₹ 5,00,000 technical support fee to Non-
resident being capitalized as the cost of machinery

Q.18 T Ltd. previous year ended on 31st March 2023. During that period, it made a claim for refund of
customs duty which was admitted as due by the customs authorities during April 2023. T Ltd.
neither credited the claim in the profit and loss account nor reported the same in clause 16(b) of
Form 3CD for the reason that this has been admitted as due by the authorities only in the next
financial year. Further T Ltd. had changed the method of determination of cost formula for the
purpose of stock valuation from FIFO basis to Weighted Average Cost basis, but that was also not
reflected in clause 13(b) of Form 3CD which requires reporting on change in accounting method
employed. Comment. [May 12 (6 Marks)]

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Chapter 15 Audit under Fiscal Laws
Ans.: Reporting requirement of Claim of Custom Duty Refund and change in Accounting policy:
• As per Clause 16(b) of form 3CD, the details of custom duty refund, if admitted as due but not
reported in Profit and Loss account, are to be stated. But the claim which have been admitted as
due after the relevant previous year need not be reported.
• Hence non-reporting of claim of refund of custom duty in Form 3CD is in order.
• Clause 13(b) of Form 3CD required reporting in case of change in method of accounting
employed. But in the present case there is a change in accounting policy. Change in Accounting
policy cannot be treated as change in method of accounting, hence does not require any
reporting under clause 13(b) in Form 3CD.
• Hence non-reporting of method of valuation in Form 3CD is in order.
Q.19 While conducting the tax audit of A & Co. you observed that it made an escalation claim to one of its
customers but which was not accounted as income. What is your reporting responsibility?
[MTP-April 19]
Ans.: Clause 16(c) of Form 3CD:
• A tax auditor has to report under clause 16(c) of Form 3CD on any escalation claim accepted
during the previous year and not credited to the profit and loss account under clause 16(c) of
Form 3CD.
• The escalation claim accepted during the year would normally mean “accepted during the
relevant previous year.” If such amount is not credited to Profit and Loss Account the fact should
be reported. The system of accounting followed in respect of this particular item may also be
brought out in appropriate cases. If the assessee is following cash basis of accounting with
reference to this item, it should be clearly brought out since acceptance of claims during the
relevant previous year without actual receipt has no significance in cases where cash method of
accounting is followed.
• Escalation claims should normally arise pursuant to a contract (including contracts entered into
in earlier years), if so permitted by the contract. Only those claims to which the other party has
signified unconditional acceptance could constitute accepted claims. Mere making claims by the
assessee or claims under negotiations cannot constitute accepted claims. After ascertaining the
relevant factors as outlined above, a decision whether to report or not, can be taken.
Q.20 In the course of your tax audit assignment u/s 44AB of the Income-tax Act, 1961 of Dream Bank Ltd.
You have instructed your assistant to find out receipt of capital nature which might not have been
credited to Profit & Loss Account and needs to be reported in Para 16(e) of Form 3CD. Your audit
assistant seeks your guidance in reporting the same. Specify any four illustrative examples of such
receipt. [May 19 – New Syllabus (4 Marks)]
Ans.: Instances of Capital receipt:
(a) Capital subsidy received in the form of Government grants, which are in the nature of promoters’
contribution i.e., they are given with reference to the total investment of the undertaking or by
way of contribution to its total capital outlay. For e.g., Capital Investment Subsidy Scheme.
(b) Government grant in relation to a specific fixed asset where such grant is shown as a deduction
from the gross value of the asset by the concern in arriving at its book value.
(c) Compensation for surrendering certain rights.
(d) Profit on sale of fixed assets/investments to the extent not credited to the profit and loss
account.

15.13
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
Audit procedures:
Capital receipts are not generally credited to profit and loss account hence the auditor should take
enough care to check out any transaction generating the capital receipts by –
• Enquiring whether the assessee is in receipt of any amount of capital nature during the previous
year.
• Going through the financial statements, in particular reserve account, to ascertain whether the
assessee has received any such receipts and credited them directly to reserve account.
• Enquiring whether the assessee has credited such receipts to profit and loss account.
• Checking that any such receipts is accounted for in terms of method of accounting followed by
the assessee.
Q. CA. Gunjan is conducting tax audit of a company. The client is engaged in business of manufacturing
20A and export of carpets (Turnover ₹ 100 crore in year 2022-23). The financial statements of the
company show amount of ₹ 4 crore credited in Statement of Profit and Loss on account of “Duty
Drawback”.
(a) How should she perform audit procedures to comply with specific reporting requirements
under Form 3CD in this respect?
(b) It was noticed that amount of ₹ 5 lac of duty drawback pertaining to few export shipments has
not been credited in Statement of Profit and loss. The above noted amount was admitted by
customs authorities in month of March 2023. However, it was electronically transferred to
bank account of the company in next financial year. How should she deal with the matter?
[RTP-May 23]
Ans.: Reporting under clause 16(b) of Form 3CD:
(a) Under Clause 16(b) of Form 3CD, proforma credits, drawbacks, refund of duty of customs or
excise or service tax, or refund of sales tax or value added tax, where such credits, drawbacks or
refunds are admitted as due by the authorities concerned and not credited to the profit and loss
account are to be reported.
The details of the following claims, if admitted as due by the concerned authorities but not
credited to the profit and loss account, are to be stated under clause 16(b).
(i) Pro forma credits
(ii) Drawback
(iii) Refund of duty of customs
(iv) Refund of excise duty
(v) Refund of service tax
(vi) Refund of sales tax or value added tax or GST
All relevant correspondence, records and evidence should be examined to determine whether
any refund/claim has been admitted as due and accepted during the relevant financial year. The
words' admitted by the concerned authorities' would mean 'admitted by the authorities within
the relevant previous year'.
Therefore, the tax auditor may need to scrutinise the relevant files or subsequent records,
including copies of shipping bills, etc., relating to such refunds while verifying the particulars.
Besides, appropriate management representation should also be obtained.
(b) A drawback of ₹ 5 lac is noticed as admitted by customs authorities, which has not been credited
to the Statement of Profit and loss. A company has to maintain accounts on accrual basis in

15.14
By: CA. Pankaj Garg
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Chapter 15 Audit under Fiscal Laws
accordance with Sec. 128 of Companies Act, 2013. As admitted drawback has not been credited
in the statement of Profit and loss, the same should be reported under clause 16(b) of Form 3CD.
Q.21 LMN Ltd., a manufacturing concern, sold a house property owned by it in Chennai for a
consideration of Rs. 58 lakhs, to Mr. X on 14.09.2022. LMN Ltd. purchased the house property in the
y for Rs. 45 lakhs. The stamp duty value on the date of transfer i.e. 14.09.2022 is Rs. 74 lakhs for the
said house property. How would you deal with this matter in the tax audit report of LMN Ltd.?
[May 23 (4 Marks)]
Ans.: Reporting of Sale of property at a price lower than value adopted for the purpose of stamp
duty:
• Clause 17 of Form 3CD requires tax auditor to furnish certain information if land or building or
both is transferred during the previous year for a consideration less than value adopted by any
authority of a State Government as under:
Details of Consideration Value adopted Whether provisions of second proviso
Property Received or or assessed or to Sec. 43CA(1) or 4th proviso to Sec.
Accrued assessable 56(2)(x) applicable? [Yes/No]

• For this purpose, auditor should obtain a list of all properties transferred by the assessee during
the previous year and furnish the amount of consideration received or accrued, as disclosed in
the books of account of the assessee.
• For reporting the value adopted or assessed or assessable, the auditor should obtain from the
assessee a copy of the registered sale deed. In case the property is not registered, the auditor
may verify relevant documents from relevant authorities or obtain third party expert like lawyer,
solicitor representation to satisfy the compliance of section 43CA/section 50C of the Act.
Conclusion: LMN Ltd. has sold the house property to Mr. X at a price lower than value adopted for
stamp duty purpose, tax auditor is required to report on the same under Clause 17 of Form 3CD.
Q.22 A is proprietor of a firm M/s ABC & Co. The firm has a turnover of ₹ 500 lakhs during the financial
year ended 31.03.2023. The firm sold land and building during the year for a consideration of ₹ 15
lakhs, whose value for stamp duty purposes was ₹ 16 lakhs. As the Tax Auditor of the said firm, is
the above to be reported? If yes, how will you report the same? [Nov. 19 – Old Syllabus (4 Marks)]
Ans.: Reporting of Sale of property at a price lower than value adopted for the purpose of stamp
duty:
• Clause 17 of Form 3CD requires tax auditor to furnish certain information if land or building or
both is transferred during the previous year for a consideration less than value adopted by any
authority of a State Government as under:
Details of Consideration Value adopted Whether provisions of second proviso
Property Received or or assessed or to Sec. 43CA(1) or 4th proviso to Sec.
Accrued assessable 56(2)(x) applicable? [Yes/No]

• For this purpose, auditor should obtain a list of all properties transferred by the assessee during
the previous year and furnish the amount of consideration received or accrued, as disclosed in
the books of account of the assessee.

15.15
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Audit under Fiscal Laws Chapter 15
• For reporting the value adopted or assessed or assessable, the auditor should obtain from the
assessee a copy of the registered sale deed. In case the property is not registered, the auditor
may verify relevant documents from relevant authorities or obtain third party expert like lawyer,
solicitor representation to satisfy the compliance of section 43CA/section 50C of the Act.
Conclusion: ABC Ltd. has sold the house property to Mr. X at a price lower than value adopted for
stamp duty purpose, tax auditor is required to report on the same under Clause 17 of Form 3CD.
Note: Suggested answer of ICAI also requires reporting under Clause 29B. Reporting under
clause 29B is required when the assessee receives any property. But in this case the assessee, i.e.
firm ABC and Co. sold its property, hence no reporting required under Clause 29B.
Q.23 As an auditor of a partnership firm u/s 44AB of the Income-tax Act, 1961, how would you report on
the following: M/s WAR wants to purchase a new machine which is available for ₹ 45,000, if
purchased on 45 days' credit and for ₹ 40,000, if purchased by cash. The machine is purchased by
paying cash on 01.08.2021 and depreciation on it charged to profit and loss account is ₹ 6000.
[July 21 – Old Syllabus (2 Marks)]
Ans.: Reporting Requirements under Clause 18 of Form 3CD:
• As per Sec. 43(1) to the Income-tax Act, 1961, the expression "actual cost" means the actual cost of
the asset to the assessee as reduced by that portion of the cost thereof, if any, as has been met
directly or indirectly by any other person or authority. However, where an assessee incurs any
expenditure for acquisition of any asset or part thereof in respect of which a payment or aggregate
of payments made to a person in a day, otherwise than by an account payee cheque drawn on a
bank or account payee bank draft or use of electronic clearing system through a bank account or
through such other prescribed electronic mode, exceeds ₹ 10,000, such expenditure shall not form
part of actual cost of such asset.
• In the given case, M/s. WAR purchased a new machine by paying cash amounting ₹ 40,000 and
charged the depreciation of ₹ 6,000 to profit and loss account on the same. According to Sec. 43(1),
₹ 40,000 paid in cash will not form part of actual cost of such asset. Therefore, depreciation on the
same is also not allowable.
• The tax auditor is required to report on the same in accordance with Clause 18.
• As per Clause 18 of Form 3CD, tax auditor is required to report the particulars of depreciation
allowable as per the Income-tax Act, 1961 in respect of each asset or block of assets, as the case
may be, in the following form:
Clause 18(d) Additions/deductions during the year with dates; in the case of any addition of
an asset, date put to use; including adjustments on account of –
Clause 18(e) Depreciation allowable.
Clause 18(f) Written down value at the end of the year.
.

Q.24 As an auditor of a partnership firm under section 44AB of the Income-tax Act, 1961, how would you
report on the following: Capital Expenditure incurred for scientific research assets.
[Nov. 12 (2 Marks)]
Ans.: Reporting of Capital Expenditure incurred on Scientific Research Assets in form 3CD:
Clause 19 of Form 3CD requires the auditor to report the following:
(i) Amount debited to profit and loss account.

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Chapter 15 Audit under Fiscal Laws
(ii) Amounts admissible as per the provisions of the Income-tax Act, 1961 and also fulfils the
conditions, if any specified under the relevant provisions of Income-tax Act, 1961 or Income
Tax Rules, 1962 or any other guidelines, circular, etc., issued in this behalf.
Q.25 As an auditor of a partnership firm under section 44AB of the Income-tax Act, 1961, how would you
report on the following: Expenditure incurred at Clubs.
Ans.: Reporting of Payment to Club in Form 3CD:
• Clause 21(a) of Form 3CD requires the tax auditor to furnish the details of amounts debited to
the profit and loss account, being in the nature of capital, personal, advertisement expenditure
etc.
• Such reporting requires the tax auditor to report on the
(a) Expenditure incurred at clubs being entrance fees and subscriptions; and
(b) Expenditure incurred at clubs being cost for club services and facilities used.
• The payments made may be in respect of directors and other employees in case of companies,
and for partners or proprietors in other cases.
• The fact whether such expenses are incurred in the course of business or whether they are of
personal nature should be ascertained.
Q.26 XYZ Ltd. pays ₹ 90,000 for its 10 employees to a Hotel as boarding and lodging expenses of such
employees for a conference. The Company pays the amount in cash to the Hotel. The Hotel gives ten
bills each amounting to ₹ 9,000. The Company contends that each bill is within the limit, so there is
no violation of the provisions of the Income-tax Act, 1961. As the tax auditor, how would you deal
with the matter in your tax audit report for the Assessment Year 2023-24? [Nov. 14 (4 Marks)]
Ans.: Reporting for Cash payments above ₹ 10,000:
• Clause 21(d) of Form 3CD requires tax auditor to report on disallowance under section 40A(3).
Disallowance u/s 40A(3) of the Income-tax Act, 1961 is attracted if the assessee incurs any
expenses in respect of which payment or aggregate of payments made to a person in a day,
otherwise than by an account payee cheque drawn on bank or account payee draft, exceeds
₹ 10,000.
• In the given case, the tax auditor found that a hotel issued 6 bills to XYZ Ltd. Each amounting to
₹ 9,000 for boarding & lodging expenses of 6 employees. XYZ Ltd. in aggregate has paid ₹ 90,000
to the hotel in cash. Consequently, no expenditure shall be allowed for deduction as per the
provisions of section 40A(3).
• Contention of the company that each bill is within the limit is not tenable since aggregate of
payments need to be considered.
Conclusion: Payments made by the XYZ Ltd. are inadmissible u/s 40A(3) of the Income-tax Act, 1961
and hence, needs to be reported under clause 21(d) of Form 3CD.
Q.27 Answer the following: As the tax auditor of a Company, how would you report on payments
exceeding ₹ 10,000 made in cash to a supplier against an invoice for expenses booked in an earlier
year?
Ans.: Reporting of payments exceeding ₹ 10,000 in cash:
• Reporting is required under clause 21(d) of Form 3CD for the payments exceeding ₹ 10,000
made in cash against an invoice for expenses booked in an earlier year.

15.17
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
• Section 40A(3A) disallowed an expense payment exceeding ₹ 10,000 made in cash against an
invoice booked in an earlier year.
• Clause 21(d) of Form 3CD requires furnishing of the amount inadmissible u/s 40A(3) read with
rule 6DD along with computation.
• The entire amount paid, is likely to be disallowed u/s 40A(3A) of the Income-tax Act, 1961.
Q.28 Mr. R, the Tax Auditor finds that some payments inadmissible under section 40A(3) were made, and
advised the client to report the same in form 3CD. The client contends that cash payments were
made since the other parties insisted upon the same and did not have Bank Accounts. Comment.
[Nov. 10 (5 Marks)]
Ans.: Reporting for Cash payments above ₹ 10,000:
• Clause 21(d) of Form 3CD requires tax auditor to report on disallowance under section 40A(3).
Disallowance u/s 40A(3) of the Income-tax Act, 1961 is attracted if the assessee incurs any
expenses in respect of which payment or aggregate of payments made to a person in a day,
otherwise than by an account payee cheque drawn on bank or account payee draft, exceeds
₹ 10,000.
• However, there are certain cases as specified in Rule 6DD, in which, disallowance under section
40A(3) would not be attracted. Cash payment made on insistence of other parties on the
contention that they do not have bank accounts is not covered under the list of exceptions
provided under Rule 6DD.
• In the present case, tax auditor is required to scrutinize on the basis of the examination of books
of account and other relevant documents/evidence, whether the expenditure covered under
section 40A(3) read with rule 6DD were made by account payee cheque drawn on a bank or
account payee bank draft. If not, the same has to be reported under abovementioned clause.
Conclusion:Payments made by the XYZ Ltd. are inadmissible u/s 40A(3) of the Income-tax Act, 1961
and hence, needs to be reported under clause 21(d) of Form 3CD.
Q.29 You are the Tax auditor of BL & Co., a partnership firm engaged in the business of plying of Goods
Carriages for the financial year 2022-23 having a turnover of ₹ 20 crores. How would you deal and
report on the following:
(i) Payment of ₹ 50,000 in cash to Mr. R on 10th September, 2022 towards settlement of invoice
for expenses accounted in financial year 2021-22.
(ii) Payments of 3 invoices of ₹ 15,000 each made in cash to Mr. Y on 8th, 9th, 10th, July, 2022
respectively. [Nov. 18-Old Syllabus (4 Marks)]
Ans.: Reporting of Payments Exceeding ₹ 10,000 in Cash:
• Clauses 21(d)(A) and 21(d)(B) of Form 3CD, requires tax auditor to scrutinize on the basis of the
examination of books of account and other relevant documents/evidence, whether the
expenditure covered under section 40A(3) and 40A(3A) respectively read with rule 6DD were
made by account payee cheque drawn on a bank or account payee bank draft. If not, the same has
to be reported under abovementioned clauses.
• As per section 40A(3) of the Income-tax Act, 1961, an expenditure is disallowed if the assessee
incurs any expenses in respect of which payment or aggregate of payments made to a person in a
day, otherwise than by an account payee cheque drawn on bank or account payee draft, exceeds
₹ 10,000. However, in case of payment made for plying, hiring or leasing of goods carriage, limit
is ₹ 35,000 instead of ₹ 10,000.

15.18
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 15 Audit under Fiscal Laws
• As per section 40A(3A) of the Income-tax Act, 1961, where an allowance has been made in the
assessment for any year in respect of any liability incurred by the assessee for any expenditure
and subsequently during any previous year the assessee makes payment in respect thereof,
otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the
payment so made shall be deemed to be the profits and gains of business or profession and
accordingly chargeable to income-tax as income of the subsequent year if the payments made to
a person in a day, exceeds ₹ 10,000 (₹ 35,000 in case of plying, hiring or leasing of goods
carriages).
• Based on the abovementioned provisions, following conclusion may be drawn:
(i) Reporting required under Clause 21(d)(B) w.r.t. payment of ₹ 50,000.
(ii) Reporting required under Clause 21(d)(A) w.r.t. each payment as individual payment made
on a day exceeds ₹ 10,000.
Note: Limit of ₹ 35,000 is not applicable as this limit is applicable when the payee is engaged in
the business of plying of goods carriages. In this case, payer is engaged in the business of plying
of goods carriages hence, limit of ₹ 10,000 will be applicable assuming that payee is not
engaged in business of plying of goods carriages.
Q.30 M/s PQRS & Associates is appointed for conducting tax audit as per Income-tax Act, 1961 of QW Ltd.,
a cotton textile company. The Company had incurred ₹ 6 lac towards advertisement expenditure on
a brochure/pamphlet published by a political party in Pune. Advise the auditor whether such
expenditure should be included in the tax audit report or not. [RTP-Nov. 20]
Ans.: Expenses on Advertisement in the Media of a Political Party:
• Clause 21(a) of Form 3CD requires the tax auditor to furnish the details of amounts debited to
the Profit and Loss Account, being in the nature of advertisement expenditure in any souvenir,
brochure, tract, pamphlet or the like published by a political party in his tax audit report.
• In the given situation, M/s PQRS & Associates is appointed for conducting tax audit as per
Income-tax Act, 1961 of QW Ltd., a cotton textile company. The Company had incurred ₹ 6 lac
towards advertisement expenditure on a brochure/pamphlet published by a political party.
Conclusion: Advertisement expenditure of ₹ 6 lakh on brochure/pamphlet published by a political
party shall be reported in the tax audit report as per Clause 21(a) of Form 3CD.
Q.31 ABC Ltd., engaged in the manufacturing of goods carriage, appointed you as the tax auditor for the
financial year 2022-23. How would you deal with the following matters in your tax audit report:
(i) Payments of 6 invoices of ₹ 5,000 each made in cash to Mr. X, engaged in leasing of goods
carriages on 4th July, 2022.
(ii) Payments of 2 invoices of ₹ 18,000 each made in cash to Mr. Y, engaged in leasing of goods
carriages on 5th July, 2022 and 6th July, 2022 respectively.
(iii) Payment of ₹ 40,000 made in cash to Mr. Z, engaged in leasing of goods carriages on 7th July,
2022 against an invoice for expenses booked in 2021-22. [MTP-Oct. 21]
Ans.: Reporting of Payments Exceeding ₹ 35,000 in Cash:
• Clauses 21(d)(A) and 21(d)(B) of Form 3CD, requires tax auditor to scrutinize on the basis of the
examination of books of account and other relevant documents/evidence, whether the
expenditure covered under section 40A(3) and 40A(3A) respectively read with rule 6DD were
made by account payee cheque drawn on a bank or account payee bank draft. If not, the same has
to be reported under abovementioned clauses.

15.19
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
• As per section 40A(3) of the Income-tax Act, 1961, an expenditure is disallowed if the assessee
incurs any expenses in respect of which payment or aggregate of payments made to a person in a
day, otherwise than by an account payee cheque drawn on bank or account payee draft, exceeds
₹ 10,000. However, in case of payment made for plying, hiring or leasing of goods carriage, limit
is ₹ 35,000 instead of ₹ 10,000.
• As per section 40A(3A) of the Income-tax Act, 1961, where an allowance has been made in the
assessment for any year in respect of any liability incurred by the assessee for any expenditure
and subsequently during any previous year the assessee makes payment in respect thereof,
otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the
payment so made shall be deemed to be the profits and gains of business or profession and
accordingly chargeable to income-tax as income of the subsequent year if the payments made to
a person in a day, exceeds ₹ 10,000 (₹ 35,000 in case of plying, hiring or leasing of goods
carriages).
• Based on the abovementioned provisions, following conclusion may be drawn:
(i) Payments of 6 invoices of ₹ 5,000 each aggregating ₹ 30,000 made in cash on 4th July,
2022 need not be reported as the aggregate of payments do not exceed ₹ 35,000.
(ii) Payments of 2 invoices of ₹ 18,000 each made in cash on 5th July, 2022 and 6th July, 2022
respectively aggregating ₹ 36,000 need not be reported as the payment do not exceed
₹ 35,000 in a day.
(iii) Payment of ₹ 40,000 made in cash against an invoice for expenses booked in 2021-22 is
likely to be deemed to be the profits and gains of business or profession under section
40A(3A) of the Income-tax Act, 1961. Thus, the details of such amount need to be
furnished under clause 21(d)(B) of Form 3CD.
Q.32 As a tax auditor of RM & Co. for the AY 2023-24, how would you deal and report the following: RM &
Co. has borrowed ₹ 75 lakhs from a bank @10% p.a. for purchase of machinery. The machinery was
purchased on 30.09.2022, but was put to use on 10.04.2023. The interest paid to bank for the year
2022-23 was charged to Profit and Loss Account. [Dec. 21 – Old Syllabus (2 Marks)]

Ans.: Reporting of Capital expenditure and inadmissible amounts:

• As per Clause 21(a), the tax auditor is required to furnish the details of amounts debited to the
profit and loss account, being in the nature of Capital, personal, advertisement expenditure etc.:

Nature Serial number Particulars Amount in ₹

Capital Expenditure

• Further as per Clause 21(i) of Form 3CD, auditor is required to report the amount inadmissible
under the proviso to Sec. 36(1)(iii).
• The provisions of Sec. 36(1)(iii) provide that the amount of the interest paid in respect of capital
borrowed for the purposes of the business or profession would be allowed as a deduction in
computing the income referred to in Sec. 28 of the Act. The proviso thereunder provides that any
amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether
capitalized in the books or account or not) for any period beginning from the date on which the
capital was borrowed for acquisition of the asset till the date on which such asset was put to use,
shall not be allowed as a deduction.

15.20
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 15 Audit under Fiscal Laws
• In the given situation, RM & Co. has borrowed ₹ 75 lakh from a bank @10% p.a. for purchase of
machinery. The machinery was purchased on 30.09.22 but was put to use on 10.04.22. The interest
paid to bank for the year 2022-23 was charged to profit and loss account of RM & Co. is not in
order in accordance with Proviso to Sec. 36(1)(iii) therefore, reporting of the same will be done as
per Clause 21(a) and Clause 21(i) of Form 3CD.

Q. Discuss the reporting of the following issues under tax audit report of PPK Limited engaged in - (i)
32A giving consultancy for agriculture of sugarcane planting and (ii) cultivation /growing of sugarcane
crop at a stretch of land for about 15 KMs taken on lease from state government.
(i) The company during the year absorbed another company- AFM Ltd., (resulting in the latter
becoming merged with this Company). The purchase price over the value of net assets taken
over was more by ₹ 40 lakhs. The Management wished to write it off over five years and to
claim the same as depreciation for intangibles at rates as allowed by Income Tax rules for
intangible assets.
(ii) The Profit and loss statement of the company indicated the operating revenue of consultancy
fees ₹ 75 lakhs and agriculture income of ₹ 225 lakhs (gross revenue from crop sale). The
expenses included material consumed for plantation and add-ons for crop growing, staff cost-
for plantation, interest cost (combined), Depreciation for planation equipment and its
ancillary parts. [May 23 (4 Marks)]

Ans.: Reporting in Form 3CD:

(i) The company during the year absorbed another company-AFM Ltd., (resulting in the latter
becoming merged with this Company). The purchase price over the value of net assets taken over
was more by ₹ 40 lakhs. The Management wished to write it off over five years and to claim the
same as depreciation for intangibles at rates as allowed by Income Tax rules for intangible
assets.
Excess price paid will be considered as goodwill and depreciation is not allowed over the
goodwill.
Clause 18(cc) of Form 3CD requires the auditor to report the adjustment made to WDV of
Intangible asset due to excluding value of goodwill of a business or profession. Hence if
management includes the excess price in the cost of intangible asset, auditor is required to
report the same under Clause 18(cc).
(ii) Profit and loss statement indicated the operating revenue of consultancy fees ₹ 75 lakhs and
agriculture income of ₹ 225 lakhs. The expenses included material consumed for plantation and
add-ons for crop growing, staff cost- for plantation, interest cost (combined), Depreciation for
planation equipment and its ancillary parts.
This information requires reporting under Clause 21(h) of Form 3CD which requires the auditor
to report amount of deduction inadmissible in terms of Sec. 14A in respect of the expenditure
incurred in relation to income which does not form part of the total income.
Audit procedures required to be performed for the purpose of reporting under clause 21(h)
includes the following:
(i) Check whether the total income of the assessee includes any income which is exempt from
tax.

15.21
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
(ii) Check whether the assessee has claimed any expenses against such income.
(iii) Scrutinize expense accounts particularly interest account to check whether there is included
any expense which is relatable to exempt income. If yes, note down the amount and mention
against this clause.

Q.33 Mr. Sharma carries on the business of dealing and export of diamonds. For the year ended 31st
March 2023, you as the tax auditor find that the entire exports are to another firm in U.S.A. which is
owned by Mr. Sharma’s brother. Comment.

Ans.: Export Payments to a Relative:

• Clause 23 of Form 3CD, requires the tax auditor to specify particulars of payments made to
persons specified u/s 40(A)(2)(b) of the Income-tax Act, 1961. Persons specified in the said
section are relatives of an assessee and sister concerns, etc.
• In the instant case, however, Mr. Sharma has not made any payments to his brother. On the
contrary, he must have received payments from him against exports made and, thus, this clause
would not be applicable to him.
Auditor will nonetheless be still as a part of his normal audit planning would be required to verify
whether the exports are genuine, i.e., whether the diamonds have been delivered by verifying the
necessary delivery documents, relevant invoices, etc., the reasonableness of the price and whether the
export realisations have been received.

Q.34 As an auditor appointed under section 44AB of the Income-tax Act, 1961, how would you verify and
report on the following: The assessee has paid rent of ₹ 5 lakhs for premises to his brother.
[Nov. 17 (3 Marks)]

Ans.: Reporting of payment of rent and interest to relative:

Clause 23 of Form 3CD requires the tax auditor to furnish the particulars of payments made to
persons specified under Section 40A(2)(b) of the Income-tax Act, 1961. In relation to an individual,
the specified persons include any relative of the assessee (i.e. Husband, Wife, Brother, Sister or any
other Lineal Ascendant or Descendant).
In the present case, an assessee has paid rent to his brother and interest to his sister which may be
disallowed if, in the opinion of the Assessing Officer, such expenditure is excessive or unreasonable
having regard to:
1. the fair market value of the goods, services or facilities for which the payment is made; or
2. for the legitimate needs of business or profession of the assessee; or
3. the benefit derived by or accruing to the assessee from such expenditure.
Conclusion: Auditor is required to report the payments made to specified persons.

Q.35 M/s RB Ltd. is engaged in the trading of engineering goods. Turnover of the Company for the year
ended 31.03.2023 was ₹ 150.00 crores. During the F.Y 2020-21, the Company claimed deduction of
bad debts amounting to ₹ 100.00 lakhs while filing income tax return (Out of total debts of ₹ 150.00
lakhs due from Mr. X). However, during the F.Y 2022-23, the Company was able to recover ₹ 75.00
lakhs from Mr. X through legal means and correctly credited to its profit and loss account. As a tax
auditor, is it required to report such transactions in Tax Audit report under Income-tax Act, 1961?
[July 21 – New Syllabus (4 Marks)]

15.22
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 15 Audit under Fiscal Laws
Ans.: Reporting under Clause 25 of Form 3CD:
• Clause 25 of Form 3CD requires the tax auditor to report any amount of profit chargeable to tax
u/s 41 and computation thereof.
• Sec. 41 of Income-tax Act, 1961 provides that where an allowance or deduction has been made in
the assessment for any year in respect of any loss or expenditure and subsequently during any
previous year, the assessee has obtained, any amount in respect of such loss or expenditure by way
of remission or cessation thereof, the amount obtained by such person shall be deemed to be
profits and gains of business or profession and accordingly chargeable to income-tax as the income
of that previous year.
• In the given case, during the FY 2020-21, the Company claimed deduction of bad debts amounting
to ₹ 100.00 lakhs while filing income tax return (Out of total debts of 150.00 lakhs due from Mr. X).
However, during the FY 2022-23, the Company was able to recover ₹ 75.00 lakhs from Mr. X
through legal means and correctly credited to its profit and loss account. The amount recovered to
the extent of which deduction was allowed earlier, shall be deemed to be income of the assessee of
FY 2022-23.
• The tax auditor should maintain the following in his working papers for the purpose of furnishing
details required in the format provided in the e-filing utility:
Sr. Name of Amount of Sec. Description of Computation if
No. person income transaction any

Q.36 You are doing Tax Audit of Private Limited Company for the financial year ending 31st March, 2023.
During audit, you notice that the company is not regular in deposit of VAT/GST and there remains
pendency every year. The details of VAT/GST payable are:
(i) GST payable as on 31/03/2022 of FY 2021-22 was ₹ 200 Lakh and out of which ₹ 100 Lakh was
paid on 15/09/2022 and ₹ 50 Lakh on 30/03/2023 and balance of ₹ 50 Lakh is outstanding.
(ii) GST payable of current financial year 2022-23 was ₹ 100 lakh and out of this, ₹ 40 Lakh was
paid on 25/05/2022 and balance of ₹ 60 Lakh remained unpaid till the due date of return.
The date of Tax Audit report and due date of return was 30th September.
Now as a Tax Auditor, how/where the said transaction will be reflected in Tax Audit Report under
Section 43B(a)? [MTP-Oct. 19, RTP-Nov. 19]

Ans. Reporting in Tax Audit Report:

• Any amount of GST/Tax payable on the last day of previous year (opening balance) as well as on
the last day of current year has to be reported in Tax Audit Report under clauses 26(A) and 26(B)
in reference of section 43B.
• Clause 26(A) dealt GST/VAT payable on the pre-existed of the first day of the previous year but
was not allowed in the assessment of any preceding previous year and was either paid {clause
26(A)(a)}/ or/ and/ not paid during the previous year {clause 26(A)(b)}
• The details will be as under in regard to opening balances:

15.23
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
Liability Pre-existed on the previous year.
Sr. No. Sec. Nature of Outstanding Amount Amount Amount
Liability Opening balance paid / set- written back unpaid at
not allowed in off during to P&L the end of
previous year the year Account the year
01 43B(a) VAT / GST 100 lakh 50 lakh 0 50 lakh
It has been assumed that 100 lakh was allowed in last year as it was paid before the due date of
return.
Liability incurred during the previous year
Sr. No. Sec. Nature of Amount Amount paid/set- Amount unpaid
Liability incurred in off before the due on the due of
previous year date of filing filing of return/
but remaining return/date upto date upto which
outstanding which reported in reported in the
on last day of the tax audit tax audit report,
previous year report, whichever whichever is
is earlier earlier
01 43B(a) VAT / GST 100 lakh 40 lakh 60 lakh

Q.37 How will you verify the Income & Expenditure of earlier years credited/debited in current year for
reporting under clause 27(b) of 3CD while carrying out Tax Audit u/s 44AB of the Income-tax Act,
1961? [Nov. 19 – Old Syllabus (5 Marks)]
Ans.: Reporting under Clause 27(b) of Form 3CD:
Clause 27(b) requires the tax auditor to report particulars of income or expenditure of prior period
credited or debited to the profit and loss account. Information under clause 27(b) would be relevant
only in those cases where the assessee follows mercantile system of accounting.
The tax auditor may perform following procedures for the purpose of reporting under clause 27(b):
(i) Ask the assessee to furnish a schedule indicating particulars of expenditure/income of any
earlier year debited/credited to the Profit & Loss account of the relevant previous year.
(ii) Verify various expenses account to see whether any expenditure pertaining to any earlier year
has been debited to the profit and loss account. For example, an assessee might have paid some
certification fee etc., for four years in the year under audit. In that case payment of expenses for
previous three years would be prior period payment.
(iii) Also see that all such items are properly disclosed.
(iv) Check while conducting the routine audit, that there is no expenditure/income relating to
earlier years that has not been mentioned in the particulars furnished by the assessee.
(v) In case of cash system of accounting, there will be no amount to be disclosed under this head.
Q.38 ABC Pvt. Ltd. was XYZ Pvt. Ltd. are the Companies in which public are not substantially interested.
During the previous year 2022-23, ABC Pvt. Ltd. received some property being shares of XYZ Pvt.
Ltd. The details of which are provided below:
No. of shares 1000
Face Value ₹ 10 per share

15.24
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 15 Audit under Fiscal Laws
Aggregate Fair Market Value ₹ 1,00,000
Consideration Value Nil
As the tax auditor how would you deal with the situation? [May 16 (4 Marks), MTP-April 18]
Ans.: Reporting requirement in Form 3CD:
• Clause 28 of Form 3CD requires the auditor to report “Whether during the previous year the
assessee has received any property, being share of a company not being a company in which the
public are substantially interested, without consideration or for inadequate consideration as
referred to in section 56(2)(viia), if yes, please furnish the details of the same”
• Sec. 56(2)(viia) provides that where a firm or a company not being a company in which the
public are substantially interested, receives, in any previous year any property being shares of a
company, not being a company in which the public is substantially interested, without
consideration, the aggregate fair value of which exceeds ₹ 50,000, the whole of the aggregate fair
market value of such property shall be chargeable to income-tax under the head “Income from
other sources”. Finance Act, 2017 amends Sec. 56(2), in accordance with which provisions of
Section 56(2)(viia) are not applicable for transactions taken place on or after 01.04.2017.
• This transaction now, falls under clause (x) of Sec. 56(2). For transactions falling u/s 56(2)(x),
reporting is required as per Clause No. 29B, which provides as follow:
(a) Whether any amount is to be included as income chargeable under the head ‘income from
other sources’ as referred to in clause (x) of sub-section (2) of section 56? (Yes/No)
(b) If yes, please furnish the following details:
(i) Nature of income;
(ii) Amount (in ₹) thereof.
Q.39 While doing Tax Audit, under section 44AB of the Income-tax Act, 1961, of the accounts of Glue
Private Limited for the Assessment Year 2023-24, it was found that during the Financial Year 2022-
23, Glue Private Limited had received 9,000 shares, the market value of which was ₹ 90,000 on the
date of transfer, at a price of ₹ 45,000 from Stick Private Limited. The Management of Glue Private
Limited maintained that the transaction was as per the terms of negotiations and there would be no
cause for the Auditor to bring this matter in his Tax Audit Report-Comment.
[Nov. 18 – New Syllabus (5 Marks)]
Ans.: Reporting requirement in Form 3CD:
• Clause 28 of Form 3CD requires the auditor to report “Whether during the previous year the
assessee has received any property, being share of a company not being a company in which the
public are substantially interested, without consideration or for inadequate consideration as
referred to in section 56(2)(viia), if yes, please furnish the details of the same”.
• Section 56(2)(viia) provides that where a firm or a company not being a company in which the
public are substantially interested, receives, in any previous year any property being shares of a
company, not being a company in which the public is substantially interested, without
consideration, the aggregate fair value of which exceeds ₹ 50,000, the whole of the aggregate fair
market value of such property shall be chargeable to income-tax under the head “Income from
other sources”. Finance Act, 2017 amends Sec. 56(2), in accordance with which provisions of
Section 56(2)(viia) are not applicable for transactions taken place on or after 01.04.2017.

15.25
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
• This transaction now, falls under clause (x) of Sec. 56(2). For transactions falling u/s 56(2)(x),
reporting is required as per Clause No. 29B, which provides as follow:
(a) Whether any amount is to be included as income chargeable under the head ‘income from
other sources’ as referred to in clause (x) of sub-section (2) of section 56? (Yes/No)
(b) If yes, please furnish the following details:
(i) Nature of income;
(ii) Amount (in ₹) thereof.
• As per Sec. 56(2)(x), where any person receives, in any previous year, from any person or
persons on or after the 1st day of April, 2017, any property, other than immovable property, for a
consideration which is less than the aggregate FMV of the property by an amount exceeding
₹ 50,000, the aggregate FMV of such property as exceeds such consideration, shall be chargeable
to income-tax under the head "Income from other sources".
Conclusion: In the present case, difference of Fair Market Value and consideration paid is lower than
₹ 50,000, auditor is required to state the answer with “No”.

