KUNAL MANDHANIA

COMPANIES (ORD AUDITOR’S REPORT) ORDER, 2020

Se 143(11)  Power to C.G


Auditor  Additional matters report


C.G. Issues CARO, 2020


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If CARO applies


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21 clauses  report as annexure to A.R.

Applicability of CARO

2.
OPC
Small Co. [Sec. 2(85)]
dh
CARO is applicable to All the companies including FOREIGN company excluding the following:

1.

3. Sec. 8 Co.
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4. Banking Co.
5. Insurance Co.
6. Private LIMITED Co. which satisfies ALL the following conditions.
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T  Total Revenue does not exceed 10 Cr. (as per FS)

O  O/s Loans (aagreagate) from Bank & F.I. does not exceed 1 Cr. (Anytime during year)

P  Paid up + Res. & Surp. Does not exceed 1 Cr. (as on B/S Date)
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Neither holding no subsidiary of public Co.

Calculation of Revenue
Ku

1. From operations (including discontinuing operations) 

2. Other income like interest, dividend, etc. 
3. GST / Excise (included in Sales)  Include
4. GST / Excise (excluded in Sales )  Exclude
5. Sales return of whether CY or PY to be deducted
6. Trade discount to be deducted

Calculation of Paid – up capital

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KUNAL MANDHANIA

1. Equity 
2. Preference 
3. Shares application money 
4. Bonus share
5. Consideration other than cash 
6. Unpaid calls 
7. Forfeited shares 

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Calculation of Reserves
Every type of Reserve (General / Specific)

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(+) Cr. Bal of P & L

(-) Dr. Bal of P &L

Calculation of Loan
1.
2.
Fond based loan
Jitna Amt. ka loan utna o/s.
dh
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3. Long term or short term
4. Bil discounted
5. Interest Accrued & Due
6. Any type of credit facility availed
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7. Secured or unsecured.

Government Company
Rule of normal company applies.
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Standalone financial statements

Ku

Applicable to standalone & not consolidated.

* F.S. of Branches is standalone only.

Branch audit report

If CARO is applicable to main /head Co. then it is applicable to branch also.

Notes :

1. Private unlimited Co. CARO is applicable.

2. CARO applicability is to be checked every year because

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KUNAL MANDHANIA

“One applicable, always applicable” doen’t apply to CARO.

Particulars Whether What to Report

1. Fixed Assets
a) Proper Proper records maintained:-
Records i) PPE  Quantity + Situation
Same
ii) Intangible Assets  Full
Particulars
b) Physical Physical verification of PPE. i) At reasonable intervals.
Verification ii) Material discrepancy properly
dealt in books of A/c (BOA)

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c) Title deed of Held in the name of company. If not, provided details.
immovable (learn table from notes )
property

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d) Revaluation i) PPE  Property, Plant & i) By Registered Valuer
Equipment. ii) Amount of change [> 10%]
ii) Intangible Assets.
e) Benami Any proceeding s under Benami Properly disclosed in F.S.
Property
2. Inventories
a) Physical
Verification
Act.

Conducted by management
dh i) At reasonable intervals.
ii) Coverage & procedures apt or
not
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iii) Discrepancy [> 10% ] properly
dealt in Books of A/c or not.
b) Working Sanctioned to Co. in excess of 5Cr. Whether quarterly returns in
capital loan On security of current assets from agreement with Books of A/c (which
Banks or F.I. gives to Bank)
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3. Loans,  Not applicable to banks & F.I.

Guarantee,  NBFC – 16th clause
Security, Invest,
(LGSI)
a) LGSI Given to any person i) Amount to subs/ J.V. Associates.
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ii) Amount to others.

b) T & C Given to any person Not prejudicial to interest of Co.
c) Repayment Given to any person i) Repayment schedule 
made or not
ii) Regular receipts
Ku

d) Irregular Overdue i) Amount overdues by 90 days

Receipts ii) Reasonable steps to recover.
e) Restructurin Loan renew / extension / Fresh i) Aggregate amount
g of loan loanto settle old loan. ii) X of total loan
f) Demand To promoter / related parties. i) Aggregate amount
loan ii) X of total loan.
4. LGSI (Legal Sec. 185 & 186 followed or not. i) Complied
compliance ) ii) Provide details of non-
compliance.

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KUNAL MANDHANIA

Company con't give

Director / Relative
LGS
Sec. 185 S.R.
Can give loan to Business
Money utilise for
Principal busienss

Sec. 186 : Limit Calculate :-

i) 60% [PSC + Free Res. + Sec. From A/c]
ii) 100% [Free Res. + Sec. From A/c]

a) Upto limit  unanimous B.R.

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b) Exceeds Limit  U.B.R + S.R

5. Deposits Accepted deposits during the year. i) Sec. 73 to 76 complied . (+)

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Rules.
If not, nature contraventions 
report
Any orders by NCLT / RGI/ ROC / ii) Followed or not.
CLB

dh
i) Tenure  Min. 6 months [3 months only of 10% of (PSC + FR)]
 Max 36 months
ii) Circular  before it.
iii) DRRA Transfer  20% of deposit maturity in following year
(upto 30th April)  Bal. 20% of deposit maturing in CY.
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iv) Accepting Deposits by  Eligible Public Co.[Networth > 100 Cr. Or T/O
>  500 cr
]
Always secured deposit
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v) Penal Interest  18% p.a.

vi) Receipt given  within 21 days
vii) Maximum Deposits (X of PSC + F.R. Sec. from A/c):
a) Eligible Public Co.  Member 10% & Public 25%
b) Eligible Govt. Co.  35%  Members / Public
c) Private Co. - 100% members
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d) Pvt. Co.  Start up & fulfil conditions  no limit

6. Cost Records Required to be maintained. Maintained or not
*Cost Records to be matintained
 deal regulated / unregulated
sector
Ku

(+)
Overall T/O > 3 Cr.
7. Statutory Dues i) Disputed. i) Which forum
(Tases ) ii) Amount involved
ii) Undisputed Overdues > 6 months [as on 31st Mar.
]
8. Undisclosed Disclose during the year Properly dealt in books of A/c
income
9. Defaulter
Company
a) Defaulter From any lender Report on chart in Notes (learn)

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KUNAL MANDHANIA

b) Willful Disclosed by Bank / F.I./ Other Report on chart in Notes (learn)

Defaulter lenders
c) Purpose of Used from purpose loan was taken If not
loan i) Amount diverted
ii) Purpose of use
d) Use of short Funds raised for short term Nature (+) Amount
– term loan purpose used for long term
for long purpose.
term
e) Loan for Loan taken to meet obligation of Nature (+) Amount
Group Co. Group Co.
f) Pledging Loan taken by pledging securities i) Details

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Group Co. held in Group Co.’s. ii) Whether defaulted.
Securities.
10. Securities

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Offered
a) Public Offer Money raised during year by IPO/ If not, details of delay / default.
FPO applied for the purpose
money was raised
b) Private i) ---------------------------- Sec. 92 complied or not
Placement
ii)

Sec. 92: - a) S.R.


dh
Applied for the
purpose
 if not , Nature (+) Amount
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b) Max 200 (except QIB/ ESOP)
c) No Fresh offer until previous
complete/ withdrawer
d) No ad not in Cash.
𝑤𝑖𝑡ℎ𝑖𝑛
e) Application money 60 𝑑𝑎𝑦𝑠 
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𝑖𝑓
allot  refund (+) 12% p.a.
𝑛𝑜𝑡
st
from 61 day

Comparison: -
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Basis CARO 143(12) SA -240

i) Who notified Anyone Auditor Anyone
Fraud
ii) Who did fraud By the Co. One the Co. Against the Co. by
Ku

Or By office or EF of the Anyone

On the Co. co.

Q. State reporting requirements of following fraud in A.R. as per Co. ‘s Act, 2013.

Particulars CARO 143(12)

(i) Fraud against Co. by officer  
/EF
(ii) Against Co. by Vendor  
(iii) On customer by Co.  

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KUNAL MANDHANIA

(iv) Noticed by Govt. Auditor  

Sec. 177  any R.P.T  take approval of Audit Committee

Sec. 188  B.M  B.R.

 If RPT > Limit (10% of T/O)  GM  OR

11. Fraud
a) Noticed or Frauds  by Co. Nature (+) Amount

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Reported  On Co.
 by anyone
b) Reported Any fraud reported to CG u/s 143 Whether filed by auditor .

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to C.G. (12) in ADT -4
c) Whistle If any complaint Considered or not
Blower
12. Nidhi Co. Applicable only if reporting Co. is
Nidhi Co.
a) Ratio
b) Liquidity

c) Default
Unencumbered (free) term
deposit
i)
dh
Net owned fond : Deposit Ratio

Payment of interest
1:20
Atleast 10%

Details of default
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ii) Repayment of deposit
13. Related Party During the year i) Sec. 177 & 188 complied
Transactions ii) Disclosed in F.S. as per AS
– 18 and Ind As -24
14. Internal Audit i) Commensurate with Size
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System and nature

ii) His report considered by
US.
15. Non- Cash During the with Director/ Sec. 192 complied or not
Transaction unsecured person
(Bartar)
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16. NBFC, HFC, CIC

a) Registratio Require to be registered with RBI Registered or not
n (Sec. 45IA)
b) Transaction NBDC/HFC done any activity With Registration
Ku

without
Registratio
n
c) Core If CIC Continues or exempted  report
Investment
Company
(CIC)
d) If more Report in CARO
than 1 CIC
in 1 group
17. Cash Lasser Co. incurred cash losses Report amount
 this year or

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KUNAL MANDHANIA

(Net loss +  previous year

Depn)
18. Resignation Previous auditor resigned during New Auditor has been taken into
from previous the year consideration
auditor  issues / objection / concern of
outgoing Auditor
19. MURGA On basis of : 1) If no MURGA
i) Ratios 2) Co. can meet its liability in 1
ii) Ageing report Year from B/S date.
(Creditors)
iii) Liability
iv) Info in F.S

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v) Auditors knowledge of
management’s plan
20. Unspent CSR During the year Sec. 135 (5) & (6) complied.

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Unspent (SR u/s 135(6)

Ongoing Activity (1-3 years) Normally

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Transfer to Unspent (SR A/c
withn 30 days

spend within 3 years

transfer to Schedule VII Fund
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if still unspent

transfer to Schedule VII fund

within 30 days

21. Consolidated There has been any qualification / Indicate details and para no. (of
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FS adverse remark in CARO Report of consolidated FS of CARO Report)

consolidated FS.
na
Ku

Page 7|7
 -
Implied representation
% -
Assertions  ImplicitP[ExplicitO
panij
claim by Mgt. while pre paies F.S
-


End
2
MP – COVER HOW TO CHECK

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1. M  Measurement  Transactions  Recorded accurately at proper amt. Check accuracy
 No errors

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 Figures not mis-stated

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2. P  Presentation &  Properly presented and disclosed as per AFRF As per AFRF /Scd III
Disclosure
3. C  Completeness  Supposed to be recorded are recorded Check entry

d
 No omission
4. O  Occurrence  Transition in F.S Occurred during the year Check bills, voucher,

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-
= =>
 No Omission contracts
>

5. V  Valuation  Properly valued Check valuation

6.
7.
E  Existence
R  Rights &
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 No over or under statement
 Asset / liability Equity exist s on B/S date
 Entity has right of ownership or use for assets
Physical verification
Check bill/ voucher
F

Obligation  Liability in F.S presents obligation on entity contract

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8. C  Cut -Off  Reported in correct a/c period Transaction of 1 year not

recorded in otherIvice
Ku

9. O  Other IMP Pts 1) Law 2) A.S 3) S.A 4) CARO 5) ARP ver

-
-
 Assertions

a
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B/S Items - P & L Items

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 
MPCOVER D !
MPCOVER

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.

 

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PC-VER -
MP-COV

How questions
Mcan be .
asked

Capital
l
+ share
na

check Capital
share
⑪ How will you
to check sh-cap
.
procedures to follow
Ku

⑪ what and

⑪ past a audit
programme to check share Capital
 Audit of items of F.S
②

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1) Share Capital (PC-VER)

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To check share capital , verify following assertions
Assertion Basic Language
-W Additional Points
G

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1. Presentation & i) Check whether it is properly P & D Disclosure separately shareholders holding more than 5% of
Disclosure as per Scd III or AFRF total shareholding & number of shares.
-

Check whether any addition IdeletionFor no change, obtain W.K

-

2. Completeness i) R from Mgt.

d
.

=
during year is properly recorded
and there is no omission .

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3. Valuation Check whether it is properly valued.  At Face value
 PUC within limits of authorized Share capital.
 Fees
- and stamp duty properly calculated.
4. Existence
exist as on B/S date.
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Ensure that amount shown in B/S actually  Check share capital register
 Check whether opening balance is matches with close
balance of previous year.
&

 Check resolutions for any changes during the year.

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 Check SH-7, PAS-3
5. Rights &
obligation
- =>
um
 Check share capital Register, copy of resolutions/
agreements.
Ku

⑧ Imp. Pts.
6. Then 1)
⑥ Ensure law related to has been  Companies Act..

properlycalcai
↓
fees a stampduty
one complied.

Go
P
Anets nued
borcourts It show
- at
Fixed
-

-
-
stude
- ↑
am
a # marked recorded
,
as per law
 S Share
-
Capital
-

↓
2 2 2

GRIP-RCF
-

separate
Atleast shareholding
&

Each shareholder ~ 5% disclose

5

5 syns--Preceding
info
=
no 2
amt

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Buy-bad2
:

bonus
paid
.

up

an
&

cash)
each class
.
of
=>

shares
6- Group Co
- >
-

ChISA) -
of year
RI
-
.

Reconcillation
- ols dh
Crestrictions
begining
-
2 end

attack to each
show
.
Rights , Preference
an
C
s

unpaid.

Es
subscribed Paid :
- no- issued , ,

value
P-par change
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pe promoters
- on shareholding a -

OR
Ro
tum decided a
na

convertible sec
Cs

C+ calls unpaid ~
director employees
Ku

shares
Fe Forfited
 surplus
Reeves &
.

scaI or
AFRF .

Pe PRD-
surplus a
-

Check amt of deficit

C-completeness
-
Record >
-
-
--
during
me year- and no whether
properly tif Receiver &
to surplus
.

a
clarification into capital
ve
valuation-properly -
proper .
reserves
-
valued revenue

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closing pobal opens
&
amt shown - last year
Et Existence - I
bal-of C Y-
-

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receives
.

additio
-
in

exist as on -
During year
-
Bis date
- Al propels
- Tree surplus deficit per

dh
-

·
tansten
Dividend announces
share premium all e
BR
. .

utilise
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&
*

XXXXX
Re
Righthia
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2
Sad II .

-
-
Ro
DSX
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① classifications -
-
C xeRS.
SR -

Reserve
>
-
-
-capital
CRR
Ku

.
S-spA
resave.
Revaluation
Re

ore other reserve [nature & .

purpose-specity?
=

DRR- beth market

Do
- see option outstanding
AKEEsopedist
arc Line]
price
&

S -

Su surplus
.

② Receiver
Per ear bale
earmarked - tem on
showedas negative bal
③ surpluse
-
 ④ components - ⑭disclose- separately as
.
(End-AS).
>mark.
(Nov)
-

As
-
-

-- -

B - Balance.
- at beginny .

E T
-
Erro + prior period-adjust -

-
By Re-stated bce
.

I - Income-add
Brident
B
&

traineda
cami
O
p- period

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-

-cannot creati
-

appropriation of 1 notmedy , I no propthe

an
- ,
Reserves
-
profit

Icreate
u

provision ↑
change again methey
to
=

-reser
Revenue
·

-
propt available for
profit
ve
distribution
- of divided
.
dh
earned p some specific
surplus /Propt
an
reserve
Capital
-

↑
type of
transactio

included
-

>
- not available for payment of dividend
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not - includes share numum CRR/DRR/ profit

for
pre -
-

revisue of forpted then / Abet

reserve
- - New reserve .
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Ku
 may &

2) Shares at discount / premium / Sweat Eq. Shares / reduction

Verify / check following assertion
Assertions Shares at discount Shares at Premium Sweat Eq. Shares Reduction of Capital

a
(i) Presentation & As per Sch. III or AFRF As per Sch. III or AFRF As per Sch. III or AFRF As per Sch. III or AFRF

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disclosure
(ii) Completeness Check it is properly Check it is properly Check it is properly Check it is properly
recorded and there is no recorded and there is no recorded and there is no recorded and there is no

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omission omission omission omission
(iii) Valuation D
Check whether it is Check whether it is Check whether it is Check whether it is
&

properly valued and properly valued and properly valued and properly valued and
reduced price/value

d
shown at face value shown at face value shown at face value shown at face value
=

Issue within limits of Reduced

per law
as

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Issue within limits of Issue within limits of Issue within limits of
j

& - -

authorized share capital authorized share capital authorized share capital authorized share capital
-

(iv) Existence  Ensure that amt.  Ensure that amt.  Ensure that amt.  Ensure that amt.
shown in B/S actually shown in B/S actually shown in B/S actually shown in B/S actually
l
 Check opening
balanceS
M
exist as on B/S date.

additions
exist as on B/S date.
 Check openingI
balance additions
exist as on B/S date.
 Check opening
balance;additions
exist as on B/S date.
 Check opening
reduction
balanceI additions
-
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during year capital during year during year during year
share Soc
 Check register &  Check register &
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 Check register &  Check register &
1

resolution copy resolution copy resolution resolution

&

&

(v) Other Imp Pts. Law Law Law Law :- check / verify
Ku

(i) Check Co. Act  Sec. (i) Check Se. 52 (i) Resolution – S.R (i) Resolution – S.R
53 complied complied (ii) Sec. 54 complied (ii) Sec. 66 complied
 (ii) No shares issued at (ii) Ensure that Sec. (iii) Shares issued of (iii) Permission from
discount except (a) premium a/c only class already existing NCLT obtained
sweat Eq. shares (b) used for prescribed (iv) Shares do not (iv) No default in
Debt conversion purpose: (TQ)
- (write exceed 25% of total deposits and A.S .

a
scheme off
E ) off) equity P.U.C (50% in
(write

S
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(iii) B.R passed C :- Commission on issue start up)
(iv) If issuedSvoid P :- Premium on (v) Lockin period – 3
check money redemption years.

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returned with 12 year Disc :- Discount allowed
P.A interest (write off )
Buy :- Buy back

d
·
B :- Bonus shares – issue

- P :- Preliminary exp-

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M Write off
Note: If Co. comply A.S
u/s 133 both ‘P’ above
l M not to be used.
na
Ku
 ① clamify (PPE-types mention)
.
ScdtCARR
-eas
22
Kenos
&
out -
discer
-
3) Fixed Assets / PPE - bet under
A leases separately
-
--

Re Reconcille
- each class-bot I net amt-begus <
end

f
- -

Check following Assertions

Ry Revaluation
-
I'll sys - ① Date Ant&
red figh
>
- -
-

Assertion Basic language Additional pts.

a
(i) Presentation & Check whether properly presented and disclosed as per If reduction / addition, ensure, F.S
disclosure Scd. III, AFREF disclose (i) amt (ii) Date (iii) reduced

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figures for first 5 years
(ii) Completeness Check alIaddition during the year has been properly Only capital expenditures added to cost
No

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recorded · ommission

(iii) Valuation  Check whether asset is properly valued at cost less Only following expenses to be added to
cost (a)
-

depreciation
-

 Check proper depreciation method applied as per (a) Acquisition cost

d
AS-10/ Ind A.S -16 (b) Addition which increase earning
 Verify impairment assessment if asset impaired as capacity

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(c) Long term benefits
in leve's
per AS -28.
be shown (d) Expense to decrease cost of
·
En-lease can amt
Verification
, production
(iv) E – Existence l (i)

(ii)
M
Perform physical variation to ensure that
-

asset of amt shown in B/S actually exist as on

B/S date. I reconcille
Compare1verified asset with recorded asset.1
-

n any
to ensure

(v) R – Rights and Ensure entity has valid ownership right over PPE. With title deeds / purchase invoice /
na
of
obligation Register
.
changes
& copy of contract external
Z
10228 complied If held by banker – obtains confirmation
>
(vi) Other Imp Pts. (i) As  Ensure A.S applied or
- not 10| Ind-AS-16 | AS – 28 1
1
Ku

(ii)
-
SA apply S.A - 501 if asset material to F.S
(iii) CARO  report under CARO Clause (i)
applicable)
=>

Cit
-
-
 Clarication
4) Intangible Asset (Goodwill / Patent/ |T.M / Copyright/ Software, etc) SidIP -

Check following assertions by Mgt. s

Assertion Basic language Additional pts.
(i) Presentation & Check properly presented and disclosed Ensure proper disclosure about carrying amt.

a
disclosure as per Scd. III, AFRE①F amortization method, useful life etc.
(ii) Completeness Check whether all intangible asset  Only purchased goodwill to be recognized * (AS-26)

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-

properly recognized and recorded  Check softwares, patent , T.M and copyright with
No omission in recording of any addition  Active use

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or deletion  Alive
 Active legal life only recognized.
(iii) Valuation Verify that intangible asset properly  Shown after amortization and impaired amt. if any
valued add=> only  Verify amortization method

d
~
recognise
future
eft
 If purchased – purchase consideration, legal fees

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ben and Registration charges to be added.
economic  If internally generated – Legal fees, registration
charges to be added.
(iv) E – Existence Ensure that amt shown in intangible With

M
assets, such assets actually exist as on  copy of contract * Reiter And de
verily
B/S date .  Certificates --
Ensure legal life not expend
(v) R – Rights and Ensure entity has valid ownership right With
l
contract /agreement
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obligation on intangible asset  Invoices / purchase S
 Registers &
certificates
 Quotation , tenders are in name of entity
-

(vi) Other Imp Pts. (1) Law  whether law related  Patent act/ copyright act
Ku

complied
(2) AS – whether AS complied  AS-26, AS -28
(3) CARO – Report under CARO  Clause (i)
·
Cif CARO applicable)
 classing RM/Wip(FS/stock m sTree & Look Good
spaces I
23
① Oct- -- = II -
sedl-- trade Roches .

5) Inventory Ene in
transit-separated disclos
,
-

-
Check following assertions V evaluation
&
methods state
Assertion Basic language Additional pts.

a
(i) Presentation & Check whether properly presented and Goods in transit should be separately disclosed
disclosure disclosed as per Scd. III & AFRF

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(ii) Completeness Check all sale and purchase has been -
* Interdepartment transfer+ proper record
properly recorded.

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(iii) Valuation Check inventory is properly valued.  Valued using FIFO or weighted average method
 At cost or NRV whichever is less. CAS-2)
 R.M – Carriage inward, taxes added.
 W.I.P – exclude abnormal cost

d
2
 F.G- Consider defective, damaged, absolute,
D slow
moving goods to determine NRV.

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(iv) E – Existence Attend physical verification to ensure  Check verification method.
inventory that is shown in record  Perform test count for some
reconcile physically
(v) Other Imp Pts.
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(1) Law – ensure related law complied
(2) AS – Ensure A.S complied
(3) CARO – Report on CAROCif CARO
applicableS
Sales of goods Act
AS -12
& 2

Clause (ii)

(4) S.A – comply SA 501- to ensure D G

existence and condition of inventory
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(5) ARP – Perform ARP to ensure i. Compare with previous years - to determine
reasonableness ii. Inventory turnover ratios
3 unusual or
unreasonable
circums
have

(vi) R – Rights and Ensure entity has ownership right on  Purchase & sale invoice
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obligation entity and held on entity’s name  Transport document External

 PRN/ MRN/ GRN/ confirmatios
·
6) Cash & Cash Equivalent
Perform Audit Procedures to check following assertion
Assertion Basic language Additional pts.

