Best Ca - Inter - Audit - Workbook PDF

CA Inter (Paper 6)
Auditing and Assurance Workbook
Contents - Auditing and Assurance Workbook

S. No.
Topic
Page No.
Practical Illustrations Module I Auditing Concepts
02 09
Practical Illustrations Module II Company Audit
10 41
Questions & Answers Module IV Engagement standards
42 84
True / False Questions (Objective questions)
85 95
List of Important Questions
96 100
List of Important Sections
101 - 102
May 2013 Exam Paper
103 - 103
Compiled by: CA. Pankaj Garg
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Practical Illustrations Module I Concepts of auditing

Q. No. 1
State with reasons your views on the following: Mr. X, a partner of X & Co., Chartered
Accountant died of a heart attack on 30.3.13 after completing the entire routine audit work of
T Ltd. Mr. Y one of the partners of the firm, therefore signed the accounts of T Ltd. without
reviewing the finalisation work done by the assistants.
Answer: Reliance on work performed by others: It is one of the basic principle that auditor can
delegate work to assistants or use the work performed by other auditors and experts,
subject to following:
(a) Auditor is entitled to rely in respect of such work delegated to assistants or
performed by others, provided
he exercises adequate skill and care, and
is not aware of any reasons to believe that he should not have so relied.
(b) In respect of work delegated to assistants, auditor should carefully direct,

supervise and review the work.
(c) Responsibility for forming and expressing opinion on the financial information
continues with the auditor.
Conclusion: In the instant case, it is not clear whether Mr. X did review the work
performed by assistants or not. Hence, it is the duty of Mr. Y to review the work
performed by the assistants before expressing an opinion on financial statements.
Accordingly, Mr. Y had failed to exercise adequate skill and care and has negligently
performed his duties.
Q. No. 2
As an auditor comment on the following situations: As an auditor of PQR Ltd. you have asked
your audit assistant to draw the audit programme. The assistant drew up the audit programme
without going through the monthly report of the Internal Auditor on the plea that he is a CA
and have found no serious irregularities and internal control system is running perfectly.
Answer: Non-adherence to Basic Principles: An auditor is required to adhere to the basic
principles while performing his duties. But in this situation, it appears that the
following basic principles has not been adhered to:
(i) Integrity, Objectivity and Independence: Objectivity implies that auditors opinion
should be based on facts and evidences collected through audit procedure.
(ii) Skill and competence: It requires that an auditor should exercise due professional
care in performing the audit.
(iii) Accounting System and Internal Control: It requires auditor to gain an
understanding of accounting system and related internal controls.
Conclusion: In the instant case, the basic principles mentioned above have not been
followed by the auditor.
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Q. No. 3
State with reasons your views on the following: An assistant of X & Co., Chartered Accountants
detected an error of Rs. 5 per interest payment which recurred number of times. The General
manger (Finance) of T Ltd. advised him not to request for passing any adjustment entry as
individually the errors were of small amounts. The company had 2,000 deposit accounts and
interest was paid quarterly.
Answer: Consideration of materiality while performing an audit:
SA 320 on Materiality in Planning and Performing an Audit lays down the standard
on the concept of materiality. Accordingly, any misstatements, including omissions,
are considered to be material if they, individually or in the aggregate, could
reasonably be expected to influence the economic decisions of users of the F.S.
The auditor considers materiality at both the overall financial information level and
relation to individual account balances and classes of transactions.
Conclusion: In this case, auditor should determine the cumulative error and then take a
decision as to whether an adjustment is required or not. Accordingly, they need not pay
any attention to the advice made by General Manager (Finance) of T Ltd.
Q. No. 4
As an Auditor, how would you react to the following situation: The company produced
photocopies of fixed deposit receipts as the original receipts were kept in the safe custody of
director finance who was presently out of the country on company business.
Answer: Considering photocopies as Audit Evidence:
SA 500 on Audit Evidence requires that an auditor should obtain sufficient and
appropriate audit evidence, evaluates the same and draw reasonable conclusions
therefrom. In the present case, photocopies of fixed deposit receipts were made
available to the auditor as the original receipts were not available. The auditor is
generally required to inspect and physically verify the fixed deposit receipts
representing the assets on the last day of the accounting period. Such verification is
necessary to ensure the followings:
no unauthorised charge has been created, or
the fixed deposit receipts have not been lodged with a bank to secure a loan or an
overdraft.
Thus the photocopies of the receipts cannot serve the desired purpose.
Alternatively, reliance can be placed by the auditor on such evidence through the
following ways:
1. Get these photocopies, certified, as true copies by the management as also backed by
a letter of representation.
2. Director (Finance) may also be asked to confirm in writing from abroad that no
unauthorised charge has been created on the FDRs and the same shall be produced
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to the auditors as soon as he returns from business trip.