Q.40 AB Ltd. is a company in which public are not substantially interested. During the previous year
2022-23, the company issued shares to residents of India and provides you the following data
related to such issue:
No. of shares issued 1,00,000
Face Value ₹ 10 per share
Fair Market Value (FMV) ₹ 60 per share
Consideration received ₹ 80 per share
The management of the company contends that, it is a normal issue of shares, thus, needs not to be
reported. As the tax auditor of AB Ltd., how would you deal with the matter in your tax audit report?
[MTP-Oct.18]
Ans.: Reporting for Issue of Shares for Value Exceeding Fair Market Value:
• Clause 29 of Form 3CD requires tax auditor to report whether, the assessee received any
consideration for issue of shares which exceeds the fair market value of the shares as referred to
in section 56(2)(viib) of the Income-tax Act, 1961.
• Section 56(2)(viib) provides that where a company, not being a company in which the public are
substantially interested, receives, in any previous year, from any person being a resident, any
consideration for issue of shares that exceeds the face value of such shares, the aggregate
consideration received for such shares as exceeds the fair market value of the shares shall be
chargeable to income-tax under the head “Income from other sources”.
• In the present case, AB Ltd. is a company, in which public is not substantially interested. Company
has received consideration for issue of shares of ₹ 80 per share (Face value ₹ 10 per share +
Premium ₹ 70 per share) which exceeds the face value of ₹10 per share and fair market value of
the shares of ₹ 60 per share, and hence the case covered u/s 56(2)(viib).
Conclusion: Tax auditor of AB Ltd. is required to furnish the details of shares issued under clause 29
of Form 3CD.
Q.41 As an auditor appointed under section 44AB of the Income-tax Act, 1961, how would you verify and
report on the following: The assessee has borrowed ₹ 50 lakhs from various persons partly in cash
and partly by account payee cheque. [Nov. 17 (3 Marks)]

15.26
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 15 Audit under Fiscal Laws
Ans.: Reporting of Borrowing in Form 3CD:
Clause 31(a) of Form 3CD requires tax auditor to report on below mentioned particulars of each loan
or deposit for an amount exceeding the limit specified in section 269SS taken or accepted during the
previous year:
(i) name, address and permanent account number (if available with the assessee) of the lender or
depositor;
(ii) amount of loan or deposit taken or accepted;
(iii) whether the loan or deposit was squared up during the previous year;
(iv) maximum amount outstanding in the account at any time during the previous year;
(v) whether the loan or deposit was taken or accepted by cheque or bank draft or use of electronic
clearing system through a bank account;
(vi) in case the loan or deposit was taken or accepted by cheque or bank draft, whether the same
was taken or accepted by an account payee cheque or an account payee bank draft.
Conclusion: Auditor should verify the compliance with the provisions of section 269SS of the Income
Tax Act and report the same under Clause 31(a) of Form 3CD.
Q.42 The provisions of Sec. 269SS of Income-tax Act, 1961 are not applicable to some organisations.
Mention those organisations. [Jan. 21 – Old Syllabus (5 Marks)]
Ans.: Organisations on which Provisions of Sec. 269SS not applicable:
As per the proviso to Sec. 269SS, the provisions of section 269SS shall not apply to any loan or
deposit taken or accepted from, or any loan or deposit taken or accepted by-
(i) Government;
(ii) any banking company, post office savings bank or co-operative bank;
(iii)any corporation established by a Central, State or Provincial Act;
(iv) any Government company as defined in Sec. 2(45) of the Companies Act, 2013;
(v) such other institution, association or body or class of institutions, associations or bodies which
the C.G. may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette.
The auditor should maintain the prescribed information in his working papers for the purpose of
reporting against this clause in the format provided in the e-filing utility. These particulars need not
be given in case of a Government Company, a banking company or a corporation established by a
Central, State or Provincial Act.
Q.43 Mr. KK is a contractor dealing in food catering, flower decorating and light decorating activities. He
has received contract in respect of food catering and flower decorating from one NGO for holding
Annual Talent evening event to celebrate completion of 25 years of their establishment. For the said
event Mr. KK has received in cash ₹ 1,85,000 for food catering and ₹ 1,25,000 for flower decoration.
As a tax auditor how would you deal and report on the above?
[Jan. 21 – Old Syllabus (4 Marks), MTP-March 22, April 23]
Ans.: Reporting of Cash receipts in Form 3CD:
• Section 269ST provides that no person shall receive sum of ₹ 2 lakh or more
(a) in aggregate from a person in a day; or
(b) in respect of a single transaction; or
(c) in respect of transactions relating to one event or occasion from a person
otherwise than by an account payee cheque or an account payee demand draft or by use of
electronic clearing system through a bank account.

15.27
By: CA. Pankaj Garg
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Audit under Fiscal Laws Chapter 15
• Tax auditor has the responsibility to verify the compliance with the provisions of 269T of the
Income-tax Act and is required to report under Clause 31(ba) particulars of each receipt in an
amount exceeding the limit specified in section 269ST, in aggregate from a person in a day or in
respect of a single transaction or in respect of transactions relating to one event or occasion from a
person, during the previous year, where such receipt is otherwise than by a cheque or bank draft
or use of electronic clearing system through a bank account-
(i) Name, address and Permanent Account Number (if available with the assessee) of the
payer;
(ii) Nature of transaction;
(iii) Amount of receipt (in ₹);
(iv) Date of receipt;
• In the present case, Mr. KK, contractor dealing in food catering, flower decorating and light
decorating activities, received in cash ₹ 1,85,000 for food catering and ₹ 1,25,000 for flower
decoration from one NGO for holding one event, by way of cash which is exceeding prescribed
amount of ₹ 2,00,000.
Conclusion: Tax auditor is required to report the cash receipts in compliance with Clause 31(ba) of
Form 3CD.
Q.44 Discuss the reporting requirements in Form 3CD of the Tax Audit Report u/s 44AB of the Income-
tax Act, 1961 for the Brought forward loss or depreciation allowance.

Ans.: Reporting requirements for Brought forward loss or depreciation allowance in Form 3CD:
Clause 32(a) of Form 3CD requires the following details of brought forward loss or depreciation
allowance, in the following manner, to the extent available:

1 Serial Number

2 Assessment Year

3 Nature of loss /allowance (in rupees)

4 Amount as returned (in rupees)*

5 All losses/allowances not allowed u/s 115BAA/115BAC/ 115BAD

6 Amount as adjusted by withdrawal of additional depreciation on account of opting

for taxation u/s 115BAC/115BAD^

7 Amounts as assessed (give reference to relevant order)

8 Remarks

*If the assessed depreciation is less and no appeal pending than take assessed.
^ To be filled in for assessment year 2021-22 only.

Q.45 Tiger Ltd., is a company engaged in the production of wool. Along with its production business, it is
also engaged in buying and selling of securities with the expectation of a favourable price change.
During the year, its speculation loss on account of purchase and sale of securities was to the tune of
₹ 12 lacs.
As a tax auditor, what is the reporting requirement in Form 3CD u/s 44AB of the Income-tax Act,
1961? [May 18 – Old Syllabus (4 Marks)]

15.28
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Chapter 15 Audit under Fiscal Laws
Ans.: Reporting Requirement Under Clause 32(e) of Form 3CD:
• Clause 32(e) of Form 3CD requires the auditor to furnish the details of speculation loss if any
incurred during the previous year, in case of a company which is deemed to be carrying on a
speculation business.
• Explanation to section 73 provides that where any part of the business of a company consists in
the purchase and sale of shares of other companies, such company shall, for the purposes of this
section, be deemed to be carrying on a speculation business to the extent to which the business
consists of the purchase and sale of such shares.
• In the present case, SL Pvt. Ltd. is engaged in production business and side by side dealing in
buying and selling of securities with the intention of speculation and during the current financial
year, hence the company will be deemed to be carrying on a speculation business.
Conclusion: Tax auditor is required to furnish the details under Clause 32(e) of Form 3CD with
respect to the speculation loss of ₹ 12 lakhs made during the year.
Q.46 While conducting the tax audit of PJP Ltd. you observed that company has timely filed ETDS return
for TDS deducted on salary u/s 192 of the Income-tax Act, 1961 in Form 24Q in respect of fourth
quarter period from 1st January 2023 to 31st March 2023. The company has not furnished list of
details which are not reported in the statement of tax deducted at source under the pretext that
TDS statements are furnished within the prescribed time. As a Tax Auditor of PJP Ltd. how you
would deal and report? [Dec. 21 – Old Syllabus (5 Marks), MTP-April 22, Sep. 22]
Ans.: Reporting Requirements under Clause 34(b) of Form 3CD:
• Clause 34(b) deals with information pertaining to statement of tax deducted at source and tax
collected at source in the below mentioned format.
Tax deduction Type Due date Date of Whether the statement of tax deducted
and collection of for furnishing, or collected contains information about
Account Form furnishing if all details/transactions which are
Number (TAN) furnished required to be reported.
If not, please furnish list of
details/transactions which are not
reported.

• Under this clause, a list of details/transactions which are not reported in the statement of tax
deducted at source and statement of tax collected at source are required to be furnished. The
reporting requirement is notwithstanding the fact that the assessee has furnished the statements
of tax deducted at source and tax collected at source within the prescribed time.
• Tax auditor should take into consideration the relevant sections, rules, notifications, circulars and
various judicial pronouncements in relation to transactions of relevant payments or collections.
• There may be occasions when the tax auditor may not agree with the interpretation/view taken
by the auditee. In such cases the tax auditor may report about the views as observation in clause
(3) of Form No. 3CA or clause (5) of Form No. 3CB, as the case may be.
Q.47 ABC Printing Press, a proprietary concern, made a turnover of above ₹ 103 lacs for the year ended
31.03.2023. The Management explained its auditor Mr. Z, that it undertakes different job work
orders from customers. The raw materials required for every job are dissimilar. It purchases the
raw materials as per specification/requirements of each customer, and there is hardly any balance

15.29
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 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
of raw materials remaining in the stock, except pending work-in-progress at the year end. Because
of variety and complexity of materials, it is rather impossible to maintain a stock-register. Give your
comments. [RTP-May 20]
Ans.: Non-maintenance of stock register:
• As per requirement of Para 35(b) and Para 11(b) of Form 3CD, auditor is required to report on
the details of stock and account books (including stock register) maintained.
• Auditor need to verify the closing stock of raw materials and finished products and by-products of
the entity. In case the details are not properly maintained, he has to specifically mention the same,
with reasons for non-maintenance of stock register by the entity.
• The explanation of the entity for the use of varieties of raw materials for different jobs undertaken
may be valid. But the auditor needs to verify the specified job-orders received and the different
raw materials purchased for each job separately. The auditor may also enquire with the other
similar printers in the locality to ensure the prevailing custom.
Conclusion: Auditor is required to report under Paras 35(b) and 11(b) about non-maintenance of
stock register.
Q.48 As a tax auditor of RM & Co. for the assessment year 2023-24, how would you deal and report the
following: RM & Co. is a trading concern and maintains the quantitative details of items traded. The
said details have been provided to you by the company for meeting reporting requirements, if any.
[Dec. 21 – Old Syllabus (2 Marks)]
Ans.: Reporting Requirement for inventory in Form 3CD:
• Clause 35(a) of Form 3CD requires that in the case of a trading concern, following quantitative
details of the principal items of goods traded should be given:
(i) Opening stock;
(ii) Purchases during the previous year;
(iii) Sales during the previous year;
(iv) Closing stock;
(v) shortage/excess, if any.
• The tax auditor should obtain certificates from the assessee in respect of the principal items of
goods traded, the balance of the opening stock, purchases, sales and closing stock and the extent
of shortage/excess/damage and the reasons thereof.
Q.49 ABC Ltd., having principal place of business in Delhi, is engaged in the generation, transmission,
distribution and supply of electricity throughout India. The management of the company came to
know that the provisions related to maintenance of cost records and cost audit are applicable to the
company. The company, therefore, appointed a cost auditor for the financial year 2022-23.
The cost auditor reported certain disqualifications in Form CRA-3 of the cost audit report to which
the management of the company disagreed.
The management of ABC Ltd. instructed its tax auditor not to reveal any of the disqualifications
related to the cost audit while filling particulars to be furnished in Form No. 3CD contending that
the disqualifications are not relevant and there is no correlation between tax audit and cost audit as
well. As a tax auditor, how would you deal with the matter? [MTP-Aug.18]
Ans.: Reporting Requirement for Disqualifications in Cost Audit Report:
• Clause (37) of Form 3CD requires tax auditor to comment upon whether cost audit was carried
out and if yes, details of disqualification or disagreement on any matter/item/value/quantity as
may be identified by the cost auditor should be reported.

15.30
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Chapter 15 Audit under Fiscal Laws
• For this purpose, tax auditor should obtain the copy of cost audit report from the assessee. Tax
auditor is not required to make any detailed study of such report, he is required to take note of
the details of disqualification on any matter/item/value/quantity as may be reported by the cost
auditor.
• In the present case, the cost auditor of ABC Ltd. has reported certain disqualifications in Form
CRA-3 of the cost audit report. Tax auditor is required to provide the details of disqualifications
reported by the cost auditor as per Clause (37) of the Form 3CD.
Conclusion: Contention of management is not acceptable as auditor is required to provide the details
of disqualifications on any matter/item/value/quantity as may be reported/identified by cost
auditor under clause 37 of Form 3CD.
Q.50 As a tax auditor, which are the accounting ratios required to be mentioned in the report in case of
manufacturing entities? Explain in detail any one of the above ratios and how does it help the tax
auditor in his analytical review.
Ans.: Accounting Ratios in Form 3CD:
Clause 40 of Form 3CD requires the details regarding turnover, gross profit, etc., for the previous
year and preceding previous year as mentioned below:
Serial Previous Preceding previous
Particulars
number year year
1. Total turnover of the assessee
2. Gross profit/turnover
3. Net profit/turnover
4. Stock-in-trade/turnover
5. Material consumed/finished goods produced
The details required to be furnished for principal items of goods traded or manufactured or services
rendered. These ratios have to be given for the business as a whole and not product wise.
Details of Profitability Ratio: By relating sales with the Gross profit or net profit, auditor may
ascertain the operating efficiency of an enterprise. Auditor is required to inquire any variations in
any of these ratios. The fall in the gross profit ratio and net profit ratio alert the auditor who, in turn
should ask the management for the reasons thereof and which should be carefully examined by him.
Details of Stock-in-trade/Turnover Ratio: The relationship of stock-in-trade to turnover over a
period of time would reveal whether the entity has been accumulating stocks or there is a decline in
the same. The auditor may obtain data for about 4-5 years, compute ratio of stock-in-trade/turnover
and compare the change made. A study of this relationship would reveal whether stocks are being
accumulated or they are dwindling over a period. Such information would provide an input to tax
auditor as to whether figures of either stock or turnover are being manipulated.
Q.51 ABC Ltd. is engaged in providing certain services on which it did not pay any service tax. As per
company, said services were not liable to service tax. However, Department issued a show cause
notice to company demanding service tax along with interest worth ₹ 5,45,000 on the same and
such demand was also confirmed. An appeal was filed to the Commissioner of Central Excise
(Appeals) which passed an order which upheld the demand on company. Company, being aggrieved
by the order of the Commissioner of Central Excise (Appeals), decided to file an appeal to the
CESTAT against such order. ABC Ltd. has also requested the tax auditor not to report as those
services were not liable for service tax and it has also filed an appeal for the same.

15.31
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
Ans.: Reporting of Taxation demands in Form 3CD:
• Clause 41 of Form 3CD requires auditor to furnish the details of demand raised or refund issued
during the previous year under any tax laws other than Income-tax Act, 1961 and Wealth tax Act,
1957 along with details of relevant proceedings.
• In the instant case, ABC Ltd. is engaged in providing certain services on which it did not paid any
service tax. Therefore, Department issued a show cause notice and demand for Service Tax along
with interest thereon. ABC Ltd. has also filed an appeal mentioning that said services are not liable
to service tax, but Central Excise (Appeals) has passed an order confirming the demand and ABC
Ltd. being aggrieved by the order of Commissioner of Central Excise (Appeals) decided to file an
appeal against the same. ABC Ltd. also requested the tax auditor not to report on the same as the
concerned services were not liable for any service tax and they have also decided to file an appeal
to CESTAT against the order of Commissioner of Central Excise (Appeals).
• Tax auditor should obtain a copy of all the demand/refund orders issued by the Excise
Authorities. It may be noted that even though the demand/refund order is issued during the
previous year, it may pertain to a period other than the relevant previous year.
Conclusion: Request of ABC Ltd. is not acceptable as clause 41 of Form 3CD requires tax auditor to
furnish the details of demand raised during the previous year under any tax law other than Income-
tax Act, 1961.
Q.52 M/s. NKB Ltd. is engaged in the manufacturing of textile products having an annual capacity of
producing 1,00,000 units of garments. NKB Ltd. is covered under the provisions of Goods and
Services Tax Act with an applicable rate of 12%. During the financial year 2022-23, NKB Ltd.
received a demand notice of ₹ 15.00 Lacs pertaining to the F.Y 2015-16 when the provisions of
Central Excise Act were applicable. NKB Ltd. deposited the demand amount after discussing with its
legal department. Are you, as a tax auditor of NKB Ltd., required to report the same?
[Jan. 21 – New Syllabus (4 Marks), MTP-Oct. 22]
Ans.: Reporting of tax demands in Form 3CD:
• Clause 41 of Form 3CD requires the tax auditor to furnish the details of demand raised or refund
issued during the previous year under any tax laws other than Income-tax Act, 1961 and Wealth
tax Act, 1957 along with details of relevant proceedings.
• It is to be noted that reporting is required under this clause even if the demand/refund order is
issued during the previous year and that demand/refund pertain to a period other than the
relevant previous year. If there is any adjustment of refund against any demand, the auditor shall
also report the same under this clause.
• In the given case, NKB Ltd. is a manufacturer of textile products and is covered under GST Act.
During financial year 2022-23 NKB has received a demand notice of ₹ 15 lakhs which pertains to
financial year 2015-16 when the Central Excise Act was prevalent.
• In this case, liability is of excise duty i.e. under Central Excise Act, other than Income Tax Act and
Wealth Tax Act, thus this clause gets attracted and the reporting has to be done as per format:
S. Name of Demand Date of Financial Amount of Adjustment Remar
No. the / demand year to demand / of refund ks
Applica Refund Raised / which the raised / against
ble Order refund demand / refund demand, if
issued refund issued any
Act No., if
relates
any

15.32
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 15 Audit under Fiscal Laws
Q.53 CA Nitesh, while carrying out the Tax audit of PQR Ltd. observed that PQR Ltd. has entered into
specified financial transactions covered u/s 285BA of the Income-tax Act, 1961. PQR Ltd. has
furnished statement of the specified financial transaction in Form No. 61 & Form No. 61A.
Guide CA. Nitesh with reporting requirements under clause 42 of Form 3CD?
The management contends that tax auditor need not report, if the transactions are not covered in
the ambit of Section 269ST. Comment. [Dec. 21 – New Syllabus (5 Marks)]
Ans.: Reporting requirements in respect of specified financial transactions:
Clause 42 of Form 3CD requires the tax auditor to report the following:
(a) Whether the assessee is required to furnish statement in Form No. 61 or Form No. 61A or Form
No. 61B? (Yes/No)
(b) If yes, please furnish:

Income-tax Type of Due date Date of Whether the Form contains information
Department Form for furnishing, about all details/ transactions which are
Reporting Entity furnishing if furnished required to be reported. If not, please
Identification furnish list of the details/transactions
Number which are not reported.

With respect to Form 61, the tax auditor should verify whether the taxpayer has entered into any
transaction where the other party was required to quote PAN. He should verify whether the
taxpayer has obtained declaration in Form No. 60 where the other party has not furnished his
PAN. Wherever the taxpayer has received declarations in Form No. 60, the auditor should verify
if the taxpayer has filed Form No. 61 including therein all the necessary particulars.
With respect to Form 61A, the tax auditor should ascertain whether the taxpayer is required to
report any transactions u/s 285BA read with Rule 114E.
While verifying the same, the tax auditor should ensure that the provisions of Rule 114E(3) have
been properly considered and applied. Failure to do so may result in a certain transaction not
being reported. It may be noted that the payment may be received for various transactions and
on different dates, and hence these may not be covered under Section 269ST but will have to be
reported under Section 285BA.
Conclusion: Based on the above discussions it can be concluded that management contention
that tax auditor need not report, if the transactions are not covered in the ambit of Section 269ST
is not correct.
Q.54 M/s. PQR Auto, a partnership firm, is engaged in manufacture of automobile spare parts having
factory at Surat. CA. S was appointed as the Tax Auditor of M/s. PQR Auto for the Assessment year
2023-24. While carrying out the Tax Audit u/s 44AB of the Income Tax Act, 1961 CA. S observed
following:
(i) Interest of ₹ 50,000 paid to Vendor X who was registered under MSME Act, 2006.
(ii) Interest payment ₹ 10,000 was incurred in relation to earning exempt interest income from
Tax Relief bonds.
(iii) Sum of ₹ 1,00,000 was received from Mr. X, for sale of one plant and machinery. But due to
non-compliance of one of the conditions as specified in the contract with Mr. X, M/s. PQR Auto
forfeited ₹ 1,00,000 during AY 2023-24 as per forfeiture clause mentioned in the contract.
Guide CA S in reporting the above transactions under the relevant clauses in Form No. 3CD.
[May 22 (5 Marks); MTP-March 23]

15.33
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 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
Ans.: Reporting in Form 3CD:
(i) Interest of ₹ 50,000 paid to Vendor X who was registered under MSME Act, 2006. This interest
needs to be reported under Clause 22 of Form 3CD which requires reporting of interest
inadmissible u/s 23 of the Micro, Small and Medium Enterprises Development Act, 2006.
Section 23 of the MSME Act lays down that an interest payable or paid by the buyer, in
accordance with the provisions of this Act, shall not be allowed as a deduction for the purposes
of the computation of income under the Income-tax Act, 1961. Accordingly, the CA. S is required
to report the payment of interest of ₹ 50,000 to Vendor X who was registered under MSME Act,
2006 under clause 22 of Form 3CD of the Income-tax Act, 1961.
(ii) Interest payment ₹ 10,000 was incurred in relation to earning exempt interest income from Tax
Relief bonds. This interest payment needs to be reported under Clause 21(h) of Form 3CD
which requires reporting of amount of deduction inadmissible in terms of Sec. 14A in respect of
the expenditure incurred in relation to income which does not form part of the total income.
Therefore, CA. S, the auditor is required to scrutinize expense accounts particularly interest
account to check whether there is included any expense which is relatable to exempt income.
He is also required to note down the amount and mention against the clause. Thus, in the given
situation, CA. S is required to report the same as per clause 21 (h) of Form 3CD of the Income-
tax Act, 1961.
(iii) Sum of ₹ 1,00,000 was received from Mr. X, for sale of one plant and machinery. But due to non-
compliance of one of the conditions as specified in the contract with Mr. X, M/s. PQR Auto
forfeited ₹ 1,00,000 during AY 2022-23 as per forfeiture clause mentioned in the contract. This
amount needs to be reported under Clause 29A of Form 3CD which requires the auditor to
report whether any amount is to be included as income chargeable under the head ‘income
from other sources’ as referred to in clause (ix) of sub-section (2) of section 56.
As per Sec. 56(2)(ix), any sum of money received as an advance or otherwise in the course of
negotiations for transfer of a capital asset, if, (a) such sum is forfeited; and (b) the negotiations
do not result in transfer of such capital asset, is chargeable to income tax under the head
“Income from Other Sources”.

15.4 - General Questions

Q.55 Comment on the following: The Statutory Auditor of P Ltd. is also appointed to undertake its Tax
Audit. After the completion of Statutory Audit, he finalizes Tax Audit without referring to Standards
on Auditing and Guidance Notes of Institute as he is of the opinion that Tax Audit relates only to tax
matters with which the Income tax department is concerned. Moreover, the assessee furnishes to
the auditor only the requisite information and records for the purpose of Tax Audit. [MTP-Aug. 18]
Ans.: Applicability of Standards on Auditing and Guidance Note in case of Tax Audit:
• In the case of a statutory audit, auditor is required to express his opinion as to whether the
financial statements give a true and fair view of the state of affairs in the case of the balance sheet
and in the case of the profit and loss account/income and expenditure account, of the profit/loss
or income/expenditure.
• While carrying out tax audit u/s 44AB, the tax auditor is required to state whether in his opinion,
the particulars as stated in Form 3CD are true and correct. The audit report given u/s 44AB assist
the income-tax department in ensuring compliance of provisions of Income Tax Act by the
assessee. In order that the tax auditor may be in a position to explain any question which may

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 By: CA. Pankaj Garg
Chapter 15 Audit under Fiscal Laws
arise later on, it is necessary that he should keep necessary working papers about the evidence on
which he has relied upon while conducting the audit and also maintain all his necessary working
papers.
• While carrying out the audit, auditor is required to refer the “Standards on Auditing” as well as
the “Guidance Note on Audit Reports and Certificate for Special Purposes”. If the statutory auditor
is also appointed to undertake tax audit, it is advisable to carry out both the audits concurrently.
• SA 210, “Agreeing the Terms of Audit Engagements” requires an auditor to establish whether the
pre-condition for an audit are present so as to accept or continue an audit engagement.
Accordingly, the auditor is required to obtain agreement of management that it acknowledges and
understands its responsibilities to provide the auditor with:
(a) Access to all information of which the management is aware that is relevant to the
preparation of the financial statements such as records, documentation and other matters.
(b) Additional information that the auditor may request the management for the purpose of the
audit, and
(c) Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.
Conclusion: Opinion of the auditor that Tax Audit relates only to tax matters with which the Income
tax department is concerned and there is no need to refer the Standards on Auditing and Guidance
Notes of Institute is not correct. Moreover, since the appointment of the tax auditor is made by
assessee, it will be in the interest of the assessee to furnish all the information and explanation and
produce books of account and records required by the tax auditor.
Q.56 State with reasons whether an auditor conducting tax audit ‘certifies’ or ‘reports’ on information
contained in the statement of particulars attached to the tax audit report under Section 44AB of
Income-tax Act, 1961.
Ans.: Tax Audit report u/s 44AB - Certification/Reporting:
• Section 44AB of the Income-tax Act, 1961 requires the auditor to submit the audit report in the
Form 3CA/Form 3CB. The statement of particulars as required in Form 3CD are required to be
annexed to the main audit report. In Form 3CA, auditor is required to report whether the
particulars in Form 3CD are true and correct. Form 3CB, in addition, requires the auditor to give
his opinion as to whether or not the accounts audited by him give a true and fair view.
• The term “certificate” is used where the auditor verifies the accuracy of facts while the term
“report” is used in case the auditor is expressing an opinion. Form 3CA/Form 3CB requires the
auditor to report on true and correct aspects of particulars stated in Form 3CD, it can be said that
an auditor conducting tax audit “certifies” the information contained in the statement of
particulars
• However, it is significant to examine whether all 41 clauses included in the statement of
particulars are capable of being simply certified on the basis of books of account or there are
some clauses in respect of which different auditor(s) may hold different opinion.
• There are several matters (Clause 14/Clause 18) on which the auditor is required to exercise
judgment while giving his report on various amounts included in the statement of particulars,
which may at times lead to different figures by different persons reporting thereon. There can
also be situations leading to difference of opinion between the tax auditor and the assessee.
Conclusion: Auditor conducting tax audit “reports” on certain information, apart from “certifying”
factual information contained in the statement of particulars annexed to the tax audit report under
section 44AB of the Income-tax Act, 1961.

15.35
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit under Fiscal Laws Chapter 15
Q.57 TP Ltd. a government company engaged in providing tourism services, has failed to get its accounts
audited by Statutory Auditor for the financial year 2022-23. You have been appointed as Tax
Auditor for the same period and management provided the unaudited financial statements which
have been adopted in the Annual General Meeting. Subsequently, the Statutory Auditor while
auditing observed that there is a material misstatement in providing depreciation on fixed assets
due to which financial statements have been revised. Now the company is requesting you to revise
the tax audit report. You are required to state whether Tax Audit Report can be revised and if so
under what circumstances? [Nov. 22 (5 Marks)]
Ans.: Revision of Tax Audit Report:
Rule 6G provide that the audit report furnished may be revised by the person by getting revised
report of audit from a CA, duly signed and verified by such CA, if there is payment by such person
after furnishing of report which necessitates recalculation of disallowance u/ss 40 or 43B. The said
revised audit report has to be furnished before the end of the relevant assessment year for which the
report pertains.
Further, when the accounts are revised in the following circumstances, the tax Auditor may have to
revise his Tax audit report also:
(i) Revision of accounts of a company after its adoption in the AGM.
(ii) Changes in law with retrospective effect.
(iii) Changes in interpretation of law through CBDT Circular, Notifications, Judgments, etc.
The Tax Auditor should state that it is a revised Report, clearly specifying the reasons for such
revision with a reference to the earlier report.
In the given case unaudited financial statements which have been adopted in the AGM has been
revised due to some material misstatement identified in depreciation.
Conclusion: As the accounts are revised after its adoption in the AGM, hence tax audit report need to
be revised.

15.36
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 By: CA. Pankaj Garg

16 Due Diligence, Investigation & Forensic Audit

Marks Distribution of Past Exams
10
9
8
7
6
Marks

5
4
3
2
1
0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 9 0 5 4 4 5 9 5 5 8 4

*From May 2019, Marks are given only for Descriptive Questions
16.1 - Due Diligence
Q.1 KDK Bank Ltd., received an application from a pharmaceutical company for takeover of their
outstanding term loans secured on its assets, availed from and outstanding with a nationalized bank.
KDK Bank Ltd., requires you to make a due diligence audit in the areas of assets of pharmaceutical
company especially with reference to valuation aspect of assets. State what may be your areas of
analysis in order to ensure that the assets are not stated at overvalued amounts.
[May 18 – New Syllabus (5 Marks), MTP-Nov. 21, March 22]
Or
K Ltd. is intending to acquire M Ltd. Your firm of Chartered Accountants is appointed to conduct due
diligence. While reviewing hidden liabilities list out any five areas which will be specifically
examined by you in your due diligence exercise. [Jan. 21 - Old Syllabus (5 Marks)]
Or
A European company engaged in the business of manufacturing and distribution of industrial gases,
is interested in acquiring a listed Indian Company having a market share of 51% and assets over
₹ 1000 Crores. It requests you to conduct "Due Diligence" of assets of this Indian Company to find
out, if any of the assets is overvalued. List down the areas of due diligence exercise to find out
overvalued assets. [Jan. 21 - New Syllabus (5 Marks), MTP-Oct. 22]
Ans.: Investigation of Hidden Liabilities:
In order to investigate hidden liabilities, the auditor should pay his attention to the following areas:
• Any show cause notice, which have not matured into demands but may be material and
important.
• Contingent liabilities not shown in books.

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• Company may have sold some subsidiaries/businesses and may have agreed to take over and
indemnify all liabilities and contingent liabilities of the same prior to the date of transfer.
• Product and warranty liabilities, product returns & discounts, liquidated damages, etc.
• Tax liability under direct and indirect taxes.
• Long pending sales tax assessment.
• Cases of custom duty where only provisional assessment has been made and final assessment is
yet to completed.
• Agreement to buy back shares at a stated price.
• Future lease liabilities.
• Claims against the company including third party claims.
• Unfunded retirement benefit of employees.
• Labour claims under negotiations.
Regularly Overvalued assets: The auditor shall have to specifically examine the following areas:
• Uncollectable receivables.
• Obsolete, slow and non-moving inventories and inventories valued above net realizable value, if
any.
• Obsolete and unused plant and machinery and their spares.
• Assets value which have impaired due to sudden fall in market value.
• Assets shown in books above market value due to capitalization of expenditure/foreign exchange
fluctuation or capitalisation of revenue expenditure.
• Assets under litigation.
• Investment shown at cost whose market value is much lower.
• Investment carrying very low rate of return.
• Infructuous project expenditure.
• Intangibles of no value.
Q.2 Ekbote Co. is currently a large organisation trading in items of office furniture. The entity wants to
expand and hence are looking at acquisition of Rawat Co. which deals in items of household
furniture. Ekbote Co. hires a Chartered Accountant to conduct a due diligence to consider whether
there is the potential for additional value to be brought out of the target company by improving its
operational function and also whether there are serious operational risks about which the potential
buyer should be concerned (thereby allowing the buyer to consider aborting the deal or
renegotiating the price). Which of the due diligence review would be helpful to achieve the above
objective? You are also required to briefly discuss the contents of a due diligence report.
[MTP – April 19]
Ans.: Due Diligence:
In the instant case Operational Due Diligence is required to confirm that the business plan provided is
achievable with the existing facilities plus the capital expenditure outlined in the business plan.
Contents of Due Diligence Report: Refer answer of Q. No. 4.
Q.3 LMN Ltd. entered into a deal with SP Ltd. for buying its business of manufacturing wooden products/
goods. LMN Ltd. has appointed your firm for conducting due diligence review and they want to know
the cash generating abilities of SP Ltd. What points will you check in order to ensure that the
manufacturing unit of SP Ltd. will be able to meet the cash requirements internally?
[MTP – March 21]

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Ans.: Conducting Due diligence to examine cash generating abilities:
In order to ensure that the manufacturing unit of SV Ltd. will be able to meet the cash requirements
internally, one is required to verify:
(a) Is the company able to honour its commitments to its trade payables, to the banks, to the
government and other stakeholders?
(b) How well is the company able to convert its trade receivables and inventories?
(c) How well the Company deploys its funds?
(d) Are there any funds lying idle or is the company able to reap maximum benefits out of the
available funds?
(e) What is the investment pattern of the company and are they easily realizable?
Q.4 Write short note on: Example of headings of a Due Diligence Report. [RTP – Nov. 21]
Or
XYZ Limited, a company engaged in the business of manufacturing and distribution of copper rods
and copper wire is interested in acquiring a listed company having a market share of 38% of
Insulated Copper Wires. You were appointed to conduct a “Due Diligence” of the target company and
you have completed review of a few key areas. List out the contents of the Due Diligence Report
which you will submit to XYZ Limited.
Ans.: Contents of a Due Diligence Report
1. Executive summary.
2. Introduction.
3. Objective of due diligence.
4. Terms of reference and scope of verification.
5. Brief history of the company.
6. Summary on capital structure and group structure of company.
7. Shareholding pattern.
8. Observations on the review.
9. Assessment of Management structure.
10. Assessment of financial liabilities.
11. Assessment of valuation of assets.
12. Assessment of operating results.
13. Assessment of taxation and statutory liabilities.
14. Assessment of possible liabilities on account of litigation.
15. Assessment of net worth.
16. Any liabilities not provided for in the books.
17. SWOT analysis comments on future projections.
18. Status on charges, liens, mortgages and assets of the company.
19. Ways and means to cover unforeseen contingent liabilities.
20. Aspects to be taken care of before/after merger.
21. Interlocking investments and financial obligations with group/associate companies amounts
receivable subject to litigation.

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Q.5 A Ltd. who is one of the leading manufacturer of kids clothing is interested to acquire B Ltd. B Ltd. is
currently a manufacturer of women’ clothing. As a professional consultant in due diligence and
valuation, A Ltd. entrusted you to value B Ltd. The valuation of B Ltd. is dependent on future
maintainable sales. Discuss the factors you would consider in assessing the future maintainable
turnover of B Ltd? [MTP-March 19]
Ans.: Factors to be considered in assessing future maintainable turnover:
In assessing the turnover which the business would be able to maintain in the future, the following
factors should be taken into account:
(i) Trend: Whether in the past, sales have been increasing consistently or they have been
fluctuating. A proper study of this phenomenon should be made.
(ii) Marketability: Is it possible to extend the sales into new markets or that these have been fully
exploited? Product wise estimation should be made.
(iii) Political and economic considerations: Are the policies pursued by the Government likely to
promote the extension of the market for goods to other countries? Whether the sales in the
home market are likely to increase or decrease as a result of various emerging economic
trends?
(iv) Competition: What is the likely effect on the business if other manufacturers enter the same
field or if products which would sell in competition are placed on the market at cheaper price?
Is the demand for competing products increasing? Is the company’s share in the total trade
constant or has it been fluctuating?
Q. CA. Sanjana is acting as Credit manager in branch of DFC Bank Limited. A company has approached
5A the branch for a request to sanction credit facilities worth `10 crore for meeting usual business
requirements. It is a prospective new client. She checks past history of the company, back ground of
promoters & directors, shareholding pattern and nature of business. Assessment of financial results
of past years and future projections is also undertaken. She also carries out SWOT analysis of the
company.
Besides, assessment of net worth of directors is also undertaken. Status of CIBIL score and position
of name of promoters/directors in RBI defaulter list is also verified.
She also makes discreet inquiries from few clients of the branch engaged in similar line of activity
regarding credit worthiness of company, its promoters and directors. Based on above:
(a) Identify activity being performed by CA Sanjana and discuss its nature.
(b) Would your answer be different if this activity was to be performed by a person not qualified as
a Chartered Accountant? Can a non-CA perform such activity? State reason.
(c) Name any three other areas where identified activity can be undertaken.
[MTP-April 23; RTP-May 23]
Ans.: Due diligence:
(a) The activity described in the situation is Due diligence. Due diligence is a measure of prudence
activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a
reasonable and prudent person under the particular circumstance, not measured by any
absolute standard but depending upon the relative facts of the case. It involves a careful study of
financial and non-financial possibilities. It implies a general duty to take care in any transaction.
Due diligence is a process of investigation, performed by investors, into the details of a potential
investment such as an examination of operations and management and the verification of
material facts. It entails conducting inquiries for the purpose of timely, sufficient and accurate
disclosure of all material statements/information or documents, which may influence the

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outcome of the transaction. Due diligence involves a careful study of the financial as well as non-
financial possibilities for successful implementation of restructuring plans.
Due diligence involves an analysis carried out before acquiring a controlling interest in a
company to determine that the conditions of the business conform with what has been
presented about the target business. Also, due diligence can apply to recommendation for an
investment or advancing a loan/credit.
(b) There would be no difference in answer if above activity was to be performed by a person who is
not a Chartered Accountant. The activity would remain due diligence. Due diligence can be
performed by any person. It is not necessary that due diligence can only be carried out by a
Chartered Accountant. As due diligence involves exercise of prudence and general duty to take
care in any transaction, it can be undertaken by any person.
(c) The areas where due diligence may be undertaken are: -
(i) Corporate restructuring
(ii) Venture capital financing
(iii) offerings
Q. AB Ltd wants to acquire a unit of CT Ltd. AB Ltd is uncertain about the future viability of the unit
5B under consideration. You are appointed to investigate economic and financial position of the unit.
What are the factors that you shall consider while studying the economic and financial position of
the business? [May 23 (4 Marks)]
Ans.: Factors to be considered while studying the economic and financial position of the business:
(i) The adequacy or otherwise of fixed and working capital. Are these sufficient for the growth of
the business?
(ii) What will be the trend of the sales and profits in the future? Establishing the trend of sales,
product-wise and area-wise will ordinarily help in drawing a conclusion on whether the trend
will be maintained in the future.
(iii) Whether the profit which the business could be expected to maintain in the future would yield
an adequate return on the capital employed?
(iv) Whether the business is operating at its 100 percent capacity or improvements can be made to
reach at full productivity?

16.2 - Audit vs. Investigation

Q.6 Write a short note on - Audit and Investigation. [Nov. 18-Old Syllabus (4 Marks)]
Or
General objective of an audit is to find out whether the financial statements show true and fair view.
On the other hand, investigation implies systematic, critical and special examination of the records
of a business for a specific purpose. In view of the above, you are required to brief out the difference
between Audit and Investigation. [RTP-Nov. 19]
Ans.: Audit vs. Investigation:
• Auditing involves examination of financial information contained in financial statements to express
an opinion whether or not the same have been prepared properly. In essence, auditing involves
independent examination of financial information prepared by the management of an entity.
• Investigation implies systematic, critical and special examination of the records of a business for a
specific purpose.

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• Difference between audit and investigation are given below:
Basis Audit Investigation
Objective To verify whether the financial statements It aims at establishing a fact or
display a true and fair view of the state of a happening or at assessing a
affairs and the working results of an entity. particular situation.
Scope The scope of audit is wide and is determined The scope of investigation may
by the provisions of relevant law in case of be governed by statute or it
statutory audit. may be non-statutory.
Periodicity The audit is carried on either quarterly, half- The work is not limited by
yearly or yearly. rigid time frame.
Nature Involves tests checking to collect evidences Requires a detailed study and
for forming a judgment. examination of facts and
figures.
Inherent Audit suffers from inherent limitation. No inherent limitation owing
Limitations to its nature of engagement.
Evidence Audit is mainly concerned with prima facie It seeks conclusive evidence.
evidence.

Observance of Is governed by compliance with generally It is analytical in nature and

Accounting accepted accounting principles, audit requires a thorough mind,
Principles procedures and disclosure requirements. capable of observing,
collecting and evaluating facts.
Reporting The outcome is reported to the owners of the The outcome is reported to the
business entity. person(s) on whose behalf
investigation is carried out.
.