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(i) Presentation & Check properly P & D as per Scd III
balance
Show separately
 Earmarked bad with bank

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disclosure or AFRF
 Bank deposit with more than 12 months
maturity

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(ii)Completeness Ensure that cash and cash Check IOUs are not shown in cash in hand.
equivalent during year are properly -
Obtain bapk statement 2BRs
recorded - Petty cash bash-amt properly record

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(iii) Valuation Ensure cash & cash equivalent has Check BRS to see whether all effects has been
been valued appropriately enteredFont Foreign rates add prei

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2

(iv) E – Existence *Perform surprise checks onO B/S Contract or take confirmation from banks / F.I
-
-

last O
date or verification of cash to and ask then to confirm amount held in current
-open/year ensure cash in hand physically A/c’s, deposit A/c’s, CC A/c’s etc.
-

(v) R – Rights and

obligation
l -

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correspond to that in B/S
Ensure exact amt of cash & cash
equivalent held by entity as per B/S
culificate
Through
 External confirmation
is as per entity name.  Bank statement
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 Certificates
 F.D receipts
bar
classification ① cash in Land ② Bal-wip
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ofsepanety
>
-

sed it ⑤ cheque /preft in hand ⑪

one

disclos Dearmaned bal D As security lamt

.

12 most
um bar -

⑮ Depart
 Assertion Borrowings Current liabilities Trade Loans & advances
Payable
1) Existence Ensure balance appears in B/S is Ensure balance at year end Ensure balance at year
correct
correct by is current
- by correct end is current by
-

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 External confirmation with banks  Ext. confirmation with  Ext. confirmation

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& lenders parties with parties
 Schedule of borrowing  Amt. properly trf. From  Amt. properly trf.
Registers mantels Trial balance. From Trial balance.

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>
-

 Register maintained for  Register maintained

- Board minute
- contact
IT for IT
copy-  Aging report

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2) P & D (Presentation  Check whether properly P & D as Check whether properly P Check whether properly
& Disclosures) & D as per Schd. III and P & D as per Schd. III

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per Schd. III and AFRF
AFRF and AFRF
3) Completeness  Check transaction properly Properly recorded  Properly recorded
computation
Reinnclue
recorded at correct amt.  Discounts, rebates,

propuls
recorded - &
l
I
Aging
-

-BR
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 Check computation
report
Bad
+ debts-
report
Agry
write
·

of
&

properly adjusted
 Bad debts properly
written off.
 Check whether amt. shown in B/S  Check properly valued  Check properly
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4) Valuation
properly valued  Proper distinction into valued
⑰  Ensure limit not exceeded by
>
-

MOA / AOA
short term – long term.
 --
Discount rebates
 Proper distinction
into short term –
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D
⑯  Proper classification long term.
&
-
in long term
>
-
properly adjusted.
/short term ·
Dad debD .

witeif-
-

* Exchange rates forelish carency look

5) Rights & Obligation  Ensure amt. of obligation by way  Purchase invoice  Sales invoice
of borrowing is correct & in name  GST challans to check wo
 GST challans
statement of co. by purchase
conhast copy.
-  Board minutes -
·

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-T
 Agreement / contract copy- > same
- -
 =

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Within borrowing power -
-

 Bank certificate-
1) Law  verify co. has not ARP  Perform to

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6) Other IMP points i) (i) ARP
contravened Sec. 180 ensure (ii) AS-11 for
2) A.S - 11 complied if foreign reasonableness foreign
currency loan ii) AS -11 if foreign currency trade

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3) A.S -18 complied if RPT currency trade receivable

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4) If CARO applicable report under payable. (iii) Inquire u/s
clause
⑭ 143(1) 
B properly
secured
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clause (iii), (iv)
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asset Liabilit
current whes -
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-~ -
①
⑪
 2
↑

-
&

MP-c -

-
Income / Expense
cut-off Docedl
1. Measurement
- - Check whether transaction-
&

date pertains to current year or not

-

2. Presented & - Check such transaction is properly presented & disclosed in P&L as per Sch. III (Part 2)

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=> -

Disclosed
- Check whether transaction is properly①

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3. Completeness recorded by:
- Debiting -
record - Crediting -

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--
4. Occurrence - Check whether transaction has actually occurred during the year by checking
6
C
supportive documents such as ______________

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5. Additional i. Law:
Consideration ii. Cut off procedures

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-

(Other important iii. ARP

-
points) No Sud ITT -
-
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 Oct 22

Sales

-
1. Check ICS Regarding execution of transaction & recording of sale

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2. Ensure Date Pertains to current year or not

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3. Authorisation Check whether transaction is properly authorised by Sales Manager

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4. Recording  Check whether transaction is properly recorded
 Check whether sales return is properly adjusted
⑭  Check all discounts & incentives have been properly deducted

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*  Ensure no fictitious sale is recorded

5. Supportive Ensure occurrence & correctness of transaction from supportive documents such as sales

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invoice, credit note, shipping documents, GST returns. , Delivery challen , way
Documents
⑭ bill
6. Books / Registers Confirm transaction is complete & properly posted by tracing it in Sales Register, Stock

7. Presentation &
Disclosure
⑨
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i. Sale of products ii. Sales of service
- -

Register, Cash Book, Bank Book, Debtor Register, Security Gate Outward Register.
Check whether revenue from operation is properly disclosed as
iii. Other operating revenue
recognition
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8. Other Important i. Cut off procedure
- Asg fo revenue
Points ii. AS – Ensure AS 18 is complied if sales made to related partyI As-11-wonigh exchange ,
iii. ARP – compare sales return : Sales ratio of previous year to ensure genuineness &
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S -

reasonableness of transaction
-

in
common revenues
perfor
lawe SOGA
As-ge revenue
, GST law
recognlich
all - -
-)
 Purchase
1. Check ICS Ordering, procurement & recording of purchase
2. Ensure Date Pertains to current year or not

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3. Authorisation Check whether transaction is properly authorised by Purchase Manager
 Check whether transaction is properly entered

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4. Recording
 Proper bifurcation of revenue & capital purchase

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 Ensure no fictitious purchase is recorded
5. Supportive Ensure occurrence & correctness of transaction from supportive documents such as GRN,
Documents Purchase invoice (Original) (in name of entity), GST invoice , transportation bills.

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6. Books / Registers Confirm transaction is complete & properly posted by tracing it in Purchase Register, Stock

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Register, Cash Book, Bank Book, Creditor Register, Security Gate Inward Register.
7. Presentation & Sch III
Disclosure Stock in trade properly disclosed
8. Other Important
Points
l ii. - M
i. AS – Ensure AS 18 is complied if related party transaction As-11-foreign purchase
Cut off procedure
iii. ARP – Creditor turnover ratio, stock turnover ratio
.

I
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to check genuinenup
In
& reasonablemen
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 Interest / Dividend Income
1. Check ICS Recognizing, receiving & accounting

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2. Ensure Date Pertains to current year or not

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3. Authorisation Check whether transaction is properly authorised by Recovery Manager, Accounts
Manager, CFO

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4. Recording  Check whether transaction is properly recorded
 Check whether interest on# FD – recognized on-time proportion basis- amat
 Dividend – recorded only when right to receive established

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5. Supportive Ensure occurrence & correctness of transaction from supportive documents such as TDS ①

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Documents certificate (26 AS), Investment Certificate, bank statement
-
F

6. Books / Registers Confirm transaction is complete & properly posted by tracing it in Investment register,
bank book. I cash book

7. Presentation &
Disclosure
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Schedule III (Part 1)
Check whether ‘other income’ is classified as – Interest income, dividend income, other
non-operating income
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8. Other Important i. =
Cut off procedure
Points ii. AS – Ensure AS #19 (revenue recognition) is complied
iii. ARP – interest /dividend : Investment Ratio genuineness 2 reasonableness
-
.
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iv. SA 505  External Confirmation from banks & investment company officials
=
 myP-Sep22
-
Employee Benefit Expense (salary, bonus, gratuity, etc.)
1. Check ICS Ascertainment, calculation, payment & accounting

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2. Ensure Date Pertains to current year or not

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3. Authorisation Check whether transaction is properly authorised by HR Manager

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4. Recording Check whether transaction is properly entered
Check whether the expense recorded actually occurred during the year
Check↑ sheet /
calculations computation .

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5. Supportive TDS certificate, Salary slips, attendance record, HR policy manual, calculation sheet,etc.

⑯
Documents

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6. Books / Registers Confirm transaction is complete & properly posted by tracing it in payroll register, cash
book, bank book.
8. Other Important
Points
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i. AS – Ensure =>
AS 15 is complied
ii. Law – provisions of Bonus Act, Gratuity Act, EPF Act, Minimum Wages Act, ESIC Act,
etc Complied
iii. ARP – compare expense incurred during year with previous years
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↓

to ensure & reasonablenes

genuinenes

Depend sops
transaction
of
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salary ⑪ contributio
Site D a ↓ fund
wayes
 study
mobitthuspleaseef
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investment

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①
& amortisation
② Depreciato

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③ Gen-expeRent , travelly .

①
Noti
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sending
once
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questions separately
, Please

check
requirements
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Ad It
⑨ Please study -

separately .
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 Audit Revision Notes – Part 2– Kunal Sir

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Contains – Cp 5 , 10 ,

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CARO , RTP,MTP May

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24 and in End – CARO –

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Quick ref
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Happy Learning – Kunal
Sir
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 ia
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Chapter 5

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Audit of Items of
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Financial Statements-
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Extra questions
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Question
Name the assertion that the auditor will check by

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performing the following audit procedures.

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a) Employees benefit expense in respect of all

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personnel have been fully accounted for.

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b) Discounts on sales has been properly adjusted/
accounted for.

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c) Employee benefit expense recorded during the
l
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period relates to the current accounting period only.
(MTP 3 Marks March ‘23)
Ku
Answer
(a) Completeness

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(b) Measurement

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(c) Cut Off

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l M
na
Ku
Question
Name the assertions for the following audit procedures:

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(i) Year end inventory verification.

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(ii) Depreciation has been properly charged on all

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assets.

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(iii) The title deeds of the lands disclosed in the
Balance Sheet are held in the name of the company.

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(iv) All liabilities are properly recorded in the financial
l
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statements.
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(v) Related party transactions are shown properly.(

RTP Nov’22, MTP 4 Marks Oct ’23)
Answer
i. Year-end inventory verification: Existence Assertion.

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ii. Depreciation has been properly charged on all assets:

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Valuation Assertion.

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iii. Title deed of lands disclosed in the Balance Sheet are
held in the name of the Company: Rights & Obligations

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Assertion.

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iv. All liabilities are properly recorded in the financial
statements: Completeness.
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v. Related party transactions are shown properly:
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Presentation & Disclosure.

Question
You are an auditor of PQR Ltd. which has

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spent Rs. 50 lakhs on Research activities of the

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product during period under audit. Board of

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Directors want to recognize it as an internally
generated intangible asset. Advise and discuss

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the conditions necessary to be fulfilled to

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recognize the intangible assets in the financial
statements. l
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(MTP 3 Marks Oct ’20 & April ‘23)
Ku
Answer
No Intangible asset arising from research (or from the research phase of an internal project)

ia
shall be recognised. Expenditure on research shall be recognised as an expense when it is
incurred since in the research phase of an internal project, an entity cannot demonstrate that

an
an i ntangible asset exists that will generate probable future economic benefits. Thus, board
of directors of PQR Ltd cannot recognize the expense as internally generated intangible asset.

dh
An intangible asset shall be recognised if, and only if:
(i) the said asset is identifiable;

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(ii) the entity controls the asset i.e. the entity has the power to obtain the future
economic benefits flowing from the underlying resource and to restrict the access of others

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to those benefits;
(iii) it is probable that future economic benefits associated with the asset will flow to the
entity; l
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(iv) the cost of the item can be measured reliably.
Ku
Question
XYZ Ltd made huge additions to Intangible assets

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during the period 01-04-2021 to 31-03-2022 i.e

an
period under audit. You have been appointed as

dh
an auditor and you want to verify the additions

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made to intangible assets during the period.
Suggest the audit procedure to verify the additions

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to intangible assets.
l
na
(MTP 6 Marks March 22, Sep 22)
Ku
Answer
1. Verify the movement in the intangible assets schedule (asset class wise like software, designs/ drawings, goodwill etc.) compiled by the
management i.e. Opening balances + Additions – Deletions = Closing balances. Tally the closing balances to the entity’s books of account.

ia
2. Check the arithmetical accuracy of the movement in intangible assets schedule.

an
For additions during the period under audit, obtain a listing of all additions from the management and undertake the following procedures:
(i) For all material additions, verify whether such expenditure meets the criterion for recognition of an intangible asset as per AS 26.

dh
(ii) Ensure that no cost related to research (or from the research phase of an internal project) gets recognized as intangible asset.
(iii) Check the certificate or report or other similar documentation maintained by the entity to verify the date of use of the intangible
which could be linked to date of commencement of commercial production/ economic use to the entity, for all additions to intangible assets
during the period under audit.

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(iv) Verify whether the additions (acquisitions) have been approved by appropriate entity’s personnel.
(v) Verify whether proper internal processes and procedures like inviting competitive quotations/ proper tenders etc. were followed

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prior to finalizing the vendor for procuring item of intangible assets by testing those documents on a sample basis.
(vi) In relation to deletions of intangible assets, understand from the management the reason and rationale for deletion and the
manner of disposal. Obtain the management approval and disposal note authoring disposal of the asset from its active use.
l
na
(vii) Verify the process followed for sale of discarded asset, example inviting competitive quotes, tenders and the basis of calculation
of sales proceeds. Verify that the management has accurately recorded the deletion of intangible asset (original cost and accumulated
amortization up to the date of disposal) and the resultant gain/ loss on disposal in the entity’s books of account.
Ku
Question
While auditing the accounts of ABC Ltd, a member of

ia
audit team is not clear about:

an
(i) the criteria regarding classification of liability into
current liability and non-current liability.

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(ii) Classification of Reserves and Surplus

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You being the senior member of audit team guide the

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member of the audit team about such criteria and
classification as per general instructions for preparation
l
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of balance sheet as per Schedule III.
(MTP 6 Marks April 22)
Ku
Answer
A liability shall be classified as current when it satisfies any of the following criteria:

ia
(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;

an
(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.

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All other liabilities shall be classified as non-current. Reserves and Surplus shall be classified as:
(a) Capital Reserves;

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(b) Capital Redemption Reserve;
(c) Securities Premium;
(d) Debenture Redemption Reserve;

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(e) Revaluation Reserve;
(f) Share Options Outstanding Account;
(g)
l
Other Reserves – (specify the nature and purpose of each reserve and the amount in respect thereof);
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(h) Surplus i.e. balance in Statement of Profit & Loss disclosing allocations and appropriations such as dividend, bonus shares and transfer to/from
reserves etc.
(Additions and deductions since last balance sheet to be shown under each of the specified heads) Note: A reserve specifically represented by earmarked
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investments shall be termed as a ‘fund’.

Note: Debit balance of statement of profit and loss shall be shown as a negative figure under the head ‘Surplus’. Similarly, the balance of ‘Reserves and Surplus’,
after adjusting negative balance of surplus, if any, shall be shown under the head ‘Reserves and Surplus’ even if the resulting figure is in the negative.
Question

Explain how you would verify

ia
an
rent expense incurred by a

dh
Company.

an
l M
(MTP 3 Marks Oct’22, RTP May 19)
na
Ku
Answer
Rent expense can be verified by:

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• Obtaining a month wise expense schedule along with the rent

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agreements.
• Verifying if expense has been recorded for all 12 months and whether the

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rent amount is as per the
underlying agreement.

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• Giving specific consideration to the escalation clause in the agreement to

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verify if the rent was required to be recorded on a straight line basis during the
period under audit.
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Also, verifying if the agreement is in the name of the entity and whether
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the expense pertains to premises used for running business operations of the
entity.
Ku
Question
What are the required disclosures for

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cash & Cash equivalents to be made by

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the company as per Schedule III (Part I)

dh
to Companies Act, 2013?

an
M
(MTP 4 Marks March ’23, RTP May 23,
l
na
PYP 3 Marks Dec’21, New SM)
Ku
Answer
The following are the required disclosures for cash & Cash equivalents to be made by the

ia
company as per Schedule III (Part I) to Companies Act, 2013:
Cash and cash equivalents

an
(i) Cash and cash equivalents shall be classified as:

dh
(a) Balances with banks;
(b) Cheques, drafts on hand;

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(c) Cash on hand;
(d) Others (specify nature)

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(ii) Earmarked balances with banks (for example, for unpaid dividend) shall be separately
stated.
l
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(iii) Balances with banks to the extent held as margin money or security against the
borrowings, guarantees, other commitments shall be disclosed separately.
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(iv) Repatriation restrictions, if any, in respect of cash and bank balances shall be separately
stated.
Question
Discuss the audit procedures generally

ia
required to be undertaken by the auditor

an
while auditing Goods sent out on Sale or

dh
Return Basis.

an
M
(MTP 3 Marks Sep ’23, PYP 3 Marks Nov
l
na
’20, Old & New SM)
Ku
Answer
The audit procedure generally required to be undertaken by the auditor while auditing Goods

ia
sent out on Sale or Return Basis is as under:
(i) Check whether a separate memoranda record of goods sent out on sale or return

an
basis is maintained. The party accounts are debited only after the goods have been sold and
the sales account is credited.

dh
(ii) Verify that price of such goods is unloaded from the sales account and the trade
receivables record. Check the memoranda record to confirm that on the receipt of

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acceptance from each party, his account has been debited and the sales account
correspondingly credited.

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(iii) Ensure that the goods in respect of which the period of approval has expired at the
end of the year, have either been received back or customers’ accounts have been debited.
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(iv) Confirm that the inventory of goods sent out on approval, the period of approval in
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respect of which had not expired till the end of the year lying with the party, has been
included in the closing inventory.
Ku
Question
ABC Ltd. wants to buy some equipment on lease

ia
and hence is required to sign lease agreement

an
with the supplier of the equipment. What are the

dh
important points to be considered in the lease

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agreement?

l M (MTP 4 Marks Sep ‘23)

na
Ku
Answer
The important points to be examined in the lease agreement are:

ia
(i) the description of the lessor, the lessee, the equipment and the location

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where the equipment is to be installed. (The stipulation that the equipment
shall not be removed from the described location except for repairs. For the

dh
sake of identification, the lessor may also require plates or markings to be
attached to the equipment).

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(ii) the amount of tenure of lease, dates of payment, late charges, deposits
or advances etc. should be noted.

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(iii) whether the equipment shall be returned to the lessor on termination of
the agreement and the cost shall be borne by the lessee.
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(iv) whether the agreement prohibits the lessee from assigning the subletting
the equipment and authorises the lessor to do so.
Ku
Question
Depreciation and amortisation expense

ia
generally constitute an entity's significant part

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of overall expenses and have direct impact on

dh
the profit/loss of the entity. What are the

an
attributes, the Auditor needs to consider

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while verifying Depreciation and amortisation
expense. l
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(MTP 4 Marks Oct’23)
Ku
Answer
Depreciation and amortisation generally constitute an entity’s significant part of overall expenses and have

ia
direct impact on the profit! loss of the entity, hence auditors need to verify and ensure that such expenditure is
appropriate, accurately calculated and has been accounted as per applicable provisions of Companies Act or

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other statutes, to the extent applicable on the respective industry and as per generally accepted accounting
principles.
Auditor needs to consider the following attributes while verifying the depreciation and amortisation expense:

dh
• Obtain the understanding of entity’s accounting policy related to depreciation and amortisation.
• Ensure the Company’s policy for charging depreciation and amortisation is as per the relevant

an
provisions of Companies Act! applicable accounting standards.
• Whether the depreciation has been calculated after making adjustment of residual value from the cost

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of the assets.
• Whether depreciation and amortisation charges are valid.
•
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Whether depreciation and amortisation charges are accurately calculated and recorded.
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• Whether all depreciation and amortisation charges are recorded in the appropriate period.
• Ensure the parts (components) of each item of property, plant and equipment that are to be
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depreciated separately have been properly identified.

• Whether the most appropriate depreciation method for each separately depreciable component has
been used.
Question
Explain how you will verify the items given while

ia
conducting an audit of an entity:

an
(a) Recovery of Bad debts written off (RIP May

dh
’22, Nov’21)

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(b) Receipt of Insurance claims (RIP May ’22,

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Nov’21)
l
(c) Payment of Taxes (RIP May ’22, Nov’21)
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Ku
Answer
(a) Recovery of Bad Debts written off: Recovery of bad de
to relevant correspondence and proper authorisation.

ia
(i) Ascertain the total amount lying as bad debts and verify the relevant correspondence with the trade receivables whose accounts were written off as bad debt.
(ii) Ensure that all recoveries of bad debts have been properly recorded in the books of account.
(iii) Examine notification from the Court or from bankruptcy trustee. Letters from collecting agencies or from account receivables should also be seen.

an
(iv) Check Credit Manager’s file for the amount received and see that the said amount has been deposited into the bank promptly.
(v) Vouch acknowledgement receipts issued to account receivables or trustees.
(vi) Review the internal control system regarding writing off and recovery of bad debts
(b) Receipt of Insurance Claims: Insurance claims may be in respect of fixed assets or current assets.

dh
While vouching the receipts of insurance claims-
a. The auditor should examine a copy of the insurance claim lodged with the insurance company correspondence with the insurance company and with the insurance agent
should also be seen. Counterfoils of the receipts issued to the insurance company should also be seen.
b. The auditor should also determine the adjustment of the amount received in excess or short of the value of the actual loss as per the insurance policy.
c. The copy of certificate/report containing full particulars of the amount of loss should also be verified.

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d. The accounting treatment of the amount received should be seen particularly to ensure that revenue is credited with the appropriate amount and that in respect of claim
against asset, the Statement of Profit and Loss is debited with the short fall of the claim admitted against book value, if the claim was lodged in the previous year but no entries were
passed, entries in the Statement of Profit and Loss should be appropriately described.
(c) Payment of Taxes:

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a. Obtain the computation of taxes prepared by the auditee and verify whether it is as per the Income Tax Act/GST Act/ Rules/ Notifications/ Circulars etc.
b. Examine relevant records and documents pertaining to payment of advance income tax and self assessment tax.
c. Payment on account of income-tax and other taxes like GST consequent upon a regular assessment should be verified by reference to the copy of the assessment order,
notice of demand and the receipted challan acknowledging the amount paid.
d.
l
The penal interest charged for non-payment should be debited to the interest account.
na
e. Nowadays, electronic payment of taxes is also in trend. Such electronic payment of taxes by way of internet banking facility or credit or debit cards shall also be verified.
f. The assessee can make electronic payment of taxes also from the account of any other person. Therefore, it should be verified that the challan for making such payment is
clearly indicating the PAN No./TAN No./TIN No./GSTIN etc. of the assessee on whose behalf the payment is made.
Ku
Question
CA Saurabh is the statutory auditor of UVW

ia
Ltd. for the FY 20 -21. While verifying the

an
purchases made by UVW Ltd., CA Saurabh

dh
decided to perform analytical procedures to
obtain audit evidence regarding the overall

an
reasonableness of purchase quantity and price

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of purchases. What analysis should CA
l
Saurabh perform?
na
(RTP May ’23)
Ku
Answer
CA Saurabh should perform following analytical procedures to obtain audit

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evidence as to overall reasonableness of purchase quantity and price:

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(i) Consumption Analysis: He should scrutinize raw material consumed as
per manufacturing account and compare the same with previous years with

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closing stock and ask for the reasons from the management if any significant
variations are found.

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(ii) Stock Composition Analysis: He should collect the reports from
management for composition of stock i.e. raw materials as a percentage of total

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stock and compare the same with previous year and ask for reasons from
management in case of significant variations.
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(iii) Ratios: He should compare the creditors’ turnover ratios and stock
turnover ratios of the current year with previous years.
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He should review quantitative reconciliation of closing stocks with opening

stock, purchases and consumption.
Question
(b) A junior accountant of a limited company has not

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separated transactions of one period from those in the

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ensuing period. As an Auditor, state the correct

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procedure to be followed and the areas in which it can
be applied. (RTP Nov ’23)

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Answer
(b) Cut-off Arrangement:

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1. Accounting is a continuous process because the business never comes to halt. It is, therefore, necessary
that transactions of one period would be separated from those in the ensuing period so that the results of the

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working of each period can be correctly ascertained. The arrangement that is made for this purpose is
technically known as “cut-off arrangement”.