3. An independent confirmation may also be obtained from the bank that no charge
has been created on such FDRs.
Conclusion: Under the present circumstances, the auditor must consider the materiality
of the amount involved and its overall impact on the final conclusion. In case the auditor
is satisfied after extending the substantive audit procedures and if amount involved is
reasonable in his opinion he need not state anything in his report after getting a suitable
confirmation in writing form Director (Finance) about the status of FDRs.
Q. No. 5
State with reasons your views on the following: An assistant of X & Co., Chartered Accountants
wanted to verify the cash in hand and investments of T Ltd. The General Manager (Finance) of T
Ltd. suggested to the assistant of X & Co. that it was not necessary as his staff had done the same
only few days back and no discrepancies were noted.
Answer: Verification of cash and Investments:
SA-500 on Audit Evidence requires that the auditor should obtain sufficient and
appropriate audit evidence through the performance of compliance and substantive
procedures to enable him to draw reasonable conclusions therefrom on which to
base his opinion on the financial statements.
Obtaining audit evidence from substantive procedures is intended to reasonably

assure the auditor in respect of the various assertions, including therein is Existence
of an asset or a liability at a given date.
Generally both cash and investments constitute a significant proportion of the total
assets of an entity. Physical verification of both these items to verify their existence
constitute an important auditing procedure. Since it is normally not possible to
verify the existence of these items on the date of balance sheet, it is recommended
that surprise check must be conducted during the year.
Conclusion: Auditor should verify the cash in hand and investments even though the
same has been verified by the personnel of the Finance department of T Ltd. for
obtaining reliance regarding the existence of these assets.
Q. No. 6
X, a Chartered Accountant was engaged by PQR & Co. Ltd. for auditing their accounts. He sent
his letter of engagement to the Board of Directors, which was accepted by the company. In the
course of audit of the company, the auditor was unable to obtain appropriate sufficient
evidence regarding receivables. The client requested for a change in terms of engagement. Offer
your comments in this regard.
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Answer: Acceptance of Changes in terms of Engagement:

SA 210 (revised) Agreeing the terms of Engagement provides the auditor course of
action in case any change in agreed terms is requested by management. Accordingly:
(a)
The auditor shall not agree to a change in the terms of the audit engagement
where there is no reasonable justification for doing so.
(b)
If, prior to completing the audit engagement, the auditor is requested to change
the audit engagement to an engagement that conveys a lower level of assurance,
the auditor shall determine whether there is reasonable justification for doing so.
(c)
If the terms of the audit engagement are changed, the auditor and management
shall agree on and record the new terms of the engagement in an engagement
letter or other suitable form of written agreement.
(d)
If the auditor is unable to agree to a change of the terms of the audit engagement
and is not permitted by management to continue the original audit engagement,
the auditor shall:
Withdraw from the audit engagement where possible under applicable law
or regulation; and
Determine whether there is any obligation, either contractual or otherwise,