16.3 - Steps in Investigation

Q.7 Write Short note on: Important issues to be kept in mind by the investigator while preparing his
report. [RTP – May 21]
Ans.: Issues to be kept in mind while preparing the report:
1. The report should not contain anything which is not relevant.
2. Expressions used should be properly considered so that the possibility of arriving at a different
meaning or interpretation other than the one intended by the investigator can be minimized.
3. Relevant facts and conclusions should be properly linked.
4. Bases and assumptions made should be explicitly stated.
5. Report should clearly spell out the nature and objective of the assignment, its scope and
limitations, if any.
6. Report should be made in paragraph form with headings for the paragraphs.
7. Report should also state restrictions or limitations, if any, imposed on the instructions given by
the client.
8. Opinion of the investigator should appear in the final paragraph of the report.

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16.4 - Special Issues in Investigation
Q.8 XYZ Ltd. has bought a land in Nagpur for setting up a manufacturing unit in the year 2021 at a price
of ₹ 10 crores. In the year 2022, one of the directors of company raised suspicion on the price and
transactions related to purchase of land. Therefore, an investigation was ordered by the
management and PV Associates were appointed to investigate the matter and submit their report
accordingly. PV Associates were of the view that they need to take an expert’s opinion on the price of
land. Whether PV Associates is authorized to take assistance of expert? If yes, what is the process
they need to follow?
Ans.: Assistance of Expert in due diligence activity:
• If PV Associates feels the necessity of obtaining views and opinions of experts in various fields to
properly conduct the investigation, they are allowed to do so.
• It would be therefore, proper for the investigator to get the written general consent of his client, to
refer special matters for views of different experts at the beginning of investigation and he should
settle the question of costs for obtaining the views and other related implications.
Q.9 Milk Ltd. is engaged in the business of manufacturing and distribution of various milk products like
cheese, curd, paneer, etc. Government made certain changes in rules and regulations relating to this
sector, consequently management decided to go for expansion. Management was looking for some
financial investor, who can fund some part of the proposed expansion. Mr. X is interested in the
venture and appoints you to act as an advisor to the proposed investment in the business of Milk Ltd.
You have to investigate the audited financial statements and ensure that the valuation of shares of
the company on the basis of audited financial statements is appropriate. What process will be used
for checking and whether you can put reliance on already audited statement of accounts?
[July 21 – New Syllabus (5 Marks)]
Ans.: Process to be carried out for investigating the audited financial statements:
Following process may be carried out-
(i) If the statements of account produced before the investigator were not audited by a qualified
accountant, then of course there arises a natural duty to get the figures in the accounts properly
checked and verified.
(ii) However, when the accounts produced to the investigator have been specially prepared by a
professional accountant, who knows or ought to have known that these were prepared for
purposes of the investigation, he could accept them as correct relying on the principle of liability
to third parties.
(iii) Nevertheless, it would be prudent to see first that such accounts were prepared with objectivity
and that no bias has crept in to give advantage to the person on whose behalf these were
prepared.
Reliance on Audited Statement of Accounts:
If the investigation has been launched because of some doubt in the audited statement of account, no
question of reliance on the audited statement of account arises. However, if the investigator has been
requested to establish value of a business or a share or the amount of goodwill payable by an
incoming partner, ordinarily the investigator would be entitled to put reliance on audited materials
made available to him unless, in the course of his test verification, he finds the audit to have been
carried on very casually or unless his terms of appointment clearly require to test everything afresh.

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16.5 - Investigation under the Companies Act, 2013
Q.10 What will be your approach in investigation under section 210 into the affairs of the company
registered under Companies Act, 2013? [May 14 (4 Marks)]
Ans.: General approach for Investigation:
The general approach for investigation under sections 210 and 213 of Companies Act, 2013 is
conditioned by the legal requirements in these regards. The affairs of the company may include
everything such as goodwill, profit and loss, contracts, investments, assets, shareholding in
subsidiaries, decision making, etc.
Investigation under sections 210 and 216 do not call for any special approach. The general approach
for investigations should, therefore, be formulated having regard to the terms of reference, scope, the
period, the programme and procedure of the investigation and the attending legal requirements as
explained below:
1. Clarity of Terms of Reference: The inspector should ensure that the terms of reference are
clear, unambiguous and in writing. If he has any doubt about any item in the terms, he should
obtain clarification in writing.
2. Scope of Investigation: Inspector should determine scope of the investigation on the basis of the
terms of reference. At this stage, it may be useful for the inspector to go into the history of the
company and its affiliates or associates.
3. Period for investigation: Inspector should also have regard to the period over which the
investigation should stretch. The evaluation of terms of reference and the consequential
determination of the scope of investigation are the twin props on which the entire investigation
would rest.
4. Framing of Programme: The next step is the investigator/inspector should frame his
programme for investigation in a systematic manner. He should keep adequate working notes and
papers with references and cross references in a proper and methodical way to aid him in the
preparation of the report.
5. Using the work of Experts: He should also consider whether assistance of other experts like
engineers, lawyers, etc., is necessary in the interest of a comprehensive and full proof
examination of the documents and information.
6. Legal requirements and investigation Report: After completion of steps in the investigation
programme and collection of all the information that he needed, report should be prepared.
However, an interim report may be made if required. The findings should be completed and
exhaustive. Before he makes his final report, he should obtain and keep on record the evidences
relied upon by him. By the nature of things, such evidence should be as conclusive as possible
depending on circumstances of the case. He should make his report in accordance with the
provisions of the Companies Act, 2013.
Q.11 The Central Government is of the view that there are certain interested members and companies
who are financially interested in the success or failure of the company or who have been able to
control or to materially influence the policy of the company.
Hence the Central Government wants to investigate the ownership of the company.
Describe the scope and extent of investigation by an Investigator/Chartered Accountant on behalf of
Central Government under Companies Act, 2013. [Nov. 16 (4 Marks)]

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Ans.: Scope and Extent of Investigation under Companies Act, 2013:
• When a CA is appointed to carry out an investigation under section 210, 213 or 216 of Companies
Act, 2013, the scope and extent of enquiry, the objective of the investigation and other matters
asked for investigation are specified in the order of investigation issued by the appointing
authority.
• On the basis of terms of investigation, the investigating accountant should determine the areas of
accounts to be investigated and the extent to which the enquiry is to be made.
• In case of a company having subsidiaries or where one or more directors are interested in one or
more entities, all the dealings with these entities should be examined.
• Any breach of duty for purposes of investigation would be material only if it has resulted in a loss
to the company. In such a case, the factors responsible for the losses, besides the amount thereof,
shall have to be investigated. Negligence would be culpable only if it was in relation to a duty cast
by the Act, Articles of Association or by a resolution of the shareholders or that of the Board of
Directors.
• Any negligence in the discharge of duty of a director or any other managerial personnel must be
construed very broadly. As such, it is their duty to safeguard the property of the company and
protect the interest of the shareholders.
• An investigator may interrogate directors, officers, agents, and others concerned with matters
under his enquiry, if appears necessary.
• If the Investigating accountant is required to report on the efficiency of the management, he
should be discreet in expressing his opinion.
• The inspector must ensure that the persons who figure in the investigation get the fullest
opportunity to explain their action and conduct.

16.6 - Investigation on behalf of Incoming Partner

Q.12 What are the important steps involved while conducting Investigation on behalf of an Incoming
Partner? [MTP-April 18]
Or
Lamba, Malhotra and Khandelwal are partners in a firm sharing profits and losses in the ratio 2:2:1.
The partners have agreed to take Mr. Jain as a partner with effect from 1st April, 2021 as 1/4th
partner. What are the important steps involved while conducting investigation on behalf of Mr.
Mistri, the incoming partner? [MTP-May 20, March 23]
Ans.: Investigation on behalf of incoming partner:
Investigation on behalf of incoming partner is carried out so as to ascertain whether the terms offered
to him are reasonable having regard to the nature of the business, profit records, capital distribution,
personal capability of existing partners, etc. Steps involved in investigation includes the following:
(a) Ascertaining the history of the firm since inception and growth of the firm.
(b) Studies of the provisions of the Deed of Partnership, particularly for composition of partners,
their capital contribution, drawing rights, retirement benefits, job allocation, etc.
(c) Scrutiny of the record of profitability of the firm’s business over a suitable number of years.
(d) Examination of the asset and liability position to determine the tangible asset, investment,
appraisal of the value of intangibles like goodwill, know-how, patents, etc. including contingent
liabilities and those for pending tax assessment.

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(e) Assess position of order at hand and the range and quality of clientele should be thoroughly
examined under which the firm is presently operating.
(f) Scrutinize terms of loan finance to assess its usefulness and the implication for the overall
financial position.
(g) Study important contractual and legal obligations. It may be the case that the firm has
standing agreement with the employees as regards salary and wages, bonus, gratuity and other
incidental benefits.
(h) Study the composition and quality of key personnel employed by the firm and any likelihood
of their leaving the organisation.
(i) Ascertain reasons for the offer of admission to a new partner and it should be determined
whether the same synchronizes with the retirement of any senior partner whose association
may have had considerable impact having on the firm’s successes.
(j) Appraisal of the record of capital employed and the rate of returns. It is necessary to have a
comparison with alternative business avenues for investments.
(k) Ascertain manner of computation of goodwill on admission as also on retirement, if any.
(l) Examine whether any special clause exist in the Deed of Partnership to allow admission in
future a new partner.

16.7 - Investigation on behalf of the Bank for Advances

Q.13 M/s ISBN Bank Ltd. appoints you to investigate on behalf of them for advancing loan to M/s Dust Ltd.
As an investigating accountant, what information and factors you will enquire into?
[May 18 – Old Syllabus (4 Marks)]
Ans.: Points to be covered in an investigation on behalf of bank:
1. Collection of Information: Investigator is required to collect the information w.r.t.
(a) Purpose for which the loan is required.
(b) Manner in which the borrower proposed to invest the amount of the loan.
(c) Schedule of repayment of loan submitted by the borrower, particularly, the assumptions
made therein as regards amounts of profits that will be earned in cash and the amount of cash
that would be available for the repayment of loan to confirm that they are reasonable and
valid in the circumstances of the case.
(d) Financial standing and reputation for business integrity enjoyed by the directors and
officers of the company.
(e) Authorisation under Memorandum or the Articles of Association to borrow money for the
purpose for which the loan will be used.
(f) History of growth and development of the company and its performance during the past
five years.
2. Examination of Financial Statements: It will cover the followings:
(a) Preparation of a condensed income statement: It will be prepared from statement of
profit & Loss for the previous five years, showing separately therein various items of income
and expenses, the amounts of gross and net profits earned and taxes paid annually during
each of the five years. Purpose of condensed income statement is to ascertain strengths of
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(b) Computation of Relevant Ratios:
• Sales to Average Stocks held.
• Sales to Fixed Assets.
• Equity to Fixed Assets.
• Current Assets to Current Liabilities.
• Quick Assets to Quick Liabilities.
• Equity to Long Term Loans.
• Sales to Book Debts.
• Return on Capital Employed.
(c) Break-up of annual sales: Product-wise to show their trend.
(d) Schedule of assets and liabilities: Schedule of assets is to be prepared to ensure their
existence, ownership and proper valuation and to examine whether assets have been
adequately insured. Schedule of liabilities will assist in determining present and future
obligations and ensure completeness of recording.
Q.14 A nationalized bank received an application from a Limited company seeking sanction of a term loan
to expand its existing business. In this connection, the Loan Manager of the Bank approaches you to
conduct a thorough investigation of the items of the Balance Sheet of this Limited company and
submit a confidential report based on which he will decide whether to sanction this loan or not. List
out the major steps an investigating accountant would keep in mind while verifying assets and
liabilities included in the Balance Sheet of the borrower company which has been furnished to the
Bank. [MTP-Oct.20]
Ans.: Steps involved in the verification of assets and liabilities included in the Balance Sheet:
(1) Fixed assets:
• The investigating accountant should prepare schedules of full description of each item, its
gross value, the rate at which depreciation has been charged and the total depreciation written
off.
• In case the rate at which depreciation has been adjusted is inadequate, the fact should be
stated.
• In case any asset is encumbered, the amount of the charge and its nature should be disclosed.
• In case an asset has been revalued recently, the amount by which the value of the asset has
been decreased or increased on revaluation should be stated along with the date of
revaluation.
(2) Inventory:
• The investigating accountant should prepare schedules of the value of different types of
inventories held (raw materials, work-in-progress and finished goods) and the basis on which
these have been valued.
• Details as regards the nature and composition of finished goods should be disclosed.
• Slow-moving or obsolete items should be separately stated along with the amounts of
allowances, if any, made in their valuation. For assessing redundancy, the changes that have
occurred in important items of inventory subsequent to the date of the Balance Sheet, either
due to conversion into finished goods or sale, should be considered.
• If any inventory has been pledged as a security for a loan the amount of loan should be
disclosed.

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(3) Trade Receivables, including bills receivable:
Composition of trade receivables should be disclosed to indicate the nature of different types of
debts that are outstanding for recovery; also whether the debts were being collected within the
period of credit as well as the fact whether any debts are considered bad or doubtful and the
provision if any, that has been made against them.
(4) Investments:
Investigating accountant should prepare schedule of investments which disclose the date of
purchase, cost and the nominal and market value of each investment. If any investment is pledged
as security for a loan, full particulars of the loan should be given.
(5) Secured Loans:
• Investigating accountant is required to include debentures and other loans together in a
separate schedule.
• Against the debentures and each secured loan, the amounts outstanding for payments along
with due dates of payment should be shown.
• In case any debentures have been issued as a collateral security, the fact should be stated.
Particulars of assets pledged or those on which a charge has been created for re-payment of a
liability should be disclosed.
(6) Provision of Taxation:
• Investigating accountant should ascertain the period up to which taxes have been assessed.
• If provision for taxes not assessed appears in be inadequate, the fact should be stated along
with the extent of the shortfall.
(7) Other Liabilities:
Investigating accountant should state whether all the liabilities, actual and contingent, are
correctly disclosed.
(8) Insurance:
• Investigating accountant should prepare schedule of insurance policies giving details of risks
covered, the date of payment of last premiums and the sum assured.
• He should also make a report as to whether or not the insurance-cover appears to be adequate,
having regard to the value of assets.
(9) Contingent Liabilities:
• Investigating accountant should ascertain particulars of any contingent liabilities which have
not been disclosed.
• For this purpose, he may conduct direct enquiries from the borrower company and members of
its staff.

16.8 - Investigations of Frauds

Q.15 In a Public Limited Company, it is suspected by the Management that there has been embezzlement
in supplier’s ledger. As an auditor of the Company, you have been asked to investigate the matter.
What are the major areas that you would verify in this regard? [Nov. 19 – Old Syllabus (4 Marks)]
Ans.: Investigation of frauds through supplier’s ledger:
(i) Verify the adjustments in fictitious or duplicate invoices as purchases in the accounts of suppliers
and subsequently misappropriating the amounts when payments are made to the suppliers in
respect of these invoices.

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(ii) Check whether any Credit Notes issued by suppliers are being suppressed and the corresponding
amounts not claimed by them is subsequently withdrawn.
(iii) Check whether any amount unclaimed by suppliers, for one reason or another is being
withdrawn by showing that the same have been paid to suppliers.
(iv) Verify whether purchase invoices are accepted at prices considerably higher than their market
prices.
(v) Verify the bought journal with reference to entries in the Goods Inward Book and the suppliers’
invoices to confirm that amounts credited to the accounts of suppliers were in respect of goods,
which were duly received, and the suppliers’ accounts had been credited correctly.
(vi) Request all the suppliers to furnish statements of their accounts to see whether or not any
balance is outstanding or due so as to confirm that allowances and rebates given by them have
been correctly adjusted.
Q.16 MF Ltd., engaged in the manufacturing of various products in its factory, is concerned with shortage
in production and there arose suspicion of inventory fraud. You are appointed by MF Ltd. to evaluate
the options for verifying the process to reveal fraud and the corrective action to be taken. As an
investigating accountant what will be your areas of verification and the procedure to be followed for
verification of defalcation of inventory? [Nov. 19 – New Syllabus (4 Marks)]
Ans.: Ways of Committing Inventory Frauds:
(i) Employees may simply remove goods from the premises.
(ii) Theft of goods may be concealed by writing them off as damaged goods, etc.
(iii) Stock records may be manipulated by employees who have committed theft so that book
quantities tally with the actual quantities of stocks in hand.
Verification procedure:
1. The first step towards verification is to establish the different items of inventory defalcated and
their quantities by checking physically the quantities in inventory held and those shown by the
Inventory Book.
2. Next step will be to verify all the receipts and issues of inventory recorded in the Inventory
Book by reference to entries in the Goods Inward and Outward Registers and the documentary
evidence as regards purchases and sales. This would reveal the particulars of inventory not
received but paid for as well as that issued but not charged to customers.
In addition, entries in respect of returns, both inward and outward, recorded in the financial
books should be checked with corresponding entries in the Inventory Book.
3. Afterwards, the shortages observed on physical verification of inventory should be reconciled
with the discrepancies observed on checking the books in the manner mentioned above.
4. Defalcations of inventory, sometimes, also are committed by the management, by diverting a
part of production and the consequent shortages in production being adjusted by inflating the
wastage in production; similar defalcations of inventories and stores are covered up by inflating
quantities issued for production.
5. For detecting such shortages, the investigating accountant should take assistance of an
engineer. For that he will be more conversant with factors which are responsible for shortage in
production and thus will be able to correctly determine the extent to which the shortage in
production has been inflated. In this regard, guidance can also be taken from past records
showing the extent of wastage in production in the past.

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16.9 - Forensic Accounting

Q.17 Explain how a Forensic Accounting differs from an Assurance Engagement. [May 18 (4 Marks)]
Or
You have been requested to carry out a forensic investigation of a listed entity by the Board of
Directors, based on a whistle blower complaint received. Before the commencement of the forensic
investigation, you and your team, are discussing the various aspects relating to the scope and the
procedures to be carried out. What would be the items of discussion with respect to the differences
between forensic investigation and other audit? [Nov. 22 (4 Marks)]
Ans.: Forensic Investigation vs Financial Audit:
Basis Forensic Accounting / Assurance Engagement
Investigation (Financial Audit)
Meaning Examination of evidence regarding Examination of Financial Information so as
an assertion to determine its to express an opinion on true and fair view
correspondence to established of state of affairs and financial results.
criteria carried out in a manner
suitable to the court.
Objective To determine whether fraud has To express an opinion on true and fair view.
taken place.
Frequency No specific period. Generally carried out for a financial year.
Techniques Investigative and substantive. Risk based with the help of compliance &
substantive procedures.
Extent In-depth checking. Test Checking based
Verification Verification of suspected/selected All assets & liabilities are verified with the
of Asset and items is done where misappropria- help of audit procedures or management
liabilities tion is suspected. certificate/representation.
Adverse Legal determination of fraud Modified opinion (Qualified or Adverse)
findings if impact and identification of expressed with/without quantification.
any perpetrators depending on scope.
.

Q.18 You have been appointed as a forensic accountant in M/s Secure Ltd. to carryout various analysis as
part of your assignment to arrive at a particular result. Specify the various analysis which might have
to be carried out by you to arrive at your result. [May 19 – New syllabus (5 Marks)]
Ans.: Analysis to be carried out in process of forensic investigation:
The actual analysis to be performed will solely depend upon the nature of the assignment. Various
analysis that can be performed are listed below:
1. Summarisation of a large number of transactions.
2. Performing robust procedures to trace unidentified assets.
3. Calculating the economic damages and if required, the loss of goodwill.
4. Estimating the present value of the financial losses or frauds involved in case such irregularities or
frauds took place for a long period of time.
5. Performing the statistical regression or sensitivity analysis of the frauds etc.
6. Using various computerized application softwares and graphs etc. to explain and analyse the
frauds.

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Q.19 CA Robo has been appointed as Forensic Investigator by BMY Bank Limited for one of its borrowal
accounts WRONG Ltd. CA Robo started the audit by first reviewing the transactions of the borrower
in Bank statement as per Bank records to identify any hidden patterns in that information. She had
to review huge volume of data, as the number of transactions per day were in hundreds and the data
was to be reviewed for the last three years. So, she was stuck up as to how to proceed further to
identify any hidden patterns in information, if any. Guide CA Robo, suggesting which technique to be
used for identifying any hidden patterns in the information.
[Nov. 20 (4 Marks), MTP-March 22, Sep. 22]
Ans.: Technique to be used for identifying hidden patterns:
Detecting fraud is difficult, especially frauds involving material financial statement misstatements,
which occur only in about 2% of all financial statements. Fraud is generally concealed and often
occurs through collusion. Normally, the documents supporting omitted transactions are not kept in
company files. False documentation is often created or legitimate documents are altered to support
fictitious transactions. While fraud detection techniques will not identify all fraud, the use of sound
techniques can increase the likelihood that misstatements or defalcations will be discovered on a
timely basis.
In the given situation, CA Robo can use Data Mining technique.
• Data Mining Technique is a set of assisted techniques designed to automatically mine large
volumes of data for new, hidden or unexpected information or patterns.
• Data mining techniques are categorized in three ways: Discovery, Predictive modelling and
Deviation and Link analysis.
• It discovers the usual knowledge or patterns in data, without a predefined idea or hypothesis
about what the pattern may be, i.e. without any prior knowledge of fraud.
• It explains various affinities, association, trends and variations in the form of conditional logic.
Q.20 M/s GSB Limited is into the business of construction for the past 25 years. Management of the
Company came to know that building material sent to construction sites are of substandard quality
whereas the payment released by the accounts department of the Company are on the higher side.
Forensic Accountant was asked to carry out detailed investigation. Forensic accountant completed
his investigation and now preparing his report. What are the broad areas of information that needs
to be incorporated in the report of forensic accountant? [July 21 (5 Marks)]
Ans.: Broad areas of information to be incorporated in the report of Forensic accountant:
• Issuing an audit report is the final step of a fraud audit. Information detailing the fraudulent activity,
if any has been found need to be reported in the report. The client will expect a report containing
the findings of the investigation, including a summary of evidence, a conclusion as to the amount of
loss suffered as a result of the fraud and to identify those involved in fraud.
• The report may include sections on the nature of the assignment, scope of the investigation,
approach utilized, limitations of scope and findings and/or opinions. The report will include
schedules and graphics necessary to properly support and explain the findings.
• The report will also discuss how the fraudster set up the fraud scheme, and which controls, if any,
were circumvented. It is also likely that the investigative team will recommend improvements to
controls within the organization to prevent any similar frauds occurring in the future.
• The forensic accountant should have active listening skills which will enable him to summarize the
facts in the report. It should be kept in mind that the report should be based on the facts assimilated
during the process and not on the opinion of the person writing the report.

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Q.21 ACT Silk Industries is a leading textile manufacturing listed company. In the course of evidence
collection and analysis, it was observed that the company is involved in siphoning of funds through
payments to shell companies. Hence, SEBI appointed B & S Associates, Chartered Accountants, as
forensic auditors of the company.
Enumerate in brief the steps to be taken by B & S Associates in forensic investigation process.
[Dec. 21 (5 Marks)]
Ans.: Steps to be undertaken in Forensic Investigation:
Step 1 - Initialisation
• Meeting with the client and accepting the engagement: In order to understand
important facts, players and issues etc., the investigator must meet the client. It is to be
considered initially that whether his firm has the necessary skills and experience to
accept the work.
• Performing conflict check: In order to achieve objectivity, a conflict of interest check
should be carried out as soon as the relevant parties are established.
• Performing initial investigation: It is generally desired to perform an initial action plan
prior to developing a detailed plan. Such initial action plan will help to formulate
subsequent planning to be based upon more complete and comprehensive understanding
of the situation.
Step 2 – Planning
• This is to be developed based on the meeting with the client and carrying out the initial
investigation scanner on the subjects to be investigated.
• This action plan will set out the objectives to be achieved and the methodologies to be
adopted. The investigation team must carefully take into consideration the objectives to
be achieved and plan their work accordingly.
Step 3 – Collection of Evidences
• It involves obtaining relevant documents, economic information, tracing different
assets/persons/unaccounted records, meeting with other experts, statutory and internal
auditors of the client.
• The evidences gathered should be sufficient to ultimately identify and prove the
fraudster(s) and the mechanism adopted for such frauds.
Step 4 – Performing Analysis
The actual analysis to be performed will solely depend upon the nature of the assignment.
This may include:
• Summarisation of a large number of transactions.
• Performing robust procedures to trace unidentified assets.
• Calculating the economic damages and if required, the loss of goodwill.
• Estimating the present value of the financial losses or frauds involved in case such
irregularities or frauds took place for a long period of time.
• Performing the statistical regression or sensitivity analysis of the frauds etc.
• Using various computerized application software and graphs etc. to explain and analyse
the frauds.

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Step 5 – Reporting
The report generally includes various sections describing the nature of the assignment, scope,
approaches utilized, findings, opinions and limitations.
Report is generally submitted to the appointing authority.
Step 6 – Court Proceedings
• The investigation is likely to lead to legal proceedings against the suspect.
• The evidence gathered during the investigation will need to be presented at court, and
team members may be called to court to describe the evidence they have gathered and to
explain how the suspect was identified.
Q.22 BR Construction was into the business of building roads and other infrastructure facilities for
government contracts. Mr. Tiwari, one of the senior official, was looking after the procurement of
cement required at the construction sites. There was a substantial increase in the price of cement
bags bought as compared to those bought prior to the appointment of Mr. Tiwari. The management
of the company decides to get a forensic investigation done for the transactions handled by Mr.
Tiwari. What points should be kept in mind by the management while appointing a forensic
accountant? [MTP-April 22]

Ans.: Characteristics and Skills to be possessed by Forensic Accountant:

While appointing a forensic accountant, the Management of BR Construction must initially consider
whether the firm has the necessary skills and experience to accept the work.
A Forensic Auditor should necessarily possess the following characteristics:
1. Strong Visualization and Imagination
2. Curiosity and Persistence
3. Detail-oriented and Inquisitiveness
4. Creativity and Out of the Box Thinking
5. Discretion, Rationalisation and Skepticism
6. Confidence and Sound professional judgment.
Forensic Accountant must possess skills related with the followings:
1. Standards of Auditing, Auditing Procedures and related methodologies
2. Accounting & Business reporting systems
3. IT and Data Analytics
4. Criminology, Legal Framework, Litigation processes & procedures
5. Investigative Techniques and Evidence gathering
6. Network of professional contacts in related fields' viz. enforcement, regulatory bodies, law,
industry, peers etc.

Q.23 Shipra recently qualified as a Chartered Accountant and started her own practice. One of her friends
told her that Forensic Accounting is a new area and has a lot of potential in terms of professional
opportunities and remuneration. Seema said that there is nothing new in this as ultimately forensic
accounting is also like other audits. Do you agree with the views of Seema? Support your answer with
relevant explanation. [RTP-May 22]

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Ans.: Forensic Accounting vs Financial Audit:
A forensic accountant will often look for indications of fraud that are not subject to the scope of a
financial statement audit. Forensic Accounting has an Investigative mentality. however auditing is
done with "professional scepticism". A forensic accountant will often require more extensive
corroboration. A forensic accountant may focus more on seemingly immaterial transactions.
Therefore, the contention of Seema is not correct that ultimately forensic audit is also like other
audits.
Difference between Forensic Accounting and Financial Audit: Refer answer of Q. No. 17.
Q.24 TQR Limited is engaged in the business of garment manufacturing having registered office at
Mumbai and branches across India. Mr. Shyam, one of the senior Managers was involved in creating
false documents and legitimate documents were altered to support fictitious transactions.
Consequently, the management appointed you to get forensic audit done based on the digital foot-
print of transactions handled by Mr. Shyam. The use of sound techniques will enable to discover the
defalcations on a timely basis. As a forensic auditor how will you deal and suggest Technology
based/ Digital forensic technique. [May 22 (5 Marks)]
Ans.: Techniques of Forensic Investigation – Digital Techniques:
• Digital investigations are complex techniques and require support from trained digital
investigators. Digital techniques comprise of close scrutiny of relevant emails, accounting records,
phone logs and target company hard drives are requisite facet of any modern forensic audit.
• Before applying digital techniques like obtaining data from e-mail etc. the forensic auditor should
take appropriate legal advice so that it doesn’t amount to invasion of privacy.
• Many open-source digital forensics tools are now available to assist auditor in the investigation.
Examples are:
(1) Cross Drive Analysis (6) EnCase
(2) Live Analysis (7) MD5
(3) Deleted Files (8) Tracking Log Files
(4) Stochastic Forensics (9) PC System Log
(5) Steganography (10) Free Log Tools

Q.25 Write a short note on: Services rendered by Forensic Accountants. [RTP-Nov. 22]

Ans.: Services rendered by Forensic Accountants:

(i) Crafting questions to be posed
(ii) Responding to questions posed
(iii) Identifying documents to be requested and/or subpoenaed
(iv) Identifying individuals to be most knowledgeable of facts
(v) Conducting research relevant to facts of the case
(vi) Identifying and preserving key evidence
(vii) Evaluating produced documentation and information for completeness
(viii) Analysing produced records and other information for facts
(ix) Identifying alternative means to obtain key facts and information
(x) Providing questions for deposition and cross examination of fact and expert witnesses.

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17 Peer Review & Quality Review

Marks Distribution of Past Exams
10
9
8
7
6
Marks

5
4
3
2
1
0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov-22 May-23
Series1 4 4 0 0 0 5 0 4 5 5 9

*From May 2019 Exams, marks are given only for descriptive questions
17.1 – Meaning, Objectives and Scope of Peer Review
Q.1 Write short note on: Areas not to be examined in Peer Review. [Nov. 17 (4 Marks)]
Ans.: Area excluded from the scope of peer review:
As per Peer Review Guidelines, 2022, the following services are excluded from the scope of peer
review:
(i) Management Consultancy Engagements;
(ii) Representation before various Authorities;
(iii) Engagements to prepare tax returns or advising clients in taxation matters;
(iv) Engagements for the compilation of financial statements;
(v) Engagements solely to assist the client in preparing, compiling or collating information other
than financial statements;
(vi) Testifying as an expert witness;
(vii) Providing expert opinion on points of principle, such as Accounting Standards or the
applicability of certain laws, on the basis of facts provided by the client; and
(viii) Engagement for Due diligence.
(ix) Any other service rendered or function performed by practitioner not prescribed by the
Council to be ‘Assurance Engagement’.
Q.2 Explain the objectives of Peer Review. [Nov. 18 - New Syllabus (4 Marks)]
Ans.: Objectives of Peer Review:
The main objective of Peer Review is to ensure that in carrying out the assurance service assignments,
the members of the Institute –

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Peer Review & Quality Review Chapter 17
(a) comply with Technical, Professional and Ethical Standards as applicable including other
regulatory requirements thereto and
(b) have in place proper systems including documentation thereof, to amply demonstrate the quality
of the assurance services.
Note: Primary objective of peer review is not to find out deficiencies but to improve the quality of
services rendered by members of the profession.
The key objective of peer review exercise is not to identify isolated cases of engagement failure, but to
identify weaknesses that are pervasive and chronic in nature.
Q.3 Write short note on: Scope of Peer Review. [Nov. 18 - Old Syllabus (4 Marks), RTP-May 20]
Ans.: Scope of Peer Review:
The Peer Review process shall apply to all the assurance services provided by a Practice Unit. While
carrying out review, the reviewer examines the assurance engagement records of the Practice Unit so
as to cover the following:
1. Compliance with Technical, Professional and Ethical Standards.
2. Quality of reporting.
3. Systems and procedures for carrying out assurance services.
4. Self-evaluation under Audit Quality Maturity Model or any other guideline issued by the
Centre for Audit Quality.
5. Training programmes for staff (including articled and audit assistants) concerned with assurance
functions, including availability of appropriate infrastructure.
6. Compliance with directions and/or guidelines issued by the Council to the Members, including Fees
to be charged, Number of audits undertaken, register for Assurance Engagements conducted during
the year and such other related records.
7. Compliance with directions and/or guidelines issued by the Council in relating to article assistants
and/or audit assistants, including attendance register, work diaries, stipend payments, and such
other related records.
Peer Review Guidelines, 2022 aims to confine the scope of review to preceding 3 years since this
would establish the consistency or deviations, if any, in respect of procedures followed by the PU.
Q.4 Peer Review Guidelines, 2022 defines the scope of peer review which revolves around compliance
with technical, ethical and professional standards; quality of reporting; office systems and
procedures with regard to compliance of assurance engagements; and, training programmes for staff
including articled and audit assistants involved in assurance engagements.” You are required to
explain the meaning assigned to Technical, Ethical and Professional Standards as per Peer Review
Guidelines, 2022. [MTP-May 20]
Ans.: Technical, Ethical and Professional Standards:
(i) AS issued by ICAI that are applicable for entities other than companies under the Companies Act,
2013;
(ii) AS prescribed u/s 133 of the Companies Act, 2013 by the C.G. based on the recommendation of
ICAI and in consultation with and after examination of the recommendations made by NFRA;
(iii) Indian Accounting Standards prescribed u/s 133 of the Companies Act, 2013 by the C.G. based on
the recommendation of ICAI and in consultation with NFRA and notified as Companies (Indian
Accounting Standards) Rules, 2015, as amended from time to time;
(iv) Standards issued by the ICAI including:

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(a)Engagement and Quality Control Standards
(b)Statements
(c)Guidance notes
(d)Standards on Internal Audit
(e)Guidelines/Notifications/Directions/Announcements/Pronouncements/Professional
Standards issued from time to time by the Council or any of its Committees.
(v) Framework for the preparation and presentation of financial statements, Preface to the Standards
on Quality Control, Auditing, Review, Other Assurance and Related Services and Framework for
Assurance engagements;
(vi) Provisions of the relevant statutes and/or rules or regulations which are applicable in the context
of the specific engagements being reviewed including instructions, guidelines, notifications,
directions issued by regulatory bodies as covered in the scope of assurance engagements.
(vii) Any other Technical, Professional, Ethical Standards and other Standards issued by any
authority governing the profession of Chartered Accountancy.
Q.5 CA. M appointed as a Peer Reviewer for M/s. K Associates has asked for all the compilation and the
Due Diligence engagements carried out by M/s. K Associates for her peer review during the period
considered for peer review purposes by the board. She has also sent out a mail to Peer Review Board
regarding her selections. Mr. K, the managing partner of the firm seeks your advise on this matter.
[Nov. 20 – Old Syllabus (5 Marks), MTP-April 22]
Ans.: Selection of Assurance Service Engagements for Review:
• Peer Review Guidelines, 2022 defines the scope of peer review which revolves around
compliance with technical, ethical and professional standards; quality of reporting; office systems
and procedures with regard to compliance of assurance engagements; and, training programmes for
staff including articled and audit assistants involved in assurance engagements. The entire peer
review process is directed at the assurance services.
• Assurance Services means an engagement in which a practitioner expresses a conclusion designed
to enhance the degree of confidence of the intended users other than the responsible party about
the outcome of the evaluation or measurement of a subject matter against criteria but does not
include engagements for the compilation of financial statements or engagements solely to assist the
client in preparing, compiling or collating information other than financial statements; or
engagement for Due diligence.
• In the given situation, CA. M is appointed as a peer reviewer for M/s K Associates, has asked for all
the compilations and the due diligence engagements carried out by M/s K Associates for her peer
review. In view of above, Peer Review of compilation and due diligence at the time of execution step
by CA. M is not correct as due diligence and compilation engagements are not covered in the scope
of Assurance engagement and Peer Review is directed at assurance engagement only.
Conclusion: Compilation and Due Diligence engagements are not covered within the meaning of
assurance engagements and hence outside the scope of Peer Review.
Q.6 CA. Sudarshan, appointed as a Peer Reviewer for M/s. Preet Associates, has asked for all the
management consultancy engagements and engagements solely to assist the client in preparing,
compiling or collating information other than financial statements carried out by M/s. Preet
Associates for peer review during the period considered for peer review purposes by the board. Peer
Reviewer CA. Sudarshan has also sent out a mail to Peer Review Board regarding his selection. Mr.
Preet, the managing partner of the firm seeks your advise on this matter. [MTP-March 21]

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Ans.: Selection of Assurance Service Engagements for Review:
• Peer Review Guidelines, 2022 defines the scope of peer review which revolves around
compliance with technical, ethical and professional standards; quality of reporting; office systems
and procedures with regard to compliance of assurance engagements; and, training programmes for
staff including articled and audit assistants involved in assurance engagements. The entire peer
review process is directed at the assurance services.
• Assurance Services means an engagement in which a practitioner expresses a conclusion designed
to enhance the degree of confidence of the intended users other than the responsible party about
the outcome of the evaluation or measurement of a subject matter against criteria but does not
include management consultancy engagements or engagements solely to assist the client in
preparing, compiling or collating information other than financial statements.
• In the given situation, CA. Sudarshan is appointed as a peer reviewer for M/s Preet Associates, has
asked for all management consultancy engagements and engagements solely to assist the client in
preparing, compiling or collating information other than financial statements carried out by M/s
Preet Associates for her peer review. In view of above, Peer Review of management consultancy
engagements and engagements solely to assist the client in preparing, compiling or collating
information other than financial statements at the time of execution step by CA. Sudarshan is not
correct.
Conclusion: CA. Sudarshan is not correct as management consultancy engagements and engagements
solely to assist the client in preparing, compiling or collating information other than financial
statements are not covered in the scope of Assurance engagement and Peer Review is directed at
assurance engagement only.
Q.7 CA Mohan has been appointed as a Peer Reviewer for M/s TB & Associates. He has asked for all the
management consultancy engagements done by the firm and representations before various
authorities carried out by the M/s TB Associates for his peer review during the period considered for
peer review purposes by the board. He has also sent out a mail to Peer Review Board regarding his
selections. Mr. T, the managing partner of the firm believes that these areas are outside the scope of
the Peer Reviewer. Is the Mr. T correct or not? [May 23 (5 Marks)]
Ans.: Selection of Assurance Service Engagements for Review:
• Peer Review Guidelines, 2022 defines the scope of peer review which revolves around
compliance with technical, ethical and professional standards; quality of reporting; office systems
and procedures with regard to compliance of assurance engagements; and, training programmes for
staff including articled and audit assistants involved in assurance engagements. The entire peer
review process is directed at the assurance services.
• Assurance Services means an engagement in which a practitioner expresses a conclusion designed
to enhance the degree of confidence of the intended users other than the responsible party about
the outcome of the evaluation or measurement of a subject matter against criteria but does not
include management consultancy engagements or representations before various authorities.
• In the given situation, CA. Mohan is appointed as a peer reviewer for M/s TB & Associates, has asked
for all management consultancy engagements and representations before various authorities
carried out by M/s TB & Associates for his peer review. In view of above, Peer Review of
management consultancy engagements and representations before various authorities by CA.
Mohan is not correct.
Conclusion: CA. Mohan is not correct as management consultancy engagements and representations
before various authorities are not covered in the scope of Assurance engagement and Peer Review is
directed at assurance engagement only.