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2. It essentially forms part of the internal control system of the organisation.
3. Accounts, other than sales, purchase and inventory are not usually affected by the continuity of the
business and therefore, this arrangement is generally applied only to sales, purchase and inventory.

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4. The auditor satisfies by examination and test-checks that the cut-off procedures are adequately
followed and ensure that:

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(i) Goods purchased, property in which has already been passed on to the client, have infact been
included in the inventories and that the liability has been provided for in case credit purchase.

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(ii) Goods sold have been excluded from the inventories and credit has been taken for the sales. If the value of
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sales is to be received, the concerned party has been debited.
5. The auditor may examine a sample of documents, evidencing the movement of inventory
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into and out of stores, including documents pertaining to period shortly before and after the cut-off date and
check whether inventories represented by those documents were included or excluded as appropriate during
inventory taking for perfect and correct presentation in the financial statements.
Question
M/s MP & Co, Chartered Accountants, have

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been appointed as auditors of LMP Private

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Limited. The partner of the firm asked the

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Audit assistant to carry out the 'examination-

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in- depth' of the payment made to a creditor.

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Advise him about the documents to be
verified. l
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(RTP Nov ’23)
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Answer
Examination – in depth of the payment made to creditor: The Audit

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Assistant of M/s MP & Co., should verify the following documents of

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LMP Private Limited in case of payment to a creditor is to be verified
“in depth”:

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(i) The invoice and statement of account received from the
supplier.

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(ii) The entry in the inventory record showing that the goods were

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received.
(iii) The Goods Received Note and Inspection Certificate showing
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that the goods on receipt were verified and inspected.
(iv) The copy of the original order and authority showing that the
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goods in fact were ordered by an authority which was competent to

do so.
Question
While auditing books of accounts of SOLAR

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Ltd., you observed that an amount due from

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a debtor for invoice issued on 31.03.2022
has not been recognized in the books of

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accounts. As an auditor, you want to ensure

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that all trade receivable balances that are
supposed to be recorded have been
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recognized in the financial statements. How
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will you achieve the stated objective?
(PYP 3 Marks Nov 22)
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Answer
Audit of Trade Receivable:

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All Trade receivable balances that were supposed to be recorded have been

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recognized in the financial statements. (COMPLETENESS): The auditor needs to
satisfy himself of the cut-offs. Without a cut-off, sales could be understated or

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overstated, hence there is a need to perform the following cut off procedure:
(a) For the invoices issued during the last few days (last 5 days of the

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reporting year) i.e. cut-off date and which have been included in the debtors;
check that the goods should have been dispatched and not lying with the

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Company;
(b) Ensure that all goods dispatched prior to the period/ year-end have been
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invoiced and included in debtors on a test check basis;
(c) Ensure that no goods dispatched after the year- end have been invoiced
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and included in debtors for the period under audit.

Question
A Ltd. has traded for 50.00 Lacs in "TETRA", a

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virtual currency, during the F.Y. 2021 -2022 and

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earned a profit of 20.00 Lacs on it. What

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disclosure requirements are prescribed for

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such type of transactions done by the

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company?
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Answer
Disclosure of Crypto Currency or Virtual Currency:

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Where the Company has traded or invested in Crypto

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currency or Virtual Currency during the financial year, the

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following shall be disclosed:
(a) profit or loss on transactions involving Crypto currency or

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Virtual Currency

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(b) amount of currency held as at the reporting date,
(c) deposits or advances from any person for the purpose of
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trading or investing in Crypto Currency/ virtual currency.
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Question
X Ltd. is a hardware manufacturing

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company. At each and every stage of

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production processes, large amount of

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scrap is generated in the factory and

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subsequently sold. As an auditor how

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will you vouch/ verify the sale of scrap?
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(3 Marks May ’23, RIP May ’22, RIP
Nov’21, Old & New SM)
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Answer
Vouching/Verification of the Sale of Scrap by Auditor would be undertaken as under:

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(i) Review the internal control as regards generation, storage and disposal of scrap.

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(ii) Check whether the organization is maintaining reasonable record for generation of
scrap.

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(iii) Analyze the raw material used, production and generation pattern of scrap and
compare the same with figures of earlier year.

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(iv) Check the rates at which scrap has been sold and compare the rate with previous year.
(v) Vouch sales with invoices raised, advertisement for tender, rate contract with scrap

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dealers.
(vi) Ensure that there exists a proper control procedure to identify scrap and good units
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and they are not mixed up and sold as scrap.
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(vii) Make an overall assessment of the value of realization from scrap as to its
reasonableness.
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Question
2. Obtaining trade receivables ageing report

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and analysis and identification of doubtful debts is

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performed

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during audit of accounts receivable balances to
address the following balance sheet assertion:

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(a) Valuation

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(b) Rights and obligations
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(c) Existence
(d) Completeness (MTP 1 Marks March 22)
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Question
3. is a possible obligation that arises from the

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past events and whose existence will be confirmed

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only by the occurrence/ non occurrence of one or

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more uncertain future events not wholly within

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the control of the entity:-
(a) Provisions
(b) Reserves l M
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(c) Contingent Liabilities
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(d) Liability (MTP 1 Mark April 22, Oct’20, Sep 22)

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Question
5. Cut-off testing is performed during audit of

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sales to address the following assertion:

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(a) Occurrence

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(b) Measurement

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(c) Cut-off

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(d) Accuracy (MTP 1 Marks April ’23)
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Question
6. are charges against profits to provide for

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known liabilities for which amounts cannot be

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determined with accuracy

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(a) Contingent Liabilities

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(b) Provision

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(c) Securities Premium Reserve.
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(d) Liabilities (MTP 1 Marks April ’23)
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Question
7. Financial statements of a company have been put up for audit

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before the auditor. On going through financial statements, he wants

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to verify some major bills debited in “Machinery repair” account. The
purpose of it is to ensure that bills are entered correctly and their

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classification is proper.
As regards verification of bills debited in “Machinery repair” account,

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identify what he intends to perform?

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(a) Tests of Controls
(b) Tests of transactions
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(c) Tests of balances
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(d) Risk assessment procedures (MTP 1 Mark Sep ’23)

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Question
8. The securities premium account may be

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applied by the Company for which of the following

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purpose:

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(a) payment to creditors for material

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(b) purchase of fixed assets

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(c) repayment of loans
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(d) writing off the preliminary expenses (MTP 1
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Mark Sep ’23)
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Question
9. During the audit of sales, the auditor found

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that recorded sales represent goods which were

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ordered

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by valid customers and were dispatched and invoiced in
the period. The auditor is addressing which of the

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following assertions:

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(a) Occurrence
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(b) Measurement
(c) Cut-off
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(d) Accuracy (MTP 1 Mark Sep ’23)

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Question
10. ABC Ltd is engaged in manufacturing of fabrics from yarn

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purchased from different suppliers. Occasionally, it also manufactures

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fabrics tailor made in accordance with requirements of certain mills
from yarn received from these mills. ABC Ltd raises bills of its labour

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charges only on mills for converting yarn into fabrics. The auditor of
ABC Ltd tries to ensure that stocks of the company as at year end do

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not include stocks pertaining to these mills. Which assertion auditor
tries to verify in above situation:

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(a) completeness
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(b) Occurrence
(c) rights and obligations
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(d) cut -off (MTP 1 Mark Sep ’23)

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Question
14. ABC Limited is engaged in manufacturing of electric two-wheelers.

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During the year, a customer has gone to court due to incident of fire

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in battery-operated vehicle. The damages claimed are to tune of `5
lakhs. The company insists that this incident was due to improper

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charging of battery and has nothing to do with manufacturing design
of vehicle. The company’s lawyers advise that it is probable that

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company is not likely to be held liable. It is likely to be reflected in
financial statements of company under?

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(a) Provisions
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(b) Reserves
(c) Contingent liabilities
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(d) Other current Liabilities (RTP Nov ’23)

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Chapter 10

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Audit of diff types

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of entities
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GOVERNMENT

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AUDIT

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Kunal Mandhania
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 Government Audit
Meaning Legal framework & Comptroller & Auditor General

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Audit of Basic points Duties of CAG Powers of CAG
government

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CAG is head of Indian Audit & Accounts Dept. 1. Compile & submit account of union / state 1. Can enter any
enterprises (IAAD) Union – to President government enterprises
1. Appointed by: President of India State – to Governor
a)Government 2. Tenure :
2. Can ask information &
UT – administrator of UT

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company 6 years of service or
explanation from any
2. Conduct audit of government receipt & expense government official
Personal age of 65 years w.e.e.
b)Government 3. Status :
duty of CAG to audit all receipts & expenses
3. Can inspect, take
department payable into consolidated funds of India/ State/
abstract & copies of BOA

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Equivalent to supreme court judge
UT
c) Government 4. Remuneration: 4. Can shift BOA to any
Equivalent to supreme court judge 3. Audit of entity substantially financed by govt.
cooperation Conditions to be satisfied: other specific place
5. Removal:
5. Any other duty as

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Proven misconduct + 2/3 majority of a) it receives atleast 25 lakh from govt
members of both houses of parliament b) such money covers atleast 75 % of its expense specified by CG
6. Article 149: 4. Conduct audit of government grants & loans 6. Appoint auditor of
states duties & powers of CAG to be where any loan/ grant for specific purpose from government company
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performed as per law CFI 7. Conduct test audit &
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7. Article 150: 5. Conduct audit of government stock & stores supplementary audit
account of union / state be kept in form 6. Appoint auditor of government company & NOTE: CAG can conduct
prescribed by president on consultation Corporation u/s 139 supplementary audit within
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with CG 7. Conduct test audit & supplementary audit

8. Article 151:
60 days of receipt of AR u/s
reports of CAG of union / state to be 143(6)
submitted to president / governor before
parliament / state legislature
 Question

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(c) Explain the meaning of Government Audit and also discuss its
objectives.

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(4 Marks) (MTP Oct. 22)

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 Answer

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(c) The U.N. Handbook on Government Auditing and Developing Countries defines government
auditing in a comprehensive manner which is as follows:
Government Audit is the objective, systematic, professional and independent examination of
financial, administrative and other operations of a public entity ,made subsequently to their

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execution for the purpose of evaluating and verifying them, presenting a report containing
explanatory comments on audit findings together with conclusions and recommendations for
future action by the responsible officials and in the case of examination of financial statements,

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expressing the appropriate professional opinion regarding the fairness of the presentation.
OBJECTIVES of the Govt Audit are :
1. Accounting for Public Funds: It serves as a mechanism or process for public accounting
of government funds.

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2. Appraisal of Govt. Policies: It also provides public accounting of the operational,
management, programme and policy aspects of public administration as well as accountability
of the officials administering them.
3. l
Corrective Actions: Audit observations based on factual data collection also serve to
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highlight the lapses of the lower hierarchy, thus helping supervisory level officers to take
corrective measures.
4. Administrative Accountability: The main objective of audit is a combination of ensuring
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accountability of administration to legislature and functioning as an aid to administration

 Question

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152. Article 151 requires that the reports of the C&AG

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relating to the accounts of the Union/State shall be
submitted to the _______ who shall cause them to be

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laid before House of Parliament/State Legislature

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(a) President/Governor
(b) Prime Minister/ Chief Minister
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(c) Union Finance Minister/State Finance Minister
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(d) Union Cabinet

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 Question

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1. Examine with reasons (in short) whether the following
statements are correct or incorrect :

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(vii) The Constitution of India contains no specific provisions
regarding the appointment, salary and duties and powers of the

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C&AG. Moreover, the constitution does not guarantee the
independence of the C&AG of India.

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(MTP Apr. 22) (2 Marks)
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 Answer

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(vii) Incorrect: The Constitution of India contains specific
provisions regarding the appointment, salary and duties and

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powers of the C&AG. The constitution guarantees the
independence of the C&AG of India by prescribing that he shall

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be appointed by the President of India and shall not be removed
from office except on the ground of proven mis-behaviour or

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incapacity.
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 Government Expenditure Audit
Audit against rules & orders Audit of Audit against Propriety Audit Performance Audit

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Sanctions provision of funds 1. Whether government
1.Deals with IWA i.e.
1. Whether programs have achieved
1.Expenditure as per rules / Check whether:

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I-improper Expenditure; even
desired objectives at lowest
expenditure though incurred in
regulations / orders issued was 1. Provision / W-wasteful conformity with cost and intended benefits
by competent authority 2. It includes 3E
sanctioned appropriation A- avoidable rules
a)Efficiency audit:

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2.The above said rules / (general/ 2. wasteful – eg. Building
special) made whether desired result
orders may fall into constructed for installing achieved
2. Whether it 2. Expenditure
following categories: was telephone exchange but
b)Economy audit:
made as per - whether govt acquired

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a) power to incur & sanction sanctioned by
provision not used for the same financial, human & physical
expense from CFI competent
authority 3. Avoidable – eg. Schools, resources in an economical
b) dealing with mode of 3. In case of manner
colleges made but not

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claims against govt, under or over - sanctioning authority &
withdrawing money from used for years spending authority & have
provisioning observed economy
CFI & Public account of GOI 4. Improper – eg. CWG scam
whether c)Effectiveness audit:
/ states
l applicable rules
5. General Rules for - appraisal of performance
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c) regulating condition of expenditure to of schemes, project w.r.t.
are complied or overall targeted objectives
serices pay, allowances, Government Employees - whether all resources
not 
pensions.
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were optimally utilized

3.Check whether rules & See Next Slide
orders are complied
 General Rules for expenditure to Government Employees

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No hard & fast rule for standards of financial propriety ; but auditor

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shall check
a)Expense prima facie not more than what occasion demands

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b)Power not sanctioned for own advantage

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c)Expense done in same vigilance as man of ordinary prudence
would do

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d)Re-imbursement not result into profiteering
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e)Public money not utilized for benefit of particular person or section
of persons
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 Question

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6. (b) Audit of government expenditure is one of the major
components of government audit conducted by the office of C &

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AG. The basic standards set for audit of expenditure are to
ensure that there is provision of funds authorised by competent

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authority fixing the limits within which expenditure can be
incurred. Explain those standards.

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(RTP Mar 23)
l (MTP Apr. 22) (4 Marks)
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 Question

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153. _________ aims at ascertaining that the

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expenditure incurred has been on the purpose for which
the grant and appropriation had been provided and that

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the amount of such expenditure does not exceed the
appropriation made.

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(a) Audit against provision of funds
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(b) Propriety audit
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(c) Audit of sanctions

(d) Audit against rules and orders
 Answer

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 Question

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2. is conducted to ensure that the various programmes,
schemes, and projects where large financial expenditure have

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been incurred are run economically and are yielding results
expected of them:-

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(a) Propriety audit
(b) Audit against Rules and orders

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(c) Performance Audit
(d) Audit against Provision of funds
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 Question

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3. While conducting audit against provision of funds, the statutory
auditors, M/s Suresh Rana & Associates must check:-
(a) That each item of expenditure is covered by a sanction either

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general or special of a competent authority.
(b) That the expenditure incurred has been on the purpose for

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which the grant and appropriation has been provided and the
amount of expenditure does not exceed the appropriation made.

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(c) That the expenditure conforms to the relevant provision of the
constitution.
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(d) That the expenditure is in accordance with the financial rules,
regulations and orders issued by the competent authority.
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 Answer

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 Question

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4. Which part of expenditure audit covers the scrutiny of the
expenditure incurred on the construction of stockyard by the

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company which is considered as infructuous and avoidable by CA
Suresh Rana?

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(a) Propriety Audit
(b) Audit against provision of funds

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(c) Audit of sanctions
(d) Performance Audit
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 Answer

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 Question

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2. aims at ascertaining that the expenditure incurred has been on the

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purpose for
which the grant and appropriation had been provided and that the amount of
such expenditure does not exceed the appropriation made.

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(a) Audit against provision of funds
(b) Propriety audit

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(c) Audit of sanctions
(d) Audit against rules and orders

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(RTP Mar 23)

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 Government Audit
Audit of receipts Audit of stock & stores Audit of commercial A/c Reporting requirements

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1.Internal Checks Check whether: Commercial A/c are classified as 1.CAG shall report on account of
imposed for 1. IC over purchase, receipt, issue under: a) union – to President

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prompt detection of stores is proper a) Departmental enterprises b) state – to Governor
of irregularities 2. Communication deficiencies in engaged in commercial & 2.The report should be publicized
2.Proper accounting ICS to govt trading operations adequately to create proper

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of demands 3. Audit of purchase of stores b) Statutory bodies, climate of public opinion for taking
collection conducted same as audit of corporations, mostly remedial action where necessary
3.Effective check on expenditure financed by govt. in form of 3.CAG is allowed to make

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assessment, 4. Prices paid reasonably loans, grants, etc recommendation in AR; but
collection, 5. Examine uneconomical c) Government company set traditionally this is done by Public
allocation of purchases & losses up under Companies Act Account Committee

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revenue 6. Certificate of quality & quantity 2013 4.Contents of AR given by CAG
4.Revenues by expert a) introduction containing general
correctly realized 7. Account of receipts, issues, • Functions, norms & review of working results of govt
& credited to govt
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balances are CAV (complete, standards of work of public enterprise
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account accurate & valid) enterprises are usually b) results of comprehensive
5.There is no 8. Valuation of stock proper or not followed by professional appraisals of selected undertaking
leakage of 9. Attend physical verification auditors resume of company AR submitted
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revenue • Compilation of account of under directions issued by CAG &

public enterprises vest with that of comments on Account of
CAG govt co.
 Question

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6. (b) Audit against rules and orders aims to ensure that the
expenditure conforms to the relevant provisions of the

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Constitution and of the laws and rules made thereunder. The job
of audit is to see that these rules, regulations and orders are

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applied properly by the subordinate authorities. It is, however,
not the function of audit to prescribe what such rules,

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regulations and orders shall be. Analyse and Explain
l (4 Marks) (MTP Sep. 22)
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(MTP Apr. 22) (4 Marks)
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 Answer

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(b) Audit against Rules & Orders - Audit against rules and orders aims to ensure that the expenditure conforms to the relevant
provisions of the Constitution and of the laws and rules made thereunder. It also seeks to satisfy that the expenditure is in accordance with
the financial rules, regulations and orders issued by a competent authority. These rules, regulations and orders against which regularity
audit is conducted mainly fall under the following categories:
(i) Rules and orders regulating the powers to incur and sanction expenditure from the Consolidated Fund of India or of a State (and

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the Contingency Fund of India or of a State);
(ii) Rules and orders dealing with the mode of presentation of claims against government, withdrawing moneys from the
Consolidated Fund, Contingency Fund and Public Accounts of the Government of the India and of the States, and in general the financial
rules prescribing the detailed procedure to be followed by government servants in dealing with government transactions; and
(iii) Rules and orders regulating the conditions of service, pay and allowances, and pensions of government servants.

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It is the function of the executive government to frame rules, regulations and orders, which are to be observed by its subordinate
authorities. The job of audit is to see that these rules, regulations and orders are applied properly by the subordinate authorities. It is,
however, not the function of audit to prescribe what such rules, regulations and orders shall be. But, it is the function of audit to carry out
examination of the various rules, regulations and orders issued by the executive authorities to see that:
(a) they are not inconsistent with any provisions of the Constitution or any laws made thereunder;

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(b) they are consistent with the essential requirements of audit and accounts as determined by the C&AG;
(c) they do not come in conflict with the orders of, or rules made by, any higher authority; and
(d) in case they have not been separately approved by competent authority, the issuing authority possesses the necessary rule-
making power.
Audit of expenditure against regularity is of a quasi-judicial type of work performed by the audit authorities. It involves interpretation of
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the Constitution, statutes, rules, regulations and orders. The final power of interpretation of these, however, does not vest with the C&AG.
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 Question

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151. Public enterprises are required to maintain commercial accounts
and are generally classified under three categories. Which of the

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following is not a category relating to above:

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(a) departmental enterprises engaged in commercial and trading
operations, which are subject to the same laws, financial and other
regulations as other government departments and agencies;

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(b) statutory bodies, corporations, created by specific statutes mostly
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financed by government in the form of loans, grants, etc.; and
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(c) government companies set up under the Companies Act, 2013.
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(d) Charitable Trusts.

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Question

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158. After a Government expenditure has been

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incurred and the accounts are closed, the
Appropriation Accounts are prepared which are

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scrutinised by the

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(a) CAG
(b) President l
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(c) Public Accounts Committee
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(d) Parliament
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 Question

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7. The office of C&AG conducted audit in state of Gujarat to assess whether
system for enforcement of the
provisions of the Air (Prevention and Control of Pollution) Act,1981 was

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efficient and effective. It also evaluated whether various schemes and
initiatives taken by state government for abatement for air pollution were
adequate. Besides, it also assessed adequacy of human resources in State

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pollution control Board to regulate and monitor air pollution.
Which of the following terms best exemplifies such audit carried out by
C&AG?

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(a) Propriety audit
(b) Audit of sanctions
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(c) Audit against rules and orders
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(d) Performance audit
(1 Mark) (MTP Oct. 22)
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Co-operative Society Act

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 Audit of Cooperative Societies

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Cooperative Societies Act, Multi-state Cooperative
1912 Societies Act, 2002

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Features Audit of Reporting Features of Special Inquiry &

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cooperatives Requirements MSCS Audit of Inspection
MSCS

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Note: here we will study provisions of
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‘Central Cooperative Societies Act, 1912’
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 Provisions of Cooperative Societies Act

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1 Qualifications of Auditor CA as per CA Act.

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(+)
Person holding diploma in Cooperative A/c /

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cooperation / Accountancy
(+)

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Person served as auditor in cooperative
department

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2 Appointment of Auditor Sec 17
Appointed by  Registrar of Cooperative Society
l Conducts Audit  on behalf of Registrar
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Submits Report to  Registrar + Society
Audit fees  Prescribed by – registrar
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 Paid by – Society
 Provisions of Cooperative Societies Act

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3 Books of accounts

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Statute Registrar’s Instruction
Sec. 43(h) of Central Act May issue instructions for maintaining BOA &

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State Government can frame rules other records depending upon nature &
prescribing BOA to be kept object of Society

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Eg. MH Co-operative Society – maintain Eg. BOA + Registers (Such as)
BOA as per Registrar’s instruction as MASC - Property Register

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follows: - Investment Register
M – money received / expended - FD Register
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A – Assets & liabilities - Loan Disbursement
S – Sales & purchases of goods Register
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C – Cash book - Surety Register, etc

 Provisions of Cooperative Societies Act

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4 Restrictions on

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Shareholding Sec 5 Loans Sec 29 Borrowings Other transactions with
Individual members cannot i. Can give loan only Sec 30 non-members Sec 31

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hold more than to members
i) Can be taken Subject to prohibition &
a) 20% of total no. of ii. Can give to other
from anyone restriction, if any prescribed

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shares registered society
(member or by SG
or on special sanction
non-member)
b) value of shares upto Rs. of registrar

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ii) Auditor shall
1000 iii. The SG may put
examine such
- No limit for registered such restrictions as
society being members l required in interest
bye-laws
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- State Act, may provide of society & its
other limits than that of members
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Central Act
 Provisions of Cooperative Societies Act
5 Investment of Funds Sec. 32

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A registered Society may invest or deposit its fund

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i. In central / State co-operative bank
ii. In securities specified in section 20 of Indian Trust Act, 1882
iii. In shares / bonds / debentures of other Society with limited liability

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iv. In any co-operative bank as approved by registrar (other than central or state co-operative
banks)

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v. In any other moneys permitted by CG/SG
6 Appropriation of Funds Sec 33

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i. Transfer atleast 25% of net profit to Reserve Funds, before distribution of dividend & bonus to
members
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ii. In case of poor financial position of society; Registrar may reduce transfer amount but not
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more than 10%
iii. Unlimited liability Society can distribute profits only after obtaining general / special order of
Ku

SG
 Provisions of Cooperative Societies Act
7 Charitable Contribution Sec. 34

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After taking consent (sanctioning) from registrar

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(+)
Transfer of reserve


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Can contribute not more than 10% of NP for any charitable purpose as per Sec. 2 of Charitable
Endowments Act, 1890

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8 Investment of Reserve Funds Outside the business
Some State Acts provide that society may use Reserve Fund:

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i. In business of society, as working capital
ii. May invest as per provisions of the Act
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iii. May not be used for some public purpose likely to promote the object of the society
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9 contribution to Education Fund
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i. It is charge on profits & not appropriation

ii. Some state Acts provide that society shall annually contribute to Education Fund of state
Federal Society, at rates applicable as per class of the society
 Provisions of Cooperative Societies Act

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Some other considerations

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a) Appropriation of profits must be approved by the General body
b) Necessary accounting entries appropriation of profit must be passed after date of approval by
general body

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 Question
AB Co-operative Society has net profit of Rs. 100,000 for the year end 31st March 2020. Advise the

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society as to minimum transfer to reserve funds. The society is in the view that it can contribute 20%
of net profits to Charitable Institutions. Discuss whether Society is correct.