to report the circumstances to other parties, such as TCWG, owners or
regulators.
Q. No. 7
Give your comments on the following: The auditors are being insisted by the management to
hand over the letters of confirmation of balances received by the auditor from debtors and
creditors.
Answer: Ownership of Working papers:
SA 230, "Audit Documentation" lays down that the working papers are the property
of the auditor.
The auditor may, at his discretion, make portions or extracts from his working
papers available to the client.
In the given case, the letters of confirmation of balances of debtors and creditors are
the working papers which have been obtained by the auditor from third parties, viz.,
debtors and creditors.
Conclusion: Working papers are the property of the auditor. Hence he may at his
discretion either part with or refuse such papers. The company management cannot
demand such letters.
Q. No. 8
Comment on the following situations/statements : M/s Health Zone, a partnership firm, running
a nursing home have decided to discontinue you as an auditor for the next year and requests
you to handover all the relevant working papers of the previous year.
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Answer: Ownership of Working Papers:
As per SA 230 Audit Documentation the working papers are the property of the
auditor and the auditor has right to retain them.
He may at his discretion can make available working papers to his client.
Working papers are the important records of the auditor. They serve as evidence of
the auditors exercise of due care and conclusion reached regarding significant
matters. The client does not have a right to access the working papers and it is up to
the discretion of the auditor to make them available or not to others including the
client.
Conclusion: Management of M/s Health Zone cant insist upon the auditor to handover
the working papers of the previous year.
Q. No. 9
R.K. & Company are the auditors of PQR Company Ltd. The Managing Director of the Company
demands copies of the working papers from the auditors. Are the auditors bound to oblige the
Managing Director?
Answer: Ownership and custody of working papers:
As per SA-230 Audit Documentation, the working papers are the property of the
auditor, the auditor may, at his discretion make portion of or extracts from his
working papers available to the client.
In the instant case the managing director of the company has demanded copies of
the working papers from the auditor. He has no right to obtain copies of the
working papers from the auditor because they are the property of the auditor.
However the auditor may at his discretion make portions of or extracts from the
working paper to the managing director of R K & Company.
Conclusion: The auditor is not bound to oblige the managing director by supplying
copies of the audit working papers.
Q. No. 10
Auditor of AAS Ltd. was unable to confirm the existence and valuation of imported goods lying
with the transporter and accepted a certificate from the management without obtaining other
audit evidence.
Answer: Written Representation as audit evidence:
SA 580, Written Representations, establishes standards on the use of
management representations as audit evidence. Management representation
constitutes audit evidence furnished by management to auditor in respect of any
transaction entered into by the entity.
Management Representation is of great use to the auditor when other sufficient
appropriate audit evidence cannot reasonably be expected to exist. However, it
cannot be a substitute for other audit evidences expected to be available. The
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auditor should seek and apply normal audit procedure. Mere possession of a
certificate does not absolve the auditor from his liability. He should not seek or
accept certificates when subject matter is such that it is capable of verification from
internal and/or external evidences.
In the instant case, the stock of imported material lying with the transporter can be
easily verified with documents like purchase order, invoice, bill of entry, custom
document etc.
Conclusion: Under present circumstances, auditor may be held liable for negligence
and professional misjudgment.
Q. No. 11
State with reasons your views on the following: A senior assistant of X & Co. Chartered
Accountants drew up his audit programme without evaluating internal controls of T Ltd. When
the partner asked him for the reason, he stated that the controls were developed by the
General Manager (Finance) of T Ltd., who is a Chartered Accountant and had written a few
books on Internal Control and therefore there was no need to review the said area.
Answer: A proper understanding of the internal control system enables auditor to decide
upon the nature, extent and timing of the appropriate substantive audit procedures to
be performed for the different areas to be covered under the audit programme. The
management is responsible for maintaining an adequate accounting system
incorporating various internal controls to the extent appropriate to the size and
nature of the business. The mere fact that the controls have been developed by a
chartered accountant is not important. In any case, the auditor should independently
gain an understanding of the accounting system and related internal controls and
should study and evaluate the operation of those internal controls upon which he
wishes to rely in determining the nature, timing and extent of other audit procedures.
Where the auditor concludes that he can rely on certain internal controls, his
substantive procedures would normally be less extensive than would otherwise be
required and may also differ as to their nature and timing.
In cases where internal control is weak, the auditor might choose an auditing
procedure or test that otherwise might not be required, he might extend certain tests
to cover a large number of transactions or other items than he otherwise would
examine at times and perform additional tests for his satisfaction.
Accordingly, just because the internal control was developed by a chartered
accountant who had also authored books on Internal control is of no consequence. The
auditor must understand and evaluate internal controls to develop a proper audit
programme.
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Q. No. 12
Comment on the following: Inspite of the internal control weakness commented upon by the
audit manager, no further tests need to be carried out, as the purchase and sales figure as a
percentage of gross profit was same as in the previous year. The audit managers comments
were in regard to control over purchases and sales.
Answer: The audit managers observation that internal control over purchases and sales were
weak after evaluating the system should be quite pertinent for the auditor. However,
the auditor's judgement that no further tests need to be carried out since purchase and
sale as a percentage of gross profit were same as in the previous year cannot be
accepted since the same percentage may be a coincidence. As a matter of fact, while
performing analytical procedures when no deviations are reported, it is necessary to
investigate such a situation in more detailed manner to ascertain the reasons for same
percentage. It is quite possible that the absolute figures might have changed in the
same proportion. In fact, such a state of affairs calls for conducting further audit tests
in detail since there might have been attempts by the management to manipulate
figures. Therefore, the audit team would have to rely more on test of details of
transactions and balances than on drawing their conclusions on analytical procedures.
In fact, the auditor should carry out substantive tests in more detail to ensure that
transactions are genuine and valid and, thus, supported by sufficient and appropriate
evidence.
Q. No. 13
Doing an audit in an CIS environment is simpler since the trial balance always tallies?
Analyse critically.
Answer: Though it is true that in an CIS environment the trial balance always tal1ies, the same
cannot imply that the job of an auditor becomes simpler. There can still be some errors
of omissions like omission of certain entries, compensating errors, duplication of
entries, etc. in the books of account even when the trial balance tallied. In todays
complex business environment, the importance of trial balance in an audit has to be
gauged not from the view point of arithmetical accuracy but the nature of transaction
to be recorded which in fact have become very complex. The emergence of new forms
of financial instruments like options and futures, derivatives, off-balance sheet
financing, etc. have given rise to further complexities in recording and disclosure of
transactions. In an audit besides the tallying of a trial balance, there are also other
issues like estimation of depreciation, valuation of inventories, etc. which still require
judgement to be exercised by the auditor. The total time taken in an audit where the
trial balance has tallied may still be considerably higher than an audit where the trial
balance has not tallied. That responsibility will still remain even in an CIS
environment. Therefore, simply because of CIS environment and the trial balance has
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tallied it does not mean that the audit would become simpler.
Q. No. 14
Comment on the following: The use of computer facilities by a small enterprise may increase
the control risk.
Answer: The statement in question is correct because of the limited segregation of duties and
functions whereby users of computers may be able to perform two or more of the
following functions in the accounting system viz. initiating and authorising source
documents;
operating
and
entering
data
into
the
computer
system;
changing/modifying of programmes and data files as also operating systems; using or