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17.2 - Applicability of Peer Review and Peer Reviewer

Q.8 Write short note on: Eligibility criteria to be a Peer Reviewer.
[May 18-Old Syllabus (4 Marks), RTP-May 22]
Or
The elements of skill, experience and independence of reviews are ensured before initiating them
in Peer Review process. In the above light, state few eligibility criteria fixed for a person to be
empanelled and also for being appointed as a peer Reviewer.
[May 18-New Syllabus (4 Marks), MTP-Oct. 21]
Or
What is the eligibility to be a Peer reviewer? [May 19-Old Syllabus (4 Marks)]
Ans.: Eligibility criteria to be a Peer Reviewer:
(a) A Peer Reviewer:
(i) shall be a member in practice with at least 7 years of assurance practice experience.
(ii) in case a member has moved from industry to practice and is currently in practice he
should have at least 10 years of audit experience in industry and at least 3 years audit
experience in practice.
(iii) should have undergone the requisite training and cleared the requisite test for Peer Review
as prescribed by the Board.
(b) A member on being appointed as a Reviewer shall be required to furnish:
(i) a declaration as prescribed by the Board, at the time of empanelment of Peer Reviewer.
(ii) a Declaration of Confidentiality giving consent for appointment as a Peer Reviewer.
(c) A member shall not be eligible for being appointed as a Reviewer, if –
(i) any disciplinary action/proceeding is pending against him.
(ii) he has been found guilty of professional or other misconduct by the Council or the Board of
Discipline or the Disciplinary Committee at any time.
(iii) he has been convicted by a competent court whether within or outside India, of an offence
involving moral turpitude and punishable with imprisonment.
(iv) he or his partners has any obligation or conflict of interest in the Practice Unit.
(v) he has undergone training/articleship under any of the partner of Practice Unit.
(d) A Reviewer shall not accept any professional assignment from the Practice Unit for a period of
next two years from the date of appointment. Further, he should not have accepted any
professional assignment from the Practice Unit for a period of two years before the date of
appointment as reviewer of that Practice Unit.
Q.9 CA S has been appointed as peer reviewer of JS & Associates, a Level I CA Firm. CA S wants to
appoint CA K as his assistant, as he has working experience in a Level I CA Firm. What aspects CA S
should take care of before appointing CA K as Assistant, for the peer review of JS & Associates?
[Dec. 21 – Old Syllabus (4 Marks)]
Ans.: Aspects to be taken care before appointing Assistant:
• The reviewer may take the help of a qualified assistant while carrying out peer review. In this
context, the Board decided to clarify that a reviewer is permitted to take the assistance of only one
assistant who shall be a chartered accountant and a person who does not attract any of the dis-
qualifications prescribed under section 8 or Section 21 of the Chartered Accountants Act, 1949.

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• The name of the qualified assistant which the reviewer would like to assist him shall be identified
and intimated to the Board as well as the practice unit before the commencement of the peer
review.
• Such a qualified assistant shall also have to sign the declaration of confidentiality as annexed to the
Statement.
• He shall have no direct interface either with the practice unit or the Board. Further the person
chosen for assisting the reviewer shall be from the firm of the reviewer as a partner or paid
assistant as per the records of ICAI.
Q.10 CA. Vimal wants to apply in the empanelment of peer reviewer. He was into employment till 2013
since then he shifted from industry and started his own practice. Below is his experience and
employment record from 1996 to 2013.
Name of Company Designation From Date To Date
Parshav Ltd. Project Implementation Manager 1-4-1996 31-3-1999
Suparshava Ltd. Financial Reporting Senior Manager 1-4-1999 31-3-2008
(Assisting in Audits)
Parasnath Ltd. Project & Improvement Director 1-4-2008 31-3-2013
Own Practice – Sole Prop Audit & Taxation 1-4-2013 31-3-2023
Kindly assess whether CA. Vimal can apply and is qualified to get admitted in the empanelment of
Peer Reviewer. [MTP-Oct. 22]
Ans.: Eligibility criteria to be a Peer Reviewer:
For Explanation refer to answer of Q. No. 9
In the current scenario, CA. Vimal was in employment for a period from 1-4-1996 to 31-3-2013 i.e., 17
years. Out of which, he was having audit experience for 9 years. However, he is in practice since 10
years i.e. 2013 to 2023.
Conclusion: CA. Vimal will be eligible for Peer Reviewer by virtue of the condition stipulating that a
Peer Reviewer shall be a member in practice with at least 7 years of assurance practice experience.

17.3 – Approach of the Reviewer

Q.11 Explain the stepwise approach adopted by the Peer Reviewer. [May 15 (4 Marks), RTP-Nov. 18]
Ans.: Stepwise Approach adopted by the Peer Reviewer:
(i) Obtain an understanding of the assignment: The reviewer should obtain an understanding of
the assignment so as to plan the review of documentation.
(ii) Selection of assurance engagements: Reviewer should ascertain the number of assurance
engagements to be reviewed based on the evaluation of replies given in the questionnaire and
the size of the practice unit.
(iii) Examine the Policies and procedures of Practice Unit: The reviewer should, wherever
possible, examine that the policies and procedures for acceptance of audit have been complied
with and necessary documentation with regard to the same exists.
(iv) Review and Evaluation of records – Compliance and Substantive Checking: The reviewer
would conduct adequate compliance procedures to gain evidence that those general controls on
which the reviewer intends to rely upon, actually exists and functioning effectively throughout
the period of reliance.

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Based on the results of compliance procedures, the reviewer concludes either to rely or not to
rely on the general controls. In case the reviewer decides to rely on the general controls, he
would also need to determine the extent of reliance to be placed on such controls. In such a
situation, the NTE of substantive procedures would be, normally, less extensive and vice versa.
The substantive approach involves application of such review procedures that provide the
reviewer with the evidence as to the appropriateness of the factors on which the review is
required to be focused on.
Q.12 CA. Manoj has been appointed as Peer Reviewer of M/s UV Associates, a Chartered Accountant firm
consisting of 18 partners. As a Practicing unit what are the obligations that are to be complied by
M/s UV associates in addition to furnishing the questionnaire, statements and such other
particulars as the Board may deem fit? [Dec. 21 – New Syllabus (4 Marks)]
Ans.: Obligations of Practicing Unit:
Any Practice Unit, in addition to the prescribed information to be furnished including the
questionnaire, statements and such other particulars as the Board may deem fit, shall comply with
the following:
(i) Produce to the Reviewer or allow access to, any record, document or prescribed register
maintained by the Practice Unit or any other record or document which is of a class or
description so specified, and which is in the possession or under the control of the Practice Unit.
(ii) Provide to the Reviewer such explanation or further particulars/information in respect of
anything produced in compliance with a requirement under sub-clause (1) above, as the
Reviewer shall specify.
(iii) Provide to the Reviewer all assistance in connection with Peer Review.
(iv) Where any information or matter relevant to a Practice Unit is recorded otherwise than in a
legible form, the Practice Unit shall provide and present to the Reviewer a reproduction of any
such information or matter, or of the relevant part of it in a legible form, with a translation in
English or Hindi, if the matter is in any other language, and if such translation is requested for by
the Reviewer. The Practice Unit shall be responsible and accountable for the accuracy and
truthfulness of the translation so provided.

17.4 - Peer Review Process

Q.13 Write short note on: Selection of sample by the Reviewer in case of Peer Review. [RTP-Nov. 20]
Ans.: Selection of sample by the Reviewer in case of Peer Review:
• The Reviewer shall, within 2 working days of receiving the information from the PU, select
assurance service engagements that he would like to review and intimate the same to the Practice
Unit and the Peer Review Board in Form 5.
• The Reviewer may seek further/additional clarification in Form 6 from the PU on the information
furnished/not furnished by the PU in the Questionnaire. The PU shall provide this additional
information to the Reviewer within 1 working day.
• The Reviewer shall plan for an on–site Review visit or initial meeting in consultation with the PU.
The Reviewer shall give the PU at least 2 days’ time to keep ready the necessary records of the
selected assurance services.
• Reviewer and PU shall mutually co-operate and ensure that the entire review process is completed
within 20 working days from the date of receipt of application from the PU for being Peer
Reviewed or from the date of notifying the PU about its selection for Review as the case may be.

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Q.14 ABC & Co. LLP is a large firm of Chartered Accountants based out of Chennai. ABC & Co. LLP is subject
to peer review which was last conducted 3 years back. For the peer review of the financial year
ended 31 March 2023, the firm got an intimation on 31 May 2023. The process of peer review got
started and was completed on 29 September 2023. In view of peer reviewer, the systems and
procedures of ABC & Co. LLP are deficient/non-compliant. The peer reviewer did not share any of
his observations with ABC & Co. LLP as draft and final report was submitted to the Board. Comment.
[MTP-Oct. 20]
Ans.: Peer Review Report of Reviewer:
• After completing on-site review, the Reviewer, shall submit the Peer Review Report to the Board
along with Form 9 if in his opinion, the PU has adequate systems and procedures in compliance
with the Technical, Professional and Ethical Standards. A copy of the report shall also be
forwarded to the Practice Unit.
• In case, in the opinion of the Peer Reviewer, the systems and procedures of the PU are deficient or
non-compliant with reference to any matter that has been noticed by him or if there are other
matters where he wants to seek clarification, he shall communicate his findings to the Practice
Unit, in a Preliminary Report issued by him.
• PU shall, within 2 working days of the date of receipt of the findings, make its submissions or
representations, in writing to the Reviewer.
• If the Reviewer is satisfied with the reply received from PU, he shall submit an unqualified Peer
Review Report to the Board along with Form 9. A copy of the report shall also be forwarded to the
PU.
• In case the Reviewer is of the opinion that the response submitted by the PU is not satisfactory,
the Reviewer shall submit a Qualified Report to the Board incorporating his reasons for the same
along with Form 9. A copy of the report shall also be forwarded to the Practice Unit.
• The Peer Reviewer shall ensure to submit the following documents along with the Peer Review
Report:
(i) Annexures to the Report as prescribed by the Board
(ii) Copy of Questionnaire as received from the Practice Unit
(iii) List of samples selected by him in accordance with the criteria prescribed by the Board
(iv) Preliminary Report, if issued, along with Practice Unit’s submissions on the same.
• All reports shall be placed before the Board or its Sub-Committee for its consideration and
issuance of Peer Review Certificate.
• In case of a qualified report, the PRB Secretary shall place the report before the Board for
consideration. The Board may decide for a “Follow On” Review after a period of 1 year from the
date of issue of report by the Peer Reviewer.
• If the Board so decides, the period of one year may be reduced but shall not be less than 6 months
from the date of issue of the report.
Conclusion: Contention of ABC & Co. LLP is correct. Peer reviewer should not submit the report
directly to the Board as systems and procedures of ABC & Co. LLP are deficient.
Q.15 CA S has been appointed as peer reviewer of Shivam & Co. LLP. Shivam & Co. LLP submitted a list of
its assurance and due diligence services for the peer review. CA S is in the process of deciding as to
how many assurance services should be reviewed. Guide CA S in deciding the number of assurance
services engagement to be reviewed. [Jan. 2021 – New Syllabus (5 Marks)]

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Ans.: Selection of Assurance Service Engagements:
The number of assurance service engagements to be reviewed shall depend upon:
(i) Standard of quality controls generally prevailing;
(ii) The size and nature of assurance service engagements undertaken by the PU;
(iii) The methodology generally adopted by the PU in providing assurance services;
(iv) The number of partners/members involved in assurance service engagements in the PU;
(v) The number of locations/branch offices of the practice Unit;
(vi) The Fees charged/received/GST paid by the Practice unit.
Q.16 Prabhu & Co. LLP is a large firm of Chartered Accountants based out of Mumbai. Prabhu & Co. LLP is
subject to peer review which was last conducted 3 years back. For the peer review of the financial
year ended 31st March 2022, the firm got an intimation on 29th May 2022. The process of peer
review got started and was completed on 27th September 2022. In view of peer reviewer, the
systems and procedures of Prabhu & Co. LLP are deficient/non-compliant. The peer reviewer did
not share any of his observations with Prabhu & Co. LLP as draft and final report was submitted to
the Board. Comment. [RTP-Nov. 22]
Or
AB & Co., Chartered Accountants, is a large firm based in Mumbai. AB & Co. is subject to peer review.
For the peer review of the financial year ended March 31, 2022, the firm got an intimation on June
30, 2022. X & Co., Chartered Accountants, were appointed to undertake the peer review process.
Upon completion of the peer review, X & Co., observed certain non-compliance with auditing
standards. X & Co., did not share any of observations with AB & Co. and submitted its final report to
the Peer Review Board of the Institute of Chartered Accountants. Comment. [Nov. 22 (5 Marks)]
Ans.: Peer Review Report of Reviewer:
• After completing on-site review, the Reviewer, shall submit the Peer Review Report to the Board
along with Form 9 if in his opinion, the PU has adequate systems and procedures in compliance
with the Technical, Professional and Ethical Standards. A copy of the report shall also be
forwarded to the Practice Unit.
• In case, in the opinion of the Peer Reviewer, the systems and procedures of the PU are deficient or
non-compliant with reference to any matter that has been noticed by him or if there are other
matters where he wants to seek clarification, he shall communicate his findings to the Practice
Unit, in a Preliminary Report issued by him.
• PU shall, within 2 working days of the date of receipt of the findings, make its submissions or
representations, in writing to the Reviewer.
• If the Reviewer is satisfied with the reply received from PU, he shall submit an unqualified Peer
Review Report to the Board along with Form 9. A copy of the report shall also be forwarded to the
PU.
• In case the Reviewer is of the opinion that the response submitted by the PU is not satisfactory,
the Reviewer shall submit a Qualified Report to the Board incorporating his reasons for the same
along with Form 9. A copy of the report shall also be forwarded to the Practice Unit.
• The Peer Reviewer shall ensure to submit the following documents along with the Peer Review
Report:
(i) Annexures to the Report as prescribed by the Board
(ii) Copy of Questionnaire as received from the Practice Unit
(iii) List of samples selected by him in accordance with the criteria prescribed by the Board
(iv) Preliminary Report, if issued, along with Practice Unit’s submissions on the same.

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• All reports shall be placed before the Board or its Sub-Committee for its consideration and
issuance of Peer Review Certificate.
• In case of a qualified report, the PRB Secretary shall place the report before the Board for
consideration. The Board may decide for a “Follow On” Review after a period of 1 year from the
date of issue of report by the Peer Reviewer.
• If the Board so decides, the period of one year may be reduced but shall not be less than 6 months
from the date of issue of the report.
Conclusion: Contention of Practicing Unit is correct. Peer reviewer should not submit the report
directly to the Board in case any non-compliance or deficiency in systems and procedures of
practicing unit is being observed.

17.5 - Compliance Review Procedures

Q.17 A, a practicing Chartered Accountant is appointed to conduct the peer review of another practicing
unit. What areas A should review in the assessment of independence of the practicing unit?
[Jan. 21 – Old Syllabus (5 Marks), RTP-Nov. 21]
Ans.: Assessment of Independence of the Practice Unit:
(i) Does the PU have a policy to ensure independence, objectivity and integrity, on the part of
partners and staff? Who is responsible for this policy?
(ii) Does the PU communicate these policies and the expected standards of professional behaviour to
all staff?
(iii) Does the PU monitor compliance with policies and procedures relating to independence?
(iv) Does the PU periodically review its association with clients to ensure objectivity and
independence?

17.6 – Miscellaneous Topics of Peer Review

Q.18 What are the inherent limitations of Peer Review? [Nov. 18 – New Syllabus (4 Marks)]
Ans.: Inherent Limitations of Peer Review:
Peer review suffers from certain inherent limitations given as below:
• The reviewer conducts the review in accordance with the Statement on Peer Review.
• The review would not necessarily disclose all weaknesses in compliance of technical standards
and maintenance of quality of assurance services since it would be based on selective tests.
• As there are inherent limitations in the effectiveness of any system of quality control which
happens to be subject-matter of review, departure from the system may occur and may not be
detected.
Q.19 Briefly explain difference between Peer Review and Quality Review. [MTP-April 21]
Ans.: Difference between Peer Review and Quality Review:
• Peer review is a review of the systems and procedures of an audit firm. Although sample audit
files are inspected by the peer reviewer, it is done for the purpose of testing the effectiveness of
the systems and procedures. The intention is to not to find faults but to help the firm develop
effective systems. It is a kind of mentoring process. Peer review is a part of the activities of ICAI
aimed at improving the quality of service.

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• A quality review normally pertains to one particular audit conducted by an audit firm. The main
objective quality review is to find errors or inadequacies, if any, committed by the auditor while
conducting the audit. Serious errors detected in quality review lead to disciplinary action against
the member.

17.7 – Meaning, Objectives and Scope of Quality Review

Q.20 Write short note on: Objectives of Quality Review. [RTP-Nov. 18]
Ans.: Objectives of Quality Review:
• Quality Review is directed towards evaluation of audit quality and adherence to various statutory
and other regulatory requirements.
• It would involve assessment of the work of auditors while carrying out their audit function so that
the Board is able to assess:
(a) the quality of audit and reporting by the Statutory auditors; and
(b) the quality control framework adopted by the Statutory auditors/Audit firms in conducting
audit.
• Quality reviews initiated by the QRB are designed to identify and address weaknesses and
deficiencies related to how the audits were performed by the Audit firms. To achieve that goal,
quality reviews included reviews of certain aspects of selected statutory audits performed by the
firm and reviews of other matters related to the firm’s quality control system.
• In the course of reviewing aspects of selected audits, a review may identify ways in which a
particular audit is deficient, including failures by the firm to identify, or to address appropriately,
aspects in which an entity’s financial statements do not present fairly the financial position or the
results of operations in conformity with the applicable Generally Accepted Accounting Principles
(GAAP) and other technical standards.
• It is not the purpose of a review, however, to review all of a firm’s audits or to identify every aspect
in which a reviewed audit is deficient. Accordingly, a review should not be understood to provide
any assurance that the firm’s audits, or its clients’ financial statements or reporting thereon, are
free of any deficiencies.
Q.21 Write short note on: Scope of Quality Review. [RTP-Nov. 19]
Ans.: Scope of Quality Review:
The scope of the quality review includes:
(a) examining whether the Statutory Auditor has ensured compliance with the applicable technical
standards in India and other applicable professional and ethical standards and other relevant
guidance.
(b) examining whether the Statutory Auditor has ensured compliance with the relevant laws and
regulations as required under applicable auditing standard.
(c) examining whether the AFUR has implemented a system of quality control with reference to the
applicable quality control standards.
(d) examining whether there is no material misstatement of assets and liabilities as at the reporting
date in respect of the selected entity.
Q.22 What are the important areas for evaluation while conducting quality reviews in terms of SQC-1
Standard on Quality Control? [RTP-Nov. 22]

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Ans.: Areas for evaluation while conducting quality reviews in terms of SQC -1:
SQC-1 “Quality Control for Firms that perform Audits and Reviews of Historical Financial Information,
and Other Assurance and Related Services Engagements” requires that a practitioner firm should
establish a system of quality control designed to provide it with reasonable assurance that the firm
and its personnel comply with professional standards and regulatory and legal requirements, and
that reports issued by the firm or engagement partner(s) are appropriate in the circumstances.
Significant aspects to be looked into to ensure existence of effective quality control system are:
(1) Whether the audit firm establishes and implements policies and procedure on all the element of
system of quality control.
(2) Whether the engagement quality control reviewer review at an appropriate time for the
planning of an audit, significant audit judgment, and expressions of an audit opinion.
(3) Whether the audit firm assigns as the person responsible for the monitoring of the system of
quality control a person with appropriate experience for the role, vest the assigned person with
sufficient and appropriate authority.
(4) Whether the audit firm obtain, at least annually, a confirmation letter concerning compliance
with policies and procedure for the maintenance of independence from all person required to
maintain independence.
(5) Whether the audit firm perform the independence confirmation procedure set forth in its
internal rules before acceptance and continuance of an audit engagement, and when issuing the
auditor’s report appropriately confirms that there was no change in the status of independence.
(6) Whether the audit firm develop and provides education/training program that fully take into
account the knowledge, experience, competence and capabilities of the professional staff.

17.8 - Quality Review Board – Establishment, Composition, Functions and Powers

Q.23 In exercise of the powers conferred by clauses (f) and (g) of sub-section (2) of Sec. 29A read with Sec.
28C and sub-section (1) of Sec. 28D of the Chartered Accountants Act, 1949, the Central Government
has made 'Chartered Accountants (Procedures of Meetings of Quality Review Board, and Terms and
Conditions of Service and Allowances of the Chairperson and Members of the Board) Rules, 2006.
Elucidate the powers of Quality Review Board in discharging its functions. How the Quality Review
Board would proceed in case it does not receive the information called for by it from any Company?
[May 22 (5 Marks)]
Ans.: Powers entrusted to QRB:
Rule 6 of Chartered Accountants (Procedures of Meetings of QRB, and Terms and Conditions of
Service and Allowances of the Chairperson and Members of the Board) Rules, 2006 specifies that the
Board may, in discharge of its functions:
(a) evaluate and review the quality of work and services provided by the members of the Institute in
such manner as it may decide;
(b) lay down the procedure of evaluation criteria to evaluate various services being provided by the
members of the Institute and to select, in such manner and form as it may decide, the individuals
and firms rendering such services for review;
(c) call for information from the Institute, the Council or its Committees, Members, Clients of
members or other persons or organizations, in such form and manner as it may decide;

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(d) invite experts to provide expert/technical advice or opinion or analysis on any matter or issue
which the Board may feel relevant for the purpose of assessing the quality of work and services
offered by the members of the Institute;
(e) make recommendations to the Council to guide the members of the Institute to improve their
professional competence and qualifications, quality of work and services offered and adherence
to various statutory and other regulatory requirements and other matters related thereto.
Information not received from the company:
Where the Board does not receive the information called for by it from any company registered under
the Companies Act, the Board may request the C.G. in the MCA for assistance in obtaining the
information.
Q. Secretarial staff of the Quality Review Board (QRB) is in the process of preparing a panel for
23A submission to Board to enable it to initiate reviews of the quality of audit services provided by
members of ICAI. The draft panel has been prepared by Mr. P, a junior staff in QRB secretariat and it
has moved up in hierarchy for vetting by a senior staff, Mr. R, before being put up in the upcoming
meeting of Quality review board for its consideration. The draft panel contains details of following
entities audited by different audit firms:
Name of Listing status Sector Paid up Annual O/S loans & Name of
entity capital* turnover* deposits* audit firm
XYZ Ltd. Unlisted Education 450 1200 450 BB & Co.
Public technology
PQR Ltd. Listed in BSE, Manufacturing 1000 5000 750 GPR & Co.
NSE and NYSE
X Insurance Unlisted Health 250 1500 400 DS & Co.
Ltd. insurance
AAZ Ltd. Unlisted Manufacturing 200 800 200 CT & Co.
* Figures are of immediately preceding year and are in ₹ Crore.
Is the inclusion of names of audit firms of corresponding entities in the draft panel to be put up
before QRB appropriate? Guide Mr. R. [MTP-April 23; RTP-May 23]
Ans.: Selection of Audit Firms:
Rule 3 (1) of NFRA, 2018 inter alia, provides that the Authority (NFRA) shall have power to monitor
and enforce compliance with accounting standards and auditing standards, oversee the quality of
service under sub-section (2) of section 132 or undertake investigation under sub-section (4) of such
section of the auditors of the following class of companies and bodies corporate, namely: -
(a) companies whose securities are listed on any stock exchange in India or outside India;
(b) unlisted public companies having paid-up capital of not less than ₹ 500 crores or having annual
turnover of not less than ₹ 1,000 crores or having, in aggregate, outstanding loans, debentures
and deposits of not less than ₹ 500 crores as on the 31st March of immediately preceding
financial year;
(c) insurance companies, banking companies, companies engaged in the generation or supply of
electricity, companies governed by any special Act for the time being in force or bodies
corporate incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f) of sub-
section (4) of section 1 of the Act;

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(d) any body corporate or company or person, or any class of bodies corporate or companies or
persons, on a reference made to the Authority by the Central Government in public interest;
and
(e) a body corporate incorporated or registered outside India, which is a subsidiary or associate
company of any company or body corporate incorporated or registered in India as referred to
in clauses (a) to (d), if the income or net-worth of such subsidiary or associate company
exceeds twenty percent of the consolidated income or consolidated net-worth of such company
or the body corporate, as the case may be, referred to in clauses (a) to (d).
MCA has clarified to the QRB that in view of Sec. 132(2) of the Companies Act, 2013 r/w Rule 9(4) of
NFRA Rules, 2018, issue of QRB reviewing audits of the companies/bodies corporate specified under
Rule 3 of NFRA Rules, 2018 will only arise in case a reference is so made to QRB by NFRA, and not
otherwise.
Conclusion: Considering the above, in the case of auditors of XYZ Ltd., PQR Ltd. and X Insurance Ltd.,
NFRA has power to oversee quality of services of these audit firms. However, QRB can undertake
review of the quality of services of auditors of AAZ Ltd.
Therefore, inclusion of names of auditors of XYZ Ltd, PQR Ltd and X insurance Ltd. in the draft panel
for consideration by QRB is not proper.
Only the inclusion of the name of the auditor of AAZ Ltd in the draft panel is proper.
Q. ABC & Co. is a firm of Chartered Accountants located at Mumbai with branches at Calcutta and
23B Chennai. During the financial year 2021-22, the firm carried out statutory audits of
(1) 18 listed companies consisting of:
(A) 10 companies with turnover exceeding ₹ 1000 crores - one public sector Listed Company,
the rest 9 being companies in private sector and
(B) 8 companies with turnover exceeding ₹ 500 crores and less than or equal to ₹ 1000 crores;
and
(2) 24 private limited companies.
The firm had subjected itself to Peer Review process during 2020-21 and continues to hold
certificate issued by Peer Review Board with validity date unexpired. During the F.Y. 2022-23 it had
been decided that the firm be subjected to Quality Review (QR) by QRB of the Institute. Can QR be so
conducted for this firm? If yes, can one of the audits of listed companies- viz. audit of public sector
Company done by firm in 2021-22 be subjected to QR by QRB, as this is the biggest statutory audit in
terms of turnover of the auditee, as well as of complexity of audit issues involved?
[May 23 (4 Marks)]
Ans.: Selection of Audit Firms:
Rule 3(1) of NFRA, 2018 inter alia, provides that the Authority (NFRA) shall have power to monitor
and enforce compliance with accounting standards and auditing standards, oversee the quality of
service u/s 132(2) or undertake investigation u/s 132(4) of the auditors of the following class of
companies and bodies corporate, namely:
(a) companies whose securities are listed on any stock exchange in India or outside India;
(b) unlisted public companies having paid-up capital of not less than ₹ 500 crores or having annual
turnover of not less than ₹ 1,000 crores or having, in aggregate, outstanding loans, debentures
and deposits of not less than ₹ 500 crores as on the 31st March of immediately preceding
financial year;

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(c) insurance companies, banking companies, companies engaged in the generation or supply of
electricity, companies governed by any special Act for the time being in force or bodies corporate
incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f) of sub-section (4) of
section 1 of the Act;
(d) any body corporate or company or person, or any class of bodies corporate or companies or
persons, on a reference made to the Authority by the Central Government in public interest; and
(e) a body corporate incorporated or registered outside India, which is a subsidiary or associate
company of any company or body corporate incorporated or registered in India as referred to in
clauses (a) to (d), if the income or net-worth of such subsidiary or associate company exceeds
twenty percent of the consolidated income or consolidated net-worth of such company or the
body corporate, as the case may be, referred to in clauses (a) to (d).
MCA has clarified to the QRB that in view of Sec. 132(2) of the Companies Act, 2013 r/w Rule 9(4) of
NFRA Rules, 2018, issue of QRB reviewing audits of the companies/bodies corporate specified under
Rule 3 of NFRA Rules, 2018 will only arise in case a reference is so made to QRB by NFRA, and not
otherwise.
In the given case, ABC & Co. is auditor of 18 listed companies and 24 private limited companies.
Conclusion: Considering the above, Quality Review of the ABC & Co. may be conducted in relation to
Audit of Private Limited Companies.
As far as Audit of Listed entities are concerned, NFRA has power to oversee quality of audit services.
Hence, audit of public sector Company done by firm in 2021-22 cannot be subjected to QR by QRB.

17.9 – Quality Review Process

Q.24 Reviewers, based on the conclusions drawn from the quality review, shall issue a preliminary report
and subsequently the final report. As a quality reviewer briefly discuss the basic elements of Quality
Review Report. [MTP-April 18]

Ans.: Basic Elements of Quality Review Report:

The report should contain:
(a) Elements relating to audit quality of companies:
(i) A reference to the description of the scope of the review and the period of review of audit
firm conducted alongwith existence of limitation(s), if any, on the review conducted with
reference to the scope as envisaged.
(ii) A statement indicating the instances of lack of compliance with technical standards and
other professional and ethical standards.
(iii) A statement indicating the instances of lack of compliance with relevant laws and
regulations.
(b) Elements relating to quality control framework adopted by the audit firm in conducting audit:
(i) An indication of whether the firm has implemented a system of quality control with
reference to the quality control standards.
(ii) A statement indicating that the system of quality control is the responsibility of the
reviewed firm.
(iii) An opinion on whether the reviewed firm’s system of quality control has been designed to
meet the requirements of the quality control standards for attestation services and whether

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it was complied with during the period reviewed to provide the reviewer with reasonable
assurance of complying with technical standards in all material respects.
(iv) Where the reviewer concludes that a modification in the report is necessary, a description
of the reasons for modification. The report of the reviewer should also contain the
suggestions.
(v) A reference to the preliminary report.
(vi) An attachment which describes the quality review conducted including an overview and
information on planning and performing the review.
(vii) The Quality Review Report should be issued on the reviewer’s (individual) letterhead and
signed by the reviewer. The report should be addressed to the Board and should be dated
as of the date of the conclusion of the review.
Q.25 Reviewers, based on the conclusions drawn from the review, shall issue a preliminary report and
subsequently the final report. A clean report indicates that the reviewer is of the opinion that the
affairs are being conducted in a manner that ensures the quality of services rendered. However, a
reviewer may qualify the report due to one or more reasons. In view of above Give example of some
of the situations when Reviewer of Quality Review Board may qualify the report. [MTP-Aug. 18]
Ans.: Examples of situations when Reviewer of Quality Review Board may qualify the report:
Technical Reviewers, based on the conclusions drawn from the review, shall issue a preliminary
report and subsequently the final report.
A clean report indicates that the reviewer is of the opinion that the affairs are being conducted in a
manner that ensures the quality of services rendered.
However, technical reviewer may qualify the report due to one or more of the following:
(a) non-compliance with technical standards and other relevant guidance;
(b) non-compliance with relevant laws and regulations as required under applicable auditing
standard;
(c) quality control system design deficiency; or
(d) non-compliance with quality control policies and procedures.
Q. What are the consequences if the Quality Review Board notices major non-compliances with the
25A requirements of the Standards on Quality Control or Standards on Auditing or Accounting
Standards? [MTP-March 23]
Ans.: Consequences in case Quality Review Board notices non-compliances with requirements of
SQC or SAs or ASs:
The actions that the Board may take, based upon consideration of recommendations of the Quality
Review Group, include one or more of the following: -
(a) Make recommendations to the Council of ICAI u/s 28B(a) of Chartered Accountants Act, 1949 for
referring the case to the Director (Discipline) of the Institute for consideration and necessary
action under the Chartered Accountants Act, 1949.
(b) Issue advisory and guidance to the AFUR u/s 28B(c) of Chartered Accountants Act, 1949 for
improvement in the quality of services and adherence to various statutory and other regulatory
requirements. A copy of such advisory may also be sent to the ICAI for information.
(c) Inform the details of the non-compliance to the regulatory bod(y)/ies relevant to the entity as
may be decided by the Board.
(d) Intimate the AFUR as to the findings of the Report as well as action initiated as above.

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(e) In case of review arising out of a reference received from a regulatory body, inform the results of
review and the details of action taken to the concerned regulatory body.
(f) Consider the matter complete and inform the AFUR accordingly.

17.10 - Technical Reviewer and Assistant

Q.26 While assigning the quality review work to the respective Technical Reviewers, in order to ensure
independence and avoid conflict of interest, certain eligibility conditions were specified for carrying
out the specified quality review assignment to the Technical Reviewers who were required to
submit a declaration of eligibility before starting the assignment. In view of above, briefly discuss
those eligibility conditions prescribed for Technical Reviewer. [MTP-March 22]
Ans.: Eligibility conditions prescribed for Technical Reviewer:
While assigning the quality review work to the respective Technical Reviewers, in order to ensure
independence and avoid conflict of interest, the following eligibility conditions were specified for
carrying out the specified quality review assignment to the Technical Reviewers who were required
to submit a declaration of eligibility before starting the assignment.
For being a Technical Reviewer (TR):
(i) He should not have any disciplinary proceeding under the Chartered Accountants Act, 1949
pending against him or any disciplinary action under the Chartered Accountants Act, 1949/penal
action under any other law taken/pending against him during last 3 financial years and/or
thereafter;
(ii) He or his firm or any of the network firms or any of the partners of his firm or that of the
network firms should not have been the statutory auditor of the entity, as specified, or have
rendered any other services to the said entity during last financial years and/or thereafter;
(iii) He or his firm or any of the network firms or any of the partners of his firm or that of the
network firms should not have had any association with the specified AFUR, during the last 3
financial years and /or thereafter;
(iv) He should comply with all the eligibility conditions laid down for appointment as an auditor of a
company u/s 141(3) of the Companies Act, 2013 which apply mutatis mutandis in respect of the
review of the quality of statutory audit of the entity, as specified, so far as applicable; and
(v) He does not belong to the city/region of head office of the AFUR.

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18 Audit of Banks
Marks Distribution of Past Exams
6

4
Marks

0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 4 4 4 5 5 5 5 5 5 5 0

From May 2019, Marks are given only for descriptive questions.
18.1 - Legal and Regulatory Framework
Q.1 What do you understand by Long Form Audit report?
Ans.: Long Form Audit Report:
• Besides the audit report as per the statutory requirements discussed above, the terms of
appointment of auditors of public sector banks, private sector banks and foreign banks (as well as
their branches), require the auditors to also furnish a long form audit report (LFAR).
• The long form audit report is to be given by statutory branch auditors as well as statutory central
auditors.
• The LFAR for branch auditors is in form of questionnaire where observations/comments have to
be provided on range of matters including cash, balance with banks, investments, advances,
deposits etc. These are submitted by the statutory branch auditors to statutory central auditors.
• The consolidation is done at head office level and LFAR for bank is submitted by statutory central
auditors to management. The LFAR, on the bank, after due examination, should be placed before
the ACB of the bank indicating the action taken/proposed to be taken for rectification of the
irregularities, if any, mentioned therein; and a copy of the LFAR and the relative agenda note,
together with the Board's views or directions, is submitted to RBI within 60 days of submission of
LFAR by statutory auditors.
Q.2 M/s GH & Associates have been appointed as Central Statutory Auditors of BNB Bank, a nationalized
bank, headquartered in New Delhi for the F.Y 2022-23. Bank functions in automated environment
using “FLC Software”. While preparing audit report, one of the partners highlighted that some matters
covered by Companies Act, 2013 and the requirements of Companies (Auditor's Report) Order, 2020
reporting. You are required to answer the following:
(i) To which authority auditors should submit their audit report?

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(ii) List the matters covered under Companies Act, 2013 and
(iii) Reporting under Companies (Auditor's Report) Order, 2020. [July 21 – New Syllabus (5 Marks)]
Ans.: Auditor’s report in case of a nationalised Bank:
(i) In the case of a nationalised bank, the auditor is required to make a report to the Central
Government.
(ii) Reporting requirements under Companies Act, 2013 are not applicable in case of a nationalised
bank. However, in case of a banking company, following matters need to be reported:
(a) Matters as stated u/s 143(3) of Companies Act, 2013;
(b) Adequacy and Operating Effectiveness of Internal Financial Controls u/s 143(3)(i) of the
Companies Act, 2013.
(c) Other matters in accordance with rule 11 of the Companies (Audit and Auditors) Rules, 2014.
(iii) Reporting requirements relating to the Companies (Auditor’s Report) Order, 2020 are not
applicable to a nationalised bank or to a banking company.

18.2 – Stages in conducting Bank Audit

Q.3 Write short note on: Requirements of a Risk Management Process/System in a bank.
[Nov. 16 (4 Marks)]
Ans.: Requirements of a Risk Management Process/System in a Bank:
1. Involvement of TCWG: Risk Management policies should be approved by TCWG. While approving
the policies, TCWG should ensure that 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 & monitoring of risks: Risks that may significantly affect the
achievement of bank’s goals and objectives should be identified, measured and monitored against
pre-approved limits and criteria.
3. Control activities: Banks must have appropriate controls to manage its risks, including the
following:
• effective segregation of duties,
• verification and approval of transactions,
• setting of limits,
• reporting and approval of exception.
4. Monitoring activities: Independent risk management unit should be set up which regularly assess
the Risk management models, methodologies and assumptions used to measure and manage risk.
5. Reliable information systems: Banks must have a reliable information system that provide
adequate financial, operational and compliance information on a timely and consistent basis to
management and TCWG.
Q.4 Banks, because of certain characteristics, are distinguished from other commercial enterprises and
hence it needs special audit consideration. As an auditor of a bank, specify the various peculiarities
which may necessitate special audit consideration to be taken care by you.
[May 19 – New Syllabus (4 Marks)]
Ans.: Need for Special Audit Considerations in audit of Banks:
Special audit considerations arise in the audit of banks because of:

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Chapter 18 Audit of Banks
1. the particular nature of risks associated with the financial transactions undertaken by banks;
2. voluminous scale of banking operations and the resultant significant exposures which can arise
within short period of time;
3. extensive dependence on IT for process of transactions;
4. various statutory and regulatory requirements; and
5. the continuing development of new products and services and banking practices which may not be
matched by the concurrent development of accounting principles and auditing practices.
In today’s environment, the banks use different applications to carry out different transactions which
may include data flow from one application to other application; the auditor while designing his plans
should also understand interface controls between the various applications.

18.3 - Internal Control Procedures in Bank

Q.5 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 given to audit
assistant?
Ans.: Evaluation of Telegraphic Transfer and Demand Drafts operations:
The following points should be considered so as to identify the irregularities in the area of telegraphic
transfers and demand drafts:
1. Codes for TT should be known only to responsible officers.
2. Coding and Decoding of telegrams should be done only by authorised officers.
3. The signatures on the documents used for TT and DD should be checked by an officer with the
Signature Book.
4. All the TTs and DDs sold by a branch should be immediately confirmed by the advices to the
branches concerned.
5. If the paying branch does not receive proper confirmation of any TT or DD from the issuing
branch or does not receive credit in its account with that branch, it should take immediate steps
to ascertain the reasons.
Q.6 You have been appointed as an auditor of LCO Bank, a nationalized bank. LCO Bank also deals in
providing credit card facilities to its account holder. The bank is aware of the fact that there should be
strict control over storage and issue of credit cards. How will you evaluate the Internal Control System
in the area of Credit Card operations of a Bank?
[Nov. 19 – New Syllabus (4 Marks), MTP-Oct. 20, RTP-May 22, Nov. 22 (4 Marks)]
Ans.: Evaluation of Internal Control System in the area of Credit Card Operations:
The following points should be considered so as to evaluate the internal control system in the area of
credit card operations:
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.

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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 monitor 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 holders’ 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.
Q.7 You are auditing a small bank branch with staff strength of the manager, cashier and three other staff
S1, S2 and S3. Among allocation of work for other areas, S1 who is a peon also opens all the mail and
forwards it to the concerned person. He does not have a signature book so as to check the signatures
on important communications. S2 has possession of all bank forms (e.g. Cheque books, demand
draft/pay order books, travellers’ cheques, foreign currency cards etc.). He maintains a record
meticulously which you have test checked also. However, no one among staff regularly checks that.
You are informed that being a small branch with shortage of manpower, it is not possible to always
check the work and records. Give your comments. [MTP-Nov. 21, April 23]
Ans.: Internal Control System:
Banks are required to implement and maintain a system of internal controls for mitigating risks,
maintain good governance and to meet the regulatory requirements. Given below are examples of
internal controls that are violated in the given situation:
• S1 who is a peon opens all the mail and forwards it to the concerned person. Further, he does not
have a signature book so as to check the signatures on important communications. This is not in
accordance with implementation and maintenance of general internal control, as the mail should
be opened by a responsible officer and signatures on all the letters and advices received from other
branches of the bank or its correspondence should be checked by an officer with the signature
book.
• S2 has possession of all bank forms. He maintains a record meticulously which were also verified
on test check basis. This is not in accordance with implementation and maintenance of general
internal control, as all bank forms (e.g. Cheque books, demand draft/pay order books, travellers’
cheques, foreign currency cards etc.) should be kept in the possession of an officer, and another
responsible officer should verify the issuance and stock of such stationery.
• Contention of bank that being a small branch with shortage of manpower they are not able to check
the work and records on regular basis, is not tenable as such lapses in internal control pose risk of
fraud.
The auditor should report the same in his report accordingly.