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Would your answer as to transfer to Reserve Funds be different in case of poor financial position of
the society??
Solution

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i. As per Sec. 33 of Central Act, Co-operative Society must compulsorily transfer atleast 25% of the
net profit to reserve funds before distribution of dividend or bonus to members.

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In Present Scenario;
Net Profit  1,00,000

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25% of NP  25,000
Thus AB Co-operative society must transfer atleast Rs. 25,000 to the Reserve Funds
ii. As per Sec. 34of the Central Act; a registered society with sanction of registrar, contribute an
l
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amount not exceeding 10% of net profit remaining after compulsory transfer to the reserve
funds for any charitable purpose
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i.
ii.
Question

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In Present Scenario;
Net Profit  1,00,000

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less: 25% transfer to Reserve Funds 25,000
Remaining Net profit  75,000


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10% of remaining Net profit 7,500
Thus AB Co-operative society can contribute maximum Rs. 7,500 (10%) for charitable purpose;
hence wrong in its assumption to contribute 20% of Net profit

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iii. In case of poor financial position of Society; the registrar may reduce the transfer percentage
nut not less than 10% of net profits. Hence, if AB Co-operative Society is in poor position then it

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has to transfer minimum Rs. 10,000 (10% X 100000) to reserve funds

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 Salient Features of Audit of Cooperative Societies
1. Overdue Debt: ensure the following

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i. overdue debts classified as: (a) upto 6 months
(b) 6 months – 5 years

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(c) more than 5 years
ii. Chances of recovery

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iii. Adequate provision for doubtful debts
iv. Analyse % of debt to working capital

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2. Overdue interest
i. It is the interest accrued / accruing in account w.r.of overdue debt

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ii. Verify: a) overdue interest excluded while calculating profit
b) overdue interest reserve created or not
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c) reserve the overdue interest credited to interest a/c
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3. Certificate of Bad debts:
i. bad debts can be written off only when certified as bad by auditor, if required by
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auditor
ii. If not required, managing committee must authorize
 Salient Features of Audit of Cooperative Societies
4. Valuation of assets & liabilities:

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No specific provision under Act/ Rules
I. ASSETS:

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a) ascertain existence, ownership & valuation of assets
b) fixed assets valued at- Cost

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less: Depreciation Provision
incidental expenses must be capitalized

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c) if there is Significant difference in original cost & present market value; must be
noted in FS.

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d) Current Assets valued at cost or market price, w.e.less
II. LIABILITIES:
ensure all known liabilities are brought into account & Contingent liabilities are
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stated as note
5. Adherence to Co-operative Principles:
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Verify whether:
 Salient Features of Audit of Cooperative Societies
4.

5. Adherence to Co-operative Principles:

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Verify whether:
a) objective of co-operative accomplished

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b) modern methods of cost accounting like variance analysis
c) expenses incurred economically

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d) principles of propriety audit should be followed
6. Infringing statutory compliance:

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auditor must properly assess the financial implications of such infringement & report
the same eg. Some state acts restrict dividend payment; must be noted by auditor

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7. Members register / Pass book:
examine entries in such books for loans given & their repayments & ensure entries
are free of manipulation
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8. Audit classification of society:
a) assess overall performance  award a class to society  based on criteria specified
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by registrar
b) if management not specified with class awarded  appeal to registrar
 Salient Features of Audit of Cooperative Societies
8. Audit classification of society :

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Discussion with managing committee:
auditor must discuss draft audit report with Managing committee before finalizing

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the same

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 Reporting Requirements of Cooperative Societies
Audit Report Additional Information Special Report to Registrar

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Submission: To Society & copies to authorities Attached as schedules to AR i. For drawing attention of registrar
such as District Special Auditor, Deputy Registrar, regarding the following- Serious CBI towards serious irregularities

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etc Matters ii. Registrar may take necessary
Form: as prescribed by registrar S – Sums not accounted; which actions
Contents: state whether should have been accounted iii. Illustrative list of instances

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I – Information & Explanation required by Act C – Contrary transactions as to requiring special report
A – accounts give information required by act provisions of Act/ Rules/ Bye-laws a. Personal profiteering by
B – BOA properly maintained B – Property appears to be bad or managing committee

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B – B/s & P&L in conformity with BOA doubtful of recovery b. Detection of fraud w.r.t.
P&L – gives True & Fair view I – any material Irregularity / expenses, purchases, stores,

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B/s – gives True & Fair view Impropriety expenditure etc.
Audit Report to chairman of society M – other matter specified by c. Mis-mgt for say, mgts decision
a) AR in narrative form submitted to chairman Registrar against society’s principles
b) Narrative AR divided into l Audit Memo: Set of Questionnaire d. Dis-proportionate advances to
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Part I- Comparative Financial Position, answered by auditor vested interested groups, like
Solvency & Profitability of society i.e. a) General Questions: applicable to relative of mgt
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comments on working of Society all types of societies e. Reckless advancing where mgt
Part II- Comprises observations of Routine b) Society Specific Questions: is negligent about taking
Nature applicable for a particular type of adequate security
society. Drafted in detail
 Multi-State Cooperative Societies Act, 2002
Features of MSCS:

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1. Books of Accounts
as per act, every MSCS shall keep BOA w.r.t.

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a) Money expended / received
b) assets liabilities

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c) sale / purchase of goods
d) if MSCS engaged in production, manufacturing, processing, then books relating to utilization

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or materials or labour
2. Qualification of Auditors (Sec. 72)

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CA as per CA Act, 1949
3. Disqualification of Auditor (Sec. 72) Shortcut: BIG_E
a) Body corporate
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b) Person Indebted or MSCS
Guarantee or > 1000
Security for 3rd person
Ku

c) officer or Employee of MSCS OR person in employment of employee of MSCS

* If disqualified by virtue of above points, cannot be appointed as auditor of any other body corporate/ MSCS/ Co-operative
 Multi-State Cooperative Societies Act, 2002
Features of MSCS:

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4. Appointment of Auditors of MSCS (Sec. 70)

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First Auditor Sec. 70(6) Subsequent Auditor Sec. 70(2) Casual Vacancy Sec. 70(7)
 i. At each AGM i. Check if due to
 other reason – by BOD

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By BOD ii. MSCS select from
  Own panel or  resignation – by General Body
Within 1 month from date of  Panel approved by central in GM

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registration registrar ii. Tenure : next AGM
 iii. Tenure : till next AGM
If BOD fails iv. Society

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  within 7 days of appointment
By General Body in 1st meeting intimate to auditor so appointed
 v. Auditor
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Tenure : till 1st AGM  within 30 days of receipt
inform Central Registrar of his
Consent/ Refusal
Ku
 Multi-State Cooperative Societies Act, 2002
Features of MSCS:

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5. Other Points w.r.t. Appointment of Auditor

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Reappointment of Retiring Removal Appointment of person other
Auditor Sec. 70(8) than retiring Auditor Sec. 71
Sec. 70(4) & (5)

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Generally eligible for reappointment a) Removed from i. Special notice to be given
except: office before expiry ii. Society send copy of notice to
a) Not qualified for reappointment of term by General Retiring Auditor

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b) Unwilling to continue Body iii. Retiring Auditor has right to
c) Other person appointed by b) Special Notice must representation in writing or to be
be given

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General Body read out at meeting
d)Notice given for appointing other
person; but resolution cannot be
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passed due to death, incapacity or
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Disq of other person
Ku

Sec. 70(5): if no auditor appointed or

reappointed, Central Registrar will
fill Vacancy
 Multi-State Cooperative Societies Act, 2002
Features of MSCS:

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6. Remuneration of Auditors Sec. 70(9)
a) Fixed by Board / Central Registrar

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b) Subject to above points; fixed by General Body or manner determined in GM
c) any sum paid by MSCS w.r.t. auditors expenses deemed to be included in remuneration

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7. Powers of Auditors
i. Access Sec. 73: to all books, accounts & vouchers kept anywhere

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ii. Information & Explanation Sec. 73: to enquire from officers or other employees
iii. Attend GM Sec. 76: to receive notice & comm of any GM

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iv. Right of remuneration: Retiring Auditor can make representations to be read out in AGM

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 Multi-State Cooperative Societies Act, 2002
Features of MSCS:

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8. Reporting Requirements / Duties of Auditor of MSCS

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Duty to enquire whether Duty to report to members on a/c Special Schedule to AR
Sec. 73 examined by him stating: Sec. 73 Rule 27- violation CBIL Matter +
SBI DPS IA2B3CDEF a) Transaction appearing contrary

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S: Loans & Advances Properly I: information & explanation obtained to provision of Act/ Rule/ Bye-
Secured A: account give information required by act laws
B: Mere book entries A: account give T&F view (B/s & P&L) b) Transaction appearing contrary

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P: Personal expenses charges to B: proper BOA maintained to guidelines of RBI / NABARD
revenue account B: branch office report received c) Money appearing to be bad /

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S: cash received for shares allotted B: B/s & P&L in conformity with BOA & doubtful of recovery
for cash returns d) Loan given by MSCS to
C: Co-operative banks follow guidelines members of board
l issued RBI & NABARD e) Any violation of guidelines by
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E: impropriety / irregular expenditure if any RBI/ NABARD
f) Other matters as specified by
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Central Registrar
 Special Audit of MSCS Sec. 77
Ordered by Conditions Qualification For whom Expense Reporting

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CG Any 1 1. Statutory Including 1. Submit report to CG
 1. MSCS is not being auditor of i.e. when remuneration 2. CG Considers report

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Direct special managed as per MSCS order can be of special (+)
audit for a. sound business or made auditor prescribe necessary
specified principles 2. Any other   changes

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period b. co-operative principles CA under If CG/ SG/ Determined by (+)
 c. prudent commercial CA Act both CG Forward Report to
Order may practices   Society members

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direct any 2. MSCS is being managed Holds less Borne by 3. If CG do not take action
person in such a way that it can than 51% of MSCS on report within 4


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specified to cause serious injury to PUSC or of months
furnish entire trade & profession shares in Default shall 
information to which it pertains MSCS be recoverable CG will forward to MSCS
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to special 3. Financial position is so from society either copy or extract of
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auditor as bad that it can become as arrears of report
required by insolvent land revenue 
him Society will circulate to
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members or read before

Note: Powers & Duties of special auditor members at next GM
same as auditor of MSCS
 Inquiry & Inspection
Inquiry by Central Registrar Sec. 78 Inspection of MSCS Sec. 79

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a) Central Registrar may direct some person to hold inquiry a) Central Registrar may direct person to hold inspection of
of MSCS on request from MSCS by General / Special Order on his behalf on request

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i. Federal Co-operative affiliated to MSCS, or from:
ii. Creditor, or i. Federal Co-operative affiliated to MSCS, or
iii. Atleast 1/3rd member of board, or ii. Creditor, or

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iv. Atleast 1/5th of total no. member of MSCS iii. Atleast 1/3rd member of board
b) 15 days notice must be given to MSCS before such inquiry iv. Atleast 1/5th of total no. member of MSCS
c) Power of Central Registrar / person authorised: b) 15 days notice is required before inspection

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i. access to books, Accounts, documents, etc; question c) Power of registrar / person authorised
any person having custody of such books
 Same as inquiry

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ii. Require officer to call GM of society by giving notice
atleast 7 days before
iii. Summon any person to obtain information & d) Central registrar  within 3 months from date of
explanation at HO or at branch
l completion of such inspection  copy of report to MSCS
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d) Central Registrar  within 3 months from date of receipt
of report  communicate report to
i. MSCS
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ii. FI, if any affiliated

iii. Person/Auth, at whose instance inquiry is needed
 Question

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(b) No inspection under Section 79 of Multi-State Co-operative
Societies Act, 2002 shall be made unless a notice has been given

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to the multi-state co-operative society. Explain stating clearly
when and how such inspection can be made. Also state the

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powers available with the Central Registrar in this regard along
with provisions relating to communication of the inspection

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report under the said section.
l (RTP May 22)
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Ku
 Answer

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(b) Inspection of Multi-State Co-operative societies under Section 79
1. When: The Central Registrar may, on a request from
(i) federal co-operative to which a Multi-State Co-operative society is affiliated or a creditor or
(ii) not less than one-third of the members of the board or

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(iii) not less than one-fifth of the total number of members of a Multi-State co-operative society
2. How: By general or special order in writing in this behalf inspect or direct any
person authorized by him by order in writing in this behalf to make an inspection into the constitution,
working and financial condition of a Multi-State co-operative society.

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3. Opportunity of Being heard: No inspection shall be made unless a notice of
not less than fifteen days has been given to the multi-state co-operative society.
4. Powers available: The Central Registrar or the person authorized by him shall

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have the following powers:
(a) He shall at all times have access to all books, accounts, papers, vouchers, securities, stock and
other property of that society and may, in the event of serious irregularities discovered during inspection,
take them into custody and shall have power to verify the cash balance of the society and subject to the
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general or special order of the central registrar to call a meeting of the society where such general
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meeting is, in his opinion necessary.
(b) Every officer or member of a Multi-State Co-operative society shall furnish such information with
regard to the working of the society as the central registrar or the person making such inspection may
require.
Ku

5. Inspection Report: A copy of the report of inspection under this section shall
be communicated to the Multi-State Co-operative society within a period of three months from the date
of completion of such inspection.
 LLP Audit
Powers of Audit of LLP Appointment of Advantage / Auditors Duty regarding
Registrar a) As per Rule 24 Auditors Purpose / Need of Audit of LLP

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1.Obtain (LLP Rules 1. Appointed by  1. Helps inAudit
detecting 1. Get instruction in writing 
information 2009) Designated Partners errors, frauds & work to be performed

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from: b) LLP Audit  verification of FS 2. Mention whether:
a) Designated Compulsory if: 2. Improves a) any restriction imposed
a) any time but

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partner i) T/o > 40 management of LLP b) able to obtain information &
before end of 1st FY
b) Partner Lakhs in any 3. Settling accounts explanation
b) atleast 30 Days
c) Employee FY between partners at c) firms record reliable

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prior to end of each 3. Read LLPA and note:
2. Summon: OR time of death,
FY (other than 1st admission, retirement a) Nature of business
a) Designated ii) Contribution
partner FY) 4. Reasonableness of b) Duration of partnership

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> 25 Lakhs
b) Partner c) However, can 2. If designated salary & bonus c) Drawing / rights / duties of
c) Employee be audited at partners fails  by calculation partners
 discretion of l Partners 5. Banks & FI lend money d) Loans to partners
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If not satisfied partners 3. Casual vacancy on basis of audited e) Capital by partners
with information filled by designated accounts f) Interest / salary / commission
to partner
Ku

furnished to him partners 6. Disputes if any

between any partners g) Methods of settlement of
4. Tenure: as decided
account between partners
4. Read minutes books, if any.
 Salient Feature of LLP Audit
Basics of LLP Some Statutory Compliance Maintain BOA Public Inspection
• Min 2 Annual Statement of Fees 1. Document open for

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partners in Return Account & M A S C – Others inspection by any
LLP person:
Solvency

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• Atleast two M – Money received & a) Annual Return
designated In Form 11 In Form 8 File document expended b) Statement of
partners (1   after due date account &

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should be File with ROC File with ROC  A – Assets & Liabilities Solvency
c) Name of Partners
resident in  every year Additional fees
S – Sales & Purchase d) Incorporation
India) Within 60 days  upto 300 days documents

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• LLP has of closure of FY Within 30 days  C – Cost Record 2. Fees:
obligation to
  If > 300 days a) For inspection of
maintain O – others prescribed by LLP


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annual Open for From end of 6
partners = Rs. 50
account public months of FY Pay normal b) For certificate
• LLP is under inspection on (biannually) fees copy or extract
no obligation payment of l (+) u/s 36
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for fees Additional fees = Rs. 5/page
compulsory
(+)
insurance, it
Ku

increases Liable for

cost of prosecution
operation
Question

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an
155. Every LLP would be required to file annual

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return in Form with ROC within 60 days of closer
of financial year :-

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(a) Form 11

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(b) Form 8
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(c) Form 9
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(d) Form DPIN

 Answer

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Question
Cinescreen Multiplex Ltd. is operating cinemas in different locations in

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Mumbai and has appointed you as an internal auditor. What are the
areas that need to be verified in relation to receipts from

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sale of Tickets?
(MTP 4 Marks May 20, Apr’21, RTP Nov ’22)

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OR

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M/s PQ & Co., Chartered Accountants have been appointed as statutory
auditor of CBD Multiplex Cinema Ltd. The audit team started the audit
and verified the ledger and other books of accounts for the F.Y 2021-

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2022. However, one of the team members is of the view that the
internal control mechanism of the company should also be verified. Can
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you guide the audit team about the areas that will be covered in
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verifying the internal control mechanism?
(PYP 4 Marks Nov 22)
Ku
Answer
Audit of Cinema: The special steps involved in its audit are stated below-

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(i) Verify that entrance to the cinema-hall during show is only through printed tickets;

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(ii) Verify that they are serially numbered and bound into books;
(iii) Verify that the number of tickets issued for each show and class, are different though the numbers of
the same class for the show on the same day, each week, run serially;

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(iv) Verify that for advance booking a separate series of tickets is issued;
(v) Verify that the inventory of tickets is kept in the custody of a responsible official.

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(vi) Confirm that at the end of show, a statement of tickets sold is prepared and cash collected is agreed
with it.

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(vii) Verify that a record is kept of the ‘free passes’ and that these are issued under proper authority.
(viii) Reconcile the amount of Entertainment Tax collected with the total number of tickets issued for each
class.
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(ix) Vouch the entries in the Cash Book in respect of cash collected on sale of tickets for different shows on
a reference to Daily Statements which have been test checked as aforementioned with record of tickets issued
Ku

for the different shows held.

Question
Explain and also state the role of

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an
auditor with respect to the following

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in case of a school: The fees from the

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students.
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(MTP 4 Marks Oct’22)
Ku
Answer
1. Check names entered in the Students Fee Register for each month or term, with the respective Class

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Registers, showing names of students on rolls and test amount of fees charged; and verify that there operates a
system of internal check which ensures that demands against the students are properly raised.

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2. Check fees received by comparing counterfoils of receipts granted with entries in the Cash Book and
tracing the collections in the Fee Register to confirm that the revenue from this source has been duly accounted
for.

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3. Total up the various columns of the Fees Register for each month or term to ascertain that fees paid in
advance have been carried forward and that the arrears that are irrecoverable have been written off under the

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sanction of an appropriate authority.
4. Check admission fees with admission slips signed by the head of the institution and confirm that the
amount has been credited to a Capital fund, unless the Managing Committee has taken a decision to the

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contrary.
5. See that free studentship and concessions have been granted by a person authorised to do so, having
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regard to the Rules prepared by the Managing Committee.
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6. Confirm that fines for late payment or absence, etc. have been either collected or remitted under
proper authority.
Ku

7. Confirm that hostel dues were recovered before student’s accounts were closed and their deposits of
caution money refunded.
Question
"Public moneys should not be utilised for

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the benefit of a particular person or

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section of the community". List out the

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exceptions to this rule while audit

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against propriety.
lM
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(MTP 3 Marks Oct ’21, RTP Nov ’23)
Ku
Answer
Exceptions to the rule – Audit Against Propriety: Public moneys

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should not be utilised for the benefit of a particular person or section

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of the community unless:
(i) the amount of expenditure involved is insignificant; or

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(ii) a claim for the amount could be enforced in a Court of law; or

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(iii) the expenditure is in pursuance of a recognised policy or
custom; and

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(iv) the amount of allowances, such as travelling allowances,
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granted to meet expenditure of a particular type should be so
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regulated that the allowances are not, on the whole, sources of profit
to the recipients.
Ku
Question
Audit of government expenditure is one of the major

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components of government audit conducted by the office of C

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& AG. The basic standards set for audit of expenditure are to
ensure that there is provision of funds authorised by

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competent authority fixing the limits within which
expenditure can be incurred. Explain those standards.

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(MTP 4 Marks March 22, RTP Nov’19)

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OR
The audit of government expenditure is one of the major
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components of government audit. Explain the basic standards
set for such audit of expenditure.
Ku

(MTP 4 Marks March ’21, RTP May ’23, PYP 5 Marks , Nov ’18)
Answer
Government Expenditure Audit: Audit of government expenditure is one of the major components of government audit

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conducted by the office of C&AG. The basic standards set for audit of expenditure are to ensure that there is provision of
funds authorized by competent authority fixing the limits within which expenditure can be incurred. Briefly, these standards
are explained below:

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(i) Audit against Rules & Orders: The auditor has to see that the expenditure incurred conforms to the
relevant provisions of the statutory enactment and is in accordance with the financial rules and regulations framed by the

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competent authority.
(ii) Audit of Sanctions: The auditor has to ensure that each item of expenditure is covered by a sanction, either general
or special, accorded by the competent authority, authorizing such expenditure.

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(iii) Audit against Provision of Funds: It contemplates that there is a provision of funds out of which expenditure can be
incurred and the amount of such expenditure does not exceed the appropriations made.

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(iv) Propriety Audit: It is required to be seen that the expenditure is incurred with due regard to broad and general
principles of financial propriety. The auditor aims to bring out cases of improper, avoidable, or in fructuous expenditure even
though the expenditure has been incurred in conformity with the existing rules and regulations. Audit aims to secure a
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reasonably high standard of public financial morality by looking into the wisdom, faithfulness and economy of transactions.
na
(v) Performance Audit: This involves that the various programmers, schemes and projects where large financial
expenditure has been incurred are being run economically and are yielding results expected of them. Efficiency-cum-
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performance audit, wherever used, is an objective examination of the financial and operational performance of an
organization, programmer, authority or function and is oriented towards identifying opportunities for greater economy, and
effectiveness.
Question
In carrying out audit of income, the auditor is primarily

ia
concerned with obtaining reasonable assurance that the

an
recorded income arose from transactions, which took place
during the relevant period and pertained to the bank, there is

dh
no unrecorded income and the income is recorded at
appropriate amount. Explain the Audit Approach and

an
Procedures regarding following points in the above context :
(i) RBI’s Directions

M
(ii) Materiality
l
na
(iii) Revenue Certainty
(iv) Revenue Uncertainty (MTP 4 Marks April 22)
Ku
Answer
Audit Approach and Procedures

ia
• Auditor’s Concern: In carrying out audit of income, the auditor is primarily concerned with
obtaining reasonable assurance that the recorded income arose from transactions, which took place during the relevant

an
period and pertained to the bank, there is no unrecorded income and the income is recorded at appropriate amount.
• RBI’s Directions: RBI has advised that in respect of any income which exceeds one percent of the

dh
total income of the bank if the income is reckoned on a gross basis or one percent of the net profit before taxes if the income
is reckoned net of costs, should be considered on accrual as per Accounting Standard 9.
• Materiality: If any item of income is not considered to be material as per the above norms, it may

an
be recognised when received and the auditors need not qualify their report in that situation.
. Revenue Certainty: Banks recognise income (such as interest, fees and commission) on accrual

M
basis, i.e., as it is earned. It is an essential condition for accrual of income that it should not be unreasonable to expect its
ultimate collection. In modern day banking, the entries for interest income on advances are automatically generated through
a batch process in the CBS system.
l
na
• Revenue Uncertainty: In view of the significant uncertainty regarding ultimate collection of income
arising in respect of non-performing assets, the guidelines require that banks should not recognize income on non-
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performing assets until it is actually realised. When a credit facility is classified as non-performing for the first time, interest
accrued and credited to the income account in the corresponding previous year which has not been realized should be
reversed or provided for. This will apply to Government guaranteed accounts also.
Question
Explain and also state the role of

ia
auditor with respect to the following in

an
case of a hotel:

dh
Pilfering is one of the greatest problems

an
in any hotel and the importance of
M
internal control cannot be undermined.
l
na
(MTP 3 Marks Sep’22, Oct ’23, RTP May
Ku

’22)
Answer
Internal control: Pilfering is one of the greatest problems in any hotel and the importance of

ia
internal control cannot be undermined. It is the responsibility of management to introduce
controls which will minimise the leakage as far as possible. Evidence of their success i s

an
provided by the preparation of regular perhaps weekly, trading accounts for each sales point
and a detailed scrutiny of the resulting profit percentages, with any deviation from the

dh
anticipated form being investigated. The auditor should obtain these regular trading accounts
for the period under review, examine them and obtain explanations for any apparent
deviations.

an
The auditor should verify a few restaurant bills by reference to K.O.T.s (Kitchen Order Tickets)
or basic record. This would enable the auditor to ensure that controls regarding revenue

M
cycle are in order. The auditor should satisfy himself that all taxes collected from occupants
on food and occupation have been paid over to the proper authorities. If the internal control
l
in a hotel is weak or perhaps breaks down, then a very serious problem exists for the auditor.
na
As a result of the transient nature of many of his clients’ records, the auditor must rely to a
very large extent on the gross margin shown by the accounts. As a result, the scope of his
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audit tests will necessarily be increased and, in the event of a material margin discrepancy
being unexplained, he will have to consider qualifying his audit report.
Question
Explain and also state the role of auditor

ia
with respect to the following in case of a

an
school:

dh
Other Receipts/Grants & Donations

an
l M (MTP 3 Marks Oct’22)
na
Ku
Question
Explain and also state the role of auditor

ia
with respect to the following in case of a

an
hotel:

dh
(i) Inventories

an
M
(MTP 4 Marks March ’23 & Sep ‘22)
l
(ii) Travel agents & shops
na
Ku

(MTP 3 Marks March ’23)

Answer
(i) Inventories

ia
The inventories in any hotel are both readily portable and saleable particularly the food and beverage inventories. It is
therefore extremely important that all movements and transfers of such inventories should be properly documented to

an
enable control to be exercised over each individual stores areas and sales point. The auditor should carry out tests to ensure
that all such documentation is accurately processed.
Areas where large quantities of inventory are held should be kept locked, the key being retained by the departmental

dh
manager. The key should be released only to trusted personnel and unauthorised persons should not be permitted in the
stores areas except under constant supervision. In particular, any movement of goods in or out of the stores should be
checked. Many hotels use specialised professional valuers to take and value the inventories on a continuous basis

an
throughout the year. Such a valuation is then almost invariably used as the basis of the balance sheet inventory figure at the
year end. Although such valuers are independent of the audit client, it is important that the auditor satisfies himself that the
amounts included for such inventories are reasonable. In order to satisfy himself of this, the auditor should consider

M
attending the physical inventory taking and carrying out certain pricing and calculation tests. The extent of such tests could
well be limited since the figures will have been prepared independently of the hotel.
(ii) Travel agents & shops:
l
na
(i) For ledgers coming through travel agents or other booking agencies the bills are usually made
on the travel agents or booking agencies. The auditor should ensure that money are recovered from the travel agents or
booking agencies as per the terms of credit allowed.
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(ii) Commission, if any, paid to travel agents or booking agents should be checked by reference to ment on that behalf.
Question
State the points which merit

ia
an
consideration in the audit of a CLUB

dh
w.r.t its members.

an
M
(MTP 4 Marks March ’23, Old & New
l
na
SM)
Ku
Answer
The points which merit consideration in the audit of a CLUB w.r.t its members:

ia
(1) Entrance Fee: Vouch the receipt on account of entrance fees with –
> members’ applications and counterfoils issued to them,

an
> on a reference to minutes of the Managing Committee.
(2) Member Subscriptions: Vouch members’ subscriptions with –
> the counterfoils of receipt issued to them,

dh
> trace receipts for a selected period to the Register of Members;
> also reconcile the amount of total subscriptions due with the amount collected and that outstanding.

an
(3) Subscription Arrears/in Advance: Ensure that –
> arrears of subscriptions for the previous year have been correctly brought over,
> arrears for the year under audit and subscriptions received in advance have been correctly adjusted.

M
> Subscriptions received in advance should have been properly accounted for.
(4) Arithmetical accuracy: Check totals of various columns of the Register of members and tally them across.
(5)
l
Register of Members: See the Register of Members to ascertain –
na
> the Member’s dues which are in arrear and
> enquire whether necessary steps have been taken for their recovery;
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> the amount considered irrecoverable should be mentioned in the Audit Report.
(6) Member Accounts :- Trace debits for a selected period from subsidiary registers maintained in respect of supplies and services to members to
confirm that the account of every member has been debited with amounts recoverable from him.
Question
As an auditor, explain the areas of

ia
consideration while auditing the element

an
of ROOM SALES during the audit of a Star

dh
Hotel.

an
(MTP 4 Marks April ’23, Old & New SM)
l M
na
Ku
Answer
Following points merit consideration while auditing the element of ROOM SALES during the audit of a Hotel:-

ia
(1) The charge for room sales is normally posted to guest bills by the receptionist/ front office or in the
case of large hotels by the night auditor.

an
(2) The source of these entries is the guest register and audit tests should be carried out to ensure that the
correct numbers of guests are charged for the correct period.

dh
(3) Any difference between the charged rates used on the guests’ bills and the standard room rate should
be investigated to ensure that they have been properly authorised.

an
(4) In many hotels, the housekeeper prepares a daily report of the rooms which were occupied the
previous night and the number of beds kept in each room. This report tends not to be permanently retained
and the auditor should ensure that a sufficient number of reports are available for him to test both with the

M
guest register and with the individual guest’s bill.
(5) Ensure compliance with the provisions of FEMA and RBI if receipts are in foreign currency. Ensure
application of proper Conversion rate.
l
na
(6) Special emphasis to be laid on receipts through Credit Cards.
(7) The auditor should ensure that proper valuation of occupancy-in-progress at the balance sheet date is
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made and included in the accounts.

Question
As an Auditor of NGO, how do you

ia
an
check/verify at least four receipts of

dh
income during the year?

an
M
(MTP 4 Marks April ’23 & Sep ’23,
l
na
PYP 4 Marks Jan 21)
Ku
Answer
The receipt of income of NGO may be checked on the following lines:

ia
(i) Contributions and Grants for projects and programmes: Check agreements with donors and grants

an
letters to ensure that funds received have been accounted for. Check that all foreign contribution receipts are
deposited in the foreign contribution bank account as notified under the Foreign Contribution (Regulation) Act,
1976.

dh
(ii) Receipts from fund raising programmes: Verify in detail the internal control system and ascertain who
are the persons responsible for collection of funds and mode of receipt. Ensure that collections are counted and
deposited in the bank daily.

an
(iii) Membership Fees: Check fees received with Membership Register. Ensure proper classification is made
between entrance and annual fees and life membership fees. Reconcile fees received with fees to be received

M
during the year.
(i) Subscriptions: Check with subscription register and receipts issued. Reconcile subscription received
with printing and dispatch of corresponding magazine/ circulars/periodicals. Check the receipts with
l
na
subscription rate schedule.
(ii) Interest and Dividends: Check the interest and dividends received and receivable with investments held
during the year.
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Question
Central Govt. holds 55% of the paid up share

ia
Capital in Kisan Credit Co-operative Society,

an
which is incurring huge losses. Advise when

dh
the Central Government can direct Special
Audit under Section 77 of the Multi State Co-

an
operative Society Act.
lM
na
(MTP 3 Marks April ’23, PYP 3 Marks ,May ’19,
Old SM)
Ku
Answer
Central Government shall order for special audit only if that Government or the State

ia
Government either by itself or both hold fifty-one percent or more of the paid-up share
capital in such Multi-State co-operative society. Under section 77 of the Multi-State Co-

an
operative Societies Act, 2002, where the Central Government is of the opinion:
i. that the affairs of any Multi-State co-operative society are not being managed in

dh
accordance with self-help and mutual deed and co-operative principles or prudent
commercial practices or with sound business principles; or

an
ii. that any Multi-State co-operative society is being managed in a manner likely to cause
serious injury or damage to the interests of the trade industry or business to which it

M
pertains; or
iii. that the financial position of any Multi-State co-operative society is such as to
endanger its solvency. l
na
Thus, in the given case since Central Govt is holding 55% shares and financial position of
Kisan Credit co- operative society is in danger, Central government can direct for special
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audit.
Question
Before commencing the Audit of Local

ia
Bodies, a Chartered Accountant

an
employee in firm of XYZ & Co., firm of

dh
Chartered Accountants seeks assistance

an
of Mr. X, partner, in preparation of audit
M
programme for local bodies. How Mr. X
l
na
should advise to him in this connection?
Ku

(MTP 4 Marks Sep ‘23)

Answer
Audit Programme for local bodies

ia
(i) The Local Fund Audit Wing of the State Government is generally in-charge of the audit of municipal
accounts. Sometimes bigger municipal corporations e.g. Delhi, Mumbai etc have power to appoint their own

an
auditors for regular external audit. So the auditor should ensure his appointment.
(ii) The auditor while auditing the local bodies should report on the fairness of the contents and

dh
presentation of financial statements, the strengths and weaknesses of system of financial control, the
adherence to legal and/or administrative requirements; whether value is being fully received on money spent.
His objective should be to detect errors and fraud and misuse of resources.

an
(iii) The auditor should ensure that the expenditure incurred conforms to the relevant provisions of the law
and is in accordance with the financial rules and regulations framed by the competent authority.

M
(iv) He should ensure that all types of sanctions, either special or general, accorded by the competent
authority.
(v) He should ensure that there is a provision of funds and the expenditure is incurred from the provision
l
na
and the same has been authorized by the competent authority.
(vi) The auditor should check that the different schemes, programmes and projects, where large financial
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expenditure has been incurred, are running economically and getting the expected results.
Question
You have been appointed as an auditor

ia
of ABC Hotel, a three-star hotel, for

an
Financial Year 2022-23. As an auditor,

dh
what are the special points that need to

an
be considered in verifying the Inventories
M
in the nature of food and beverages?
l
na
(MTP 4 Marks Oct’23, RTP Nov ’22)
Ku
Answer
Verification of inventories in the nature of food and beverages:

ia
The inventories in any hotel are both readily portable and saleable particularly the food and
beverage inventories. It is therefore extremely important that all movements and transfers of

an
such inventories should be properly documented to enable control to be exercised over each
individual stores’ areas and sales point. The auditor should carry out tests to ensure that all

dh
such documentation is accurately owing points may be noted in this regard:
(i) All movement and transfer of inventories must be properly documented.

an
(ii) Areas where inventories are kept must be kept locked and the key retained by the
departmental manager.

M
(iii) The key should be released only to trusted personnel and unauthorized persons
should not be permitted in the stores area.
l
na
(iv) Many hotels use specialized professional valuers to count and value the inventories
on a continuous basis throughout the year.
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(v) The auditor should ensure that all inventories are valued at the year end and that he
should himself be present at the year-end physical verification, to the extent practicable,
having regard to materiality consideration and nature and location of inventories.
Question
State six important advantages of

ia
an
audit of accounts of a Partnership

dh
firm.

an
M
l (RTP Nov ’23)
na
Ku
Answer
Advantages of Audit of Accounts of a Partnership: On broad considerations, the advantages of audit of accounts

ia
of a partnership could be stated as follows:
(1) Audited accounts provide a convenient and reliable means of settling accounts between the partners

an
and, thereby, the possibility of occurrence of a dispute among them is mitigated. On this consideration, it is
usually provided in and accepted by the partners, shall be binding upon them, unless some manifest error is
brought to light within a specified period subsequent to the accounts having been signed.

dh
(2) On the retirement or death of a partner, audited accounts, which have been accepted by the partners,
constitute a reliable evidence for computing the amounts due to the retiring partner or to the representative of

an
the deceased partner in respect of his share of capital, profits and goodwill.
(3) The accounts of a partnership, which have been audited, are generally accepted by the Income Tax
Department as the basis for computing the assessable income of the partners.

M
(4) Audited statement of accounts are relied upon by the banks when advancing loans, as well as by
prospective purchasers of the business, as evidence of the profitability of the concern and its financial position.
l
na
(5) Audited statements of account can be helpful in the negotiations to admit a person as a partner,
especially when they are available for a number of past years.
(6) An audit is an effective safeguard against any undue advantage being taken by a working partner or partners
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especially in the case of those partners who are not actively associated with the working of the firm.
Question
CA B is appointed as the auditor of a Public

ia
Charitable Trust. Guide him the focus area of

an
attention relating to the vouching and

dh
verification of expenditure of charitable

an
institution.

M
(PYP 3 Marks May ‘23)
l
na
Ku
Answer
Audit of Expenditure of Charitable Institution:

ia
(i) Vouching payment of grants also verifying that the grants have been paid only for a
charitable purpose or purposes falling within the purview of the objects for which the

an
charitable institution has been set up and that no trustee, director or member of the
management committee has benefited there from either directly or indirectly.

dh
(ii) Verifying the schedules of securities held, as well as inventories of properties both
movable and immovable by inspecting the securities and title deeds of property and by

an
physical verification of the movable properties on a test basis.
(iii) Check payment along with supporting documents in regard to salary and other

M
expenses. Verify that all payments are made after proper sanction by appropriate authority.
(iv) Ascertaining that any funds contributed for a special purpose have been utilized for
the purpose. l
na
(v) Verifying the cash and bank balances/payments.
Ku
Question
M/s T & Co. Chartered Accountants, a partnership firm, is

ia
appointed as an auditor of Treatment Hospital run by Smile

an
Foundation, a charitable trust. Over and above the receipts of
treatment of patients, during the year trust has received

dh
donations from various donors to treat COVID-19 patients and

an
also incurred some capital expenditure for further
development of the hospital. On some of the investment

M
income, income tax has been deducted. What are the special
points to be considered by M/s T & Co. while auditing such
l
na
transactions of Treatment Hospital?
Ku

(PYP 3 Marks May’22)

Answer
Audit of a Hospital:

ia
(A) Receipts from treatment of patients

an
1. Register of Patients: Vouch the Register of patients with copies of bills issued to them. Verify bills for a
selected period with the patients’ attendance record to see that the bills have been correctly prepared. Also see
that bills have been issued to all patients from whom an amount was recoverable according to the rules of the

dh
hospital.
2. Collection of Cash from patients: Check cash collections as entered in the Cash Book with the receipts,
counterfoils and other evidence for example, copies of patient’s bills.

an
(B) Donations from donors to treat the patients: Ascertain those legacies and donation received for a specific
purpose have been applied in the manner agreed upon.

M
(C) Capital Expenditure Incurred: Verify the Capital Expenditure was incurred only with the prior sanction of the
Trustees or the Managing Committee.

l
(D) Where income-tax has been deducted from the Investment income, it should be seen that a refund thereof
na
has been obtained since charitable institutions are exempt from payment of Income-tax.
This involves:
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(i) vouching the Income-tax refund with the correspondence with the Income-tax Department; and
(ii) checking the calculation of the repayment of claims/refund claim.
Question
CA Sevak is appointed as an auditor of a

ia
Municipal Corporation of a big smart city. He

an
wants to verify various expenditures of the

dh
Municipality. Define the term "Municipality"

an
and state what are the heads under which

M
expenditures incurred by the Municipalities
and Corporations can be broadly classified?
l
na
(PYP 3 Marks Nov 22)
Ku
Answer
Definition of Municipality & Expenditure incurred by it: Definition: A Municipality can be

ia
defined as a unit of local self-government in an urban area. By the term ‘local self-
government’ is ordinarily understood the administration of a locality – a village, a town, a

an
city or any other area smaller than a state – by a body representing the local inhabitants,
possessing fairly large autonomy, raising at least a part of its revenue through local taxation

dh
and spending its income on services which are regarded as local and, therefore, distinct from
state and central services.

an
Expenditure incurred by the municipalities and corporations can be broadly classified under
the following heads:

M
(a) general administration and revenue collection,
(b) public health,
(c) public safety, l
na
(d) education,
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(e) public works, and

(f) others such as interest payments, etc.
Question
Ban LLP is formed during the year

ia
an
2021-22. They are not sure about the

dh
type of books of accounts to be

an
maintained. What are the books of

M
accounts that the LLP is required to
maintain? l
na
Ku

(PYP 3 Marks Nov 22)

Answer
Books of Accounts Ban LLP is required to maintain: An LLP

ia
shall be under obligation to maintain annual accounts

an
reflecting true and fair view of its state of affairs. LLPs are
required to maintain books of accounts which shall contain-

dh
1. Particulars of all sums of money received and expended

an
by the LLP and the matters in respect of which the receipt and
expenditure takes place,

M
2. A record of the assets and liabilities of the LLP,
l
na
3. Statements of costs of goods purchased, inventories,
work-in-progress, finished goods and costs of goods sold,
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4. Any other particulars which the partners may decide.

Question
SK & Co, a Chartered Accountant firm has been

ia
appointed an auditor of Metro Rail project in City

an
A. Since the project is on large scale, it involves a

dh
high volume of resources (financial, human and

an
physical resources). The appointing authority
C&AG requires an objective examination of the

M
financial and operational performance of the
l
na
Metro Rail project. Explain the nature and scope of
audit that SK & Co will undertake.
Ku

(PYP 4 Marks May ‘23)

Answer
Performance audit - The scope of the audit has been extended to cover efficiency, economy

ia
and effectiveness audit or performance audit, or full scope audit.
Efficiency audit looks into whether the various schemes/projects are executed and their

an
operations conducted economically and whether they are yielding the results expected of
them, i.e., the relationship between goods and services produced and resources used to

dh
produce them; and examination aimed to find out the extent to which operations are carried
out in an economical and efficient manner.

an
Economy audit looks into whether the government has acquired the financial, human and
physical resources in an economical manner, and whether the sanctioning and spending

M
authorities have observed economy.
Effectiveness audit is an appraisal of the performance of programmes, schemes, projects
l
with reference to the overall targeted objectives as well as efficiency of the means adopted
na
for the attainment of the objectives.
Efficiency- cum-performance audit, wherever used, is an objective examination of the
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financial and operational performance of an organisation, programme, authority or function

and is oriented towards identifying opportunities for greater economy, and effectiveness.
 ia
an
•Teacher Notes – for other types of

dh
entities please refer Kunal sirs notes

an
and Module
l M
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Ku
Ku
na
l M
an
CARO

dh
an
ia
 CARO 2020 Sec. 143(11)

ia
an
Para

dh
an
(1) (2) (3) (4)
Companies covered Applicability from 21 Clauses Such matters affect
F.S.

M
by CARO
F.Y starting from
l Comment
na
(+)
1st April 2021 Reason
Ku
Applicability of CARO

ia
CARO is applicable to all the companies including foreign company

an
excluding the following :-
1) OPC

dh
2) Small company
i. paid up capital doesn’t exceed 4 cr

an
ii. Average annual Turnover doesn’t exceed 40 crores
3) Section 8 company

M
4) Banking company u/s 5(c) of Banking Regulation Act, 1949 (not apply to
cooperative banks as they are govered under Cooperative Societies Act,
1912) l
na
5) Insurance company under Insuarance Act, 1938
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6) Private Limited company which satisfies all the following conditions .

 Does not 10 crore [As on B/s date ]
T 1. Total Revenues

ia
Exceed [ as per FS]

an
2. O/s loans from Does not 1 crore [Anytime during
O

dh
banks and financial the year]
institutions Exceed

an
3. Paid up (+) Does not

M
P Reserve & Surplus Exceed
1 crore [as on B/s date]
l
na
4. Public company is neither holding co. nor subsidiary co.
of such private co.
Ku
 Calculation of Revenue (Note-1)


ia
1) From Operations (including discontinuing operation )

an
2) Other Income such as Interest, Dividend, Non-operating


dh
3) GST/Sales tax / Excise (Included in turnover ) 

an
4) GST/Sales tax / Excise (Excluded in turnover)

M 
5) Sales Return whether deducted of previous years
l
na
6) Trade discount should be deducted from revenue (-)
Ku
Calculation of paid up Capital (Note-2)

ia
 Equity


an
 Preference 

dh
 Share application money 


an
 Bonus share


M
 Consideration otherwise than cash
 Unpaid calls l 
na
 Forfeited shares

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Note: if share capital is credited then it is included

 Calculation of Reserves (Note -3)


ia
1) Capital Reserves

an
2) Revenue Reserve

dh
3) Asset Revaluation Reserve
4) Capital Redumption Reserve 

an
5) Debenture Redumption Reserve 
M
6) Security Premium Reserve
na
l Added

7) Credit Balance of P & L
8) Debit Balance of P &L Subtracted
Ku
Calculation of Loan (Note -4)

ia
1) Limits of Loan taken separately or in aggregate Aggregated

an
dh

2) C.C /O.D

an

3) Short Term

M
4) Long Term loan
l 
na
5) Bills Discounted

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Calculation of Loan (Note -4)

ia
6) Non-fund based credit facility 

an
(to the extent it is made
fund based )

dh

7) Interest accrued but not due

an
8) Interest accrued and due

M
9) OD against F.D
l 
na
( Amount not net of F.D)
Ku
Calculation of Loan (Note -4)

ia
10) Export Credits 

an
11) O/s dues w.r.t. credit cards


dh
12) Secured borrowings


an
13) Unsecured borrowings

l M
na
Ku
 5. Government Company

ia
an
•Rule of normal company also apply to

dh
Government company

an
lM
na
Ku
6. Stand Alone Financial Statement

ia
an
•It applicable to standalone FS but

dh
not applicable to consolidated FS

an
l M
na
Ku
 7. Branch Audit Report

ia
an
CARO is applicable, if applicable to head /

dh
main company then branch auditor also

an
has to report on CARO with respect to
branch as per ICAI Guidelines
l M
na
Ku
 8. Insurance company

ia
[General Insurance as well as life

an
Insurance ]

dh
an
•CARO is not applicable
lM
na
Ku
 ia
an
Note 9.

dh
Conditions only for Private limited

an
Company , if unlimited company

M
CARO is applicable
l
na
Ku
 ia
an
Note 10.

dh
Every year we have to check CARO is applicable or
not because “Once applicable always applicable”

an
rule doesn’t apply to CARO

l M
na
Ku
 (i) Fixed Assets

ia
a) Proper Records A] Qtywise and Situationwise

an
Maintained B] Full Particulars of intangible assets

• At reasonable internal

dh
b) Physical
Verification • Material discrepancy notice and property dealt in BOA

an
c) Title deeds of • In it’s own name (except lease agreement)
immovable property • If not provide details

M
d) Revaluation • As per regd. Valuer
l
• Specify amt of change if change atleast 10% (upward or downward)
na
e) Benami Property • If held whether disclosed by Co
Ku
 (ii) Inventory

ia
(a) (b)

an
Physical Verification Working Capital Loan

dh
an
• Reasonable interval • Loan in excess of 5 cr or more on
• Appropriate security (any point of year )