18.4 - Verification of Investments

Q.8 Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The bank has
recognised on accrual basis income from dividends on securities and Units of Mutual Funds held by

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Chapter 18 Audit of Banks
it as at the end of financial year. The dividends on securities and Units of Mutual Funds were
declared after the end of financial year. Comment. [MTP-Oct. 18, April, 22; RTP-Nov. 18]
Ans.: Income Recognition w.r.t. Investments:
Prudential Norms on income recognition of investments provides the following:
• Income from dividend on shares of corporate bodies and units of mutual funds should be booked
on cash basis.
• In respect of income from government securities and bonds and debentures of corporate bodies,
where interest rates on these instruments are predetermined, income could be booked on accrual
basis, provided interest is serviced regularly and as such is not in arrears.
• Banks may book income from dividend on shares of corporate bodies on accrual basis, provided
dividend on the shares has been declared by the corporate body in its AGM and the owner's right
to receive payment is established. This is also in accordance with AS-9 as well.
Conclusion: Recognition of dividend income on securities may be recognized on accrual basis if the
same has been declared by the Corporate Body in its AGM and the Shareholder’s right to receive
payment is established. In the present case, dividends were declared after the end of financial year.
Hence, recognition of income from dividends on securities and units of mutual fund on accrual basis is
not in order.
Q.9 ABN Bank was engaged in the business of providing Portfolio Management Services to its customers,
for which it took prior approval from RBI. Your firm has been appointed as the statutory auditors of
the Bank’s financial statements for the year 2022-23. Your senior has instructed you to verify the
transactions of Portfolio Management Services (PMS). While verifying the transactions you noticed
that the bank has not maintained separate record for PMS transactions from the Bank’s own
investments. As a statutory auditor what methodology will be adopted by you for verification of PMS
transactions? [RTP-Nov. 20, MTP-April 21]
Ans.: Separation of Investment Functions:
• The auditor needs to examine whether the bank, as required by the RBI, is maintaining separate
accounts for the investments made by it on their own Investment Account, PMS clients’ account,
and on behalf of other Constituents (including brokers).
• As per the RBI guidelines, banks are required to get their investments under PMS separately
audited by external auditors.
• In the instant case, ABN Bank is required to prepare separate records for PMS and as per RBI
guidelines PMS investments need to be audited separately by the external auditors and the
auditors are required to give a certificate separately for the same.
Conclusion: In the above case, auditor should not verify the PMS transactions and advise the bank to
segregate the PMS transactions from its own investments and provide the certificate of external
auditor as described above. In case ABN Bank does not provide the same the auditor may report
accordingly.

18.5 - Verification of Advances

Q.10 ABC Bank had sanctioned credit limits of ₹ 100 lakh to M/s Volkart Ltd. on 1st Sep. 2021. The
renewal of limits was due on 1st Sep. 2022. While doing the statutory branch audit for the year
ended 31st March 2023, you find that the renewal has not been done even though 180 days are over.
The bank says that the renewal process has been initiated on time and most of the document are

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Audit of Banks Chapter 18
received. The account is operated regularly and is in order; balance is maintained within drawing
power. It also shows a letter from Volkart stating that due to a sudden death of their auditor, a new
auditor had to be appointed. Procedure for appointment took some time and the new auditor was
doing the audit all over again. The limit was not renewed till 31.03.2023. However, the audited
financials are received on 10th April 2023 and the renewal letter was issued immediately. Your
assistant is insisting that the account must be classified as NPA since the limit was not renewed as on
31.03.2023. What is your opinion?
Ans.: Classification of Advances:
• As per RBI norms, accounts where regular limits are not reviewed within 180 days from the due
date, need to be classified as NPA.
• In the present case, operations in the account are excellent. The bank has shown a letter from
that company that due to certain reasons the audited financial statements are delayed. Further,
the limit has been renewed before signing the audit report.
Conclusion: Even if the sanction was issued after the balance sheet date, it relates to the position as
on the balance sheet date. Therefore, it is an adjusting event under AS 4, Contingencies and Events
Occurring After the Balance Sheet Date. It is also a matter of substance over form. The auditor needs
to consider classifying the account as a standard asset.
Q.11 Your firm has been appointed as auditors of a branch of a nationalised Bank. The bank is a
consortium member of Cash Credit Facilities of Rs. 50 crores to X Ltd. Bank's own share is Rs. 10
crores only. During the last two quarters against a debit of Rs. 1.75 crores towards interest, the
credits in X Ltd's account are to the tune of Rs. 1.25 crores only. Based on the certificate of lead bank,
the bank has classified the account of X Ltd. as performing.
Ans.: NPA Classification in Consortium advances:
• Prudential Norms on Asset Classification provides that in case of consortium advances, each bank
may classify the advance given by it according to its own experience of recovery and other factors.
• In the present case, in the last two quarters, the amount remains outstanding and, thus, interest
amount should be reversed.
• Despite the certificate of lead bank to classify the account as performing, the advance need to be
classified as non-performing asset.
Conclusion: Advance to be classified as NPA.
Q.12 M/s. S Ltd. is a MSME unit. The company does multiple banking. The company is availing cash credit
limit from U Bank of ₹ 25 crores. The limit availed remained less than ₹ 5.00 crores during all the
days of F.Y. 2022-23. The company has not done any credit in cash credit account during the year as
it is operating current account in newly opened another bank branch adjoining to company
premises. The company is having sufficient security of stocks and debtors and DP of ₹ 25.00 crores
remains all over the year. The company is availing term loans from other bank branches. Now the
Bank Manager is insisting to route the sale proceeds through U Bank, otherwise cash credit limit and
term loan accounts with other banks will be treated as Non-Performing Accounts. Now company
seeks your opinion.
Ans.: NPA Classification in Consortium advances:
• An Advance will be classified as NPA if:
(a) It ceases to generate income for a bank.
(b) Interest and/or instalment of principal in respect of such an advance have remain overdue or
out of order for a specified period of time.

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• An amount is said to be ‘Overdue’, if it is not paid on the due date fixed by the Bank. An account
should be treated as ‘Out-of-order’ if the outstanding balance remains continuously in excess of the
sanctioned limit/drawing power or if there are no credits continuously for 90 days as on the
balance sheet date or the credits are not enough to cover the interest debited during the same
period.
• Prudential Norms on Asset Classification provides that in case of consortium advances, each bank
may classify the advance given by it according to its own experience of recovery and other factors.
• In the present case, company is availing cash credit limit from U Bank of ₹ 25 crores. The limit
availed remained less than ₹ 5.00 crores during all the days of F.Y. 2022-23. The company has not
done any credit in cash credit account during the year as it is operating current account in newly
opened another bank branch adjoining to company premises. The company is availing term loans
from other bank branches. Now the Bank Manager is insisting to route the sale proceeds through U
Bank, otherwise cash credit limit and term loan accounts with other banks will be treated as Non-
Performing Accounts.
Conclusion: Cash credit facility with U bank need to be classified as NPA as there are no credit in the
account to serve the interest charged in the account. Classification of term loan with other banks
depends upon the payment made to that bank.
Q.13 Shy & Co. had been allotted the branch audit of a nationalized bank for the year ended 31st March,
2023. 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.
Ans.: Criteria for determination of NPA norms in respect of agricultural advances:
An agricultural advance is classified as NPA is interest and/or instalment of principal is overdue for:
• two crop seasons, in case loans granted for Short Duration crops,
• one crop season, in case loans granted for Long Duration crops (i.e. more than 1 year)
For this purpose, the following points are to be considered:
1. Long duration crops mean the crops with crop season longer than one year.
2. Short Duration Crops means the crops, other than long duration crops.
3. Crop season means the period up to harvesting of the crops, as determined by the State Level
Bankers’ Committee in each State.
4. 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.
5. 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.
Q.14 In course of audit of Good Samaritan Bank as at 31st March 2023 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 C.G. and hence these norms were not

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applicable. The bank has not invoked the guarantee. Please respond. Would your answer be
different if the advance is guaranteed by a State Government?
[MTP-April 18, March 21, March 23; RTP-Nov. 19, May 20]
Ans.: Classification of Government Guaranteed advances:
• The credit facilities backed by Central Government guarantee, though overdue will be classified as
NPA only when the govt. repudiates its guarantee when invoked. Credit facilities backed by State
Government guarantee should be classified as NPA in normal way.
• This exemption in case of Central Government is only for the purpose of asset classification and
provisioning and not for the purpose of recognition of income.
• Interest on government guaranteed advances should not be taken to Income Account unless it has
been realized.
• In the present case, bank has not revoked the guarantee, the question of repudiation does not
arise. Therefore, advance need not be classified as NPA in case of Central Government Guarantee.
However, as this exemption is not available in respect of income recognition norms, the income to
the extent not recovered should be reversed.
Conclusion: 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. The situation would be
different if the advance is guaranteed by State Government because this exception is not applicable for
State Government Guaranteed advances.
In case the bank has not invoked the Central Government Guarantee though the amount is overdue for
long, the reasoning for the same should be taken and duly reported in LFAR.
Q.15 Your firm has been appointed as branch auditor of East West Bank Ltd. In carrying out verification of
advances, what are the primary evidences you will look into? [May 18 – Old Syllabus (4 Marks)]
Ans.: Verification of Advances:
Advances generally constitute the major part of the assets of the bank. There are substantial number
of borrowers to whom variety of advances are granted. The audit of advances requires the major
attention from the auditors. The auditor is primarily concerned with obtaining evidence about the
following while carrying out audit of advances:
(i) Amounts included in the balance sheet in respect of advances are outstanding at the date of
balance sheet.
(ii) Advances represent amounts due to the bank.
(iii) Amounts due to the bank are appropriately supported by loan documents.
(iv) There are no unrecorded advances.
(v) The stated basis of valuation of advances is appropriate and properly applied and
recoverability of advances is recognized in their valuation.
(vi) Advances are disclosed, classified and described in accordance with recognized accounting
policies and practices and relevant statutory and regulatory requirements.
(vii) Appropriate provisions towards advances are made as per RBI norms, accounting standards
and generally accepted accounting practices.
Q.16 In the course of audit of skip Bank Ltd., you found that the bank had sold certain of its non-
performing assets. Draft the points of audit check that are very relevant to this area of checking.
[May 18 – New Syllabus (4 Marks); MTP-March 23]
Or

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CA. K have been doing audit of branch of LUD Bank Ltd. The principal business of the branch is
lending advances to large corporates. Since last one year, many large accounts have become Non-
Performing Asset (NPA) as per guidelines. The Management of the Bank decided to sell one of the
NPA account and consequently one NPA namely DEF Ltd. amounting to ₹ 10.00 Crores was sold to
Asset Reconstruction Company. What audit points CA. K should keep in mind while doing audit of
this transaction? [Jan. 21 – New Syllabus (5 Marks)]
Ans.: Sale/Purchase of NPA:
Auditor should examine the followings:
• Policy laid down by the BoD relating to procedures, valuation and delegation of powers including
non-performing financial assets that may be purchased/sold, norms for such purchase/sale,
valuation procedure and accounting policy.
• Only such NPA has been sold which has remained NPA in the books of the bank for at least 2 years.
• Assets have been sold/ purchased ‘without recourse’ only i.e. the entire credit risk associated with
the NPA should be transferred to the purchasing bank.
• Subsequent to the sale of the NPA, the bank does not assume any legal, operational or any other
type of risk relating to the sold NPAs.
• NPA has been sold at cash basis only. Under no circumstances, NPA can be sold to another bank at
a contingent price. The entire sale consideration has to be received on upfront basis.
• Bank has not purchased an NPA which it had originally sold.
Additional Points in case of Sale of an NPA:
Auditor should ensure the following:
(1) On the sale of the NPA, the same has been removed from the books of account of selling bank on
transfer;
(2) If the sale is at a price below the net book value (NBV) (i.e., book value less provisions held), the
shortfall should be debited to the profit and loss account of that year.
(3) If the sale is for a value higher than the NBV, the excess provision shall not be reversed but will
be utilised to meet the shortfall/loss on account of sale of other non-performing financial assets.
Additional Points in case of purchase of an NPA:
Auditor should verify the following:
(1) NPA purchased has been subjected to the provisioning requirements appropriate to the
classification status in the books of the purchasing bank.
(2) Any recovery in respect of an NPA purchased from other banks is first adjusted against its
acquisition cost and only the recovered amount in excess of the acquisition cost has been
recognised as profit.
(3) For the purpose of capital adequacy, banks have assigned 100% risk weights to the NPAs
purchased from other banks.
Q.17 M/s Sri & Co., Chartered Accountant have been allotted the branch audit of a nationalized bank for
the year ended 31st March, 2023. You are part of audit team and have been instructed by your
partner to verify the following areas:
(i) Fulfilment of the criteria prescribed for NPA norms for the advances given for agricultural
purposes.
(ii) Drawing power calculation from stock statements in respect of working capital accounts.
What may be your areas of concern as regards matters specified above?
[May 19 – Old Syllabus (5 Marks)]

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Ans.: (i) Criteria prescribed for NPA Norms in respect of agricultural advances:
Refer answer of Q. No. 13.
(ii) Verification of Drawing Power Calculation from stock statements:
(a) Ensure that the DP is calculated as per the BoD guidelines of the respective bank and agreed
upon by the concerned statutory auditors.
(b) Ensure that due consideration has been given to proper reporting of sundry creditors for the
purposes of calculating DP.
(c) Ensure that bank has conducted stock audit for all accounts having exposure of more than
stipulated limit. Review the report submitted by the stock auditors and consider the
comments made by the stock auditors on valuation of security and calculation of drawing
power.
(d) Special focus need to be given in examining the DP calculation in case of working capital
advances to companies engaged in construction business.
Q.18 In the course of statutory Branch audit of KS Bank Ltd., you observe that some borrower accounts
have been regularised before Balance sheet date by payment of overdue amount. Narrate the audit
procedures to be carried out with special focus on the Classification of advances and Provisioning for
Non-Performing assets of the Branch. [Nov. 20 – New Syllabus (5 Marks)]
Ans.: Audit procedures to be carried out in respect of Classification of advances and Provisioning for
Non-Performing assets of the Branch:
The Audit procedures that need to be carried out with special focus on classification of advances and
provisioning for NPAs of KS Bank Ltd., in which the auditor has observed that some borrower
accounts have been regularized before balance sheet date by payment of overdue amount shall be
carried out as under:
(i) As per the Reserve Bank guidelines, if an account has been regularised before the balance sheet
date by payment of overdue amount through genuine sources, the account need not be treated
as NPA.
(ii) Where subsequent to repayment by the borrower (which makes the account regular), the
branch has provided further funds to the borrower (including by way of subscription to its
debentures or in other accounts of the borrower), the auditor should carefully assess whether
the repayment was out of genuine sources or not.
(iii) Where the account indicates inherent weakness based in the data available, the account shall be
deemed as a NPA.
Classification and Provision:
(i) Examine whether the classification made by the branch is appropriate. Particularly, examine
the classification of advances where there are threats to recovery.
(ii) Examine whether the secured and the unsecured portions of advances have been segregated
correctly and provisions have been calculated properly.
(iii) It is to be ensured that the classification is made as per the position as on date and hence
classification of all standard accounts be reviewed as on balance sheet date.
(iv) The date of NPA is significant to determine the classification and hence specific care be taken in
this regard.
(v) NPA should be recognized only based on concept of Past Due/Overdue concept, and not based
on the Balance Sheet date.
Q.19 The bank’s advance portfolio comprised of significant loans against Life Insurance Policies. Write
suitable audit program to verify these advances. [May 13 (3 Marks), RTP-May 20, MTP-March 21]

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Ans.: Verification of Advances against life insurance policies:
Audit program for the verification of advances against life insurance policies need to cover the
following:
1. Inspect the policies and see whether they are assigned to the bank and whether such assignment
has been registered with the insurer.
2. Examine whether premium has been paid on the policies and whether they are in force.
3. Obtain Certificate regarding surrender value from the insurer.
4. The auditor should particularly see that if such surrender value is subject to payment of certain
premia, the amount of such premia has been deducted from the surrender value.
Q.20 M/s Aadi & Co., Chartered Accountants, have been allotted the branch audit of a nationalized bank
for the year ended 31st March, 2023. You are part of audit team and have been instructed by your
partner to verify the following areas:
(i) Fulfilment of the criteria prescribed for NPA norms for government guaranteed advance.
(ii) Fulfilment of the criteria prescribed for NPA norms for the advances given for agricultural
purposes.
(iii) Drawing power calculation from stock statements in respect of working capital accounts.
(iv) Accounts where regular/ad hoc limits are not reviewed within 180 days from the due
date/date of ad hoc sanction.
What may be your areas of concern as regards matters specified above? [MTP-Oct. 21]
Ans.: Areas of Concerns in case of verification of advances:
(i) Government Guaranteed Advances:
• If government guaranteed advance becomes NPA, then for the purpose of income recognition,
interest on such advance should not to be taken to income unless interest is realized.
However, for purpose of asset classification, credit facility backed by Central Government
Guarantee, though overdue, can be treated as NPA only when the Central Government
repudiates its guarantee, when invoked. This exception is not applicable for State Government
Guaranteed advances, where advance is to be considered NPA if it remains overdue for more
than 90 days.
• In case the bank has not invoked the Central Government Guarantee though the amount is
overdue for long, the reasoning for the same should be taken and duly reported in LFAR.
(ii) Agricultural Advances:
• Ensure that NPA norms have been applied in accordance with the crop season determined by
the State Level Bankers’ Committee in each State. Depending upon the duration of crops –
short term/long term - raised by an agriculturist, the NPA norms would also be made
applicable to agricultural term loans availed of by them. Also ensure that these norms are
made applicable to all direct agricultural advances listed in Master Circular on lending to
priority sector.
• In respect of agricultural loans, other than those specified in the circular, ensure that
identification of NPAs has been done on the same basis as non-agricultural advances.
(iii) Drawing Power Calculation:
• Ensure that the drawing power is calculated as per the extant guidelines (i.e. the Credit Policy
of the Bank) formulated by the Board of Directors of the respective bank and agreed upon by
the concerned statutory auditors. Special consideration should be given to proper reporting
of sundry creditors for the purposes of calculating drawing power.

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Audit of Banks Chapter 18
• The stock audit should be carried out by the bank for all accounts having funded exposure of
more than stipulated limit. The report submitted by the stock auditors should be reviewed
during the course of the audit and special focus should be given to the comments made by the
stock auditors on valuation of security and calculation of drawing power.
• The drawing power needs to be calculated carefully in case of working capital advances to
companies engaged in construction business. The valuation of work in progress should be
ensured in consistent and proper manner. It also needs to be ensured that mobilization
advance being received by the contractors is reduced while calculating drawing power.
(iv) Limits not reviewed:
• Accounts where regular/ad hoc limits are not reviewed within 180 days from the due
date/date of ad hoc sanction, should be considered as NPA. Auditors should also ensure that
the ad hoc/short reviews are not done on repetitive basis.
• In such cases, auditor can consider the classification of account based on other parameters
and functioning of the account.
Q.21 Gupta & Co. has been appointed as a statutory auditor of TCB Bank Ltd., a private sector bank,
registered with RBI. Mr. Kaival Gupta, the engagement partner, while performing the audit as per the
checklist, noted down the following points, which would be part of the audit queries, as tabulated
below:
Sr. No. Queries
1 Interest on State Government Guaranteed advance has been taken to income even
though such advance has remained overdue for more than 90 days.
2 There is an account for which an ad hoc limit has not been reviewed for 180 days from
the date of such ad hoc sanction and such account has been treated as a performing asset
in the books.
3 One of the NPAs was sold for a value higher than the net book value. Profit was not
recognized but the excess provision in respect of the same has been reversed.
4 In case of one of the accounts, an additional temporary limit has been sanctioned for
25% of the existing limit and for 120 days tenure.
5 On verification of outstanding forward exchange contracts, the ‘net position’ in respect
of one of the foreign currencies was not squared and was uncovered by a substantial
amount.
You are required to provide the reasons due to which such queries would have been raised by Mr.
Kaival and describe the actions that may be taken by the person responsible on behalf of TCB Bank
Ltd. for solving such queries. [RTP-Nov. 21]
Ans.: Verification of Advances in case of Bank Audit:
Sr. Reason for such Query Action that may be taken in response
No. to the query
1 A State Government Guaranteed advance has Interest income recognized on such
to be treated as NPA even if it remains overdue advance would be reversed and would be
for more than 90 days and in case of NPA, for taken to income only when it is realized.
the purpose of income recognition, interest on
such advance should not be taken to income
unless interest is realized.
.

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.

2 Accounts for which an ad hoc limit has not It’s treatment in the books would be changed
been reviewed for 180 days from the date of from performing asset to a non-performing
such ad hoc sanction, should be considered as asset from the date when such change in the
NPA. treatment was required.
3 In case of sale of NPA, where the sale is for a The entry for reversal of the excess provision
value higher than the NBV, the auditor is would be cancelled in the books and such
required to ensure that no profit is recognized, excess provision would be retained to meet
and the excess provision has not been reversed the shortfall/loss that may arise because of
but retained to meet the shortfall/loss that the sale of other non-performing financial
may arise because of the sale of other non- assets.
performing financial assets.
4 Additional temporary limit may be sanctioned, The terms of additional temporary limit in
for a maximum of 20% of the existing limit and case of such account would be revised to
90 days maximum tenure. 20% of the existing limit and for 90 days
maximum tenure.
5 Net position in respect of each of the foreign The net “position” of the branch in relation to
currencies should be generally squared and each foreign currency should be squared off
should not be uncovered by a substantial and get covered by a substantial amount.
amount.
.

Q.22 Your firm has been appointed as a statutory auditor of a nationalised bank which has multiple
banking accounts and consortium accounts of corporate borrowers and of which many accounts are
falling within the purview of CDR (Corporate Debt Restructuring) mechanism.
Enumerate the audit procedure to be carried out for assessing such borrowers' accounts.
[Dec. 21 – Old Syllabus (5 Marks)]
Ans.: Audit procedure in case of restructured advances:
• Restructuring is an act in which a lender, for economic or legal reasons relating to borrower’s
financial difficulty, grants concessions to the borrower. It may involve modification of terms of
advances including alteration of amount of instalments/alteration of repayment period/rate of
interest/sanction of additional credit facilities etc. to help in curing of default.
• RBI has given revised guidelines for treatment of restructured accounts by its circular. The auditor
should verify compliance with the requirements of the circular issued in this regard.
• Banks may restructure the accounts classified under standard, substandard or doubtful categories.
Banks cannot restructure accounts with retrospective effect. Once the bank receives an
application/proposal in respect of an account for restructuring, it implies that the account is
intrinsically weak. Accordingly, during the time the account remains pending for restructuring, the
auditors need to take a view whether provision needs to be made in respect of such accounts,
pending approval for restructuring.
• On restructuring, the account will be downgraded from Standard to substandard. NPAs will remain
in the same category.
Q.23 You are part of engagement team conducting statutory audit of a branch of nationalized bank.
During the course of audit, it has come to your notice that there are large number of cash credit
accounts in the branch. Many of the cash credit accounts are only partially utilized during
substantial part of year. However, in the month of March, the accounts are fully utilized. On further

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scrutiny, it is observed that these account holders have made fixed deposits from these utilized
amounts at the end of year. These deposits have been liquidated in first week of April of next
financial year. Comment upon how this situation would be dealt by you as a statutory branch
auditor? [MTP-Oct. 22]
Ans.: Reporting of Irregular Advances:
• In the given case, many of the cash credit accounts in the branch of a nationalized bank are only
partially utilized during substantial part of year. However, in the month of March, the accounts are
fully utilized. On further scrutiny, it is observed that these account holders have made fixed
deposits from these utilized amounts at the end of year. These deposits have been liquidated in
first week of April of next financial year.
• This is an example of window dressing. The branch is resorting to window dressing by artificially
boosting its advances and deposits. Utilization of advances and placing of fixed deposits at end of
year in branch and again liquidation of deposits early next year indicate that branch is resorting to
window dressing to inflate its advances as well as deposits artificially.
• The auditor has to verify whether the unavailed portion of the credit facilities (overdraft, cash
credit) are used to boost the loans and deposits which might tantamount to window dressing. The
relevant regulatory guidelines also prohibit such type of practices and these might involve penal
action in terms of Banking Regulation Act, 1949.
Conclusion: Auditor is required to suitably report the matter in audit report and commented in LFAR
also. In appropriate cases, making a suitable qualification in the main audit report has also to be
considered.
Q.24 CA Prachi was conducting statutory audit of branch of a nationalized bank for the year 2022-23.
While reviewing operations and documents/papers of a borrower enjoying overdraft credit facilities
of ₹ 50 crore (availed against security of stocks and book debts), following observations were jotted
down by her:
(i) The balance in overdraft credit facility as on 31st March, 2023 was ₹ 55.65 crore. The balance in
account exceeded sanctioned limit during the whole month of March 2023.
(ii) As per terms of sanction letter, stock/book debt statements were required to be submitted
monthly. Latest available stock/book debt statement for the month of February, 2023 showed
drawing power of ₹ 48.50 crore only. However, stock/book debt statements of previous months
showed adequate drawing power.
(iii) Stock audit of borrower was also conducted during the year by one of empanelled stock auditors
of the bank. Stock audit report dated 31st December, 2022 placed on the record showed
adequate drawing power in the account. However, it has commented adversely on the declining
turnover of borrower in year 2022-23 (till the date of stock audit report) as compared to
proportionate turnover in preceding year.
(iv) The renewal of overdraft facilities was due on 20th Oct., 2022. The account was short renewed
by competent authority for a period of 3 months pending submission of complete papers.
However, borrower has not submitted complete renewal papers till 31st March, 2023. There is a
request letter from borrower on record stating that valuation report of a property located at a
far-away location was taking time.
The branch has classified the account as ‘Standard Asset’. Considering above, CA Prachi is in
dilemma relating to proper classification of above advance. Guide her. [RTP-Nov. 22]

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Ans.: Classification of advances with temporary deficiencies and limit not renewed:
• The borrower was enjoying overdraft credit facilities of ₹ 50 crore against security of stocks and
debts. Further, though latest available stock statement for the month of February, 2023 showed
inadequate drawing power, there was adequate drawing power available throughout the year.
Stock audit report dated 31.12.2022 also reflected adequate drawing power. Hence, it shows that
borrower had adequate drawing power during the year.
• Further, comment on declining sales is of general informative value to management for making
credit decisions. The fact of over drawings in account during the month of March, 2023 and
inadequate drawing power in a month are in nature of temporary deficiencies and do not require
account to be classified as NPA in accordance with asset classification and provisioning norms of
RBI.
• RBI instructions lay down that ordinarily credit limits need to be reviewed not later than 3 months
from the due date. As per Guidance note on Audit of Banks, in case of constraints such as non-
availability of financial statements and other data from the borrowers, the branch should furnish
evidence to show that renewal/ review of credit limits is underway and would be completed soon.
In any case, delay beyond six months is not considered desirable as a general discipline.
• Hence, an account where the credit limits have not been reviewed/ renewed within 180 days from
the due date will be treated as NPA. It would be pertinent to note that the counting of 180 days
would be required to be done from the date of original due date for renewal and not from the date
of expiry of short reviews/technical reviews. In the instant case, the original date of renewal was
20th October, 2022 and period of 180 days has still not expired as on balance sheet date.
Conclusion: Based on above stated facts, CA Prachi should accept classification of account as
‘Standard Asset’ made by branch.
Q. BOT Limited is enjoying cash credit facility sanctioned from Nariman Point, Mumbai branch of KNB
24A Bank for ₹ 250 crore. However, for practical considerations, various sub-limits have been fixed for
the borrower company for operation at Solapur, Pune and Nashik branches of the same bank.
The manager of the Solapur branch notices that there are no credit transactions in sub - limit
account being operated at the Solapur branch for more than 90 days as on 31st March,2023.
Discuss the approach of CA. Muni, statutory branch auditor of Nariman Point branch, Mumbai of KNB
Bank, in the matter of asset classification of the above borrower account. Also discuss considerations
for classifying said account at the Solapur branch. [RTP-May 23]

Ans.: Asset Classification:

• Sometimes, a customer is sanctioned a cash credit limit at one branch but is authorised to utilise
such overall limit at several other branches also, for each of which a sub-limit is fixed. In such a
case, determination of status of the account as NPA or otherwise should be determined at the limit-
sanctioning branch with reference to the overall sanctioned limit/drawing power and not by each
of the other branches where a sub-limit has been fixed.
• Auditor of limit-sanctioning branch should examine whether it receives particulars of all
transactions in the account at sub-limit branches and whether status of the account has been
determined considering the total position of operation of the account at all concerned branches.
The standalone matter of no credit transactions for more than 90 days as on 31st March, 2023 at
Solapur branch is irrelevant.

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Audit of Banks Chapter 18
Conclusion: CA. Muni should consider asset classification considering the total position of operation
of the account at all concerned branches.
Regarding sub-limit at branches, the classification adopted by the limit-sanctioning branch should be
followed. Hence, the Solapur branch has to follow asset classification made by the limit-sanctioning
branch.

18.6 - Verification of Other Assets

Q.25 While auditing the branch of a Bank you are required to examine inter branch adjustments. What
points require your special attention?
Ans.: Examination of Inter Branch Adjustments (Branch Adjustment Account):
It represents the balance of all inter-branch transactions of the bank. The same are to be disclosed
“Net”. If the inter-office adjustment (Net) is a debit, it is to be shown under “other assets” and if it is a
credit, it is shown under “other Liabilities and Provisions”. These can be sub-divided into segments like
DD paid, Inter-branch remittances, Head Office Account, etc.
The auditor should pay special attention to the following points:
(a) The origin and validity of old outstanding unmatched entries, particularly debit entries. The
auditor may also seek confirmation of transactions relating to outstanding.
(b) Whether there are any reversal entries indicating the possibilities of irregular payments or
frauds.
(c) Whether the balances include any items in the nature of cash-in-transit, 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.
(d) Whether transactions, other than those relating to inter-branch transactions have been included
in inter-branch accounts.
(e) 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 may also seek explanations
from the management in this regard.

18.7 - Verification of Other Liabilities

Q.26 While doing the audit of a Nationalised bank branch, your audit assistant informed you that he
suspects some irregularities in Guarantees issued by the Bank. What should be your guidance in the
matter to check the same? [May 18 – Old Syllabus (4 Marks)]
Ans.: Verification points for checking irregularities in guarantees issued by the bank:
(a) Ensure that there exists a system whereby the non-fund based facilities or additional/ad hoc
credit facilities to parties are extended only to their regular constituents, etc.
(b) Ascertain whether there are adequate internal controls to ensure that transactions giving rise to
contingent liabilities are executed only by persons authorised to do so and in accordance with the
laid down procedures.
(c) Verify in case of LCs for import of goods, the payment to the overseas suppliers is made based on
shipping documents and after ensuring that the said documents are in strict conformity with the
terms of LCs.

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Chapter 18 Audit of Banks
(d) Ascertain whether the accounting system of the bank provides for maintenance of adequate
records in respect of such obligations and whether the internal controls ensure that contingent
liabilities are properly identified and recorded.
(e) Test the completeness of the recorded obligations.
(f) Review the reasonableness of the year-end amount of contingent liabilities in the light of previous
experience and knowledge of the current year's activities.
(g) Review whether comfort letters issued by the bank has been considered for disclosure of
contingent liabilities.
(h) Examine whether the bank has given any guarantees in respect of any trade credit (buyer’s credit
or seller’s credit) and the period of guarantees is co-terminus with the period of credit reckoned
from the date of shipment.
(i) Verify whether bank has extended any non-fund facility or additional/ad hoc credit facilities to
other than its regular customers. In such cases, auditor should ensure concurrence of existing
bankers of such borrowers and enquire regarding financial position of those customers.
Q.27 INDO Bank appointed your firm of Chartered Accountants as a branch auditor for the financial year
2022-23. Being head-in-charge of the assignment, while planning, you distributed the work among
your team members and assigned Mr. Pary for verification of bills payable. However, Mr. Pary, being
fresh to the bank audits, needs your guidance. Kindly guide. [MTP-Oct. 19]
Ans.: Verification of Bills Payable:
(i) Evaluate the existence, effectiveness and continuity of internal controls over bills payable. Such
controls should usually include the following-
• Drafts, mail transfers, traveller’s cheques, etc. should be made out in standard printed forms.
• Unused forms relating to drafts, traveller’s cheques, etc. should be kept under the custody of a
responsible officer.
• The bank should have a reliable private code known only to the responsible officers of its
branches, coding and decoding of the telegrams should be done only by such officers.
• The signatures on a demand draft should be checked by an officer with the specimen signature
book.
• All the telegraphic transfers and demand drafts issued by a branch should be immediately
confirmed by advices to the branches concerned. On payment of these instruments, the paying
branch should send a debit advice to the originating branch.
(ii) Examine an appropriate sample of outstanding items comprised in bills payable accounts with
the relevant registers. Reasons for old outstanding debits in respect of drafts or other similar
instruments paid without advice should be ascertained.
(iii) Correspondence with other branches after the year-end (e.g., responding advices received from
other branches, advices received from other branches in respect of drafts issued by the branch
and paid by the other branches without advice) should be examined specially insofar as large
value items outstanding on the balance sheet date are concerned.
Q.28 While auditing APNA Bank, you observed that a lump sum amount has been disclosed as contingent
liability collectively. You are, therefore, requested by the management to guide them about the
disclosure requirement of Contingent Liabilities for Banks. Kindly guide. [RTP-Nov. 19]
Ans.: Disclosure Requirements of Contingent Liabilities:
The Third Schedule to the Banking Regulation Act, 1949, requires the disclosure of the following as a
footnote to the balance sheet:

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Audit of Banks Chapter 18
(i) Claims against the bank not acknowledged as debts.
(ii) Liability for partly paid investments.
(iii) Liability on account of outstanding forward exchange contracts.
(iv) Guarantees given on behalf of constituents-
• In India.
• Outside India.
(v) Acceptances, endorsements and other obligations.
(vi) Other items for which the bank is contingently liable.
Q.29 Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank for the financial
year 2022-23. During the course of audit your audit team observed that a lump sum amount has been
disclosed as Contingent Liability collectively though the components are correctly identified. In
respect of contingent liabilities, the auditor is primarily concerned with seeking reasonable
assurance that all the contingent liabilities are identified and properly valued and the audit firm
intend to obtain a representation from the management. Highlight the points/checklists that are to
be covered in the management representation. [May 22 (5 Marks)]
Ans.: Checklists that are to be covered in the management representation:
In respect of contingent liabilities, the auditor is primarily concerned with seeking reasonable
assurance that all contingent liabilities are identified and properly valued. The auditor should obtain
representation from management that:
(1) all off balance sheet transactions have been accounted in the books of account as and when such
transaction has taken place;
(2) all off balance sheet transactions have been entered into after following due procedure laid down;
(3) all off balance sheet transactions are supported by the underlying documents;
(4) all year end contingent liabilities have been disclosed;
(5) the disclosed contingent liabilities do not include any crystallised liabilities which are of the
nature of loss/expense and which, therefore, require creation of a provision/adjustment in the
financial statements;
(6) the estimated amounts of financial effect of the contingent liabilities are based on the best
estimates in terms of AS 29, including consideration of the possibility of any reimbursement;
(7) in case of guarantees issued on behalf of the bank’s directors, the bank has taken appropriate steps
to ensure that adequate and effective arrangements have been made so that the commitments
would be met out of the party’s own resources and that the bank will not be called upon to grant
any loan or advances to meet the liability consequent upon the invocation of the said guarantee(s)
and that no violation of Sec. 20 of the Banking Regulation Act, 1949 has arisen on account of such
guarantee; and
(8) such contingent liabilities which have not been disclosed on account of the fact that the possibility
of their outcome is remote include the management’s justification for reaching such a decision in
respect of those contingent liabilities.

18.8 – Verification of Important Ratios

Q.30 As statutory central auditors of a Nationalised Bank, what special points are to be borne in mind in
the audit of compliance with “Statutory Liquidity Ratio” (SLR) requirements?

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Chapter 18 Audit of Banks
Ans.: Audit of Compliance of SLR Requirements:
Central statutory auditors are required to verify the compliance of SLR on 12 odd dates in different
months not having Fridays. The resultant report is to be sent to the management of the bank and to
the RBI. To verify compliance with SLR requirements, the statutory auditor has to examine two
aspects:
(a) The correctness of the figure of the DTL at the close of business on the reporting Friday
relevant to the dates selected by the auditor, and
(b) Maintenance of prescribed percentage of liquid assets on the selected date.
Steps for verification:
1. Obtain an understanding of the relevant circulars of the RBI so as to ascertain the items to be
included in composition of DTL.
2. Request the branch auditors to verify the correctness of the trial balances and examine the cash
balance at the branch on the selected dates.
3. Examine, on a test basis, the consolidations regarding DTL position prepared by the head office
with reference to the related returns received from branches. Ensure that the consolidations
prepared by the bank include the relevant information in respect of all the branches.
4. Examine the composition of items of DTL as per circulars/instructions of RBI.
5. Ensure that the interest accrued but not accounted for in the books is included in composition
of DTL.
6. Specify number of unaudited branches and a statement that auditor has relied on the returns
received from the unaudited branches in forming his opinion.

18.9 - Concurrent Audit System

Q.31 ABC Chartered Accountants have been appointed as concurrent auditors for the branches of
Effective Bank Ltd. for the year 2021-22. You are part of the audit team for Agra branch of the bank
and have been instructed by your senior to verify the advances of the audit period. You are required
to guide your assistant about the areas to be taken care while doing verification during the
concurrent audit. [RTP-May 19]
Ans.: Areas to be taken care in verification of advances:
(1) Ensure that loans and advances have been sanctioned properly in accordance with delegated
authority.
(2) Ensure that securities and documents have been received and properly charged/ registered.
(3) Ensure that post disbursement supervision and follow-up is proper, such as receipt of stock
statements, instalments, recovery/renewal of sanction limits, etc.
(4) Verify whether there is any misutilisation of the loans and whether there are instances indicative
of diversion of funds.
(5) Check whether the letters of credit issued by the branch are within the delegated power and
ensure that they are for genuine trade transactions.
(6) Check the bank guarantees issued, whether they have been properly worded and recorded in the
register of the bank. Whether they have been promptly renewed on the due dates.

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Audit of Banks Chapter 18
(7) Ensure proper follow-up of overdue bills of exchange.
(8) Verify whether the classification of advances has been done as per RBI guidelines.
(9) Verify whether the claims to DICGC and ECGC is submitted in time.
(10) Verify that instances of exceeding delegated powers have been promptly reported to
controlling/Head Office by the branch and have been confirmed or ratified at the required level.
Q.32 You are the Concurrent Auditor of a Branch of Nationalized Bank which deals in foreign exchange
transactions. Give focus areas of your checking in this respect. [Nov. 18-New Syllabus (4 Marks)]
Or
You have been appointed as Concurrent Auditor of a nationalized bank branch. The main business at
the branch is dealing in foreign exchange. Suggest the main areas of coverage in regard to foreign
exchange transactions of the said branch under concurrent audit. [Nov. 19 – Old Syllabus (5 Marks)]
Or
You have been appointed as Concurrent auditor of one of the branches of Coin Bank Ltd. This branch
is dealing mainly in foreign exchange. State the suggested audit procedures to be covered by you to
check the foreign exchange transactions of this branch while doing Concurrent audit.
[Dec. 21 – New Syllabus (5 Marks)]
Ans.: Focus area in checking of foreign exchange transactions:
Foreign exchange transactions to be verified with reference to RBI guidelines. Important points of
verification in this respect are:
1. Check foreign bills negotiated under letters of credit.
2. Check Foreign Currency Non-Resident and other non-resident accounts to ensure that only
permissible transactions route through these accounts.
3. Check whether inward/outward remittance have been properly accounted for.
4. Examine extension and cancellation of forward contracts for purchase and sale of foreign currency.
Ensure that they are duly authorised and necessary charges have been recovered.
5. Ensure that the overbought/oversold position maintained in different currencies is reasonable
considering the foreign exchange operations.
6. Ensure compliance of the guidelines issued by RBI/HO of the bank.
7. Ensure that balances in Nostro accounts in different foreign currencies are within the limit as
prescribed by the bank.
8. Verify transactions of Nostro and Vostro account and their reconciliation statements.