M
coverage and
procedure
l
• Whether discrepancy of 10% or
na
more (each class) noticed. If yes • Quarterly returns filled with bank
properly dealt
Ku

in conformity with BOA

Question
State the matters to be included in

ia
auditor's report as per CARO, 2020

an
regarding - Verification of inventory and

dh
working capital limits.

an
(MTP 3 Marks April 22)
l M
na
Ku
 (iii) Loans / Guarantee/ Security / Investment (LGSI)

ia
a) If Provided mention amt A] to group Co. [Subs | Ass | J.V]
B] others (any entity )

an
b) T & C • If not prejudicial to interest of Co.
c) Repayment • Schedule stipulated

dh
• Whether receipts regular
d) Over due recovery If receipts irregular whether Co.

an

More than 90 days


M
Steps taken to recover it

e) Renewal / Extension / Fresh

l• If yes,
na
loan (for loan fallen due during (a) Amt.
year) (b) % to total loans granted during year
Ku

(f) Demand loans to promoters / • If yes,

related parties/ others (a) Amt.
(b) % to total loans
3(iv) - Loans, Investment, Guarantee & Securities

ia
an
Whether provision of section 185 & 186


dh
complied or not

an


M
if not provide details thereof
l
na
Ku
 3(iv) - Loans, Investment, Guarantee & Securities

ia
Explanation:

an
Sec 185  MBP-1 Sec 186  MBP-2
Company  X loan Directors & Company   loan  any person

dh
 X guarantee Relative   guarantee except director
& Relative

an
 X Security for loan   Security
Company   loan  Business OR

M
  guarantee enterprises Company  invest in securities of  any
of directors body corporate
  Security for loan
l
na
2 conditions to be satisfied: Conditions to be satisfied:
i) Pass SR Limits w.e.h.  60% of (PUSC + FR + SP)
 100% of (FR + SP)
Ku

ii) loan to be utilized only for principal

business activities RULE  Upto limit – BM – UBR
 Beyond limit–BM–UBR – GM – SR
 3(v) – Deposits

ia
Section 73 to 76 &

an
Directives issued by RBI
other provision (Rules, 2014)

dh
Complied or not

an

If not, state nature of contravention

M

l
na
If order passed by NCLT / RBI / Court / Other Tribunals

Ku

Order complied or not

Question
Discuss the reporting requirements as

ia
per CARO, 2020, regarding: (i) Inventory

an
and

dh
(ii) Deposits accepted by company or

an
amounts which are deemed to be
deposits.l M
na
(MTP 4 Marks Oct’22)
Ku
 3(vi) - Cost Records

ia
If required to maintain records u/s 148(1)

an


dh
Whether maintained or not

an
Comment :

M
CARO does not require detailed examination of
l
na
such record
Ku
3(vii) - Statutory Dues Including PF, ESIC, income Tax, sales tax, service
tax, VAT, etc – this is not exhaustive definition,
it is inclusive

ia
(a) Undisputes (b) Disputes

an
Whether company is regular Report:
 1) Forum where dispute is pending

dh
If not, report, if taxes are unpaid 2) Amount involved

an
for more than 6 months as on b/s (mere representation to concerned
date from the due date department shall not constitute a

M
dispute)
l
na
Comment:
Ku

Since, emphasis of this clause is on regularity, the scope of auditor’s inquiry is restricted only to
those dues which company is required to deposit regularly to an authority
Question
Discuss the reporting requirements as per CARO,

ia
2020, regarding:

an
(i) disputed and undisputed statutory dues

dh
(MTP 2 Marks March ’23, MTP 2 Marks Sep’22,

an
RTP May’18, MTP 2.5 Marks Aug ’18, MTP 2 Marks

M
May 20) and
l
(ii) internal audit system of the company
na
(MTP 2 Marks March ’23, MTP 2 Marks Sep’22)
Ku
 (viii) Previously unrecoreded income

ia
Whether surrendered / Disclosed as per I.T Act

an
dh
an
Whether properly recorded in BOA

l M
na
Ku
 (ix) Defaulter Co.

ia
a) Default in paying (P, I ) from If yes
borrowings (a) Period (b) Amt.

an
b) Wilful Defaulter • Whether declared
c) Purpose • Whether term loan used for purpose for which it was obtained

dh
• If not report
• Amt & purpose for which diverted

an
d) Whether Short- term funds If yes, report
used for long term purpose, (a) Period (b) Amt.

l M
na
e) Loan for Group Co. • If yes,
(a) Nature
(b) Amt.
Ku

(f) Loan taken by pledging Sec. of • If yes,

Group Co. (a) Details
 (x) Issue of Securities

ia
Public Offer Private Placement /

an
Preferential allotment

dh
(IPO+FPO)
• Whether Sec. 42 & Sec. 62
(Including debt Sec. )

an

complied
Applied for purpose for which it was raise • Utilised for purpose for

M
 which it was raised
If not
• Report  non-compliance

l
na
Report
(a) Details
Ku

(b) Delays
(c) Default
(d) Subsequent rectification
Question
TS Ltd. has raised funds by issuing fully convertible

ia
debentures. These funds were raised for the

an
expansion and diversification of the business.
However, the company utilised these funds for

dh
repayment of long-term loans and advances. What

an
are the reporting requirements under CARO 2020
in this case?
l M
na
(PYP 4 Marks Nov 22, MTP 3 Marks Oct ’21, PYP 4
Ku

Marks Nov ’18)

Answer
Reporting Requirements under CARO 2020 for raising funds: As per clause (x)(b) of Para 3 of

ia
CARO, 2020, the auditor of a company has to report whether the company has made any
preferential allotment or private placement of shares or convertible debentures (fully,

an
partially or optionally convertible) during the year and if so, whether the requirements of
section 42 and section 62 of the Companies Act, 2013 have been complied with and the funds

dh
raised have been used for the purposes for which the funds were raised, if not, provide
details in respect of amount involved and nature of non-compliance.

an
In the present case, TS Ltd. has raised funds by issuing fully convertible debentures for
expansion and diversification of the business. However, the company used the funds for
repayment of long-term loans and advances instead of utilization of the same for the

M
purpose for which the funds were raised i.e. expansion and diversification of business.
Here, the auditor should report the fact in his report that the funds were used for the
l
na
purpose other than the purpose for which the funds were raised, as per cl ause (x)(b) of Para
3 of CARO, 2020.
Ku
 (xi) Fraud

ia
(a)By / On Co. Noticed  If Yes

an
(b)Reported u/s 143(12) to C.G in ADT-4

dh
(c)Auditor Considered whistle blower complaint

an
during year, recd. by Co.

l M
na
Ku
 (xii) Nidhi Co.

ia
(a)Maintained Net owned Fund : Deposit Ratio

an
1 : 20

dh
(b) Maintaining 10% unencumbered term deposits to
meet liability

an
(c)Default in payment (P or I )

M
If yes (a) Period (b) Details
l
na
Ku
 (xiii) Related Party Transaction

ia
• Whether Sec. 177 & 188 Complied

an
• Details disclosed in F.S as per A.S

dh
Note:-

an
Sec. 177  Audit Committee (A.C) Approval

M
Sec. 188  B.R in B.M
Sec. 188  if Transaction value greater than limit,
l
na
then O.R passed
A.S -18 | Ind –A.S  24 Complied
Ku
Question
State the matters to be included in the

ia
auditor's report as per CARO, 2020 regarding:

an
(i) Nidhi Company.

dh
(ii) Transactions with related parties.

an
(RTP Nov ’23)
lM
na
Ku
 (xiv) Internal Audit System

ia
•Commensurate with size and nature of

an
business

dh
•Whether report considered by statutory

an
auditor
l M
na
Ku
 (xv) Non – Cash Transaction

ia
an
Whether Sec. 192 Complied or not

dh
an
Note : Conditions
(i) Pass O.R

M
(ii) Asset valued by Regd. Valuer
l
na
Ku
 (xvi) NBFC

ia
a) Whether req. to register u/s 45 IA, If so, whether regd. or not

an
b) NBFC/HFC  Conducted Activities without registration certificate

dh
from RBI.

an
c) Whether Co. is CIC (Core Investment Co.) as per RBI or exempted

M
CIC. Whether it continues to fulfill such criteria
l
na
Note: CIC
i. Invt > 90% of it’s total Assets
Ku

ii. Invt in Sec. > 60% of it’s total Assets

iii. Whether group has more than 1 CIC, if yes number
 (xvii) Cash Losses

ia
•Whether incurred in C.Y and

an
Previous F.Y

dh
•If Yes, tell, amount

an
Ml
na
Ku
 (xviii) Resignation of Previous Auditor

ia
•During the year

an
•If Yes, whether his issues , objections,

dh
concerns

an
•considered.
l M
na
Ku
 (xix) Material Uncertainty on Going Concern (GC)

ia
•Financial a) Whether

an
ratios MURGA
On

dh
•Aging (Material
basis uncertainty

an
of analysis
related to G.C )

M
•Other b) Co. can meet
reports
l
na
it’s liability
with 1 year
Ku
 (xx) Unspent CSR

ia
an
Whether Sec. 135(5) for unspent CSR

dh
for ongoing project or otherwise

an
complied
lM
na
Ku
 (xxi) Auditor of Holding Co.

ia
If adverse If yes

an
remark / In CARO a) Details

dh
Qualificat Of Co. in of Co.
ions reports C.F.S

an
b) Para
No. of

M
CARO
l
na
Ku
Question
2. During the course of audit of a listed company, CA P finds that solar power

ia
generating plant capitalized in
books for ₹5.00 crore during the year does not exist. It became known that only bills

an
were arranged and no assets were actually procured. Besides, financial statements
also reflect depreciation of ₹1.50 core on above. The bills of capitalized asset were

dh
approved by procurement head. The matter was reported to audit committee by CA P.
However, no response was received. Considering above, choose the most appropriate
option: -

an
(a) The matter needs to be reported to MCA in ADT-4. It also requires reporting
under CARO,2020.

M
(b) The matter needs to be reported to MCA in ADT-4. It does not require
reporting under CARO,2020.
l
na
(c) The matter need not be reported to MCA. However, it requires reporting under
CARO,2020.
Ku

(d) The matter needs neither reporting to MCA nor under CARO,2020 (MTP 1
Marks Oct’22)
 Answer

Ku
na
l M
an
dh
an
ia
Question
3. For which of following company,

ia
provisions of CARO,2020 would be applicable?

an
(a) Boost Up Training (OPC) Private Limited

dh
(b) RCI Bank Limited

an
(c) PST Industries Limited

M
(d) Moon Insurance Limited (MTP 1 Mark Oct
l
na
’23)
Ku
 Answer

Ku
na
l M
an
dh
an
ia
Question
4. While reporting under CARO, 2020, it is duty of

ia
statutory auditor of company to report: -

an
(a) Fraud of less than ` 1 crore committed by officers or

dh
employees of company during the year
(b) Fraud of `1 crore or more committed by officers or

an
employees of company during the year

M
(c) Fraud of `5 crore or more committed by officers or
employees of company during the year
l
na
(d) Any fraud by the company or on the company noticed or
Ku

reported during the year (MTP 1 Mark Oct ’23)

 Answer

Ku
na
l M
an
dh
an
ia
Descriptive Questions
1. M Motors Ltd is a leading Indian automobile manufacturer with many

ia
offerings across commercial, passenger and electric vehicles. The Company is
pioneering India’s electric vehicle transition and enjoys considerable advantage

an
in one of the fastest growing automotive markets.

dh
GR & Associates have been appointed as its statutory auditors for financial year
2022-23. J and K are newly appointed audit assistants in the firm and are part of

an
engagement team constituted for purpose of audit of M Motors Ltd. However,
they are confused about what such an audit tends to achieve. They perceive

M
audit as a guarantee against possible errors or frauds in financial statements.
Do you agree with perception of both the assistants? In this context, outline
objectives of an independent audit conducted in accordance with Standards on
l
na
Auditing.
Ku

(RTP May 24)

ANSWER
1. In conducting audit of financial statements, objectives of auditor in accordance with SA-200 “Overall Objectives of the

ia
Independent auditor and the conduct of an audit in accordance with Standards on Auditing” are: -
(a) 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

an
respects, in accordance with an applicable financial reporting framework; and
(b) To report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s findings.
An analysis of above brings out following points clearly: -

dh
(1) Auditor’s objective is to obtain a reasonable assurance whether financial statements as a whole are free from material
misstatement whether due to fraud or error.
Reasonable assurance is to be distinguished from absolute assurance. Absolute assurance is a complete assurance or a guarantee that

an
financial statements are free from material misstatements. However, reasonable assurance is not a complete guarantee. Although it is a
high-level of assurance but it is not complete assurance.
Audit of financial statements is carried out by the auditor with professional competence and skills in accordance with Standards on
Auditing. Audit procedures are applied in accordance with SAs, audit evidence is obtained and evaluated. On the basis of that, conclusions

M
are drawn and opinion is formed. It leads to high level of assurance which is called as reasonable assurance but it is not absolute assurance.
(2) Misstatements in financial statements can occur due to fraud or error or both. The auditor seeks to obtain reasonable assurance
whether financial statements as a whole are free from material misstatements caused by fraud or error. He has to see effect of
l
na
misstatements on financial statements as a whole, in totality.
(3) Obtaining reasonable assurance that financial statements as a whole are free from material misstatements enables the auditor to
express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an applicable financial reporting framework.
Ku

(4) The opinion is reported and communicated in accordance with audit findings through a written report as required by Standards on
Auditing.
Therefore, perception of both assistants is not proper. Auditor of financial statements does not seek to provide guarantee that financial
statements are free from material misstatements caused by frauds or errors. He obtains reasonable assurance.
Descriptive Questions
2. Standards on Auditing (SAs) apply in

ia
“audit of historical financial information”

an
whereas Standards on Review

dh
Engagements (SREs) apply in “review of

an
historical financial information.” Explain
M
in detail giving examples.
l
na
(RTP May 24)
Ku
ANSWER
2. Standards on Auditing (SAs) apply in “audit of historical financial
information” whereas Standards on Review Engagements (SREs) apply in “review of historical financial information”. Standards on auditing apply in “audit” of

ia
historical financial information which is a reasonable assurance engagement whereas Standards on Review Engagements apply in “review” of historical financial
information which is a limited assurance engagement only.

an
“Historical financial information means” information expressed in financial terms in relation to a particular entity, derived primarily from that entity’s
accounting system, about economic events occurring in past time periods or about economic conditions or circumstances at points in time in the past.
“Audit” and “review” are two different terms. Audit is a reasonable assurance engagement, and its objective is reduction in assurance engagement risk to an
acceptably low level in the circumstances of the engagement. However, “review” is a limited assurance engagement, and its objective is a reduction in assurance
engagement risk to a level that is acceptable in the circumstances of the engagement.

dh
Standards on Auditing have been issued on wide spectrum of issues in the field of auditing including (but not limited to) overall objectives of independent
auditor, audit documentation, planning an audit of financial statements, identifying and assessing risk of material misstatement, audit evidence, audit sampling,
going concern and forming an opinion and reporting on financial statements.
Some examples of Standards on Auditing are:

an
(i) SA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing
(ii) SA 230 Audit Documentation

M
(iii) SA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment
(iv) SA 500 Audit Evidence
(v) Revised SA 700 Forming an Opinion and Reporting on Financial Statements

l
Examples of Standards on Review engagements are
na
(i) SRE 2400 (Revised) Engagements to Review Historical Financial Statements
(ii) SRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity
Ku
Descriptive Questions
3. Preliminary engagement activities include

ia
certain activities to be performed by an

an
auditor while planning an audit. Discuss such

dh
activities briefly. How performing such

an
activities assists an auditor?

l M
na
(RTP May 24)
Ku
ANSWER
3. Preliminary engagement activities

ia
Preliminary engagement activities include following

an
activities: -
(A) Performing procedures regarding the continuance of

dh
the client relationship
(B) Evaluating compliance with ethical requirements,

an
including independence

M
(C) Establishing an understanding of terms of
engagement
l
na
Performing preliminary engagement activities assists
auditor in identifying and evaluating events or
Ku

circumstances that may affect auditor’s ability to plan and

perform audit engagement.
Descriptive Questions
4. The assistant of CA K is assigned responsibility

ia
of drafting “audit programme” relating to

an
purchases appearing in financial statements of

dh
“Broad Industries”, a partnership firm. The said

an
firm is a GST registered tax payer and is engaged in
manufacturing of packing boxes from a special

M
type of paper taxable under GST. Help him by
l
na
drafting a sample audit programme for purchases.
Ku

(RTP May 24)

ANSWER
4. Sample audit programme pertaining to purchases

ia
Name of Concern : Broad Industries

an
Financial Year : 2 0XX-XX
Prepared by : Name of person with date

dh
Reviewed by : Name of person with date
Approved by : Name of person with date

an
S.no. Nature of Procedure Extent of Basis of Done
Check Sample by
(a) Vouch few purchase invoices

M
of paperfrom purchase
records of concern.
l
na
(b) Trace theseinvoicesinto
account books of concern.
Ku

(c) Verify few purchase invoices of paper

on GST portal.
(d) Trace few purchase invoices
Descriptive Questions
5. Satranga Foods Private Limited is engaged in

ia
manufacturing of pickles. The auditors of the

an
company have planned audit procedures in

dh
respect of recognition of revenues of the company.

an
Despite that, there is a possibility that
misstatements in revenue recognition are not

M
identified by planned audit procedures. Identify
l
na
and explain that particular risk in detail.
Ku

(RTP May 24)

ANSWER
5. There is a possibility that planned audit procedures may not achieve desired
result and fail to detect misstatements in revenue recognition. Such a risk is referred

ia
to as “detection risk”.

an
SA 200 defines detection risk as the risk that the procedures performed by the auditor
to reduce audit risk to an acceptably low level will not detect a misstatement that
exists and that could be material, either individually or when aggregated with other

dh
misstatements.
For example, auditor of a company uses certain audit procedures for the purpose of

an
obtaining audit evidence and reducing audit risk, but still there will remain a risk that
audit procedures used by the auditor may not be able to detect a misstatement which
by nature is material, then that risk is known as detection Risk.

M
Detection risk comprises sampling and non-sampling risk.
(a) Sampling risk is the risk that the auditor’s conclusion based on a sample may
l
be different from the conclusion if the entire population were subjected to the same
na
audit procedure. It simply means that the sample was not representative of the
population from which it was chosen.
Ku

(b) Non-sampling risk is the risk that the auditor reaches an erroneous conclusion for
any reason not related to sampling risk. Like an auditor may reach an erroneous
conclusion due to application to some inappropriate audit procedure.
Descriptive Questions
6. IT related risks can have an impact

ia
an
on audit. In what different ways,

dh
such risks can have an impact on

an
audit of financial statements?

M
l (RTP May 24)
na
Ku
ANSWER
6. IT related risks can have an impact on audit in different ways

ia
discussed as under: -
Impact on substantive checking

an
Inability to address IT risks may lead to non-reliance of data obtained from
systems. In such a case, all information, data, and reports would have to

dh
be tested thoroughly for their completeness and accuracy. It could lead to
increased substantive checking i.e. detailed checking.

an
Impact on controls
It can lead to non-reliance on automated controls, system calculations and

M
accounting procedures built into applications. It may result in additional
audit work.
Impact on reporting l
na
Due to regulatory requirements in respect of internal financial controls in
case of companies, it may lead to modification of auditor’s report in some
Ku

instances.
Descriptive Questions
7. CA Kanika audited books of accounts of

ia
Engineering Ltd. for the financial year 2022-2023.

an
The auditor used an audit procedure according to

dh
which all the documents and records maintained

an
by the company were checked in detail to obtain
audit evidence. Explain the audit procedure used

M
by the auditor. Comment on reliability of audit
l
na
evidence obtained by performing such an audit
procedure in some situations.
Ku

(RTP May 24)

ANSWER
7. Audit Procedure:

ia
Inspection involves examining records or documents, whether internal or external, in
paper form, electronic form, or other media, or a physical examination of an asset. In

an
view of above, it can be concluded that CA Kanika used Inspection as an audit
procedure.
Inspection of records and documents provides audit evidence of varying degrees of

dh
reliability, depending on their nature and source and, in the case of internal records
and documents, on the effectiveness of the controls over their production.

an
Example of inspection used as a test of controls is inspection of records for evidence
of authorisation.

M
Some documents represent direct audit evidence of the existence of an asset, for
example, a document constituting a financial instrument such as a inventory or bond.
Inspection of such documents may not necessarily provide audit evidence about
l
ownership or value. In addition, inspecting an executed contract may provide audit
na
evidence relevant to the entity’s application of accounting policies, such as revenue
recognition. Inspection of tangible assets may provide reliable audit evidence with
respect to their existence, but not necessarily about the entity’s rights and obligations
Ku

or the valuation of the assets. Inspection of individual inventory items may

accompany the observation of inventory counting.
Descriptive Questions
8. CA J is conducting statutory audit of Gemini Ltd engaged

ia
in manufacturing of pharma products. The company is fairly

an
large one and has a well-functioning internal audit
department. While considering sending out external

dh
confirmation requests to trade receivables outstanding as on

an
date of financial statements, CA J has delegated the process of
choosing trade receivables, designing requests and receiving

M
responses from customers to internal audit department. The
responses are also received on the mail id of internal audit
l
na
department. Is the approach of CA J proper?
Ku

(RTP May 24)

ANSWER
8. When using external confirmation procedures, the auditor shall

ia
maintain control over external confirmation requests, including:
(a) Determining the information to be confirmed or requested;

an
(b) Selecting the appropriate confirming party;

dh
(c) Designing the confirmation requests, including determining that
requests are properly addressed and contain return information for
responses to be sent directly to the auditor; and

an
(d) Sending the requests, including follow-up requests when applicable,
to the confirming party.

M
In the given case, it appears that external auditor has delegated entire
work of sending out external confirmation requests to internal audit
l
department over which he has no control. Further, responses to external
na
confirmation requests are received on mail id of internal audit
department. All these acts are not in line with requirements under SA 505.
Ku
Descriptive Questions
9. The newly appointed auditor of BTN

ia
Limited wants to obtain sufficient appropriate

an
audit evidence about whether the opening

dh
balances contain misstatements that

an
materially affect the current period's financial

M
statements. What audit procedures should he
perform for this purpose?
l
na
(RTP May 24)
Ku
ANSWER
9. Audit Procedure Regarding Opening Balances: The newly appointed auditor of BTN
Ltd shall read the most recent financial statements, if any, and the predecessor auditor’s report

ia
thereon, if any, for information relevant to opening balances, including disclosures.
The auditor of BTN Ltd shall obtain sufficient appropriate audit evidence about whether the opening

an
balances contain misstatements that materially affect the current period’s financial statements by:
(1) Determining whether the prior period’s closing balances have been correctly brought forward

dh
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.
(2) Determining whether the opening balances reflect the application of appropriate accounting

an
policies; and
(3) Performing one or more of the following:
(i) Where the prior year financial statements were audited, perusing the copies of the audited

M
financial statements including the other relevant documents relating to the prior period financial
statements.
(ii)
l
Evaluating whether audit procedures performed in the current period provide evidence
na
relevant to the opening balances; or
(iii) Performing specific audit procedures to obtain evidence regarding the opening balances.
Ku
Descriptive Questions
10. SPR Ltd has been into the media business since

ia
2001. During the F.Y 2022-2023, many notices were

an
received by the company for hurting public sentiments

dh
and financial claims were filed against the company. As
an auditor of the company, you requested the

an
management for arranging the meeting with company's

M
external legal counsel. Management is of the view that
such meetings are necessary in certain circumstances
l
na
only. Can you list down such circumstances?
Ku

(RTP May 24)

ANSWER
10. Circumstances when it becomes necessary to meet with company’s

ia
external legal counsel:
In the given case of SPR Ltd., Auditor requested the management for

an
meeting with SPR’s external legal counsel.
In certain circumstances, the auditor also may judge it necessary to meet

dh
with the entity’s external legal counsel to discuss the likely outcome of the
litigation or claims.

an
This may be the case, for example, where:
(i) The auditor determines that the matter is a significant risk.

M
(ii) The matter is complex.
(iii) There is disagreement between management and the entity’s
l
na
external legal counsel.
Ordinarily, such meetings require management’s permission and are held
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with a representative of management in attendance.

Descriptive Questions
11. Proceedings have been initiated against False

ia
Limited for holding benami property under law

an
relating to prohibition of benami transactions and

dh
the rules made thereunder but such property is

an
not recorded in books of accounts. As a consultant
to the company, what will you advise the company

M
as far as disclosure requirements are concerned in
l
na
financial statements in relation to said
proceedings?
Ku

(RTP May 24)

ANSWER
11. Disclosure in case of Benami Properties held by the Company:

ia
Where any proceedings have been initiated or pending against the
company for holding any benami property under the relevant law relating

an
to prohibition of such transactions, the company shall disclose the
following: -

dh
(a) Details of such property, including year of acquisition
(b) Amount thereof

an
(c) Details of Beneficiaries
(d) If property is not in the books, then the fact shall be stated with

M
reasons
(e) Where there are proceedings against the company under this law as
l
an abetter of the transaction or as the transferor, then the details shall be
na
provided
(f) Nature of proceedings, status of same and company’s view on same.
Ku
Descriptive Questions
12. Droma Shoes Private Limited was established in year 2022-23 for manufacturing of

ia
footwear. As funds were needed to carry on its business activities - including for
purchase of different raw materials, incurring of regular expenses like power and fuel

an
and payment of wages etc., it had got sanctioned a credit facility amounting to ` 2
crores repayable on demand from a bank against primary security of its current assets
and collateral security of residential house of one of its directors. Duly signed

dh
guarantee documents by directors in favour of bank also form part of bank’s loan
documentation. Account statement of above facility downloaded from bank’s website

an
shows debit balance of ` 1.85 crores as on 31st March, 2023. The operations in above
credit facility are satisfactory. In this regard: -

M
(i) Identify nomenclature of such credit facility given by banks. How would above
amount of ` 1.85 crores be reflected and classified in financial statements of company
as on 31.3.23?
l
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(ii) Also state specific disclosure requirements of Schedule III of Companies Act,
2013 in relation to above.
Ku

(RTP May 24)

ANSWER
12. (i) The type of credit facilities referred to in above situation given by banks to meet working
capital requirements of business which are repayable on demand are known as “cash credit

ia
facilities/overdraft” facilities. The amount of `1.85 crores outstanding as on 31st March, 2023 reflects
borrowings of the company and it would be classified as “short-term borrowings” as loans repayable

an
on demand from banks under current liabilities in balance sheet of the company. Borrowings shall
further be subclassified as secured.
(ii) Specific disclosure requirements of short-term borrowings under Schedule III to Companies Act,

dh
2013 in given situation are as under: -
• Nature of security i.e. primary security of current assets and collateral security of residential
house belonging to a director shall be specified.

an
• As loans have been guaranteed by directors, the aggregate amount of such loans shall be
disclosed.

M
To be disclosed as Additional Regulatory Information
Since the Company has borrowings from bank on the basis of security of current assets, it shall also
disclose the following:-
l
na
(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 accounts.
(b) if not, summary of reconciliation and reasons of material
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discrepancies, if any to be adequately disclosed.

Descriptive Questions
13. Following is extract of notes to accounts of financial statements of STU

ia
Private Limited listing some ratios. Discuss, whether disclosure, given in

an
following manner meets requirements of Schedule III of the Companies Act,
2013. Ignore other ratios which are not listed in extract given below:

dh
Name of ratio 31.3.2023 31.3.2022
Current ratio 2.50 2.30

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Inventory turnover ratio 3.00 6.00
Trade receivables turnover ratio 1.75 5.00

M
Net profit ratio (in%) 13% 10%
l
na
(RTP May 24)
Ku
ANSWER
13. The disclosure given in the question does not meet requirements of Schedule III to Companies
Act, 2013.

ia
Schedule III requires that the company shall explain the items included in numerator and
denominator for computing the ratios. Further explanation shall be provided for any change in the

an
ratio by more than 25% as compared to the preceding year.
In the given table, the company has not explained the items included in numerator and denominator

dh
for computing ratios. Further, variations in ratios as compared to preceding year are as under: -

Name of ratio 31.3.23 31.3.22 Variation

an
Current ratio 2.50 2.30 8.69%

M
Inventory turnover ratio 3.00 6.00 50%
Trade receivables turnover ratio 1.75 5.00 65%
l
na
Net Profit ratio (in%) 13% 10% 30%
As calculated above, there is change in inventory turnover ratio, trade receivables turnover ratio and
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net profit ratio by more than 25% as compared to preceding year. Therefore, explanations for such
changes have also to be provided where there are changes by more than 25% as compared to
preceding year.
Descriptive Questions
14. Rajni, a CA student, has understood that SA

ia
230 requires auditor to prepare audit

an
documentation on a timely basis. While reading

dh
about SQC 1, she notices that time limit for

an
completion of final audit file is ordinarily not more
than 60 days after the date of auditor’s report. She

M
finds it to be puzzling. Unable to comprehend, she
l
na
seeks your guidance. Guide her.
Ku

(RTP May 24)

ANSWER
14. SA 230 requires that the auditor shall prepare audit documentation

ia
on a timely basis. Preparing sufficient and appropriate audit
documentation on a timely basis helps to enhance the quality of the audit

an
and facilitates the effective review and evaluation of the audit evidence
obtained and conclusions reached before the auditor’s report is finalized.

dh
SQC 1, however, requires auditor to complete assembly of final audit file
in ordinarily not more than 60 days after the date of the auditor’s report.
The completion of the assembly of the final audit file after the date of the

an
auditor’s report is only an administrative process that does not involve the
performance of new audit procedures or the drawing of new conclusions.

M
Therefore, auditor shall prepare documentation on a timely basis.
However, for completion of assembly of final audit file which is an
l
administrative process, time period of 60 days after the date of auditor’s
na
report has been required in SQC 1.
Ku
Descriptive Questions

15. Discussing meaning of

ia
an
completion memorandum,

dh
elaborate upon its importance.

an
(RTP May 24)
l M
na
Ku
ANSWER
15. Completion memorandum is a summary that

ia
describes the significant matters identified during

an
the audit and how they were addressed.
Such a summary may facilitate effective and efficient

dh
review and inspection of the audit documentation,
particularly for large and complex audits. Further, the

an
preparation of such a summary may assist auditor’s
consideration of the significant matters. It may also

M
help the auditor to consider whether there is any
l
individual relevant SA objective that the auditor
na
cannot achieve that would prevent the auditor from
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achieving the overall objectives of the auditor.

Descriptive Questions
16. CA K is statutory auditor of DEMA Private Limited for the year

ia
2022-23. The company has three plants in India. He is nearing

an
completion of audit procedures relating to financial statements for
the year under audit and has yet to sign audit report. Meanwhile, a

dh
huge fire had broken out in one of plants of the company located near
Nashik on 25th June, 2023 damaging substantial part of machinery

an
and work-in-process resulting in loss of about ` 5 crores. Unaware of
the incident, he is in process of finalizing his report in first fortnight of

M
July 2023. State few audit procedures to be performed by him to
obtain sufficient appropriate evidence for identifying such events.
l
na
Also explain auditor’s responsibilities in this situation.
Ku

(RTP May 24)

ANSWER
16. In the given situation, a huge fire had broken out in one of plants of company
on 25th June, 2023 destroying substantial part of machinery and work-in-process

ia
resulting in loss of ` 5 crores. The auditor has yet to sign audit report.

an
Before signing audit report, he should perform following audit procedures to obtain
sufficient appropriate audit evidence that all such events have been identified and are
appropriately reflected in financial statements: -

dh
• Inquiry of management whether any subsequent events have occurred
• Reading minutes of the meetings of owners, management that have been held

an
after date of financial statements and inquiring about
matters discussed at such meetings for which minutes are not available

M
• Reading entity’s latest subsequent interim financial statements
• Obtaining Written representations from management in accordance with SA
580 l
na
The situation is an example of subsequent event occurring between date of financial
statements and date of audit report requiring disclosure in financial statements. The
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auditor has a responsibility to obtain sufficient appropriate audit evidence whether

such an event requiring disclosure in financial statements is appropriately reflected in
financial statements.
Descriptive Questions
17. Kundan, a CA student, is part of an engagement team conducting

ia
audit of an entity. The audit procedures are nearing completion. He

an
notices that engagement partner has asked for a cash flow forecast
from management for next twelve months from date of financial

dh
statements. Keeping in view above, answer the following: -
(i) Discuss likely purpose of engagement partner in the above

an
situation. Elaborate upon significance of such testing being performed

M
by engagement partner.
(ii) State any two audit procedures in relation to cash flow forecast
l
na
likely to be performed by engagement partner.
(RTP May 24)
Ku
ANSWER
17. In the given situation, the engagement partner has asked for a cash flow

ia
forecast from management for next twelve months from date of financial statements. The audit
procedures are also nearing completion.

an
Therefore, purpose of engagement partner in requiring a cash flow forecast is to obtain sufficient
appropriate audit evidence regarding and to conclude on appropriateness of management’s use of
going concern basis of accounting in preparation of its financial statements. Further, his purpose is

dh
also to conclude on basis of audit evidence obtained, whether a material uncertainty exists related to
events or conditions that may cast a significant doubt on ability to entity to continue as a going
concern, and to report in accordance with SA 570.

an
The significance of testing going concern assumption is due to its effect on preparation of financial
statements. When the use of going concern is considered as appropriate, assets and liabilities are
recorded on the basis that entity will be able to realize its assets and discharge liabilities in normal
course of business. In case it is not so viewed, financial statements are prepared on liquidation basis.

M
Hence, testing such an assumption provides evidence to auditor whether use of such assumption is
appropriate or not.
Two audit procedures in relation to cash flow forecast likely to be performed
l
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• Evaluate reliability of underlying data generated to prepare the forecast
• Determine whether there is adequate support for assumptions underlying the forecast
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Descriptive Questions
18. Mention some examples of

ia
an
circumstances where the auditor

dh
may consider it necessary to include

an
an Emphasis of Matter paragraph.

M
l (RTP May 24)
na
Ku
ANSWER
18. Examples of circumstances to include Emphasis of Matter

ia
Paragraph:
As per SA 706 (Revised) on “Emphasis of Matter Paragraphs and

an
Other Matter Paragraphs In The Independent Auditor’s Report”,
the examples of circumstances where the auditor may consider it

dh
necessary to include an Emphasis of Matter paragraph are: -
(a) An uncertainty relating to the future outcome of an

an
exceptional litigation or regulatory action.

M
(b) A significant subsequent event that occurs between the date
of the financial statements and the date of the auditor’s report.
l
(c) Early application (where permitted) of a new accounting
na
standard that has a material effect on the financial statements.
(d) A major catastrophe that has had, or continues to have, a
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significant effect on the entity's financial position.

Descriptive Questions
19. CA. S, while conducting audit of an entity is facing the following issues: -

ia
(i) He has not been provided with necessary support for attending
inventory count process of entity as at year end.

an
(ii) Accounts Manager is not providing him present addresses of customers as well
as suppliers for sending external confirmations. Even mail ids have not been provided

dh
on the pretext of business confidentiality.
(iii) He was not able to verify revenues of entity due to lack of complete details.

an
(iv) He has been asking for bills on a sample basis for the purpose of verifying
expenses, but staff has been making lame excuses.

M
The matter was brought to knowledge of higher management, but of no avail. The
auditor, CA S has come to the conclusion that the possible effects on the financial
statements of undetected misstatements would be material and affecting many
l
aspects of financial statements and in such a case, a qualification of the opinion
na
would be inadequate to communicate the gravity of the situation.
How should the auditor proceed in such a situation?
Ku

(RTP May 24)

ANSWER
19. In the given case, auditor has not been able to obtain sufficient appropriate audit
evidence relating to inventories, debtors, creditors, revenues and expenses. The

ia
matter was brought to the knowledge of management but no result has been
achieved. In such circumstances, auditor should proceed as given here under: -

an
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

dh
qualification of the opinion would be inadequate to communicate the gravity of the
situation, the auditor shall:

an
(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

M
practicable or possible, disclaim an opinion on the financial statements.
If auditor withdraws from such an engagement, before withdrawing, auditor shall
l
communicate to those charged with governance any
na
matters regarding misstatements identified during the audit that would have given
rise to a modification of the opinion.
Ku
Descriptive Questions
20. Pilfering is one of the greatest

ia
an
problems in any hotel and the

dh
importance of internal control

an
cannot be undermined. Explain.

M
l (RTP May 24)
na
Ku
ANSWER
20. Pilfering is one of the greatest problems in any hotel and the importance of
internal control cannot be undermined. It is the responsibility of management to

ia
introduce controls which will minimize the leakage as far as possible. Evidence of
their success is provided by the preparation of regular perhaps weekly, trading

an
accounts for each sales point and a detailed scrutiny of the resulting profit
percentages, with any deviation from the anticipated form being investigated. The

dh
auditor should obtain these regular trading accounts for the period under review,
examine them and obtain explanations for any apparent deviations.
The auditor should verify a few restaurant bills by reference to K.O.T.s (Kitchen Order

an
Tickets) or basic record. This would enable the auditor to ensure that controls
regarding revenue cycle are in order.

M
The auditor should satisfy himself that all taxes collected from occupants on food and
occupation have been paid over to the proper authorities. If the internal control in a
hotel is weak or perhaps breaks down, then a very serious problem exists for the
l
auditor. As a result of the transient nature of many of his clients’ records, the auditor
na
must rely to a very large extent on the gross margin shown by the accounts. As a
result, the scope of his audit tests will necessarily be increased and, in the event of a
material margin discrepancy being unexplained, he will have to consider qualifying his
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audit report.
Descriptive Questions
21. From a lessee’s perspective,

ia
an
highlight main differences between

dh
an operating lease and finance lease

an
only in relation to accounting

M
treatment and tax benefits.
l
na
(RTP May 24)
Ku
ANSWER
21. Accounting treatment

ia
Operating lease is generally treated like a renting arrangement.
Lease payments are treated as operating expenses and asset does

an
not appear as asset in lessee’s balance sheet. Finance lease is
treated like a loan arrangement Hence, asset ownership is

dh
considered of that of lessee and thus appears on the balance
sheet of the lessee.

an
Tax benefits

M
Operating lease payment is considered like an expense just as in
case of
l
renting. However, no depreciation can be claimed by lessee. In
na
case of finance lease, lessee can claim both interest and
depreciation as it is treated like a loan.
Ku
Descriptive Questions
22. While conducting statutory audit of branch of a nationalized

ia
bank, it is noticed by CA Z that credit facilities granted to a borrower

an
consisting solely of term loan have been classified as “Sub-standard
Asset” during the year 2022-23 due to failure of borrower to pay EMIs

dh
on time. Such EMIs were outstanding for more than 90 days and
account was, therefore, classified as “Sub-Standard Asset”. CA Z has

an
also agreed to above asset classification made by branch
management.

M
What are CA Z’s responsibilities regarding verification of compliance
l
with income recognition norms by branch in respect of above credit
na
facilities?
Ku

(RTP May 24)

ANSWER
22. RBI norms stipulate that if any advance account

ia
becomes NPA as at close of any year, the entire interest
accrued or credited to income account in past periods

an
should be reversed or provided for, if the same is not
realized.

dh
Further, in respect of NPAs, fees, commission and other

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similar income that have accrued should cease to accrue in
the current period and should be reversed or provided for

M
with respect to past periods, if uncollected.
In the given case, account has turned Sub-standard asset
l
na
which is a type of NPA. Therefore, auditor should make
compliance of above norms relating to income recognition.
Ku
Descriptive Questions
23. While verifying provisions of advances of a branch

ia
of MCO Bank as part of statutory branch audit, CA Z

an
notices that credit facilities consisting of term loan to

dh
KRT Enterprises have been classified under doubtful
asset (D1) category. The outstanding balance in above

an
term loan account as on 31.3.2023 is ` 50 lakhs. Value of

M
security held in account is ` 40 lakhs. The branch has
made provision of ` 7.50 lakhs. Is provision made by
l
na
branch proper? Discuss.
Ku

(RTP May 24)

ANSWER
23. The provision for advances falling in D1 category is required @ 25%

ia
of secured portion and 100% of unsecured portion. Therefore, provision in
above case is arrived as under: -

an
Outstanding balance as on 31.3.23 50 lakhs
Less: Value of security 40 lakhs

dh
Unsecured portion 10 lakhs
Therefore, outstanding balance of ` 50 lakhs is secured to the tune of `40

an
lakhs and balance ` 10 lakhs is unsecured.
Provision calculation

M
25% of secured part i.e., 25% of ` 40 lakhs ` 10 lakhs
l
100% of unsecured part i.e.,100% of ` 10 lakhs ` 10 lakhs
na
Required provision ` 20 lakhs
Therefore, provision made by branch is not proper. It should have made
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provision of `20 lakhs instead of ` 7.50 lakhs.

Descriptive Questions
24. CA X has been offered audit of financial statements of TDK

ia
Industries, a partnership firm. Prior to accepting proposed offer, he

an
insists upon obtaining an agreement of management regarding
acknowledgment of its responsibility of having a proper process in

dh
place to ensure that financial statements prepared are free from
material misstatements. However, management is of the view that it

an
is auditor’s duty to detect material misstatements in financial
statements and such an insistence by auditor is totally uncalled for.

M
Whose view is proper? Also discuss reasons for arriving at your
conclusion. What should be likely proper course of action for CA X in
l
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above situation?
Ku

(RTP May 24)

ANSWER
24. SA 210 deals with the auditor’s responsibilities in agreeing the terms of the audit engagement with management and,
where appropriate, those charged with governance. This includes establishing that certain preconditions for an audit,

ia
responsibility for which rests with management and, where appropriate, those with governance, are present.
The objective of the auditor is to accept or continue an audit engagement only when the basis upon which it is to be

an
performed has been agreed, through:
(A) Establishing whether the preconditions for an audit are present and
(B) Confirming that there is a common understanding between the auditor and management and, where appropriate,

dh
those charged with governance of the terms of the audit engagement.
One of the preconditions for an audit is to obtain the agreement of management that it acknowledges and understands its
responsibility for preparation of financial statements and for such internal control as is necessary to enable preparation of
financial statements that are free from material misstatements.

an
In the given situation, CA X is insisting only upon obtaining agreement of management regarding acknowledgment of its
responsibility for internal control to enable preparation of financial statements that are free from material misstatements in
accordance with SA 210. Design, implementation and maintenance of internal control to ensure preparation of reliable

M
financial statements that are free from material misstatements is management’s responsibility. He is insisting on obtaining
agreement of management regarding acknowledgment of its responsibility. Therefore, CA X’s view is proper.
In case management does not provide such agreement acknowledging its responsibility, the auditor shall not accept
proposed audit engagement unless required by law or regulation.
l
na
Ku
Descriptive Questions
25.“SA 220 is premised on the basis that

ia
the firm is subject to SQC 1”. What do

an
you understand by given statement in

dh
context of audit quality?

an
(RTP May 24)
l M
na
Ku
ANSWER
25. Audit quality is essential to maintain confidence in the independent

ia
assurance provided by the auditors. It is responsibility of auditor to
maintain high audit quality. SQC 1 and SA 220 both deal with quality

an
control. SQC 1 applies to entire firm. However, SA 220 applies to a
particular audit engagement.

dh
Based upon quality control system of firm established in accordance with
requirements of SQC 1, quality control policies pertaining to audit
engagements are decided by engagement teams. Engagement partner of a

an
team is responsible for quality control procedures of a particular audit
engagement in accordance with SA 220.

M
Therefore, SA 220 is premised on the basis that the firm is subject to SQC
1. Within the context of the firm’s system of quality control, engagement
l
teams have a responsibility to implement quality control procedures that
na
are applicable to the audit engagement.
Ku
Descriptive Questions
1. (a) DOX Limited, a service provider company engaged in providing

ia
courier services pan-India as well as internationally, has appointed an

an
internal auditor, Mr. G, in accordance with requirements of the
Companies Act, 2013 during financial year 2023-24. The company’s

dh
annual turnover during year 2022-23 and 2023-24 has been about `
300 crores during each of above years. Business of the company has

an
been profitable. Mr. G heads internal audit department of the
company assessing governance activities, assisting in improving risk

M
management activities and reviewing controls. Discuss reporting
responsibility of statutory auditor of the company under the
l
na
Companies Act, 2013 specifically in relation to internal audit and
related matters for the year 2023-24.
Ku

(4 Marks) MTP Mar. 24

ANSWER
1. (a) DOX Limited is in business of providing courier services. As name of the

ia
company and given facts suggest: -

an
Ø It is not a small company under section 2(85) of Companies Act, 2013.
Ø It is not a private company.

dh
)=. It is not a one person company.
Ø It is not a banking or insurance company.

an
Ø It is not a Section 8 company as it does not has charitable objects etc.
Therefore, it does not qualify for any exemption from applicability of CARO, 2020. Hence,

M
reporting requirements under CARO, 2020 are applicable. While reporting under CARO, 2020,
statutory auditor is required to report under clause (xiv) of paragraph 3 as under:
(a) l
whether the company has an internal audit system commensurate with the size and
na
nature of its business
(b) whether the reports of the internal auditors for the period under audit were
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considered by the statutory auditor

Descriptive Questions
(b) Up and High Private Limited has started its export business

ia
during the year 2023-24. The company was catering to domestic
market only in past years. CA H, statutory auditor of the company,

an
is of the view that the company has understated its revenue by `
50.00 lacs in the year 2023-24 by not complying with

dh
requirements of AS 9 relating to revenue recognition.
(i) Discuss responsibilities of statutory auditor to communicate

an
with management in the above situation in accordance with SA
450. Also explain the usefulness of such communication.

M
(ii) If management refuses to correct misstatement as
communicated by the statutory auditor, how should he proceed?
l
na
(4 Marks) MTP Mar. 24
Ku
ANSWER
(b) The above situation is an example of misstatement relating to non¬compliance
with requirements of AS 9 identified during audit. In

ia
accordance with requirements of SA 450, the auditor shall communicate on a timely

an
basis all misstatements accumulated during the audit with the appropriate level of
management, unless prohibited by law or regulation. The auditor shall request
management to correct those misstatements.

dh
Timely communication of misstatements to the appropriate level of management is
important as it enables management to evaluate whether the items are

an
misstatements, inform the auditor if it disagrees and take action as necessary. The
correction by management of all misstatements, including those communicated by
the auditor, enables management to maintain accurate accounting books and records

M
and reduces the risks of material misstatement of future financial statements because
of the cumulative effect of immaterial uncorrected misstatements related to prior
periods.
l
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If management refuses to correct some or all of the misstatements communicated by
the auditor, the auditor shall obtain an understanding of management's reasons for
not making the corrections and shall take that understanding into account when
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evaluating whether the financial statements as a whole are free from material
misstatement.
Descriptive Questions
(c) Prudent Enterprises Private Limited has incurred

ia
and fully spent for the first time Corporate Social
Responsibility (CSR) expenditure amounting to ` 14.50

an
lacs in pursuance to provisions of section 135 of

dh
Companies Act, 2013. The expenditure was spent for
women empowerment programmes through an

an
implementing agency (not a related party). As per law
provisions, it was required to spend ` 14.00 lacs during

M
the year. Discuss how such information is required to
be disclosed in accordance with requirements of
l
na
Schedule III to the Companies Act, 2013 in financial
statements of the company.
Ku

(3 Marks) MTP Mar. 24

ANSWER
(c) In the given situation, following information is required to be disclosed in
accordance with requirements to Schedule III to the Companies Act, 2013:

ia
(a) amount required to be spent by the company during the year '14.00 lacs

an
(b) amount of expenditure incurred Z 14.50 lacs
(c) shortfall at the end of the year NIL

dh
(d) total of previous years shortfall NA
(e) reason for shortfall NA

an
(f) nature of CSR activities - Women empowerment activities through
implementing agency

M
(g) details of related party transactions, e.g., sk contribution to a trust controlled
by the company in relation to CSR expenditure as per relevant
Accounting Standard NIL l
na
(h) where a provision is made with respect to a liability incurred by entering into a
contractual obligation, the movements in the provision during
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the year should be shown separately NIL

Descriptive Questions
(d) CA Tripad (engagement partner) based at New Delhi is

ia
external auditor of Lap of Nature, a firm, since last three

an
years. The firm is engaged in business of providing tourism
services including holiday packages to its club members. It has

dh
also provided auditor including his team members free

an
holiday for a week every year in one of its premium resorts in
Ooty in the State of Tamil Nadu. The company has also

M
booked free air travel for engagement team members during
all these years. Discuss why Chartered Accountant is not
l
na
acting ethically. How are familiarity threats created in above
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situation?
(3 Marks) MTP Mar. 24
ANSWER
(d) The firm is providing free hospitality to engagement team

ia
members including engagement partner. In such

an
circumstances, fundamental principles governing professional
ethics are violated. Such acts of free hospitality are capable of

dh
impairing objectivity of auditor.

an
The situation given in the question signifies that auditors have
formed relationships with client where they may end up

M
being too sympathetic to the client's interests. Due to free
l
hospitality enjoyed by engagement team members, they may
na
take a sympathetic view to issues which may have arisen
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during course of audit. In this way, familiarity threats are

created in the situation.
Descriptive Questions
2. (a) Mention any four financial

ia
an
events or conditions that,

dh
individually or collectively, may cast

an
significant doubt on the entity’s

M
ability to continue as going concern.
l
na
(4 Marks) MTP Mar. 24
Ku
ANSWER
2. (a) Financial events or conditions that may cast significant doubt on the entity's ability to continue
as going concern:

ia
(i) Net liability or net current liability position.

an
(ii) Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance on short term borrowings to finance long term assets.
(iii) Indications of withdrawal of financial support by trade payables.

dh
(iv) Negative operating cash flows indicated by historical or prospective financial statements.
(v) Adverse key financial ratios.

an
(vi) Substantial operating losses or significant deterioration in the value of assets used to
generate cash flows.
(vii) Arrears or discontinuance of dividends.