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19 Audit of Non-Banking Financial Companies

Marks Distribution of Past Exams
6

4
Marks

0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 0 0 0 5 5 0 0 4 0 5 5

From May 2019, Marks are given only for descriptive questions.
19.1 – Meaning and Types of NBFC
Q.1 Satyam Pvt. Ltd. is a company engaged in trading activities, it also has made investments in shares of
other Companies and advanced loans to group companies amounting to more than 50% of its total
assets. However, trading income constitutes majority of its total income. Whether the Company is an
NBFC?
Ans.: Classification of company as NBFC:
• In order to identify a particular company as Non-Banking Financial Company (NBFC), it will
consider both assets and income pattern as evidenced from the last audited balance sheet of the
company to decide its principal business.
• The company will be treated as NBFC when a company's financial assets constitute more than 50%
of the total assets (netted off by intangible assets) and income from financial assets constitute
more than 50% of the gross income. A company which fulfils both these criteria shall qualify as an
NBFC and would require to be registered as NBFC by Reserve Bank of India.
Conclusion: Satyam Pvt. Ltd. is fulfilling the criteria on the asset side, but however is not fulfilling the
criteria on the income side, the company cannot be classified as a deemed NBFC.
Q.2 Shubham & Associates are going to start the audit of NBFCs. They have not performed much work for
the NBFCs in the past years. You are required to explain the requirements related to registration and
regulation of NBFCs which an auditor needs to keep in his mind while planning the audit of NBFC
which would help this firm.
Ans.: Registration and regulation of NBFC:
• Sec. 45-IA of RBI (Amendment) Act, 1997 provides that no NBFC is allowed to commence or carry
on the business of a NBFC without:

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Audit of Non-Banking Financial Companies Chapter 19
(a) obtaining a certificate of registration issued by the RBI.
(b) having a net owned fund (NOF) ₹ 200 lakhs.
• The registration is required where the financing activity is a principal business of the company.
• Financial activity will be considered as principal business if the company’s financial assets
constitute more than 50% of the total assets and income from financial assets constitute more than
50% of the gross income. A company which fulfils both these criteria is required to get itself
registered as NBFC with RBI.
• However, to obviate dual regulation, certain categories of NBFC which are regulated by other
regulators are exempted from requirement of registration with the RBI, for example: companies
registered with SEBI or IRDA.
• The RBI has issued directions to NBFC on acceptance of public deposits, prudential norms, risk
exposure norms & other measures to monitor financial solvency and reporting by NBFC.
• RBI also issued directions to auditors to report to the RBI, BOD and shareholders, any non-
compliance with the RBI Act and regulations made by the RBI.
Q.3 ABC Ltd. is a company registered under the Companies Act, 2013. The company is engaged in the
business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by
Government or local authorities. For the year ended 31st March, 2023, following are some extracts
from the financial statements:
(1) Paid-up share capital ₹ 40.53 Cr.
(2) Non-Current Assets – Loans & Advances ₹ 55.90 Cr.
(3) Current Assets – Loans & Advances ₹ 344.47 Cr.
(4) Total assets of the company ₹ 530 Cr.
(5) Intangible assets ₹ 3 Cr.
(6) Profit of the Year ₹ 7.25 Cr.
(7) Income from interest and dividends ₹ 52 Cr.
(8) Gross Income ₹ 102.57 Cr.
Directors intend to apply for registration as Non-Banking Financial Company (NBFC) under Section
45-IA of the RBI (Amendment) Act, 1997. Advise. [Dec. 21 – New Syllabus (4 Marks)]
Ans.: Registration of NBFC:
• Sec. 45-IA of RBI (Amendment) Act, 1997 provides that no NBFC is allowed to commence or carry
on the business of a NBFC without
(a) obtaining a certificate of registration issued by the RBI; and
(b) having the net owned fund of ₹ 25 lakh or such other amount, not exceeding ₹ 100 crores, as
the Bank may, by notification in the Official Gazette, specify.
Note: Net Owned funds as prescribed for registration purposes is ₹ 200 lakhs.
• The registration is required where the financing activity is a principal business of the company.
• Financial activity will be considered as principal business if the company’s financial assets
constitute more than 50% of the total assets (netted off by intangible assets) and income from
financial assets constitute more than 50% of the gross income.
• In the given case, net owned funds exceeds ₹ 2 Crores and financial activity is the principal
business of the company as the financial assets constitute more than 50% of the total assets

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Chapter 19 Audit of Non-Banking Financial Companies
(netted off by intangible assets) and income from financial assets constitute more than 50% of the
gross income.
Conclusion: As the net owned funds of the company exceeds ₹ 2 Crores and financial activity is the
principal business of the company (based on 50:50 test), company is required to register as NBFC.
Q.4 Sudarshan Ltd. is a company registered under the Companies Act, 2013. The company is engaged in
the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities
issued by Government or local authorities. For the year ended 31st March, 2023 following are some
extracts from the financial statements:
(1) Paid-up share capital ₹ 40.53 Cr.
(2) Non-Current Assets – Loans & Advances ₹ 75.50 Cr.
(3) Current Assets – Loans & Advances ₹ 294.33 Cr.
(4) Total assets of the company ₹ 618.55 Cr.
(5) Intangible assets ₹ 6.35 Cr.
(6) Profit of the Year ₹ 8.15 Cr.
(7) Income from interest and dividends ₹ 62.31 Cr.
(8) Gross Income ₹ 111.23 Cr.
Directors intend to apply for registration as Non-Banking Financial Company (NBFC) under Section
45-IA of the Reserve Bank of India (Amendment) Act, 1997. Advise. [RTP-Nov. 22]
Ans.: Registration of NBFC:
• Sec. 45-IA of RBI (Amendment) Act, 1997 provides that no NBFC is allowed to commence or carry
on the business of a NBFC without
(a) obtaining a certificate of registration issued by the RBI; and
(b) having the net owned fund of ₹ 25 lakh or such other amount, not exceeding ₹ 100 crores, as
the Bank may, by notification in the Official Gazette, specify.
Note: Net Owned funds as prescribed for registration purposes is ₹ 200 lakhs.
• The registration is required where the financing activity is a principal business of the company.
• Financial activity will be considered as principal business if the company’s financial assets
constitute more than 50% of the total assets (netted off by intangible assets) and income from
financial assets constitute more than 50% of the gross income.
• Financial Assets of Sudarshan Ltd. are:
Non-Current Assets - Loans & Advances ₹ 75.50 Cr.
Add: Current Assets - Loans and advances ₹ 294.33 Cr.
Total Financial Assets ₹ 369.83 Cr.
• Total Assets (netted off by intangible assets) of Sudarshan Ltd. are:
Total assets of the company ₹ 618.55 Cr.
Less: Intangible assets ₹ 6.35 Cr.
Total Assets (netted off by intangible assets) ₹ 612.20 Cr.
• In view of above, Financial assets of Sudarshan Ltd. constitute more than 50% of the total assets
(netted off by intangible assets).
• Income from financial assets ₹ 62.31 Cr.
Gross Income ₹ 111.23 Cr.
Income from financial assets constitute more than 50% of the gross income.

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Audit of Non-Banking Financial Companies Chapter 19
• From the above, it is clear that Sudarshan Ltd.’s financial assets constitute more than 50 per cent of
the total assets (netted off by intangible assets) and income from financial assets constitutes more
than 50 per cent of the gross income.
Conclusion: As the net owned funds of the company exceeds ₹ 2 Crores and financial activity is the
principal business of the company (based on 50:50 test), company is required to register as NBFC.
Q.4A Write a short note on the following: Categorisation of NBFCs carrying out specific activity.
[RTP-May 23]
Ans.: Categorisation of NBFCs carrying out specific activity:
As the regulatory structure envisages scale based as well as activity-based regulation, the following
prescriptions shall apply in respect of the NBFCs
(i) NBFC-P2P, NBFC-AA, NOFHC and NBFCs without public funds and customer interface will
always remain in the Base Layer of the regulatory structure.
(ii) NBFC-D, CIC, IFC and HFC will be included in Middle Layer or the Upper Layer (and not in the
Base layer), as the case may be. SPD and IDF-NBFC will always remain in the Middle Layer.
(iii) The remaining NBFCs, viz., Investment and Credit Companies (NBFC-ICC), Micro Finance
Institution (NBFC-MFI), NBFC-Factors and Mortgage Guarantee Companies (NBFC-MGC) could
lie in any of the layers of the regulatory structure depending on the parameters of the scale
based regulatory framework.
(iv) Government owned NBFCs shall be placed in the Base Layer or Middle Layer, as the case may
be. They will not be placed in the Upper Layer till further notice.

19.2 – Audit Procedures

Q.5 You are the auditor of MP Ltd., a NBFC registered with RBI as an Investment Company. How would you
proceed to ensure the compliance of “Prudential Norms Directions” by MP Ltd.?
[Nov. 18-Old Syllabus (4 Marks)]
Ans.: Compliance of Prudential Norms by NBFC
1. Prudential Norms: The auditor has to verify the compliance of prudential norms relating to (1)
income recognition; (2) Income from investments; (3) Asset classification; (4) Provision for bad &
doubtful debts; (5) Capital adequacy norm; (6) Prohibition of granting loans against its own shares;
(7) Prohibition on loans & investments for failure to repay public deposits & (8) Norms for
concentration of credit etc.
2. Policy for demand Loans: The auditor shall ensure that Board of the NBFC shall frame a policy for
granting demand/call loans and implement the same.
3. Classification of Advances: The auditor should verify the classification of advances and loans as
standard/sub-standard/doubtful/loss and that proper provision has been made in accordance with
the directions.
4. Income from NPA: Auditor should ensure that unrealised income from non-performing assets has
not been taken to profit and Loss Account.
5. Recovery in NPA Accounts: The auditor should check all NPAs of the previous years to verify
whether during the current year any payments have been received or still they continue to be NPA
during the current year also.
Additional Verification point in case of investment company:
In case of Investment Company, NBFC Prudential Norms stipulates the following:

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Chapter 19 Audit of Non-Banking Financial Companies
• NBFCs should not lend more than 15% of its owned funds to any single borrower and not more than
25% to any single group of borrower.
• The ceiling on investments in shares by a NBFC in a single entity and the aggregate of investments in
a single group of entities has been fixed at 15% and 25% respectively.
• Moreover, a composite limit of credit to and investments in a single entity/group of entities has
been fixed at 25% and 40% respectively of the owned fund of the concerned NBFC.
Auditor is required to verify that the credit facilities extended and investments made by the concerned
NBFC are in accordance with the prescribed ceiling.
Q.6 CA Nadar is conducting the statutory audit of RHL Ltd., a non-banking financial company. It has
branches in various parts of India. The company with a focus on housing finance, has outstanding non-
convertible debentures worth ₹ 150 Crores. The company reportedly missed interest payments of INR
15 Crores on its debts because of inadequate liquidity. As a result, RHL Ltd. faced a series of
downgrades by rating agencies on its debts over the past two months. Rating was cut to D from A4
implying that the company was in default or expected to be in default soon. What aspects CA Nadar
should look into in relation to the activity of mobilization of public deposits (particularly in relation
to downgrading of credit facilities) by RHL Ltd?
[Nov. 20 – New Syllabus (5 Marks), MTP-March 22, April 23]
Ans.: Auditor’s procedure in relation to mobilization of public deposits in case of NBFC:
(i) The ceiling on quantum of public deposits has been linked to its credit rating as given by an
approved credit rating agency. In the event of a upgrading/downgrading of credit rating, the
auditor should bear in mind that the NBFC will have to increase/reduce its public deposits in
accordance with the revised credit rating assigned to it within a specified time frame and should
ensure that the NBFC has informed about the same to the RBI in writing.
(ii) In the event of downgrading of credit rating below the minimum specified investment grade, a
non-banking financial company, being an investment and credit company or a factor, shall
regularise the excess deposit as provided hereunder:
(a) with immediate effect, stop accepting fresh public deposits and renewing existing deposits;
(b) all existing deposits shall run off to maturity;
(c) report the position within 15 working days, to the concerned Regional Office of the RBI
where the NBFC is registered; and
(d) no matured public deposit shall be renewed without the express and voluntary consent of
the depositor.
Q.7 HG & Co. is the statutory auditor of KFN NBFC Ltd. While planning the audit procedures to be done
during the audit of entity, there was a difference of opinion between Mr. H and his partner Mr. G. Mr. G
is of the opinion that evaluation of Internal control system and verification of registration with RBI
should not be the part of audit procedure, as it is the part of internal audits only. Is the contention of
Mr. G correct? Also state what broad areas should mandatorily become part of the audit procedure of
HG & Co. for conducting the audit of KFN NBFC Ltd.?
[Dec. 21 – Old Syllabus (4 Marks), MTP-April 22, Oct. 22]
Ans.: Audit procedure in case of NBFC:
(i) Evaluation of Internal Control System:
• The responsibility of maintaining an adequate accounting system incorporating various
internal controls to the extent appropriate to the size and nature of its business vests with the
management. A sound internal control system would enable an organisation to plug loopholes

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Audit of Non-Banking Financial Companies Chapter 19
in its workings, particularly in the detection of frauds and would also aid in timely decision
making. An auditor should gain an understanding of the accounting system and related internal
controls adopted by the NBFC to determine the nature, timing and extent of his audit
procedures. An auditor should also ascertain whether the internal controls put in place by the
NBFC are adequate and are being effectively followed.
• In particular, an auditor should review the effectiveness of the system of recovery prevalent at
the NBFC. He should ascertain whether the NBFC has an effective system of periodical review
of advances in place which would facilitate effective monitoring and follow up. The absence of a
periodical review system could result in non-detection of sticky advances at their very
inception which may ultimately result in the NBFC having an alarmingly high level of NPAs.
(ii) Verification of registration with RBI:
• Sec. 45-IA of the RBI Act, 1934, has made it incumbent on the part of all NBFCs to comply with
registration requirements and have minimum net owned funds (NOF) of ₹ 2 crore for
commencing/carrying on its business.
• An auditor should obtain a copy of the certificate of registration granted by the RBI or in case
the certificate of registration has not been granted, a copy of the application form filed with the
RBI for registration.
• An auditor should, therefore, verify whether the dual conditions relating to registration with
the RBI and maintenance of minimum net owned funds have been duly complied with by the
concerned NBFC.

19.3 – Classification of Frauds

Q.8 Write short note on: Classification of Frauds by NBFC. [RTP-May 19, Nov. 20]
Ans.: Classification of Frauds by NBFC:
In order to have uniformity in reporting, frauds have been classified as under based mainly on the
provisions of the Indian Penal Code:
(a) Misappropriation and criminal breach of trust.
(b) Fraudulent encashment through forged instruments, manipulation of books of account or through
fictitious accounts and conversion of property.
(c) Unauthorised credit facilities extended for reward or for illegal gratification.
(d) Negligence and cash shortages. Reporting as fraud is required only if the intention to cheat/
defraud is suspected/proved. However, if fraudulent intention is not suspected/proved, at the
time of detection, cases of negligence and cash shortage will be treated as fraud and reported, if:
• Cash shortages are more than ₹ 10,000 and
• Cash shortages are more than ₹ 5000 and detected by management/ auditor/inspecting officer
and not reported on the occurrence by the persons handling cash.
(e) Cheating and forgery.
(f) Irregularities in foreign exchange transactions. Reporting as fraud is required only if the intention
to cheat/defraud is suspected/ proved.
(g) Any other type of fraud not coming under the specific heads as above.

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Chapter 19 Audit of Non-Banking Financial Companies
19.4 – Audit Check List
Q.9 Ram and Associates, a firm of Chartered Accountants, are the auditors of NBFC (Investment and Credit
Company). Some of the team members of the audit team who audited this NBFC have left the firm and
the new team members are in discussion with the previous team members who are still continuing
with the firm regarding the verification procedures to be performed. In this context, please explain
what verification procedures should be performed in relation to audit of NBFC - Investment and
Credit Company (NBFC-ICC). [MTP – Oct. 19, RTP-Nov. 19]
Ans.: Audit of NBFC – Investment and Credit Companies:
(A) Points related in Investments:
(i) Physical Verification: Auditor should physically verify the securities held by a NBFC. Where
any security is lodged with an institution or a bank, a certificate from the bank/institution to
that effect must be verified.
(ii) Income recognition: Verify that dividend income wherever declared by a company, has
been duly received and accounted for. NBFC Prudential Norms directions require dividend
income on shares of companies and units of mutual funds to be recognised on cash basis.
(iii) Authorisation: Verify the Board Minutes for purchase and sale of investments.
(iv) Classification: Ascertain from the Board resolution or obtain a management certificate to
the effect that the investments so acquired are current investments or Long Term
Investments.
(v) Valuation: Check whether the investments have been valued in accordance with the NBFC
Prudential Norms Directions and adequate provision for fall in the market value of
securities, wherever applicable, have been made there against, as required by the Directions.
(vi) Compliance of AS 13: An auditor will have to ascertain whether the requirements of AS 13
“Accounting for Investments” or other accounting standard, as applicable, (to the extent they
are not inconsistent with the Directions) have been duly complied with by the NBFC.
(vii) External Confirmations: In respect of shares/securities held through a depository, obtain a
confirmation from the depository regarding the shares/securities held by it on behalf of the
NBFC. Obtain a confirmation from the approved intermediary regarding securities deposited
with/borrowed from it as at the year end.
(B) Point related to Credit:
(i) Sanctioning: Auditor should examine whether each loan or advance has been properly
sanctioned. He should verify the conditions attached to the sanction of each loan or advance
i.e. limit on borrowings, nature of security, interest, terms of repayment, etc.
(ii) Security: Auditor should verify the security obtained and the agreements entered into, if
any, with the concerned parties in respect of the advances given. He must ascertain the
nature and value of security and the net worth of the borrower/guarantor to determine the
extent to which an advance could be considered realisable.
(iii) Loan against own shares: Verify whether the NBFC has not advanced any loans against the
security of its own shares.
(iv) Compliance of prudential norms: Check whether the NBFC has not lent/invested in excess
of the specified limits to any single borrower or group of borrowers as per NBFC Prudential
Norms Directions.
(v) Appraisal and follow up System: Auditor should verify whether the NBFC has an adequate
system of proper appraisal and follow up of loans and advances. In addition, he may analyse

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Audit of Non-Banking Financial Companies Chapter 19
the trend of its recovery performance to ascertain that the NBFC does not have an unduly
high level of NPAs.
(vi) Classification: Check the classification of loans and advances (including bills purchased and
discounted) made by a NBFC into Standard Assets, Sub-Standard Assets, Doubtful Assets and
Loss Assets and the adequacy of provision for bad and doubtful debts as required by NBFC
Prudential Norms Directions.

19.5 - NBFC Auditor’s Report (Reserve Bank) Directions, 2016

Q.10 What are the specific matters to be included in Auditor’s Report in an audit of NBFC not accepting
public deposits. [May 17 (4 Marks)]
Ans.: Matters to be included in Auditor’s Report in case of NBFC:
In addition to the Report made by the auditor u/s 143 of the Companies Act, 2013, the auditor shall
also make a separate report to the Board of Directors of the Company on the matters as specified in
paragraph 3 of the NBFCs Auditor’s Report (Reserve Bank) Directions, 2016:
Matters to be reported in case of all NBFC – Para 3
1. Whether the company has obtained a Certificate of Registration (CoR) from the Bank. (Conducting
Non-Banking Financial Activity without a valid CoR is an offence under the RBI Act, 1934)
2. In case of a company holding CoR issued by the Bank, whether that company is entitled to continue
to hold such CoR in terms of its Principal Business Criteria (Financial asset/income pattern) as on
March 31 of the applicable year.
3. Whether the NBFC is meeting the required net owned fund requirement as laid down in Directions
issued by RBI.
Matters to be reported in case of NBFC not accepting public deposits – Para 3
(i) Whether the Board of Directors has passed a resolution for non-acceptance of any public
deposits;
(ii) Whether the company has accepted any public deposits during the relevant period/year.
(iii) Whether the company has complied with the prudential norms relating to income recognition,
accounting standards, asset classification and provisioning for bad and doubtful debts as
applicable to it;
(iv) In respect of Systemically Important Non-deposit taking NBFCs:
(a) Whether the capital adequacy ratio as disclosed in the return submitted to the Bank, has
been correctly arrived at and whether such ratio is in compliance with the minimum CRAR
prescribed by the Bank;
(b) Whether the company has furnished to the Bank the annual statement of capital funds, risk
assets/exposures and risk asset ratio within the stipulated period.
(v) Whether the NBFC has been correctly classified as NBFC Micro Finance Institutions (MFI).
Q.11 Karma Pvt. Ltd. is a Non-Deposit Taking Non-Systemically Important NBFC registered with Reserve
Bank of India. The Statutory Auditor of the company is required to give a report to the Board of
Directors. What shall be the content of the Auditor’s Report to the Board.
Ans.: Matters to be included in Auditor’s Report in case of NBFC:
In addition to the Report made by the auditor u/s 143 of the Companies Act, 2013, the auditor shall
also make a separate report to the Board of Directors of the Company on the matters as specified in
paragraph 3 of the NBFCs Auditor’s Report (Reserve Bank) Directions, 2016:

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Matters to be reported in case of all NBFC - Para 3(A)
1. Whether the company has obtained a Certificate of Registration (CoR) from the Bank. (Conducting
Non-Banking Financial Activity without a valid CoR is an offence under the RBI Act, 1934)
2. In case of a company holding CoR issued by the Bank, whether that company is entitled to
continue to hold such CoR in terms of its Principal Business Criteria (Financial asset/income
pattern) as on March 31 of the applicable year.
3. Whether the NBFC is meeting the required net owned fund requirement as laid down in
Directions issued by RBI.
Matters to be reported in case of NBFC not accepting public deposits - Para 3(C)
(i) Whether the Board of Directors has passed a resolution for non-acceptance of any public
deposits.
(ii) Whether the company has accepted any public deposits during the relevant period/year.
(iii) Whether the company has complied with the prudential norms relating to income recognition,
accounting standards, asset classification and provisioning for bad and doubtful debts as
applicable to it.
Q.12 Krishna Pvt. Ltd. is primarily into the business of selling computer parts. However, the company is
fulfilling the Principal Business Criteria as at the balance sheet date i.e. Financial Assets are more
than 50% of total assets and Financial Income is more than 50% of Gross Income. What shall be the
obligation of the Statutory Auditor in such a scenario?
Ans.: Obligations of Statutory Auditor of NBFC:
• A company will be treated as NBFC when a company's financial assets constitute more than 50%
of the total assets (netted off by intangible assets) and income from financial assets constitute
more than 50% of the gross income. In the given case, Krishna Pvt. Ltd. is fulfilling the Principal
Business Criteria i.e. Financial Assets are more than 50% of total assets and Financial Income is
more than 50% of Gross Income.
• In such a scenario, the statutory auditor has an obligation to submit exception report to the RBI.
As per Para 5 of NBFC Auditor’s Report (Reserve Bank) Directions, 2008 provides that where, in
the case of a NBFC, the statement regarding any of the items referred to in para 3, is unfavourable
or qualified, or in the opinion of the auditor the company has not complied with:
(a) the provisions of Chapter III-B of Reserve Bank of India Act, 1934; or
(b) the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
(c) NBFC-Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions,
2016 and NBFC-Systemically Important Non-Deposit taking Company and Deposit taking
Company (Reserve Bank) Directions, 2016
it shall be the obligation of the auditor to make a report containing the details of such
unfavourable or qualified statements and/or about the non-compliance, as the case may be, in
respect of the company to the concerned Regional Office of the Department of Non-Banking
Supervision of the Bank under whose jurisdiction the registered office of the company is located.
Note: Duty of the Auditor to submit exception report shall be to report only the contraventions of
the provisions of RBI Act, 1934, and Directions, Guidelines, instructions and such report shall not
contain any statement with respect to compliance of any of those provisions.
Q.13 Sudhir and Associates, a firm of Chartered Accountants, was appointed as auditor of an NBFC. The
audit work has been completed. The audit team which was involved in the fieldwork came across
various observations during the course of audit of this NBFC and have also an limited understanding

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about the exceptions which are required to be reported in the audit report. They would like to
understand in detail regarding the obligations on the part of an auditor in respect of exceptions in
his report so that they can conclude their work. Please explain. [MTP-May 20, Nov. 21, Sep. 22]
Or
R and Associates, a firm of chartered accountants, is appointed as auditor of NBFC. During the audit,
audit team comes across various observations/exceptions and Mr. A, a junior member of audit team,
due to his limited understanding about exceptions which are required to be reported in the audit
report, would like to understand in detail, the obligations on the part of an auditor in respect of
exceptions in the audit report so that he can conclude his work. Discuss.
[July 21 – Old Syllabus (5 Marks)]
Ans.: Obligation of Auditor to submit exception report to RBI:
Para 5 of NBFC Auditor’s Report (Reserve Bank) Directions, 2008 provides that where, in the case of a
NBFC, the statement regarding any of the items referred to in para 3, is unfavourable or qualified, or
in the opinion of the auditor the company has not complied with:
(a) the provisions of Chapter III B of Reserve Bank of India Act, 1934; or
(b) the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
(c) NBFC Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions,
2016 and NBFC-Systemically Important Non-Deposit taking Company and Deposit taking
Company (Reserve Bank) Directions, 2016
it shall be the obligation of the auditor to make a report containing the details of such unfavourable or
qualified statements and/or about the non-compliance, as the case may be, in respect of the company
to the concerned Regional Office of the Department of Non-Banking Supervision of the Bank under
whose jurisdiction the registered office of the company is located.
Note: Duty of the Auditor to submit exception report shall be to report only the contraventions of the
provisions of RBI Act, 1934, and Directions, Guidelines, instructions and such report shall not contain
any statement with respect to compliance of any of those provisions.

19.6 – Compliance with CARO, 2020

Q.14 Abhimanyu Finance Ltd. is a Non-Banking Finance Company and was in the business of accepting
public deposits and giving loans. The company was having net owned funds of ₹ 1,50,00,000 (one
crore fifty lakhs) and was not having registration certificate from RBI and applied for it on 30th
March 2023. The company appointed Mr. Kabra as its statutory auditors for the year 2021-22.
Advise the auditor with reference to auditor procedures to be taken and reporting requirements on
the same in view of CARO, 2020? [MTP-March 19, Oct. 21]
Or
As per CARO, 2020 the auditor is required to report “whether the company is required to be
registered under section 45-IA of the Reserve Bank of India Act, 1934 and if so, whether the
registration has been obtained.” Mention the Audit procedures and reporting for the same.
[Jan. 21 – Old Syllabus (5 Marks)]
Ans.: Audit Procedure for reporting under CARO, 2021 w.r.t. registration u/s 45-IA of RBI Act, 1934:
Clause (xvi) of Paragraph 3 of CARO, 2020 requires the company auditor to report: “Whether the
company is required to be registered under Section 45-IA of the RBI Act, 1934 and if so, whether the
registration has been obtained”.

19.10
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 19 Audit of Non-Banking Financial Companies
Sec. 45-IA of RBI (Amendment) Act, 1997 provides that no NBFC is allowed to commence or carry on
the business of a NBFC without obtaining a certificate of registration from RBI. The registration is
required where the financing activity is a principal business of the company.
Audit Procedure and Reporting
(i) Examine the transactions of the company with relation to the activities covered under the RBI
Act and directions to determine whether the company is engaged in financial activity.
(ii) Auditor should examine the financial statements to ascertain whether company’s financial assets
constitute more than 50 per cent of the total assets and income from financial assets constitute
more than 50 per cent of the gross income.
(iii) Ascertain whether the net owned funds of the company exceeds such amount so as to require the
company to get itself registered as NBFC with RBI.
(iv) Ascertain whether the company has obtained the registration as NBFC, if not, the reasons should
be sought from the management and documented.
(v) Auditor’s Report under CARO, 2020 shall incorporate the following:
• Whether the registration is required under section 45-IA of the RBI Act, 1934.
• If so, whether it has obtained the registration.
• If the registration not obtained, reasons thereof.
Q.15 What is a Core Investment Company (CIC) under the Reserve Bank of India regulations? What are the
specific reporting requirements to be considered by an auditor in respect of CIC under CARO 2020?
[Nov. 22 (5 Marks)]
Ans.: Meaning of Core Investment Company:
A non-banking financial company carrying on the business of acquisition of shares and securities and
which satisfies the following conditions as on the date of the last audited balance sheet:
(i) it holds not less than 90% of its net assets in the form of investment in equity shares, preference
shares, bonds, debentures, debt or loans in group companies;
(ii) its investments in the equity shares (including instruments compulsorily convertible into equity
shares within a period not exceeding 10 years from the date of issue) in group companies and
units of Infrastructure Investment Trust only as sponsor constitute not less than 60% of its net
assets as mentioned in clause (i) above;
(iii) it does not trade in its investments in shares, bonds, debentures, debt or loans in group
companies except through block sale for the purpose of dilution or disinvestment;
(iv) it does not carry on any other financial activity.
Reporting Requirements in respect of CIC under CARO, 2020:
Clause (xvi) of Para 3 of CARO, 2020 requires the auditor to report the following:
• whether the company is a Core Investment Company (CIC) as defined in the regulations made by
the Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and in case the
company is an exempted or unregistered CIC, whether it continues to fulfil such criteria;
• whether the Group has more than one CIC as part of the Group, if yes, indicate the number of CICs
which are part of the Group.

19.7 – Ind AS and Schedule III

Q.16 Mr. G has been appointed as an auditor of LMP Ltd., a NBFC company registered with RBI. Mr. G is
concerned about whether the format of financial statements prepared by LMP Ltd. is as per

19.11
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit of Non-Banking Financial Companies Chapter 19
notification issued by the Ministry of Corporate Affairs (MCA) dated October 11, 2018. The
notification prescribed the format in Division III under Schedule III of the Companies Act, 2013
applicable to NBFCs complying with Ind-AS. Mr. G wants to know the differences in the presentation
requirements between Division II and Division III of Schedule III of the Companies Act, 2013. Help
Mr. G. [Nov. 19 – New Syllabus (5 Marks), MTP-April 21]
Or
RB & Co are the statutory auditors of Legal Finance Ltd, an NBFC engaged in the business of accepting
public deposits and giving loans. Auditors are concerned that the format of the financial statements
should be prepared as per the notification issued by the Ministry of Corporate Affairs dated 11th Oct,
2018. While auditing there was a difference of opinion between CA R and CA B regarding the
disclosure of "Other Income" in the financial statements. CA R believes that there is no difference in
the presentation requirements between Division II and Division III of Schedule III of the Companies
Act, 2013. Is the contention of CA R correct? [May 23 (5 Marks)]
Ans.: Differences between Division II and Division III:
The presentation requirements under Division III for NBFCs are similar to Division II (Non-NBFC) to a
large extent except for the following:
(a) NBFCs have been allowed to present the items of the balance sheet in order of their liquidity
which is not allowed to companies required to follow Division II. Additionally, NBFCs are
required to classify items of the balance sheet into financial and non-financial whereas other
companies are required to classify the items into current and non-current.
(b) An NBFC is required to separately disclose by way of a note any item of ‘other income’ or ‘other
expenditure’ which exceeds 1% of the total income. Division II, on the other hand, requires
disclosure for any item of income or expenditure which exceeds 1% of the revenue from
operations or ₹ 10 lakhs, whichever is higher.
(c) NBFCs are required to separately disclose under ‘receivables’, the debts due from any Limited
Liability Partnership (LLP) in which its director is a partner or member.
(d) NBFCs are also required to disclose items comprising ‘revenue from operations’ and ‘other
comprehensive income’ on the face of the Statement of profit and loss instead of showing those
only as part of the notes.
(e) Separate disclosure of trade receivable which have significant increase in credit risk & credit
impaired.
(f) The conditions or restrictions for distribution attached to statutory reserves have to be
separately disclose in the notes as stipulated by the relevant statute.

19.12
By: CA. Pankaj Garg
 By: CA. Pankaj Garg

20 Audit of Insurance Companies

Marks Distribution of Past Exams
6

4
Marks

0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 4 4 5 0 0 4 4 4 5 0 4

From May 2019, Marks are given only for descriptive questions.
20.1 - Regulatory Requirements of Insurance Act, 1938
Q.1 Discuss Solvency Margin in case of an Insurer carrying on General Insurance Business.
[May 19 – Old Syllabus (4 Marks)]
Ans.: Solvency Margin (Sec. 64VA of Insurance Act, 1938 as amended by Insurance Laws (Amendment)
Act, 2015):
1. Requirement of solvency margin: Sec. 64VA of Insurance Act, 1938 requires that every insurer
and re-insurer shall at all times maintain an excess of value of assets over the amount of liabilities
of, not less than 50% of the amount of minimum capital as stated u/s 6 and arrived at in the manner
specified by the regulations.
2. Non-compliance of solvency margin: An insurer or re-insurer, as the case may be, who does not
comply with the requirement of solvency margin shall be deemed to be insolvent and may be
wound-up by the court on an application made by the Authority.
3. Power of authority to prescribe level of solvency: The Authority shall by way of regulation made
for the purpose, specify a level of solvency margin known as control level of solvency on the breach
of which the Authority shall act in accordance with the provisions of law, without prejudice to
taking of any other remedial measures as deemed fit.
4. Submission of Financial Plan: If, at any time, an insurer or re-insurer does not maintain the
required control level of solvency margin, he shall, in accordance with the directions issued by the
Authority, submit a financial plan to the Authority, indicating a plan of action to correct the
deficiency within a specified period not exceeding six months.
5. Modifications to Financial Plan: If the authority considers the financial plan submitted by an
insurer inadequate, it shall propose modifications to the plan and shall give directions, as may be

20.1
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit of Insurance Companies Chapter 20
deemed necessary, including direction in regard to transacting any new business, or, appointment
of an administrator or both.
6. Non-submission of financial plan: An insurer or re-insurer, as the case may be, who does not
submit financial plan shall be deemed to have made default in complying with the requirements of
this section.
Q.2 You have been appointed as an auditor of a General Insurance Company. In this context, explain
Unexpired Risks Reserve and audit procedures for the same. [Nov. 19 – Old Syllabus (5 Marks)]
Ans.: Reserve for Unexpired Risks:
• The need for unexpired risks reserve arises from the fact that all policies are renewed annually
except in specific cases where short period policies are issued. Since the insurers close their accounts
on a particular date, not all risks under policies expire on that date.
• In other words, at the closing date, there is an unexpired liability under various policies which may
occur during the remaining term of the policy beyond the year end.
• There are two methods of creating this reserve. One is based on the proportionate number of days of
risk remaining to risk expired, which is called 1/365 method. The other method is by taking a URR
directly on 50% of the premium amount.
• IRDA (General Insurance-Claim Reserving) Regulations, 2013 requires creation of a minimum
amount of unexpired risks reserve at a specified percentage of net premium as under:
(a) For marine hull insurance – 100% of net premium
(b) For fire, marine cargo and miscellaneous business – 50% of net premium.
Note: Section 64V of Insurance Act, 1938 also specifies these percentages. Subsequent to Amendment
Act of 2015, these percentages are no more specified in amended Section 64V.
Q.3 M/s MPS & Associates, Chartered Accountants started the statutory audit of their client Contingencies
Ltd., a General Insurance company, which has a paid-up capital of ₹ 16,800 lacs. During the course of
the audit, it was found that the Company was not maintaining the required solvency margin as per the
provisions of Insurance Act, 1938. When the issue was escalated to the management, they replied that
solvency margin needs to be maintained as per limits prescribed only on last day of the financial year.
Comment whether reply of management is tenable or not. [RTP-Nov. 20, MTP-Nov. 21]
Ans.: Maintenance of Solvency Margin:
• Sec. 64VA of the Insurance Act, 1938 requires that every insurer and re-insurer shall at all times
maintain an excess of the value of assets over the amount of liabilities, of not be less than 50% of the
amount of minimum capital as stated u/s 6 and arrived at in the manner specified by the regulations.
• If, at any time, an insurer or re-insurer does not maintain the required control level of solvency
margin, he shall, in accordance with the directions issued by the Authority, submit a financial plan to
the Authority, indicating a plan of action to correct the deficiency within a specified period not
exceeding six months.
• If, on consideration of the plan, the Authority finds it inadequate, the insurer has to modify the
financial plan.
• An insurer or re-insurer, as the case may be, who does not comply with the requirements of solvency
margin shall be deemed to be insolvent and may be wound up by the Court on an application made
by the authority.
Conclusion: In the given case Contingencies Ltd. has not maintained the Solvency Margin throughout
the year. Accordingly, contention of Contingencies Ltd. that solvency margin is required to be
maintained as per limits prescribed only on last day of the financial year is not tenable.

20.2
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 20 Audit of Insurance Companies
20.2 –Audit Procedures in case of Life Insurance Business
Q.4 High Life Insurance is into life insurance business and has established presence in this field since
last 25 years. Your firm, SR & Co. are appointed auditors of the High Life Insurance company. While
conducting its audit, you come across several important actuarial processes being followed in
accordance with general regulatory guidelines. You also understand & realise that the actuarial
department is calculating and modelling hub of the company. In the above context explain the role
of auditors. [MTP-Oct. 18]
Ans.: Role of Auditor in Actuarial Process:
The job of actuary or actuarial department in any Life Insurance Company involves, detailed analysis
of data to quantify risk. The actuarial department is calculating and modelling hub of the Company.
Within the department fundamentals of Insurance business is determined from pricing to policy
valuations techniques.
The role of Actuaries in life insurance business is to concentrate on following key areas:
1. Product Development/ Pricing and Experience analysis.
2. Model Development.
3. Statutory Valuations and reserving.
4. Business Planning.
5. Solvency management.
6. Management reporting on various business valuations and profitability models of the Life
Insurance business.
Role of Auditor:
• To certify, whether the actuarial valuation of liabilities is duly certified by the appointed actuary,
including to the effect that the assumptions for such valuation are in accordance with the
guidelines and norms, if any, issued by the authority and/or the Actuarial Society of India in
concurrence with the IRDA.
• For this purpose, auditors generally rely on the Certificate issued by the Appointed Actuary,
certifying the Policy liabilities. However, he may discuss with the Actuaries with respect to
process followed and assumptions made by him before certifying the Policy liabilities.
Q.5 Auditors should evaluate various sub-processes, employed by the Insurance Companies in
accounting of premiums like collection of premium from the policy holders, booking of premium,
banking, accounting and reconciliation of the same. In view of above, you are required to briefly
discuss some illustrative points, auditors are required to follow during the Audit of Accounting of
Premiums in case of Life Insurance Companies. [RTP-Nov. 18]
Ans.: Steps to be taken while verifying the Premium of Life Insurance Company:
1. Collection of Premium
• To check existence of appropriate mechanism to ensure all the collections are deposited into
the Bank on timely basis.
• To check whether there is daily reconciliation process to reconcile the amounts collected,
entered into the system and deposited into the bank.
2. Calculation of Premium
• To check that accounting system calculates premium amounts and its respective due dates
correctly.
• To check that system is equipped to calculate all types of premium modes correctly.