M
(viii) Inability to pay trade payables on due dates.
(ix) Inability to comply with terms of loan agreements.
l
na
(x) Change from credit to cash-on-delivery transactions with suppliers.
(xi) Inability to obtain financing for essential new product development or other essential
investments.
Ku
Descriptive Questions

(b) Adequate planning

ia
an
benefits the audit of financial

dh
statements in several ways.

an
Explain.
l M
(4 Marks) MTP Mar. 24
na
Ku
ANSWER
(b) Adequate planning benefits the audit of financial statements in several

ia
ways, including the following:
(a) Helping the auditor to devote appropriate attention to important

an
areas of the audit.
(b) Helping the auditor identify and resolve potential problems on a

dh
timely basis.
(c) Helping the auditor properly organize and manage the audit

an
engagement so that it is performed in an effective and efficient manner.
(d) Assisting in the selection of engagement team members with

M
appropriate levels of capabilities and competence to respond to
anticipated risks, and the proper assignment of work to them.
l
(e) Facilitating the direction and supervision of engagement team
na
members and the review of their work.
( f ) Assisting, where applicable, in coordination of work done by
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auditors of components and experts.

Descriptive Questions
(c) The auditor carries out his work by

ia
obtaining audit evidence through

an
performance of audit procedures. However,

dh
there are practical and legal limitations on

an
ability of auditor to obtain audit evidence.

M
Give one example each for such practical and
legal limitations.l
na
(3 Marks) MTP Mar. 24
Ku
ANSWER
(c) Example of practical limitation on ability of auditor to obtain

ia
audit evidence An auditor does not test all transactions and balances.

an
He forms his opinion only by testing samples. It is an example of
practical limitation on auditor's ability to obtain audit evidence.

dh
Example of legal limitation on ability of auditor to obtain audit
evidence Management may not provide complete information as

an
requested by auditor. There is no way by which auditor can force

M
management to provide complete information as may be requested
by auditor. In case & he is not provided with required information, he
l
can only report. It is an example of legal limitation on auditor's ability
na
to obtain audit evidence.
Ku
Descriptive Questions
(d) Goods and Services Tax Network (GSTN) is a not for

ia
profit, limited by shares, company. Its 50% shareholding is

an
with Union Government and 50% with different State
Governments. The company provides IT infrastructure and

dh
services to various stakeholders including governments and

an
tax payers. The company is in operation since past few years
and subsequent auditor needs to be appointed during

M
financial year 2023-24. Who appoints statutory auditor of
such a company described above in accordance with
l
na
provisions of Companies Act, 2013? Can any directions be
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issued to statutory auditors of above company?

(3 Marks) MTP Mar. 24
ANSWER
(d) The above company is a government company. Section

ia
143(5) of the Companies Act,2013 states that, in the case of a
Government company or any other company owned or

an
controlled, directly or indirectly, by the Central Government, or
by any State Government or Governments, or partly by the

dh
Central Government and partly by one or more State
Governments, the comptroller and Auditor-General of India shall

an
appoint the auditor under sub-section (5) of section 139 i.e.
appointment of subsequent auditor and direct such auditor the

M
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
l
na
Auditor-General of India which, among other things, include the
directions, if any, issued by the Comptroller and Auditor-General
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of India, the action taken thereon and its impact on the accounts
and financial statements of the company.
Descriptive Questions
3. (a) Suniti, a CA student, is part of an engagement team conducting audit of

ia
a company TIM Private Limited. According to audit programme, she is responsible

an
for verifying purchases and PPE items appearing in books of accounts from
records/bills of company. Besides, she has also been entrusted responsibility to
obtain written representation from management regarding carrying out of physical

dh
verification of inventories during the year. During course of her work, she finds that:

an
(i) One purchase bill amounting to ` 5.00 lacs pertaining to TIM Industries has
been entered in books of TIM Private Limited.

M
(ii) The management has refused to provide a written representation relating to
physical verification of inventories during the year. She has brought it to knowledge
l
of engagement partner who has decided to use lack of such a representation as
na
audit evidence.
Discuss whether each of above constitutes audit evidence. State reasoning for your
Ku

answer.
(4 Marks) MTP Mar. 24
ANSWER
3. (a) Audit evidence comprises both information that supports and

ia
corroborates management's assertions, and any information that

an
contradicts such assertions. Purchase bill of Z 5.00 lacs pertaining to
TIM Industries has been entered in books of TIM Private Limited.

dh
Therefore, it is contradicting management's assertion relating to

an
Further, the absence of information (for example, management's
refusal to provide a requested representation) is used by auditor, and

M
therefore, also constitutes audit evidence. In the given case,
management has refused to provide a written representation relating
l
na
to physical verification of inventories during the year. Therefore,
absence of information is used by auditor and it also constitutes audit
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evidence.
Descriptive Questions
(b) CA B is statutory auditor of Boom Payments Bank for year 2023-

ia
24. During the year, banking regulator has imposed restrictions on

an
Bank from accepting new deposits due to non-compliance in
conducting KYC in large number of accounts and violation of rules

dh
aimed at preventing money laundering. There is material uncertainty
regarding probable outcome of such restrictions on ability of Bank to

an
continue as going concern. However, for year 2023-24, auditor has
concluded that use of going concern basis of accounting is

M
appropriate. The financial statements of Bank do not make adequate
disclosure of material uncertainty due to above events in financial
l
na
statements. What are implications for auditor’s report for year 2023-
24 in view of above?
Ku

(4 Marks) MTP Mar. 24

ANSWER
(b) As described in the situation given in the question, banking regulator

ia
has
imposed restrictions due to non-compliance with regulatory requirements

an
and there is material uncertainty of such events or conditions which may
cast a significant doubt on ability of Bank to continue as going concern.

dh
However, the financial statements of Bank do not make adequate
disclosure of material uncertainty due to above events in financial
statements.

an
If adequate disclosure about the material uncertainty is not made in the
financial statements, the auditor shall:

M
(i) Express a qualified opinion or adverse opinion, as appropriate, in
accordance with SA 705.
l
na
(ii) 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
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financial statements do not adequately disclose this matter.

Descriptive Questions

(c)Auditor shall develop an audit

ia
an
plan that includes description of

dh
audit procedures. Specify

an
requirements in this regard.
M
(3 Marks) MTP Mar. 24
l
na
Ku
ANSWER
(c) SA 300 states that auditor shall develop

ia
an audit plan that shall include description

an
of-

dh
(i) The nature, timing and extent of planned
risk assessment procedures

an
(ii) The nature, timing and extent of planned

M
further audit procedures at assertion level
l
(iii)Other planned audit procedures that are
na
required to be carried out so that the
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engagement complies with SAs.

Descriptive Questions

(d) What is meant by audit

ia
an
documentation? What are

dh
objectives of an independent

an
auditor in accordance with SA
230? l M
na
(3 Marks) MTP Mar. 24
Ku
ANSWER
(d) Audit documentation refers to the record of

ia
audit procedures performed,

an
relevant audit evidence obtained, and
conclusions the auditor reached. The objective

dh
of the auditor in accordance with SA 230 is to

an
prepare documentation that provides: -
(i) A sufficient and appropriate record of the

M
basis for the auditor's report and
l
na
(ii) Evidence that the audit was planned and
performed in accordance with SAs and
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applicable legal and regulatory requirements.

Descriptive Questions
4. (a) You are part of engagement team

ia
conducting audit of an entity engaged in

an
manufacturing business. State few audit

dh
procedures you would undertake to perform

an
to verify that recorded sales in financial

M
statements represent goods actually sold
during the period and recorded sales are not
l
na
overstated.
Ku

(4 Marks) MTP Mar. 24

ANSWER
4. (a) Following audit procedures can be performed to perform to verify that

ia
recorded sales in financial statements represent goods actually sold during the period and
recorded sales are not overstated.

an
Check whether a single sales invoice is recorded twice or a cancelled sales invoice has been
recorded.

dh
Test check few invoices with their relevant entries in sales journal.
Obtain confirmation from few customers to ensure genuineness of sales transaction -..
Check whether any fictitious customers and sales have been recorded.

an
Verify whether any shipments were done without the consent and agreement of the
customer, especially at the year end to inflate the sales figure

M
Whether unearned revenue recorded as earned.
Whether any substantial uncertainty exists about collectability
l
na
Whether customer obligations are contingent on other (financing, resale, etc.).
Review sequence of sales invoices
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Review journal entries for unusual transactions

Calculate the ratio of sales return to sales and compare it with previous year and enquire
for the reasons for unusual variation.
Descriptive Questions
(b) While performing statutory audit of Contra Industries Private Limited, a company engaged in
manufacturing and assembling of LED lights, CA Varun has decided to attend physical inventory count

ia
process of the company on 30th and 31st March, 2024. The inventories are lying at three different
locations - two such locations A and B are in one city and third location C is in another city. Further,

an
company also sends inventories to some service providers for quality control and testing as such facilities
are not available with the company.
CA Varun is well-versed with this type of industry and has prepared a list of following matters which could

dh
be relevant to him in planning attendance at physical inventory count process for discharging his
responsibilities in accordance with SAs: -
• Nature of inventories i.e. LED light components, parts, circuits, panels, body, WIP and finished

an
packed LED lights
• Materiality of inventories at different locations A, B and C
• Stage of completion of work-in-progress

M
• Maintenance of perpetual inventory system by company
• Materiality of inventories lying with service providers
l
na
• Timing of physical inventory counting i.e. year end
There are two important matters which do not find place in above list. Without considering these crucial
matters, it would be difficult for the auditor to properly plan his attendance at inventory count process in
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accordance with relevant SA. Discuss such matters.

(4 Marks) MTP Mar. 24
ANSWER
(b) The list given in the question does not contain following

ia
important matters: -
)> Whether adequate procedures are expected to be established

an
and

dh
proper instructions issued for physical inventory counting. The
auditor has to evaluate management's instructions for recording
and controlling physical inventory counting. It is important for the

an
auditor to know beforehand how the inventory count will be
conducted so as to assess its effectiveness.

M
> The nature of internal control related to inventories at
different locations. It is possible that inventories at one location
l
na
have unsatisfactory control leading to higher risk of material
misstatement related to inventories at that particular location.
Ku
Descriptive Questions

(c)The auditor should decide

ia
an
whether relevant information is

dh
properly disclosed in the financial

an
statements. Explain with
M
reference to scope of audit.
l
na
(3 Marks) MTP Mar. 24
Ku
ANSWER
(c) The auditor should decide whether relevant information is properly

ia
disclosed in the financial statements. He should also keep in mind
applicable statutory requirements in this regard.

an
It is done by ensuring that financial statements properly summarize
transactions and events recorded therein and by considering the

dh
judgments made by management in preparation of financial statements.
The management responsible for preparation and presentation of financial

an
statements makes many judgments in this process of preparing and
presenting financial statements. For example, choosing of appropriate
accounting policies in relation to various accounting issues like choosing

M
method of charging depreciation on fixed assets or choosing appropriate
method for valuation of inventories.
l
na
The auditor evaluates selection and consistent application of accounting
policies by management; whether such a selection is proper and whether
chosen policy has been applied consistently on a period-to-period basis.
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Descriptive Questions
(d) SQC 1 dwells upon engagement quality

ia
control review (EQCR) as part of system of

an
quality control in a firm. Why is such a review

dh
required? For which type of engagements

an
EQCR is mandatory?

M
What should be approach of firm for
l
engagements for which EQCR is not
na
mandatory?
Ku

(3 Marks) MTP Mar. 24

ANSWER
(d) Significant judgments made in an

ia
engagement should be reviewed by an

an
engagement quality control reviewer for taking
an objective view before the report is issued.

dh
Engagement quality control review is mandatory
for all audits of financial statements of listed

an
entities.

M
In respect of other engagements, firm should
devise criteria to determine
l
na
cases requiring performance of engagement
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quality control review.

Descriptive Questions
5. (a) WTE Private Limited is engaged in business of

ia
manufacturing a product liable to GST @ 5%. The input raw

an
materials for manufacturing this product are liable to GST @
12% and 18%. As a result, at the end of financial year, ITC on

dh
inputs amounting to ` 60 lacs is accumulated in Electronic

an
Credit ledger and refundable to company under provisions of
GST law. How would above amount of ` 60 lacs be reflected

M
and classified in balance sheet of company? State few audit
procedures to be performed by you for verification of
l
na
abovesaid balance.
Ku

(4 Marks) MTP Mar. 24

ANSWER
5. (a) In the given situation, Z 60 lacs is accumulated in Electronic credit ledger

ia
of WTE Private Limited as finished product is liable to lower GST rate whereas input
raw materials for manufacturing carry higher GST rate. It is refundable to company by

an
virtue of provisions of GST law. The above balance would be reflected and classified
under current assets. Within current assets, it would be classified into "Other current
assets".

dh
• Few audit procedures to be performed for verification of above balance are:
• In relation to balances with statutory authorities like GST input

an
• credit, prepare a reasonability analysis with respect to purchases by applying the
applicable rate to the purchases and in case of any variance with the asset recorded

M
by the entity, reasons for variance should be requested from the entity.
• Obtain copies of statutory GST returns filed on GST portal.
• In case refundable amount as on balance sheet date is still outstanding, verify
l
na
whether the amount recorded as per books of account tallies with the claim made
with the authorities subsequently by going to GST portal.
• In case refundable amount as on balance sheet date is received subsequently, verify
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it from Bank statement.

Descriptive Questions
(b) The objective of an auditor in

ia
accordance with SA 315 is to identify and

an
assess risks of material misstatement at

dh
financial statement level and assertion

an
level. Which specific activities an auditor is
required to perform for the purpose of
M
identifying and assessing risks of material
l
na
misstatement?
Ku

(4 Marks) MTP Mar. 24

ANSWER
(b) For the purpose of identifying and assessing the risks of material

ia
misstatement, the auditor shall:
(ii) Identify risks throughout the process of obtaining an understanding

an
of the entity and its environment, including relevant controls that relate to
the risks, and by considering the classes of transactions, account balances,

dh
and disclosures in the financial statements. Assess the identified risks, and
evaluate whether they relate more pervasively to the financial statements
as a whole and potentially affect many assertions.

an
(iii) Relate the identified risks to what can go wrong at the assertion
level, taking account of relevant controls that the auditor intends to

M
(iv) Consider the likelihood of misstatement, including the possibility of
multiple misstatements, and whether the potential misstatement is of a
l
na
magnitude that could result in a material misstatement.
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Descriptive Questions
(c) You have been appointed as an

ia
auditor of ABC Hotel, a three star hotel,

an
for Financial Year 2022-23. As an auditor

dh
what are the special points that need to

an
be considered in verifying the Inventories
M
in the nature of food and beverages?
l
na
(3 Marks) MTP Mar. 24
Ku
ANSWER
(c) Verification of inventories in the nature of food

ia
and beverages: The

an
inventories in any hotel are both readily portable and
saleable particularly the food and beverage

dh
inventories. It is therefore extremely important that
all movements and transfers of such inventories

an
should be properly documented to enable control to
be exercised over each individual stores' areas and

M
sales point. The auditor should carry out tests to
l
ensure that all such documentation is accurately
na
processed. Therefore, following may be noted in this
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regard:
Descriptive Questions
(d) Professional Behaviour is one of the

ia
an
fundamental principles governing
professional ethics. Explain its meaning.

dh
Also, give example of a situation where

an
a Chartered Accountant fails to follow
this principle. l M
na
(3 Marks) MTP Mar. 24
Ku
ANSWER
(d) The Principle of Professional Behaviour requires an accountant to

ia
comply with relevant laws and regulations and avoid any conduct that the
accountant knows or should know might discredit the profession. A

an
professional accountant shall not knowingly engage in any employment,
occupation or activity that impairs or might impair the integrity,
objectivity or good reputation of the profession, and as a result would be

dh
incompatible with the fundamental principles.
Example

an
A Chartered Accountant has conducted audit of accounts of an entity for a
particular year. ICAI has issued a letter to him relating to certain matters

M
concerning audit. He didn't even bother to reply to the letter despite
reminders. Failure to reply to professional body smacks of lack of courtesy
l
and professional responsibility. In the given case, Chartered accountant
na
has not followed principle of Professional Behaviour.
Ku
Descriptive Questions
6. (a) CA Z is appointed as statutory auditor of BETA Private Limited

ia
for the year 2023-24. There exists an internal audit function in the
company headed by its Chief Internal Auditor, CA K. Valuation of

an
trade receivables of company is assessed as area of higher risk by
statutory auditor. He wants to take direct assistance of Chief

dh
Internal Auditor in respect of above matter. Discuss along with
reasons whether it would be proper for statutory auditor to: -

an
(i) assign checking of accuracy of aging of trade receivables to
Chief Internal Auditor?

M
(ii) assign evaluation of adequacy of provision based on aging of
trade receivables to Chief Internal Auditor?
l
na
(4 Marks) MTP Mar. 24
Ku
ANSWER
6. (a) In accordance with SA 610, the external auditor shall not use internal

ia
auditors to provide direct assistance to perform procedures that relate to
higher assessed risks of material misstatement where the judgment

an
required in performing the relevant audit procedures or evaluating the
audit evidence gathered is more than limited.

dh
In the given situation, valuation of trade receivables is assigned as an area
of higher risk by statutory auditor. Judgment required in checking of

an
accuracy of aging of trade receivables is limited. Therefore, external
auditor can assign the checking of the accuracy of the aging to Chief
Internal Auditor providing direct assistance as it involves limited

M
judgment.
However, because the evaluation of the adequacy of the provision based
l
na
on the aging would involve more than limited judgment, it would not be
appropriate to assign that latter procedure to Chief Internal Auditor
providing direct assistance.
Ku
Descriptive Questions
(b) The audit of Government

ia
an
expenditure is one of the major

dh
components of Government audit.

an
Briefly explain the basic standards

M
set in relation to audit of
l
Government expenditure.
na
Ku

(4 Marks) MTP Mar. 24

ANSWER
(b) Expenditure Audit: The audit of government expenditure is one of the

ia
major components of government audit. The basic standards set for audit of
expenditure are to ensure that there is provision of funds authorized by competent

an
authority fixing the limits within which ex¬penditure can be incurred. These
standards are—
(i) that the expenditure incurred conforms to the relevant provisions of the statutory

dh
enactment and in accordance with the Financial Rules and Regulations framed by the
competent authority. Such an audit is called as the audit against 'rules and orders'.

an
(ii) that there is sanction, either special or general, accorded by competent authority
authorising the expenditure. Such an audit is called as the audit of sanctions.

M
(iii) that there is a provision of funds out of which expenditure can be incurred and
the same has been authorised by competent authority. Such an audit is called as audit
against provision of funds.
l
na
(iv) that the expenditure is incurred with due regard to broad and general
principles of financial propriety. Such an audit is also called as propriety audit.
(v) that the various programmes, schemes and projects where large financial
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expenditure has been incurred are being run economically and are yielding results
expected of them. Such an audit is termed as the performance audit.
Descriptive Questions
(c) Cinescreen Multiplex Ltd. is operating

ia
cinemas in different locations in Mumbai

an
and has appointed you as an internal

dh
auditor. What are the areas that need to

an
be verified in relation to receipts from
sale of Tickets? l M
na
4 Marks) MTP Mar. 24
Ku
ANSWER
(c) The special steps involved in the audit of receipts from sale of tickets are

ia
stated below-
(i) Verify that entrance to the cinema-hall during show is only through printed tickets;

an
(ii) Verify that they are serially numbered and bound into books. In case bookings are made
online, verify the system for online booking;

dh
(iii) Verify that the number of tickets issued for each show and class, are different though the
numbers of the same class for the show on the same day, each week, run serially;
(iv) Verify that for advance booking a separate series of tickets is issued;

an
(v) Verify that the inventory of tickets is kept in the custody of a
responsible official.

M
(vi) Confirm that at the end of show, a statement of tickets sold is
prepared and cash collected is agreed with it. -. .....
(vii) l
Verify that a record is kept of the 'free passes' and that these are issued under proper
na
authority.
(viii) Reconcile the amount of Tax collected with the total number of tickets issued for each class.
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(ix) Vouch the entries in the Cash Book in respect of cash collected on sale of tickets for different
shows on a reference to Daily Statements which have been test checked as aforementioned with
record of tickets issued for the different shows held.
Descriptive Questions
(d) Given below is a table containing Column A and Column B.

ia
Column A contains description of certain controls in an automated

an
environment. Complete Column B by stating appropriate type of
control.

dh
Column A (Description of control in an automated Column B (Type of
environment) control)

an
Reasonableness checks ?
Controls over Data centre and network ?

M
operations
Controls over application system acquisition, development and ?
l
na
maintenance
Program change controls ?
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(3 Marks) MTP Mar. 24

ANSWER
Column A (Description of control in an Column B (Type of

ia
automated environment) control)

an
Reasonableness checks Application controls

dh
Controls over Data centre and network General IT controls

an
operations

M
Controls over application system acquisition, General IT controls
development and maintenance
l
na
Program change controls General IT controls
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Descriptive Questions
(e) An engagement partner takes overall

ia
responsibility for maintaining audit

an
quality in an audit engagement in

dh
accordance with SA 220. What are his

an
objectives in taking and emphasizing
such responsibility?
l M
na
(3 Marks) MTP Mar. 24
Ku
ANSWER
(e) Leadership responsibility of an engagement partner is to take

ia
responsibility for the overall quality on each audit engagement. The
actions of the engagement partner and appropriate messages to the other

an
members of the engagement team, in taking responsibility for the overall
quality on each audit engagement, emphasise-

dh
(a) The importance to audit quality of:
(i) Performing work that complies with professional regulatory

an
and legal requirements
(ii) Complying with the firm's quality control policies and procedures as

M
applicable
(iii) Issuing auditor's reports that are appropriate in the circumstances
and l
na
(iv) The engagement team's ability to raise concerns without fear of
reprisals.
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(b) The fact that quality is essential in performing audit engagements.