20.3
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit of Insurance Companies Chapter 20
3. Recognition of Income
• To ensure that premium is recognised only on the basis of ‘Issued Policies’ and not on
underwriting dates.
• To check that there is appropriate mechanism in place to conduct reconciliation on daily basis
and reconciling items, if any, are rectified/ followed up.
4. Accounting of ‘Advance Premium’
• To check, whether system has capability to identify regular and advance premium.
• To check whether there is a process of applying advance premium to a contract when premium
is due.
Q.6 Write short note on: Auditor’s considerations while reviewing of Investment Department of Life
Insurance Company. [RTP-Nov. 19]
Ans.: Steps to be taken by the auditor while verifying the Investment:
(a) To review the management structure to ensure adequate segregation of duties between
Investment Front office, Mid Office and Back office.
(b) To review the operating procedures prescribed by the IRDA Regulations.
(c) To review the investment policy.
(d) To review the functioning and scope of Investment Committee.
(e) To check compliance of Investment regulations.
(f) To review cash management system to track funds available for investment considering the
settlement obligations and subscription and redemption of units, etc.
(g) To review fund wise reconciliation with investment accounts, bank, and custodian records.
(h) To ensure that there is split between Shareholders’ and Policyholders’ funds, and earmarking of
securities between various funds namely Life (Participating & Non-Participating), Pension &
Group (Participating & Non-Participating) and Unit Linked Fund.
(i) To review the arrangements and reconciliations of holdings with the insurer’s custodian.
(j) To review and check insurer’s Investment Accounting and valuation policy.
(k) To review the controls around personal dealings and insider trading.
Q.7 TNT Limited is engaged in the Life Insurance business. The company's operations have been
considerable in the Northern India and its Head Office is also based at New Delhi. TNT Ltd. while
preparing financial statements have classified administrative expenses under 14 heads as
mentioned in Schedule 3 forming part of financial statements given under schedule A to IRDA
Regulations, 2002. What is your responsibility as an auditor particularly in relation to
administrative/expenses of management? [Jan. 21 – New Syllabus (4 Marks)]
Ans.: Verification of Operating Expenses related to Insurance Business (Expenses of Management):
• All administrative expenses are broadly classified under 14 heads as mentioned in Schedule 3
forming part of Financial Statements given under Schedule A to the IRDA (Preparation of Financial
Statements and Auditor’s Report of Insurance Companies) Regulations, 2002.
• This Schedule is part of the Revenue Account to be prepared for insurance business.
• Any other expenses are required to be disclosed under the head ‘Others’.
• Any major expenses (₹ 5 lacs or in excess of 1% of net premium, whichever is higher) are required
to be shown separately.

20.4
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 20 Audit of Insurance Companies
Role of Auditor:
(a) To ensure that operating expenses are first aggregated and then apportioned to the Revenue
Account of each class of business on a reasonable and equitable basis.
(b) To ensure that the accounting policy should clearly indicate the basis of apportionment of these
expenses to the respective Revenue Accounts (i.e., Participating and Non-participating policies
and in between Linked and Non-Linked business) along with the certificate that all expenses of
management, wherever incurred, directly or indirectly, read with the accounting policy, have
been fully debited to the respective Revenue Account as expenses.
Q.8 CA. M has been appointed as an auditor of Life Secure Insurance Ltd. He observed that few insurance
policies have been sold by the company in the last month of the financial year ending 31st March,
2023. While recognizing income in the income statement of the company, it is the responsibility of
CA. M to make an assessment of the reasonability of the risk pattern managed by the management.
Also, it is to be ensured by him that Life Secure Insurance Ltd. should not issue policies, if the risk is
not established before the closure of the F.Y. 2020-21.
Indicate the circumstances when the company should not issue the policy documents.
[Dec. 21 – New Syllabus (4 Marks), MTP-Oct. 22]
Ans.: Issue of Policy document:
The auditor should verify that policy documents have not been issued, in case:
(1) premium had not been collected at all;
(2) premium had been collected but the relevant cheques have been dishonoured;
(3) premium had not immediately been collected due to furnishing of a bank guarantee or cash
deposit but either the deposit or guarantee had fallen short or has expired or the premium had
been collected beyond the stipulated time limit (i.e., there is a shortfall in bank guarantee
account or cash deposit account of the insured);
(4) premium had not been collected due to risk cover being increased or where stipulated limits
have been exhausted in respect of open declaration policies (i.e., where premium has accrued
but has not been received);
(5) instalments of premium have not been collected in time in respect of certain categories of
policies where facility has been granted for premium being paid in instalments; and
(6) Premium collected but policies not issued for long periods of time.
Q.9 You have been appointed to carry out the audit of Blue Heaven Life Insurance Company Ltd. for the
year 2022-23. During the course of audit, you observed that the commission payable to agents
constituted a major expense in operating expenses of the Company. Enumerate the audit concerns
that address to the assertions required for the Auditor to ensure the continued existence of internal
control as well as fairness of the amounts in accounting of commission payable to agents.
[MTP-March 22, April 23]
Ans.: Verification of Commission Payable by Life insurance company:
Insurance business is generally solicited by the Insurance agents. The remuneration of agent is paid
by way of commission which is calculated by applying percentage to premium collected by him.
Commission is payable towards generation of new business and towards settlement of renewal
premium. The Auditor during his review of Commission paid to Agents should mainly consider the
following:

20.5
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Audit of Insurance Companies Chapter 20
1. Review the system established by the Insurer with respect to calculation of commission to eligible
agents accurately and processing the same in timely manner.
2. Review the commission payment system is in sync with the premium collection system.
3. Check whether commission paid is within the limit prescribed under Insurance Act.
4. Check whether commission is clawed-back on the cancelled policies.
5. Check the completeness of commission processing system.
Q.10 You have been appointed as an auditor of Safe Life Insurance Company Limited. During the course of
audit you come across several cases of lapsed policies. Management is flooded with complaints from
Agents and Life Assured regarding Policy lapses and Revival. The policy lapsation is tracked over the
PMS software. You are requested by the Management to explain in clear terms about Policy lapses
and Revival. Also state your role as an auditor in verifying the same. [May 22 (5 Marks)]
Ans.: Policy lapse and Revival:
• Discontinuation of the policy owing to non-payment of premium dues is known as lapse.
Lapsation affects all the stakeholders – the policy holder, agents and the insurer. A lapsed policy
ceases to provide insurance protection to the insured. It forfeits the benefits under the policy and
cost of new policy is higher. Agents do not get renewal premium commission if the policy is
lapsed.
• The terms and conditions of the policy stipulate, that where the premium is not paid within the
grace period, the policy lapses but may be revived during the life time of the life assured. Some
insurers do not allow revival, if the policy has remained in lapsed condition for more than
specified period. This is because of the possibility that the arrears of premiums on such a policy
would be too heavy and that it would be better to take out a fresh policy.
Role of Auditor in verifying the Policy Lapse and Revival:
(a) To check and confirm that due dates are recorded and monitored properly and polices are
marked as “lapsed” on non-receipt of renewal premium within due dates/grace period.
(b) In case of revival request, check whether adequate checks are in place for receipt of outstanding
amounts and adequate documents are obtained before reviving the policy.
Q.11 Write a short note on the following: Free look Cancellation (FRC). [RTP-Nov. 22]
Ans.: Free Look Cancellation (FLC):
• FLC is an option provided to the policyholder wherein he has a period of 15 days from the date of
receipt of the policy document to review the Terms & Conditions of the policy and in case of
disagreement to any of the terms & conditions, he/she has the option to return the policy stating
the reason for policy’s cancellation.
• FLC requests can be received through any mode - e-mail, fax and letters depending on insurer’s
policy. In case of written letters, the signature of the policy holder should be matched with the
original proposal form.
• FLC request is processed only when the policy holder is not satisfied with the terms and
conditions of the policy document and not for any other reasons.
• FLC refund is paid either by cheque or in case the policy holder wants direct credit, then consent
for direct credit along with cancelled cheque for bank account details is submitted.
Auditor’s Duties w.r.t. FLC:
(a) To check and confirm that Free Look Cancellation requests are received within 15 days from
receipt of policy document by the policy holder.

20.6
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Chapter 20 Audit of Insurance Companies
(b) To verify signatures of the policy holder and processing of Free look cancellation request within
time defined by the insurer.
(c) To check recording of appropriate accounting entries for refund.
Q. RR & Co have been appointed as the auditors of HDG Insurance Company Limited. While conducting
11A its audit, engagement partner noticed various actuarial assumptions disclosed by way of notes to
the accounts and several other important actuarial processes being followed in accordance with
general regulatory guidelines. Actuaries in the life insurance business have gained tremendous
importance. Explain the role of the auditor in the actuarial process, and the area of the insurance
business where the actuarial department concentrates. [May 23 (4 Marks)]
Ans.: Role of the auditor in the actuarial process, and the area of the insurance business where the
actuarial department concentrates: Refer answer of Q. No. 4

20.3 - Audit of Revenue items of General Insurance Business

Q.12 Your audit assistant seeks your help in checking the claim liability of Bharat Insurance Co. Ltd. and
wants to know the registers and records which they should obtain and review in this regard.
[May 18 – Old Syllabus (4 Marks)]
Ans.: Register of Claims:
(i) Claims intimation register.
(ii) Claims paid register.
(iii) Claims Disbursement bank book.
(iv) Claims Dockets, normally containing the following records:
Claim intimation, claim forms, particulars of policy, survey report, photograph showing damage,
Repairer’s bills, letter of subrogation, police report, fire service report, claim settlement note,
claim satisfaction note, salvage report, salvage disposal note, claims discharge voucher etc.
(v) Report of quality assurance team.
(vi) Salvage register.
Q.13 You are the Auditor of Good Luck General Insurance Company. You want to ensure that there exists
goods system that effectively serves the requirements of true and fair accounting of claim-related
expenses and liabilities. Suggest how this can be ensured. [May 18 – New Syllabus (4 Marks)]
Or
M/s PQR and Associates, Chartered Accountants are the auditors of Excellent General Insurance
Company Limited. The company has paid various insurance claims during the financial year ending
31st March, 2023. Enumerate the aspects to be examined by an auditor in respect of claims paid
during the year. [July 21 – Old Syllabus (5 Marks)]
Ans.: Verification of Claims Paid:
The following aspects needs to be examined in respect of claims paid:
(a) Co-insurance: In case of co-insurance arrangements, claims paid have been booked only in respect
of company’s share and the balance has been debited to other insurance companies.
(b) Settlement Amount: Ensure that the Claim Account is debited with all the payments including
repair charges, firefighting expenses, police report fees, survey fees, amount decreed by the Courts,
travel expenses, photograph charges, etc.

20.7
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 By: CA. Pankaj Garg
Audit of Insurance Companies Chapter 20
(c) Claims communicated after the year-end: Claims communicated after the year-end for losses
which occurred prior to the year-end must be accounted for in the year of audit.
(d) Accounting for salvage and letter of subrogation: Salvage recovered has been duly accounted
company and a letter of subrogation has been obtained in accordance with the procedure.
(e) Amount deposits with courts: Amount deposits with courts in matters under litigation/
arbitration have not been treated as claims paid but are held as assets till final disposal of such
claims.
(f) Unqualified Discharge Note: has been given by claimant in case of final settlement of claims.
Q.14 You have been appointed to carry out the audit of Sky Insurance Company Ltd. for the year 2022-23.
In the course of your audit, you observed that the commission paid to agents constituted a major
expense in operating expenses of the company. Enumerate the audit concerns that address to the
assertions required for the Auditor to ensure the continued existence of internal control as well as
fairness of the amounts in accounting of commission paid to agents.
[Nov. 18-New Syllabus (4 Marks)]
Ans.: Verification of Commission paid to agents:
An insurance company pays commission to its agents for business procured through them, as per Sec.
40 of the Insurance Act, 1938; no commission can be paid to a person other than its agent. In order to
verify the amount of commission, the auditor should:
(a) Ensure that commission/brokerage is not paid in excess of the limits specified by IRDAI.
(b) Ensure that commission/brokerage is paid as per rates agreed with the agent and filed with
IRDAI.
(c) Ensure that commission/brokerage is paid to the agent/broker who has solicited the business.
(d) Vouch disbursement entries with commission bills.
(e) Check whether all disbursements were properly authorized.
(f) Check the calculation of commission amount.
(g) Scrutinize agent’s ledger for any abnormal entries or balance.
(h) Examine whether commission outgo for the period has been properly accounted for.
Q.15 You have been appointed as an auditor of ABC Insurance Co. Ltd. and found that M/s PQR Ltd. got
their plant & Machinery insured on 01-10-2022 but the amount of premium has been paid by them
on 15-10-2022. In the meanwhile, on 10-10-2022 a fire has broken out in the factory and the
company filed a claim for damages of plant & machinery with the Insurance company. Advise the
insurance company in this regard. [May 19 – New Syllabus (5 Marks)]
Ans.: Inception of Risk:
• As per Section 64VB of the Insurance Act, 1938, no insurer should assume any risk in India in
respect of any insurance business on which premium is ordinarily payable in India unless and until
the premium payable is received or is guaranteed to be paid by such person in such manner and
within such time, as may be prescribed, or unless and until deposit of such amount, as may be
prescribed, is made in advance in the prescribed manner.
• In the present case, though plant & Machinery insured on 01.10.2022, but premium was paid only
on 15.10.2022. Applying the provisions of Sec. 64VB, company cannot be held liable for the claim
arises due to fire accident happened on 10.10.2022.
Conclusion: In view of the above, the insurance company is not liable to pay the claim.

20.8
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Chapter 20 Audit of Insurance Companies
Q.16 ABC & Co., Chartered Accountants are the Auditors of Just Care General Insurance Company Limited.
As on March 31, 2023 the Management made a provision for claims outstanding. Enumerate the
steps to be taken by the Auditor while verifying the “Claims Provision”. [RTP-May 20]
Ans.: Verification of Claims Provisions:
The auditor should satisfy himself that the estimated liability provided for by the management is
adequate with reference to the relevant claim files/dockets, keeping in view the following:
(a) Provision has been made for all unsettled claims as at the year-end on the basis of claims
lodged/communicated.
(b) Provision has been made for only such claims for which the company is legally liable, considering
particularly, that
• the risk was covered by the policy,
• the claims arose during the currency of the policy; and
• claim did not arise during the period the company was not supposed to cover the risk.
(c) Provision made should not be in excess of the amount insured.
(d) Application of “average clause” in case of under-insurance.
(e) In case of co-insurance arrangements, provisions should be made only in respect of its own share
of anticipated liability.
(f) Claims are provided for net of estimated salvage, wherever applicable.
(g) No contingent liability is carried in respect of any claim intimated in respect of policies issued.
(h) Intimation of loss is received within a reasonable time and reasons for undue delay in intimation
are looked into.
(i) Provisions have been retained as at the year-end in respect of guarantees given by company to
various Courts for claims under litigation.
Q.17 As at 31st March 2023 while auditing Safe Insurance Ltd. you observed that a policy has been issued
on 25th March 2023 for fire risk favouring one of the leading corporate houses in the country
without the actual receipt of premium and it was reflected as premium receivable. The company
maintained that it is a usual practice in respect of big customers and the money was collected on 5th
April, 2023. You further noticed that there was a fire accident in the premises of the insured on 31st
March, 2023 and a claim was lodged for the same. The insurance company also made a provision for
claim. Please respond. [MTP-Oct. 21, March 23]
Ans.: Inception of Risk:
• As per Section 64VB of the Insurance Act, 1938, no insurer should assume any risk in India in
respect of any insurance business on which premium is ordinarily payable in India unless and until
the premium payable is received or is guaranteed to be paid by such person in such manner and
within such time, as may be prescribed, or unless and until deposit of such amount, as may be
prescribed, is made in advance in the prescribed manner.
• In the present case, though policy was issued on 25th March, 2022, but premium was collected only
on 5th April, 2022. Applying the provisions of Sec. 64VB, company cannot be held liable for the
claim arises due to fire accident happened on 31st March, 2022.
Conclusion: In view of the above, the insurance company is not liable to pay the claim and hence no
provision for claim is required.

20.9
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Audit of Insurance Companies Chapter 20
20.4 - Audit of Balance Sheet items of General Insurance Companies
Q.18 State the disclosure requirements in respect of contingent liabilities in the notes to the Balance
Sheet of a General Insurance Company.
Ans.: Disclosure requirements in respect of Contingent Liabilities:
The following shall be disclosed by way of notes to balance sheet in respect of Contingent Liabilities.
1. Partly paid up investments.
2. Underwriting Commitments outstanding.
3. Claims, other than those under policies, not acknowledged as debts.
4. Guarantees given by or on behalf of the Company.
5. Statutory demands/Liabilities in dispute, not provided for.
6. Reinsurance obligations to the extent not provided for in the accounts.
7. Others (to be specified).
Q.19 ARHAM Limited is engaged in the business of Insurance for the last 27 years. KUSHAL & Co., a firm of
Chartered Accountants are the statutory auditors of this company and have been required to
perform the audit of all the divisions and head office for the financial year 2022-23. At the planning
state CA K, Engagement Partner has identified outstanding premium and agents’ balances as a focus
area. Guide CA K by explaining key audit procedures to be performed for verification of outstanding
premium and agent’s balance. [RTP-May 22]
Ans.: Verification aspects of outstanding premium & agents balances of General Insurance Company:
(i) Scrutinize and review control account debit balances and their nature should be enquired into.
(ii) Examine in-operative balances and treatment given for old balances with reference to company
rules.
(iii) Enquire into the reasons for retaining the old balances.
(iv) Verify old debit balances which may require provision or adjustment. Notes of explanation may
be obtained from the management in this regard.
(v) Check age-wise, sector-wise analysis of outstanding premium.
(vi) Verify whether outstanding premiums have since been collected.
(vii) Check the availability of adequate bank guarantee or premium deposit for outstanding premium.

20.5 - Miscellaneous
Q.20 Explain the difference between the Proportional Treaties and Non-Proportional Treaties?
[Nov. 16 (4 Marks)]
Ans.: Proportional Treaties and Non-Proportional Treaties:
Proportional Treaty Re-insurance
• In proportional treaty re-insurance, the re-insurer will receive a prorated share of the premiums
of all the policies sold by the insurance company being covered. Consequently, when claims are
made, the re-insurer will also bear a portion of the losses. The proportion of the premiums and
losses that will be shared by the re-insurer will be based on an agreed percentage.
• In a proportional coverage, the re-insurance company will also reimburse the insurance
company for all processing, business acquisition and writing costs. Also known as ceding
commission, such costs may be paid to the insurance company upfront.

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Chapter 20 Audit of Insurance Companies
Non-proportional Treaty Re-insurance
• In a non-proportional type of coverage, the re-insurer will only get involved if the insurance
company’s losses exceed a specified amount, which is referred to as priority or retention limit.
Hence, the re-insurer does not have a proportional share in the premiums and losses of the
insurance provider.
• The priority or retention limit may be based on a single type of risk or an entire business
category.
Q.21 You are an auditor of XYZ Insurance Company Ltd. which offers variety of risk management
products to business entities wishing to protect their business activities against losses due to
various probable risks. XYZ Insurance Company Ltd. is in the process of offering to ABC Ltd., a
multinational group having worldwide market, “Trade Credit Insurance Policy” to cover domestic
risk, export risk and political risk. You as an auditor of Insurance Company have been requested to
ensure that all the requirements have been met by XYZ Insurance Company Ltd. before Trade
Credit Insurance Product is offered to ABC Ltd. List down those requirements.
[Dec. 21 – Old Syllabus (5 Marks), MTP-April 22, Sep. 22]

Ans.: Trade Credit Insurance

Trade credit insurance is business of effecting contracts of insurance in respect of trade credit
insurance transactions. It provides protection to suppliers against the risk of non-payment of goods
or services by their buyers who may be situated in the same country (domestic risk) or in another
country (export risk) against non-payment as a result of insolvency of the buyer or non-payment
after an agreed number of months after due date.
Requirements
Trade credit insurance product is offered subject to following requirements:
1. Policyholder's loss arises due to non-receipt of trade receivable arising out of a trade of goods or
services.
2. Policyholder is a supplier of goods or services for a consideration and does not arise out of
factoring or reverse factoring arrangement or any other similar arrangement.
3. Buyer is liable to pay a trade receivable to the policyholder in return for the goods and services
received by him from the policyholder, in accordance with a policy document filed with the
insurer.
4. Premium for the entire Policy Period has been paid.
5. Other requirement that may be specified by the Authority from time to time.

Q.22 CAB Insurance Company Ltd. was incorporated on 01.07.2020. Company is mainly in the area of
health insurance and planning to expand in other fields of general insurance. You have been
appointed as Chief Financial Officer (CFO) of the Company. The company has made investment as
per guidelines in real estate investment property and Equity Securities and Derivatives. Guide CFO
as to how the same should be valued? [July 21 – New Syllabus (4 Marks)]

Ans.: Valuation of Investments:

Procedure to determine ‘Value of Investments’:
(a) Real estate investment property: The value of investment property shall be determined at
historical cost, subject to revaluation at least once in every 3 years.

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Audit of Insurance Companies Chapter 20
The change in the carrying cost of the investment property shall be taken to revaluation reserve.
The insurer shall assess at each balance sheet date whether any impairment of the property has
occurred.
(b) Equity Securities and Derivative Instruments: Listed equity securities and derivative
instruments that are traded in active markets shall be measured at fair value on the balance
sheet date.
(c) Unlisted and other than actively traded Equity Securities and Derivative: Unlisted equity
securities and derivative instruments and listed equity securities and derivative instruments
that are not regularly traded in active markets shall be measured at historical cost. Provision
shall be made for diminution value of such investments.

20.12
By: CA. Pankaj Garg
 By: CA. Pankaj Garg

21 Audit of Public Sector Undertakings

Marks Distribution of Past Exams
6

4
Marks

0
May-18 Nov-18 May-19 Nov-19 Nov-20 Jan-21 Jul-21 Dec. 21 May-22 Nov. 22 May-23
Series1 4 4 5 5 0 5 0 5 0 0 0

From May 2019, Marks are given only for subjective questions.
21.1 - Basics of Audit of PSU
Q.1 The Comptroller & Auditor General of India plays a key role in the functioning of the financial
committees of Parliament and the State Legislatures. He has come to be recognised as a 'friend,
philosopher and guide' of the Committees. In view of above, you are required to list down role of
C&AG. [MTP-Oct. 18]
Ans.: C&AG Role in functioning of financial committees of Parliament and State Legislature:
(i) Reports of C & AG form the basis of Committees' working, i.e. committees examine the issues
raised by C & AG Reports.
(ii) Committees requires the assistance of C & AG for scrutinising the notes which the Ministries
submit to the Committees insofar as to check the correctness of submissions to the Committees
and facts and figures in their draft reports.
(iii) Reports of the Financial Committees are being submitted to the Parliament/State Legislature
with their observations and recommendations. The C & AG assists various committees in
suggesting the recommendations.

21.2 - Audit of Government Companies

Q.2 On receipt of statutory audit report on 30-03-2022 of M/s Sunlight Ltd., a government company,
C & AG on 25-05-2022 appointed M/s Veeru & Associates to conduct supplementary audit u/s
143(6)(a) of the Companies Act, 2013. They submitted their report to C & AG as per their scope of
work. The Company held its AGM on 01-09-2022 but directors did not think it necessary to discuss
supplementary auditor’s report and comment of the C & AG. Is the approach of the directors of
Sunlight Ltd. correct? Guide the company with the provisions related to supplementary audit.
[May 19 – New Syllabus (5 Marks)]

21.1
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Audit of Public Sector Undertakings Chapter 21
Ans.: Supplementary Audit u/s 143(6) of Companies Act, 2013:
Sec. 143(6) of Companies Act, 2013 provides that the C&AG shall within 60 days from the date of
receipt of the audit report have a right to,
(i) Conduct a supplementary audit of the financial statement of the company by such person or
persons as he may authorize 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 may direct; and
(ii) Comment upon or supplement such audit report:
Provided that any comments given by the C&AG upon, or supplement to, the audit report shall be
sent by the company to every person entitled to copies of audited financial statements u/s 136(1) i.e.
every member of the company, to every trustee for the debenture holders, and to all other entitled
persons and also be placed before the AGM of the company at the same time and in the same manner
as the audit report.
In the instant case, directors think that it is not necessary to discuss supplementary auditor’s report
and comment of the C&AG.
Conclusion: Based on the requirements of proviso to Sec. 143(6), management thinking does not
seem to be proper.
Q.3 “The C & AG may direct the appointed auditor the manner in which the accounts of the Government
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.” What are the relevant sections of
the Companies Act, 2013 and steps involved in auditor of Government Companies?
[Nov. 19-New Syllabus (5 Marks); MTP-March 23]
Ans.: Relevant Sections of Companies Act, 2013:
• Sec. 139(5) – Appointment of Auditor other than First Auditor
• Sec. 139(7)– Appointment of First Auditor
• Sec. 143(5) – Duties of Auditor of Government Companies
• Sec. 143(6) – Powers of CAG to order Supplementary Audit
• Sec. 143(7) – Powers of CAG to order Test Audit.
Steps involved in Audit of Government Companies:
(i) Directions by CAG - Sec. 143(5): In the case of a Government company, the CAG shall appoint
the auditor and direct such auditor the manner in which the accounts of the Government
company are required to be audited.
The auditor so appointed shall submit a copy of the audit report to the CAG which, among other
things, include the following:
1. directions, if any, issued by the CAG,
2. the action taken thereon and
3. its impact on the accounts and financial statement of the company.
(ii) Supplementary Audit – Sec. 143(6): Sec. 143(6) of Companies Act, 2013 provides that the CAG
shall within 60 days from the date of receipt of the audit report have a right to,
(a) Conduct a supplementary audit of the financial statement of the company by such
person or persons as he may authorize 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 CAG may
direct; and
(b) Comment upon or supplement such audit report:

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Chapter 21 Audit of Public Sector Undertakings
Provided that any comments given by the CAG upon, or supplement to, the audit report
shall be sent by the company to every person entitled to copies of audited financial
statements u/s 136(1) i.e. every member of the company, to every trustee for the debenture
holders, and to all other entitled persons and also be placed before the AGM of the company
at the same time and in the same manner as the audit report.
(iii) Test Audit – Sec. 143(7): The CAG may, in case of Government Company and Government
owned or controlled companies, if he considers necessary, by an order, cause test audit to be
conducted of the accounts of such company and the provisions of section 19A of the CAG (Duties,
Powers and Conditions of Service) Act, 1971, shall apply to the report of such test audit.
Q.4 Ceta Ltd. is a company in which 58% of the paid up share capital is held by Rajasthan Government.
The company is engaged in the business of providing consultancy services in relation to
construction projects. The audit of the financial statements of Ceta Ltd. for the financial year ended
31 March 2023 got completed with lot of intervention of Comptroller & Auditor General of India,
wherein C & AG was giving directions to the auditors on the manner in which audit should be
conducted in respect of certain areas. Further, it also received comments from C & AG on the audit
report of the auditors. Ceta Ltd. is seeking advice to go against C & AG so that they can avoid
unnecessary interference of C & AG. You are required to advise Ceta Ltd. with respect to role of C&AG
in the audit of a Government company. [MTP-May 20]
Ans.: Refer answer of Q. No. 3
Q.5 VM Ltd., a company wholly owned by Central Government was disinvested during the previous year,
resulting in 45% of the shares being held by public. The shares were also listed on the BSE. Since the
shares were listed, all the listing requirements were applicable, including publication of quarterly
results, submission of information to the BSE etc.
Gautam, the Finance Manager of the Company is of the opinion that now the company is subject to
stringent control by BSE and the markets, therefore the auditing requirements of a limited company
in private sector under the Companies Act, 2013 would be applicable to the company and the C&AG
will not have any role to play. Comment. [MTP – March 21; RTP-May 23]
Ans.: Role of C & AG in case of Govt. company:
• Sec. 2(45) of the Companies Act, 2013, defines a “Government Company” as a 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 and partly by one or more
State Governments, and includes a company which is a subsidiary company of such a Government
company.
• The auditors of these government companies are firms of Chartered Accountants, appointed by
the Comptroller & Auditor General, who gives the auditor directions on the manner in which the
audit should be conducted by them.
• In the given case, 55% shares of the company is still with the C.G. and hence it is classified as a
government company.
Conclusion: Gautam opinion is not correct as VM Ltd. is a government company, listing of company’s
shares on a stock exchange is irrelevant for this purpose.

21.3 – Types of Audit Conducted by CAG and Comprehensive Audit

Q.6 The reports of the Comptroller and Auditor General of India on the audit of PSUs are presented to
the Parliament and to various state legislatures to facilitate a proper consideration. Enumerate the
contents of Audit Report presented by C & AG.
[May 19 – Old Syllabus; Dec. 21 – New Syllabus (5 Marks)]

21.3
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Audit of Public Sector Undertakings Chapter 21
Ans.: Audit Report of CAG:
Reports of the CAG on the PSUs of C.G. are presented to the Parliament in following parts:
(a) Introduction containing a general review of the working results of Government companies,
deemed Government companies and corporations.
(b) Results of comprehensive appraisals of selected undertakings conducted by the Audit Board.
(c) Resume of the company auditor’s reports submitted by them under the directions issued by the
CAG and that of comments on the accounts of the Government companies.
(d) Significant results of audit of the undertakings not taken up for appraisal by the Audit Board.

21.4 – Comprehensive Audit

Q.7 XYZ & Co., a CA. firm was appointed by C & AG to conduct comprehensive audit of ABC Public
undertaking. C & AG advised to cover areas such as investment decisions, project formulation,
organisational effectiveness, capacity utilisation, management of equipment, plant and machinery,
production performance, use of materials, productivity of labour, idle capacity, costs and prices,
materials management, sales and credit control, budgetary and internal control systems, etc.
Discuss stating the issues examined in comprehensive audit. [RTP-May 20, MTP-March 22]
Or
Sun Light Limited is a public sector undertaking engaged in production of electricity from solar
power. It had commissioned a new project near Goa with a new technology for a cost of ₹ 5,750
crore. The project had seen delay in commencement and cost over-run. State the matters that a
Comprehensive Audit by C & AG may cover in reporting on the performance and efficiency of this
project. [Nov. 18-New Syllabus (4 Marks), MTP-Sep. 22]
Or
The Comptroller and Auditor General of India has appointed a chartered accountant firm to conduct
the comprehensive audit of Metro Company Limited (a listed government company) which is
handling the Metro project of the metropolitan city for the period ending 31.03.2021. The work to
be conducted under Project A handled by the Metro Company Limited was of laying down railway
line of 124 kilometers. [The chartered accountant firm reviewed the internal audit report and
observed the shortcoming reported about the performance of Project A regarding the
understatement of the Current liabilities and Capital work-in-progress by ₹ 84.68 crore.] Explain
some of the matters to be undertaken by the chartered accountant firm while conducting the
comprehensive audit of Metro Company Limited. [Jan. 21 – New Syllabus (5 Marks), MTP-April 22]
Ans.: Comprehensive Audit:
Meaning: Comprehensive Audit involves assessing overall efficiency and effectiveness of Public
Enterprises. This is done by reference to certain pre-determined standards, objectives and criteria.
The starting point of a comprehensive audit is the preparation of an audit programme based on the
study of decisions relating to the setting up of the enterprise, its objectives, the areas of operation,
organisation, financial and operational details, capital and operational budgets and other relevant
available papers.
Areas to be covered in Comprehensive Audit:
The areas covered in comprehensive audit will vary from enterprise to enterprise depending on the
nature of the enterprise, its objectives and operations. Some of the broad areas are listed below:
1. Comparison of overall capital cost of the project with the approved planned costs.
2. Production or operational outputs vis-a-vis under-utilisation of the installed capacity.
3. Soundness of systems of project formulation and implementation.

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Chapter 21 Audit of Public Sector Undertakings
4. Achievement of Planned rate of return.
5. Adequacies of Cost control measures.
6. Existence and performance of Research and development programmes.
7. Existence of adequate system of repairs and maintenance.
8. Effective and economical procedures.
9. Inefficiency or insufficiency of Project planning.
10. Undue waste, unproductive time for men and machines, wasteful utilisation or even non-
utilisation of resources.

21.5 - Propriety Audit

Q.8 What are the principles involved regarding “Propriety audit” in the case of Public Sector
Undertaking?
Ans.: General Principles of propriety Aspect:
Propriety Audit stands for verification of transactions on the tests of public interest, commonly
accepted customs and standards of conduct.
Instead of too much dependence on documents, vouchers and evidence, it shifts the emphasis to the
substance of the transactions and looks into the appropriateness thereof on a consideration of
financial prudence, public interest and prevention of wasteful expenditure. Audit against propriety
seeks to ensure that expenditure conforms to these principles which have been stated as follows:
(i) Expenditure is not prima facie more than the occasion demands and that every official exercise
the same degree of vigilance in respect of expenditure as a person of ordinary prudence would
exercise in respect of his own money.
(ii) The authority exercises its power of sanctioning expenditure to pass an order which will not
directly or indirectly accrue to its own advantage.
(iii) Funds are not utilised for the benefit of a particular person or group of persons.
(iv) Apart from the agreed remuneration or reward, no other avenue is kept open to indirectly
benefit the management personnel, employees and others.
Q.9 Tee & Co., a firm of chartered accountants had been appointed by C & AG to conduct statutory audit
of M/s Rare Airlines Limited, a Public-Sector Company. They would like to check certain mandatory
propriety points sector company. They would like to check certain mandatory propriety points as
required u/s 143(1) of the Companies Act, 2013. List the areas of check to meet these requirements.
[May 18 – New Syllabus (4 Marks), MTP-April 19]
Ans.: Areas of propriety u/s 143(1) of Companies Act, 2013:
Section 143(1) of the Companies Act, 2013 requires the auditor to make an enquiry into certain
specific areas. In some of the areas, the auditor has to examine the same from propriety angle as to:
(a) whether loans and advances made by the company on the basis of security have been properly
secured and whether the terms on which they have been made are prejudicial to the interests of
the company or its members;
(b) whether transactions of the company which are represented merely by book entries are
prejudicial to the interests of the company;
(c) where the company not being an investment company or a banking company, whether so much
of the assets of the company as consist of shares, debentures and other securities have been sold
at a price less than that at which they were purchased by the company;

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Audit of Public Sector Undertakings Chapter 21
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and documents of the company that any shares have been allotted
for cash, whether cash has actually been received in respect of such allotment, and if no cash has
actually been so received, whether the position as stated in the account books and the balance
sheet is correct, regular and not misleading.

21.6 - Performance Audit

Q.10 Kalmani & Co. Chartered Accountants have been appointed by C & AG for performance audit of a
sugar industry. What factors should be considered by Kalmani & Co., while planning a performance
audit of a sugar industry?
Ans.: Factors to be considered while planning performance audit:
1. Significance and the needs of potential users of the audit report.
2. Obtaining an understanding of the program to be audited.
3. Legal and regulatory requirements.
4. Management controls.
5. Identifying the criteria needed to evaluate matters subject to audit.
6. Identify significant findings and recommendations from previous audits that could affect the
current audit objectives.
7. Potential sources of data that could be used as audit evidence and consider the validity and
reliability of these data.
8. Consider whether the work of other auditors and experts may be used to satisfy some of the
auditors' objectives.
9. Providing sufficient staff and other resources to do the audit.
10. Preparing a written audit plan.
Q.11 In carrying out efficiency audit of a Public Sector Undertaking (PSU), what important aspects are
required to be looked into, to assess the efficiency? [May 18 – Old Syllabus (4 Marks)]
Ans.: Aspects to be looked into to assess the efficiency of a PSU:
Efficiency is the measurement of input-output. It is said to be achieved when the output is maximised
at the minimum of inputs, or input is minimised for any given quantity and quality of output.
Examining efficiency embraces aspects such as whether:
(a) procurement practices followed are sound;
(b) resources are properly protected, maintained and efficiently used;
(c) efficient operating procedures are used; and
(d) the objectives of public sector programmes are met cost-effectively.
Q.12 Write short note on: Issues addressed in Performance Audit of PSUs.
[Nov. 18-Old Syllabus (4 Marks)]
Or
“A performance audit is an objective and systematic examination of evidence for the purpose of
providing an independent assessment of the performance of a government organization, program,
activity, or function in order to provide information to improve public accountability and facilitate
decision-making by parties with responsibility to oversee or initiate corrective action.” Briefly
discuss the issues addressed by Performance Audits conducted in accordance with the guidelines
issued by C & AG. [RTP-Nov. 18, May 20]

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Chapter 21 Audit of Public Sector Undertakings
Ans.: Performance Audit:
Meaning: A performance audit is an objective and systematic examination of evidence for the
purpose of providing an independent assessment of the performance of a government organization,
program, activity, or function in order to provide information to improve public accountability and
facilitate decision-making by parties with responsibility to oversee or initiate corrective action.
Elements of Performance Audit: Performance audits include evaluation of economy, efficiency and
effectiveness.
1. Economy: Economy stands for minimising the cost of resources used for an activity, having
regard to appropriate quantity, quality and at the best price. Evaluating economy implies
forming an opinion whether resources have been used economically and acquired in due time, in
appropriate quantity and quality at the best price.
2. Efficiency Audit: Efficiency is the measurement of input-output. It is said to be achieved when
the output is maximised at the minimum of inputs, or input is minimised for any given quantity
and quality of output. Examining efficiency embraces aspects such as whether:
(a) procurement practices followed are sound;
(b) resources are properly protected, maintained and efficiently used;
(c) efficient operating procedures are used; and
(d) the objectives of public sector programmes are met cost-effectively.
3. Effectiveness: Effectiveness is the measurement of the extent to which objectives are achieved
and the relationship between the intended impact and the actual impact of an activity.
Examining effectiveness will cover the following:
(a) determine the extent to which a program achieves a desired level of results;
(b) assess the effectiveness of the program and/or of individual program components;
(c) determine whether management has considered alternatives for carrying out the program
that might yield desired results more effectively or at a lower cost;
(d) assess the adequacy of the management control system for measuring, monitoring and
reporting a programme's effectiveness;
(e) ensure compliance with laws and regulations applicable to the program.
Q.13 You have been appointed as auditor of AKY Ltd. After having determined the audit objectives, now
you have been requested to draft audit criteria. What are the sources that you will use while doing
the task? [MTP-Oct. 21]
Ans.: Sources for obtaining Audit Criteria:
Audit criteria are the standards used to determine whether a program meets or exceeds
expectations. It provides a context for understanding the results of the audit. Audit criteria are
reasonable and attainable standards of performance against which economy, efficiency and
effectiveness of programmes and activities can be assessed.
The audit criteria may be sought to be obtained from the following sources:
(i) Procedure manuals of the entity.
(ii) Policies, standards, directives and guidelines.
(iii) Criteria used by the same entity or other entities in similar activities or programmes.
(iv) Independent expert opinion and know how.
(v) New or established scientific knowledge and other reliable information.
(vi) General management and subject matter literature and research papers.

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Audit of Public Sector Undertakings Chapter 21
Q.14 C & AG appointed a chartered accountant firm to conduct Performance audit of COP Ltd., a PSU of
Govt. of India. The firm conducted the audit with a view to check all the expenses of the unit are in
conformity to the public interest and publicly accepted customs. The audit report submitted by
audit firm was rejected by C & AG. Give your opinion on the action of C & AG.
[Dec. 21 – Old Syllabus (5 Marks); RTP-Nov. 22; MTP-April 23]
Ans.: Performance Audit:
• Performance audit is an objective and systematic examination of evidence for the purpose of
providing an independent assessment of the performance of a government organization,
program, activity, or function in order to provide information to improve public accountability
and facilitate decision-making by parties with responsibility to oversee or initiate corrective
action.
• In the given case, C & AG appointed a chartered accountant firm to conduct Performance audit of
COP Ltd., a PSU of Govt. of India. The firm conducted the audit with a view to check all the
expenses of the unit are in conformity to the public interest and publicly accepted customs. The
audit report submitted by audit firm was rejected by C & AG.
• Audit conducted by the firm is propriety audit, not the performance audit.
Conclusion: Action of C & AG is right as audit conducted by CA firm is propriety audit, not
performance audit.
Q.15 The objectives of audit in connection with a State Electricity Distribution Company were to
ascertain whether the:
1. total cost of providing electricity is being recovered by timely submissions to the State
Electricity Regulatory Commission;
2. tariff orders, sales circulars and sales instructions were issued timely, without any ambiguity.
They were implemented in time;
3. metering, billing and collection was managed efficiently and effectively;
4. monitoring and internal controls were efficient.
What kind of audit is this? Prepare two sample observations which could be part of the audit
report. [RTP-May 22]
Ans.: Sample observations in case of performance audit:
This is example of Performance Audit. Sample observations are:
(i) Non-replacement of defective/ burnt meters: Large number of meters, much in excess of the
permitted limit of 1% of the total meters were defective and their replacement was not
completed within the stipulated time of 1 month. This resulted in billing on average basis for a
continuous period of several months. This could result in losses as well as administrative
hassles and disputes with consumers.
(ii) Under charging of meter rent: As per Schedule of Charges, the Company is required to charge
meter rent of ₹ 30 per month for a single phase meter and ₹ 40 per month for three phase
meter. It was observed that the Company had short charged meter rent of ₹ 60 lakh from 3 lakh
consumers in 5 lakh bills during the period.

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22 Questions on Ind-AS

From May 2019, marks are given only for descriptive questions

22.1 - Indian Accounting Standards

Ind AS-1 Q.1 What is ‘Other Comprehensive Income’ as per Ind-AS? What are its components?
[Nov. 17 (5 Marks)]

Ans.: Other Comprehensive Income as per Ind-AS:

As per Ind-AS 1 “Presentation of Financial Statements other comprehensive income
comprises items of income and expense (including reclassification adjustments) that are
not recognised in profit or loss as required or permitted by other Ind ASs.
The components of other comprehensive income include:
1. changes in revaluation surplus (Ind AS 16, Property, Plant and Equipment and Ind AS
38, Intangible Asset);
2. remeasurements of defined benefit plans (Ind AS 19 - Employee Benefits);
3. gains and losses arising from translating the financial statements of a foreign operation
(Ind AS 21, the Effects of Changes in Foreign Exchange Rates);
4. gains and losses from investments in equity instruments designated at fair value;
5. gains and losses on financial assets measured at fair value;
6. the effective portion of gains and losses on hedging instruments in a cash flow hedge
and the gains and losses on hedging instruments that hedge investments in equity
instruments measured at fair value;
7. for particular liabilities designated as at fair value through profit or loss, the amount of
the change in fair value that is attributable to changes in the liability’s credit risk;

22.1
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Questions on Ind-AS Chapter 22
8. changes in the value of the time value of options when separating the intrinsic value
and time value of an option contract and designating as the hedging instrument only
the changes in the intrinsic value;
9. changes in the value of the forward elements of forward contracts when separating the
forward element and spot element of a forward contract and designating as the
hedging instrument only the changes in the spot element, and changes in the value of
the foreign currency basis spread of a financial instrument when excluding it from the
designation of that financial instrument as the hedging instrument.

Ind-AS Q.2 Z Ltd. changed its employee remuneration policy from 1st of April 2022 to provide for
19 12% contribution to provident fund on leave encashment also. As per the leave
encashment policy the employees can either utilize or encash it. As at 31st March 2023
the company obtained an actuarial valuation for leave encashment liability. However, it
did not provide for 12% PF contribution on it. The auditor of the company wants it to be
provided but the management replied that as and when the employees availed leave
encashment, the provident fund contribution was made. The company further contends
that this is the correct treatment as it is not sure whether the employees will avail leave
encashment or utilize it. Comment in view of relevant Ind-AS.

Ans.: Treatment of Short term compensated advances:

• As per Para 13 of Ind AS-19 on “Employee Benefits”, notified under the Companies
(Indian Accounting Standards) Rules, 2015, as amended from time to time, an entity
shall recognize the expected cost of short-term employee benefits in the form of paid
absences, when the employees render service that increase their entitlement to future
paid absences.
• Since the company obtained actuarial valuation for leave encashment, it is obvious that
the paid absences are accumulating in nature. An enterprise should measure the
expected cost of accumulating paid absences as the additional amount that the
enterprise expects to pay as a result of the unused entitlement that has accumulated at
the balance sheet date.
• Here, Z Ltd. will accumulate the amount of leave encashment benefits as it is the
liability of the company to provide 12% PF on amount of leave encashment.
Conclusion: Contention of the auditor is correct that full provision should be provided by
the company.

Ind-AS Q.3 You are the Auditor of Power Supply Corporation Limited, a Government Company for
24 the year ended on 31st March 2023. The turnover of the Company for the period was
₹ 12,000 crores from sale of power. During your audit, you found that the Company had
procured Spares for Transmitters for ₹ 850 crores from abroad through a Corporation by
name Procurement and Supply India Limited which is also owned and controlled by
Government of India. The Financial Statements of the Power Supply Corporation Limited,
prepared in compliance with Ind AS for the year ended on 31.03.2023 did not contain any
additional disclosure regarding the procurement of spares as referred to above. To your
query as to whether any disclosure regarding Related Party Transaction would be

22.2
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 By: CA. Pankaj Garg
Chapter 22 Questions on Ind-AS
required, the Management of the Corporation replied that no such disclosure would be
necessary for transactions between State Controlled Enterprises. Analyse this issue in
finalizing the Audit Report. [Nov. 18-New Syllabus (5 Marks)]

Ans.: Related Party Disclosures in case of Government related Entities:

• Para 25 and Para 26 of Ind-AS 24 “Related Party Disclosures” provides the reporting
requirements of related party transactions in case of government related entities.
• As per para 25, a reporting entity (Govt. entity) is exempt from the disclosure
requirements in relation to related party transactions and outstanding balances,
including commitments, with:
(a) a government that has control or joint control of, or significant influence over, the
reporting entity; and
(b) another entity that is a related party because the same government has control or
joint control of, or significant influence over, both the reporting entity and the
other entity.
• As per Para 26, if a reporting entity applies the exemption as stated in Para 25, it shall
disclose the following about the transactions and related outstanding balances
referred to in Para 25:
(a) the name of the government and the nature of its relationship with the reporting
entity (i.e. control, joint control or significant influence);
(b) the following information in sufficient detail to enable users of the entity’s
financial statements to understand the effect of related party transactions on its
financial statements:
(i) the nature and amount of each individually significant transaction; and
(ii) for other transactions that are collectively, but not individually, significant, a
qualitative or quantitative indication of their extent.
• Further, as per SA 550 Related Parties, in forming an opinion on the financial
statements in accordance with SA 700, the auditor shall evaluate whether the
identified related party relationships and transactions have been appropriately
accounted for and disclosed in accordance with the applicable financial reporting
framework.
Conclusion: Management is required to ensure disclosure requirements of Para 25 of Ind-
AS 24. Under the circumstances, auditor shall apply the procedures as stated in SA 550
and modify his report as necessary disclosures required under Ind AS 24 not provided in
the financial statements.

Ind-AS Q.4 K Ltd. had 5 subsidiaries as at 31st March 2023 and the investments in subsidiaries are
36 considered as long term and valued at cost. Two of the subsidiaries net worth eroded as
at 31st March 2023 and the prospects of their recovery are very bleak and the other
three subsidiaries are doing exceptionally well. The company did not provide for the
decline in the value of investments in two subsidiaries because the overall investment
portfolio in subsidiaries did not suffer any decline as the other three subsidiaries are
doing exceptionally well. Comment in view of relevant Ind-AS. [MTP-April 23]

22.3
By: CA. Pankaj Garg
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Questions on Ind-AS Chapter 22
Ans.: Valuation of Long Term Investments:
• As per Para 10 of Ind AS-27 on “Separate Financial Statements”, notified under the
Companies (Indian Accounting Standards) Rules, 2015, as amended from time to time,
when an entity prepares separate financial statements, it shall account for investments
in subsidiaries, joint ventures and associates either at cost or in accordance with Ind
AS 109.
• In the given situation, K Ltd. has valued the investments in subsidiaries at cost.
• Ind AS 36 “Impairment” deals with impairment of investments in subsidiaries
accounted for at cost under Ind AS 27. As per Para 9 of Ind AS 36, an entity shall assess
at the end of each reporting period whether there is any indication that an asset may
be impaired. If any such indication exists, the entity shall estimate the recoverable
amount of the asset. It implies that impairment indicators for investment in
subsidiaries is to be assessed by K Ltd. individually for each investment and not as
group of investment.
• As provided, two of the subsidiaries of K Ltd. has their net-worth eroded on 31st
March 2023 and chances of recovery is bleak. As such, the indicators of impairment in
value of investment in such two subsidiaries exist on reporting date.
Conclusion: K Ltd. should provide for the impairment in the value of investments in two
subsidiaries despite the fact that the other investments in subsidiaries did not suffer any
impairment.

Misc. Q.5 As an Auditor give your comments for the following disclosures made by a company
which adopted Ind-AS for compilation of financial Statements:
(a) In the Balance Sheet, the sub-head inventories contained an item “goods in transit”
in which a consolidated amount aggregating the cost of raw materials in transit and
loose tools billed on company but delivery not made to company had been
specified.
(b) Provision for doubtful debts of trade debtors was grouped in “Provisions” under
current liabilities.
(c) In statement of profit and loss, prior period income was shown under “Other
Income”.
(d) Sale proceeds of scrap incidental to manufacture were included in “Other income”.
(e) Payment towards a one-time voluntary retirement scheme introduced during the
year was included in “Employee Benefit Expense”.
[May 18 – New Syllabus (5 Marks), MTP-Oct. 20]

Ans.: Appropriateness of Disclosures made in financial statements:

(a) Disclosure of cost of raw material in transit and loose tools in aggregate in the
financial statements is not correct. As per Division II of Schedule III of the Companies
Act, 2013, cost of raw material in transit shall be disclosed as sub-head of raw
material and loose tools billed on the company would be shown as separate sub-head
of Loose tools under heading of Inventories i.e. part of Current Asset.

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Chapter 22 Questions on Ind-AS
(b) Disclosure is not appropriate because as per Ind-AS 37 “Provisions, Contingent
Liabilities and Contingent Assets” the term ‘doubtful debts’ is an adjustment to the
carrying amounts of assets. Hence, provision should be shown net in trade
receivable.
(c) Disclosure is not appropriate. As per Ind-AS 8 “Accounting Policies, Changes in
Accounting Estimates and Errors”, prior period income should not be shown in
statement of profit and loss. The entity shall adjust the opening balance of each
affected component of equity for the earliest prior period presented and the other
comparative amounts disclosed for each prior period presented as if the new
accounting policy had always been applied.
(d) Disclosure is not proper. As per Ind-AS 2 “Inventories”, sale proceeds of scrap
incidental to manufacture should be deducted from the cost of the main product.
(e) Disclosure is not proper. As per Ind-AS 19 “Employee Benefits”, if the termination
benefits are expected to be settled wholly before 12 months after the end of the
annual reporting period in which the termination benefit is recognized, the entity
shall apply the requirements for short-term employee benefits, in case it is not
expected to be settled before 12 months the entity shall apply the requirements for
long term employee benefits. In the instant case, it should be shown as short-term
employee benefits in place of Employee Benefit Expenses.

22.5
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Questions on Ind-AS Chapter 22

22.6
By: CA. Pankaj Garg
 By: CA. Pankaj Garg

23 Questions on Schedule III

*From May 2019, marks are given only for descriptive questions

Q.1 The Balance Sheet of G Ltd. as at 31st March 23 is as under. Comment on the presentation in terms of
Division I and Division II of Schedule III.
Heading Note No. 31st March, 23 31st March, 22

Equity & Liabilities

Share Capital 1 XXX XXX

Reserves & Surplus 2 0 0

Employee stock option outstanding 3 XXX XXX

Share application money refundable 4 XXX XXX

Non-Current Liabilities

Deferred tax liability (Arising from Indian Income Tax) 5 XXX XXX

Current Liabilities

Trade Payables 6 XXX XXX

Total XXXX XXXX

Assets

Non-Current Assets

Property, Plant and Equipment -Tangible 7 XXX XXX

CWIP (including capital advances) 8 XXX XXX

.

23.1
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Questions on Schedule III Chapter 23
.

Current Assets

Trade Receivables 9 XXX XXX

Deferred Tax Asset (Arising from Indian Income Tax) 10 XXX XXX

Debit balance of Statement of Profit and Loss XXX XXX

Total XXXX XXXX

[May 13 (5 Marks), RTP-May 20]

Ans.: Errors in presentation as per Schedule III:

1. Share Capital & Reserve & Surplus are to be reflected under the heading “Shareholders funds”,
which is not shown while preparing the balance sheet.
Although it is a part of Equity and Liabilities yet it must be shown under head “shareholders’
funds”. The heading “Shareholders funds” is missing in the balance sheet given in the question.
2. Reserve & Surplus is showing zero balance, which is not correct in the given case. Debit balance of
statement of profit & Loss should be shown as a negative figure under the head ‘Surplus’. The
balance of ‘Reserves and Surplus’, after adjusting negative balance of surplus shall be shown under
the head ‘Reserves and Surplus’ even if the resulting figure is in the negative.
3. Schedule III requires that Employee Stock Option outstanding should be disclosed under the
heading “Reserves and Surplus”.
4. Share application money refundable shall be shown under the sub-heading “Other Current
Liabilities”. As this is refundable and not pending for allotment, hence it is not a part of equity.
5. Deferred Tax Liability has been correctly shown under Non-Current Liabilities. But Deferred tax
assets and deferred tax liabilities, both, cannot be shown in balance sheet because only the net
balance of Deferred Tax Liability or Asset is to be shown.
6. Under the main heading of Non-Current Assets, property, Plant & Equipment are further classified
as under:
• Tangible assets
• Intangible assets
• Capital work-in-progress
• Intangible assets under development.
Keeping in view the above, the Capital WIP shall be shown under Property, Plant and Equipment
as Capital Work-in-Progress. The amount of Capital advances included in CWIP shall be disclosed
under the sub-heading “Long term loans and advances” under the heading Non-Current Assets.
7. Deferred Tax Asset shall be shown under Non-Current Asset. It should be the net balance of
Deferred Tax Asset after adjusting the balance of deferred tax liability.
8. Trade Payables should be disclosed as follows:
(A) total outstanding dues of micro enterprises and small enterprises; and
(B) total outstanding dues of creditors other than micro enterprises and small enterprises.
Q.2 MG & Co. Ltd. seeks your advice while preparing financial statements the general instructions to be
followed while preparing balance sheet under Companies Act, 2013 in respect of current assets and
current liabilities. [May 15 (4 Marks)]

23.2
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 23 Questions on Schedule III
Ans.: General Instructions as to Current Assets and Current Liabilities as per Schedule III:
An asset shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be realized in, or is intended for sale or consumption in, the company’s normal
operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is expected to be realized within twelve months after the reporting date; or
(d) it is cash or cash equivalent unless it is restricted from being exchanged or used to settle a
liability for at least twelve months after the reporting date.
A liability shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the company's normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting date. Terms of a liability that could at the option of the
counterparty, result in its settlement by the issue of equity instruments do not affect its
classification.
Q.3 Director (Finance) of Beta Ltd. is of the opinion that total trade payables mentioned in the financial
statement is sufficient disclosure in the Balance Sheet as per Part I of Schedule III to the Companies
Act, 2013. They did not mention details regarding Micro, Small and Medium Enterprises (MSME).
Give your view as statutory auditor of the Company and state the details required to be disclosed in
notes regarding MSME. [May 18 – Old Syllabus (4 Marks), MTP-April 19]
Ans.: Disclosure regarding Micro, Small and Medium Enterprises:
Schedule III of Companies Act, 2013 requires that trade payables shall be classified as:
(A) total outstanding dues of micro enterprises and small enterprises; and
(B) total outstanding dues of creditors other than micro enterprises and small enterprises.
The following details relating to Micro, Small and Medium Enterprises shall be disclosed in the notes:
(a) the principal amount and the interest due thereon (to be shown separately) remaining unpaid to
any supplier at the end of each accounting year;
(b) the amount of interest paid by the buyer in terms of section 16 of the MSME Development Act,
2006, along with the amount of the payment made to the supplier beyond the appointed day
during each accounting year;
(c) the amount of interest due and payable for the period of delay in making payment (which have
been paid but beyond the appointed day during the year) but without adding the interest
specified under the MSME Development Act, 2006;
(d) the amount of interest accrued and remaining unpaid at the end of each accounting year; and
(e) the amount of further interest remaining due and payable even in the succeeding years, until
such date when the interest dues above are actually paid to the small enterprise, for the purpose
of disallowance of a deductible expenditure u/s 23 of the MSME Act, 2006.
Q.4 Comment on the following with reference to Schedule III to the Companies Act, 2013:
(a) A company has disclosed performance guarantee and counter guarantees as Contingent
Liabilities.

23.3
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Questions on Schedule III Chapter 23
(b) A company has clubbed all other expenses under the head “Other Expenses” on the basis of 1%
of total revenue or ₹ 5,000 whichever is higher.
(c) A company has shown Deferred Tax Liability under Non-Current Liabilities and Deferred tax
assets under Non-Current Asset in balance sheet. [MTP-Aug. 18, May 20]
Ans.: Appropriateness of Disclosures as per Schedule III
(a) Performance guarantee and counter guarantee are not in nature of contingent liabilities, hence
disclosures are not appropriate.
(b) Treatment is not proper as Schedule III requires that any item of expenditure which exceeds 1%
of revenue from operations or Rs. 1 Lac whichever is higher, needs to be disclosed separately.
(c) Treatment is not proper as Schedule III requires only net balance of deferred tax liability or
asset.

Q.5 Comment on the following with reference to Schedule III to the Companies Act, 2013:
(a) A company has disclosed performance guarantee and counter guarantees as Contingent
Liabilities.
(b) The parent company has recognized in the current year’s financial statement, dividend declared
by its subsidiary after the balance sheet date. [RTP-Nov. 18]

Ans.: Appropriateness of Disclosures as per Schedule III

(a) Performance guarantee and counter guarantee are not in nature of contingent liabilities, hence
disclosures are not appropriate.
(b) Dividend is to be recognized as income in the year in which right to receive dividend is
established. Hence, recognition of dividend declared after balance sheet date is not proper.

Q.6 The financial statements of MP Ltd. as on March 31, 2023 are to be prepared under Division II of
Schedule III to the Companies Act, 2013. Comment on the disclosure compliances for MP Ltd. from
the following information in the financial statements which are required to be drawn up in
compliance with Ind AS.
(i) Property, Plant and Equipment include ₹ 2.50 crore for a boiler plant under construction.
(ii) Cash and cash equivalents include ₹ 1.25 crore deposited with a nationalized bank on 31st
March, 2022 for 18 months. It is shown under current assets.
(iii) Non-current assets include under caption “Biological assets other than bearer Plants” a sum of
₹ 1.50 crore being cost of cultivation for bringing to yield level, the cashew nut trees whose
yield period, according to estimate shall not be less than 10 Years.
(iv) In the Statements of Profit and Loss, the charge due to re-measurement of defined benefit
plans of employees is shown in Employee benefit Expenses.
(v) In the Statement of Profit and Loss, proposed dividend is shown under finance cost.
[May 18 - Old Syllabus (5 Marks)]

Ans.: Appropriateness of Disclosures as per Schedule III:

(i) Disclosure is not appropriate. Boiler plant under construction should be reflected separately as
Capital Work in progress under the heading of Non Current Asset.
(ii) Disclosure is not appropriate. Amount deposited with the bank is non-current in nature being
deposit period exceed 12 months.

23.4
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Chapter 23 Questions on Schedule III
(iii) Disclosure is not appropriate. Cultivation expenses cannot be capitalized under the heading
Biological assets other than bearer Plants.
(iv) Disclosure is not appropriate. As per Ind-AS 19, charge due to re-measurement of defined benefit
plans of employees should be transferred to OCI.
(v) Disclosure is not appropriate. As per Ind-AS 10 it cannot be shown in books of account. It is
reflected in notes of accounts.

Q.7 Comment on the disclosure compliances from the following information in respect of the financial
statements of PP Ltd. which have to be drawn up in compliance with Ind AS, under Division II of
Schedule III to the Companies Act, 2013.
(i) Insurance claims receivable is classified as Non-current Trade Receivables.
(ii) Foreign exchange differences relating to foreign currency borrowings to the extent not
capitalized in accordance with Ind AS 23 is disclosed under other expenses.
(iii) Interest on shortfall in payment of advance income-tax is clubbed with the current tax
disclosed on the face of the statement to profit and loss account.
(iv) Share based payment to employees in accordance with Ind AS 102 are disclosed under finance
cost.
(v) Expenditure on CSR activities has been disclosed in the notes to the cash flow statement.
[Jan. 21 – Old Syllabus (5 Marks)]
Ans.: Appropriateness of disclosures as per Schedule III:
(i) Insurance claims receivable should be classified as "other financial assets" and each such item
should be disclosed nature-wise. Thus, disclosure of insurance claims receivable by the company
under Non-current Trade Receivable is not in compliance with Division II of Schedule III of the
Companies Act, 2013.
(ii) Foreign exchange differences relating to foreign currency borrowings to the extent not
capitalized in accordance with Ind AS 23 can be presented under the head finance costs. Thus,
disclosure of foreign exchange difference relating to foreign currency borrowing to the extent
not capitalised under other expenses is not in compliance with Division II of Schedule III of the
Companies Act, 2013.
(iii) Any interest on shortfall in payment of advance income-tax is in the nature of finance cost and
hence should not be clubbed with the Current tax. The same should be classified as Interest
expense under finance costs. However, such amount should be separately disclosed. Thus,
disclosure of interest of shortfall by the company is not in compliance with Division II of
Schedule III of the Companies Act, 2013.
(iv) Share based payment to employees in accordance with Ind AS 102 should be disclosed under the
head Employee Benefits Expense. Therefore, disclosure of share based payment to employees
under Finance Cost is not in compliance with Division II of Schedule III of the Companies Act,
2013.
(v) Expenditure incurred on corporate social responsibility activities it is recommended that all
expenditure on CSR activities, that qualify to be recognised as expense should be recognised as a
separate line item as ‘CSR expenditure’ in the statement of profit and loss. Further, the relevant
note should disclose the break-up of various heads of expenses included in the line item ‘CSR
expenditure’. Thus, disclosure of expenditure on CSR Activities in notes to the cash flow
statement is not in compliance with Division II of Schedule III of the Companies Act, 2013.

23.5
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Questions on Schedule III Chapter 23
Q.8 Mr. Khanna has been appointed as statutory auditor of RST Ltd. for the financial year ended 31st
March, 2023. The financial statements of RST Ltd. are to be drawn up in compliance of the
Companies (Indian Accounting Standards) Rules, 2015. The Chief financial officer is of the view that
the disclosure requirements specified under Division II of Schedule III of the Companies Act, 2013
are complete and no other additional disclosures shall be made in the Notes or by way of additional
statements. Advise on the General instructions to be considered by RST Ltd. while preparing its
financial statements. [Dec. 21 – New Syllabus (5 Marks)]
Ans.: General Instructions for Preparation of F.S. of a Company required to comply with Ind As:
1. Every company to which Ind AS apply, shall prepare its financial statements in accordance with
Schedule III or with such modification as may be required under certain circumstances.
2. Where compliance with the requirements of the Act including Ind AS as applicable to the
companies require any change in treatment or disclosure including addition, amendment
substitution or deletion in the head or sub-head or any changes inter se, in the financial
statements or statements forming part thereof, the same shall be made and the requirements
under this Schedule shall stand modified accordingly.
3. The disclosure requirements specified in this Schedule are in addition to and not in substitution
of the disclosure requirements specified in the Ind AS. Additional disclosures specified in the Ind
AS shall be made in the Notes or by way of additional statement or statements unless required to
be disclosed on the face of the Financial Statements. Similarly, all other disclosures as required
by the Companies Act, 2013 shall be made in the Notes in addition to the requirements set out in
this Schedule.
4. (i) Notes shall contain information in addition to that presented in the Financial Statements
and shall provide where required:
(a) narrative description or disaggregation of items recognised in those statements; and
(b) information about items that do not qualify for recognition in those statements.
(ii) Each item on the face of the Balance Sheet, Statement of Changes in Equity and Statement
of Profit and Loss shall be cross-referenced to any related information in the Notes. In
preparing the Financial Statements including the Notes, a balance shall be maintained
between providing excessive detail that may not assist users of Financial Statements and
not providing important information as a result of too much aggregation.
5. Depending upon the Total Income of the company, the figures appearing in the Financial
Statements shall be rounded off as below:
Total Income Rounding off
(i) less than ₹ 100 crores To the nearest hundreds, thousands, lakhs or
millions, or decimals thereof
(ii) ₹ 100 crores or more To the nearest, lakhs, millions or crores, or
decimals thereof.
Once a unit of measurement is used, it should be used uniformly in the Financial Statements.
6. F.S. shall contain the corresponding amounts (comparatives) for the immediately preceding
reporting period for all items shown in the Financial Statement including Notes except in the
case of first Financial Statements laid before the company after incorporation.
7. F.S. shall disclose all 'material' items, i.e. the items if they could Individually or collectively,
influence the economic decisions that users make on the basis of the financial statements.
8. For the purpose of this Schedule, the terms used herein shall have the same meanings assigned
to them in Indian Accounting Standards.

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Chapter 23 Questions on Schedule III
9. Where any Act or Regulation requires specific disclosure to be made in the standalone financial
statement of a company, the said disclosure shall be made in addition to those required under
this Schedule.
Q.9 The Balance Sheet Extract of Siddha Limited, required to prepare financial statement under Ind-AS,
as at 31st March, 2023 is as under. Comment on the presentation in terms of Division II of Schedule
III to the Companies Act, 2013.
Particulars As at 31st March, As at 31st March,
2023 2022
Property Plant and Equipment
Trademark xxxx xxxx
Other Non-current Assets
Bank deposit with more than 12 months xxxx xxxx
maturity
Equity
Share Options Outstanding Account xxxx xxxx
Other Current Liabilities
Application money received for allotment of xxxx xxxx
securities to the extent refundable and interest
accrued thereon.
[RTP-Nov. 22]
Ans.: Errors have been noticed in presentation, as per Division II of Schedule III:
Following Errors have been noticed in presentation, as per Division II of Schedule III:
(i) “Trademark” is not to be classified under “Property Plant and Equipment” since they are
specifically to be disclosed under ‘Other Intangible Assets" as per Division II of Schedule III.
(ii) “Bank deposit with more than 12 months maturity" is not to be classified under "Other Non-
current Assets” since they are specifically to be disclosed under “Other Financial Assets” as per
Division II of Schedule III.
(iii) “Share Option Outstanding Accounts” is not to be classified under “Equity", since it has to be
disclosed under “Other Equity" as per Division II of Schedule III.
(iv) “Interest accrued thereon” is not to be classified under "Other non-current assets”, since they
are specifically to be disclosed under the head “Other Financial Liabilities” as per Division II of
Schedule III.

23.7
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Questions on Schedule III Chapter 23

23.8
By: CA. Pankaj Garg
 By: CA. Pankaj Garg

Past Exam Paper (May 2023)

Part II – Descriptive Questions - Suggested Answers
Suggested Answers
Q. No. Questions Marks Chapter
Q. No.
No.

1 (a) Joy Ltd. is an entertainment company which runs a circus and travels 5 1
around the country to entertain the masses. The circus began losing its
popularity over the past few years and attendance has reportedly
dropped by as much as 75% in the current financial year. Animal rights
activists continuously targeted the circus for its use of animal creatures
like elephants in the show. The CEO noted that the audience seemed to
be abandoning the circus due to their expanding entertainment options.
The high cost of moving the show from city to city eventually made the
business model untenable. As a result, many key managerial personnel
of the company left the company, there were delays in the payment of
wages and salaries, and the bank from whom the company had taken
funds also decided not to extend further finance or to fund further
working capital requirements of the company.
When discussed with the management, the statutory auditor
understood that the company had no action plan to mitigate such
circumstances (Use of going concern assumption is inappropriate).
Further, all such circumstances were not reflected in the financial
statements of Joy Ltd. What course of action should the statutory
auditor of the company take in the auditor's report in such situation?
(b) HAM Ltd. is engaged in the business of manufacturing of medicines. The 5 1 114
manufacturing process requires raw materials such as hydrochloric
acid, caustic soda and other chemicals for the manufacturing of various
drugs. The Company has maintained large stock of raw materials of all
types of chemicals being used. The nature of raw material is such that
its physical verification requires the involvement of an expert.
Management hired their expert for the stock taking and auditors also
involved their expert for the same purpose. The auditor observed that
the work of the auditor's expert was not adequate for the auditor's
purposes and he could not resolve the matter through additional audit
procedures which included further work performed by both the
auditor's expert and the auditor.
Based on above, the auditor knows that it would be right to express a
modified opinion in the auditor's report because he has not obtained
sufficient appropriate audit evidence. But he was reluctant in doing so
and issued a clean audit report and included the name of the expert in

P.1
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Past Exam Paper – May 2023 (Suggested Answers)
his report to reduce his responsibility for the audit opinion expressed.
Comment with respect to relevant Standard of Auditing relating to the
action of the auditor of issuing clean audit report.
(c) M/s ABC Limited is engaged in the business of construction of 4 1 87B
infrastructure and housing projects. While preparing the financial
statements for the year ended 31.03.2023 management has made
various accounting estimates and confirmed to the auditor that all
necessary accounting estimates have been recognized, measured and
disclosed in the financial statements are in accordance with the
applicable financial reporting framework. The auditor during the course
of audit observed some changed circumstances giving rise to the need
for an accounting estimate. Inquiries of same were sought from the
management. Can you list down some circumstances, change of which
will result in inquiries from the management?

2 (a) While conducting audit of PC Ltd., CA. T decided to use sampling 5 1 80A
technique to test the trade receivables at the planning stage. He directed
his team members to divide the whole population of trade receivables
balances to be tested in a few separate groups called 'strata'. He
directed to treat each stratum as if it was a separate population and
divided the trade receivables balances of PC Ltd. for the Financial Year
2022-23 into groups on the basis of personal judgment as follows:

SI No. Particulars

1 (a) Balances in excess of ₹ 50,00,000;

2 (b) Balances in the range of ₹ 40,00,001 to ₹ 50,00,000;

3 (c) Balances in the range of ₹ 30,00,001 to ₹ 40,00,000;

4 (d) Balances in the range of ₹ 20,00,001 to ₹ 30,00,000;

5 (e) Balances in the range of ₹ 10,00,001 to ₹ 20,00,000;

6 (f) Balances ₹ 10,00,000 and below

From the above mentioned groups, CA. T directed to pick up different

percentage of items for examination from each of the group. One of the
team members, Mr. Neel, wants to use some other technique of
sampling for the above purpose as the concept of stratification is not
clear to him. You are required to explain the concept of stratification
and its uses to Mr. Neel.

(b) SPM Ltd., about to complete fifty years of age since its incorporation in 5 8 36A
the F.Y 2023-2024, decided during the F.Y. 2022-23 to upgrade its
registered office at an important location in Mumbai city. As part of
planned package, it decided to acquire a land very adjacent to the site of
registered office, which had been owned by Mr. Parry who is a director
of the Company. Since he was reluctant to part with the ownership, he

P.2
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Past Exam Paper – May 2023 (Suggested Answers)
had been persuaded to convey the property in favour of the company in
exchange of a site owned by the company located at the next street to
the street where the registered office is situated, which is 1.50 times
larger in area than that of the site owned by the director adjacent to the
Registered office. Happier with what he was offered in negotiation, Mr.
Parry agreed for transferring the property in favour of the company in a
deed of exchange duly executed by authorized persons of the Board, and
Mr. Parry. The registration formalities were completed by 31st
December, 2022. Assuming that you are the engagement partner for the
audit of the accounts of the company for the financial year ended on
31st March, 2023, give a list of additional audit procedures and
reporting requirements, if any, that this transaction might trigger in
your audit.

(c) Discuss the reporting of the following issues under tax audit report of 4 15 32A
PPK Limited engaged in - (i) giving consultancy for agriculture of
sugarcane planting and (ii) cultivation /growing of sugarcane crop at a
stretch of land for about 15 KMs taken on lease from state government.
(i) The company during the year absorbed another company- AFM
Ltd., (resulting in the latter becoming merged with this Company).
The purchase price over the value of net assets taken over was
more by ₹ 40 lakhs. The Management wished to write it off over
five years and to claim the same as depreciation for intangibles at
rates as allowed by Income Tax rules for intangible assets.
(ii) The Profit and loss statement of the company indicated the
operating revenue of consultancy fees ₹ 75 lakhs and agriculture
income of ₹ 225 lakhs (gross revenue from crop sale). The
expenses included material consumed for plantation and add-ons
for crop growing, staff cost- for plantation, interest cost
(combined), Depreciation for planation equipment and its
ancillary parts.

3 (a) As a part of the listing process, M/s Sun Ltd. prepared and issued its 5 12 7
prospectus to the public. The top executives thought that pending
litigation against the company (which would cause a cash outflow of ₹
1.25 crores) may affect the demand for share applications. Due to this,
they omitted the fact, for the well-being of the company. Mr. A, who was
well aware of this matter had authorised himself to be named in the
prospectus as a director. However, Mr. A was a little reluctant, so he
informed and agreed that he shall become such director after an
interval of some time. Unfortunately, after a few days, but before joining
of Mr. A as director, this matter got leaked and several subscribers
sustained losses. Mr. A is now defending himself stating that he is
currently not holding the director's post hence no action can be taken
against him. Analyse and Comment on the situation.

P.3
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Past Exam Paper – May 2023 (Suggested Answers)
(b) CTR & Associates is an audit firm with CA C and CA T as partners. M/s 5 6 23
CTR & Associates has been appointed as statutory auditor of M/s TP
Hotel Ltd. for the financial year 2022-23. The audit firm is a regular
customer of the hotel and the partners usually used to stay in the same
hotel at various locations in the course of travelling for their various
professional assignments. Normally, payments for such stays are settled
against monthly bills raised by the company. Give your comment on
qualification of the audit firm with respect to the provisions of The
Companies Act, 2013.
(c) SR and Associates are the statutory auditor of ABC Ltd. Audit of the 4 5 101A
company is pending for F.Y 2021-22 and 2022-23 due to a dispute
between auditor and company with respect to certain proposed
remarks by the auditor in the audit report for F.Y. 2021-22. The
company removed the auditor on 02.05.2023 in shareholders meeting
complying with all legal formalities. SR and Associates after coming to
know about the removal, intimated the Registrar of Companies (ROC)
through letter highlighting the points of dispute including non-
existence of fixed assets, bogus creditors etc. ABC Ltd complained to
ICAI against SR and Associates for their above letter to ROC. Comment
with reference to the Chartered Accountants Act, 1949 and schedules
thereto.
4 (a) BETA Ltd is engaged in the Construction business since year 2001. The 5 1 87A
auditor understands that a thorough construction estimate is vital to
the viability of any construction business and requested the information
related to financing and operating estimated costs from the
management to review the outcome of accounting estimates included in
the prior period financial statements and their subsequent re-
estimation for the purpose of current period.
The management refused to provide the information to the auditor as it
believed that the judgments and estimates made in the prior periods
were based on the information available at that time, and the review of
the prior period information should not be done by the auditor in the
current financial year. With reference to the relevant SA, comment on
whether the contention of management is correct or not.
(b) RB & Co are the statutory auditors of Legal Finance Ltd, an NBFC 5 19 16
engaged in the business of accepting public deposits and giving loans.
Auditors are concerned that the format of the financial statements
should be prepared as per the notification issued by the Ministry of
Corporate Affairs dated 11th Oct, 2018. While auditing there was a
difference of opinion between CA R and CA B regarding the disclosure of
"Other Income" in the financial statements. CA R believes that there is
no difference in the presentation requirements between Division II and
Division III of Schedule III of the Companies Act, 2013. Is the contention
of CA R correct?

P.4
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Past Exam Paper – May 2023 (Suggested Answers)
(c) Mumbai with branches at Calcutta and Chennai. During the financial 4 17 23B
year 2021-22, the firm carried out statutory audits of
(1) Eighteen listed companies consisting of
(A) Ten companies with turnover exceeding Rs.1000 crores - one
public sector Listed Company, the rest nine being companies
in private sector and
(B) Eight companies with turnover exceeding Rs. 500 crores and
less than or equal to Rs. 1000 crores- and
(2) Twenty four private limited companies.
The firm had subjected itself to Peer Review process during 2020-21
and continues to hold certificate issued by Peer Review Board with
validity date unexpired. During the F.Y. 2022-23 it had been decided
that the firm be subjected to Quality Review (QR) by QRB of the
Institute. Can QR be so conducted for this firm? If yes, can one of the
audits of listed companies- viz. audit of public sector Company done by
firm in 2021-22 be subjected to QR by QRB, as this is the biggest
statutory audit in terms of turnover of the auditee, as well as of
complexity of audit issues involved?
5 (a) MBP Ltd. is into the footwear manufacturing business and started its 5 14 5
operations in the year 2015. For the last two financial years, the
company's profit declined even when there was an increase in the sales
and production of goods by the company. So, the management of MBP
Ltd. felt a need to assess how well their team is applying its strategies
and resources. They appointed Mr. Pal to conduct the management
audit with the objective of detecting and overcoming current
managerial deficiencies. After completing the management audit Mr. Pal
is in the process of drafting the final management audit report. Briefly
discuss the steps to be taken into consideration by him in preparing the
management audit report.
(b) CA Mohan has been appointed as a Peer Reviewer for M/s TB & 5 17 7
Associates. He has asked for all the management consultancy
engagements done by the firm and representations before various
authorities carried out by the M/s TB Associates for his peer review
during the period considered for peer review purposes by the board. He
has also sent out a mail to Peer Review Board regarding his selections.
Mr. T, the managing partner of the firm believes that these areas are
outside the scope of the Peer Reviewer. Is the Mr. T correct or not?
(c) LMN Ltd., a manufacturing concern, sold a house property owned by it 4 15 21
in Chennai for a consideration of Rs. 58 lakhs, to Mr. X on 14.09.2022.
LMN Ltd. purchased the house property in the y for Rs. 45 lakhs. The
stamp duty value on the date of transfer i.e. 14.09.2022 is Rs. 74 lakhs
for the said house property. How would you deal with this matter in the
tax audit report of LMN Ltd.?

P.5
By: CA. Pankaj Garg
 By: CA. Pankaj Garg
Past Exam Paper – May 2023 (Suggested Answers)
6 (a) SAM Yarns Limited - a listed Company, having its registered office at 5 5 4A
Meerut is engaged in manufacturing of various types of yarns to be
supplied to the textile mills. The Company has installed pollution
control equipment for processing the pollutants so that before
discharge of effluents outside factory, the level of pollution is kept at a
level below the prescribed standard. The Company managed to get
pollution clearance certificate by unfair means, while still there
continues to be breach of pollution control laws in matters of discharge
of polluting effluents. Amount of ₹ 10.25 Lacs had been incurred for
arranging clearance certificate and the amount incurred unlawfully had
been booked as pollution recycling expenditure. The matter had not
reached to those in governance, and the Director-Finance who is a
Chartered Accountant came to know of these matters on review of
major expenditure incurred during the period. Comment the
action/responses expected of Director-Finance (CA Rahul) referring to
any applicable requirements of Responses for NOCLAR under code of
Ethics.
(b) When auditing in an automated environment the auditor should be 5 4 15
aware, adhere to, and be guided by the various standards, guidelines,
and procedures that may be relevant to both audit and the automated
environment. Explain briefly the following common standards and
guidelines that are relevant in this context-
(i) The Cyber security Framework.
(ii) Control Objectives for Information and Related Technologies.
(iii) The Payment Card Industry.
(iv) Information Technology Infrastructure Library.
(c) AB Ltd wants to acquire a unit of CT Ltd. AB Ltd is uncertain about the 4 16 5B
future viability of the unit under consideration. You are appointed to
investigate economic and financial position of the unit. What are the
factors that you shall consider while studying the economic and
financial position of the business?
OR
RR & Co have been appointed as the auditors of HDG Insurance
20 11A
Company Limited. While conducting its audit, engagement partner
noticed various actuarial assumptions disclosed by way of notes to the
accounts and several other important actuarial processes being
followed in accordance with general regulatory guidelines. Actuaries in
the life insurance business have gained tremendous importance.
Explain the role of the auditor in the actuarial process, and the area of
the insurance business where the actuarial department concentrates.
Note: Alternate Answers possible with different assumptions.

P.6
By: CA. Pankaj Garg