distributing output. Thus the principle that one man should not record a transaction
independently is not followed since it is not cost-effective. In such a situation it is quite
reasonable to expect that the risk of not detecting errors may go up . substantially.
Under the circumstances, in case of a small entity, the auditor may perform
substantive tests in detail and take large sample sizes.
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Practical Illustrations Module II Company Audit

APPOINTMENT AND REMOVAL OF AUDITORS
Q. No. 1
Give your comments on the following: M/s Verma and Sharma, Chartered Accountants were
appointed as the first auditors of Good Luck Ltd. by virtue of their name being included as
auditors in the Articles of Association.
Answer: Appointment of First Auditors:
Section 224(5) of the Companies Act, 1956 lays down that the first auditor or
auditors of a company shall be appointed by the BOD within one month of the date
of registration of the company.
The law further provides that if the board of directors fails to appoint the first
auditors, the company at a general meeting may do so.
In the instant case, M/s Verma & Sharma, were appointed as the first auditors of
M/s Good Luck Ltd. by virtue of their name being included as auditors in the
Articles of Association. But the Companies Act, 1956 does not recognise this
method of appointment.
Conclusion: The appointment of M/s Verma and Sharma is not valid as no resolution
was passed to appoint them either in the Board or in the general meeting.
Q. No. 2
Give your comments on the following: The Board of Directors removed the first auditors
before the expiry of the term and appointed another auditor in his place.
Answer: Removal of First Auditor by the Board:
According to Section 224(7) of the Companies Act, 1956, an auditor (except the first
auditor) may be removed from office before the expiry of the term by the company
in general meeting after obtaining the prior approval of the C. G.
Proviso to section 224(5) requires that the company at a G. M. may remove the first
auditor before the expiry of the term and the prior approval of C. G. is not required.
In the given case, the Board has removed the first auditor before the expiry of the
term, which is illegal.
Conclusion: Both the removal of an auditor and subsequent appointment has no

validity.
Q. No. 3
Give your comments on the following: A Government company appointed the auditors and
fixed the remuneration in its general meeting.
Answer: Appointment and remuneration of auditor of a Government company:
Section 619 of the Companies Act, 1956 requires that the auditor of a government
company shall be appointed or reappointed by the C&AG of India.
As per 224(8) dealing with the remuneration of an auditor, it provides that in case
of an auditor of the government company appointed u/s 619 by the CAG of India,
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the remuneration of the auditor shall be fixed by the company in the general
meeting or in such manner as the company in general meeting may determine.
Conclusion: Government company itself cannot appoint the auditor as per legal
provisions, but the remuneration may be fixed by it in the general meeting or in such
manner as the company in general meeting may determine.
Q. No. 4
In case the existing auditors reappointed at the AGM refused to accept the appointment,
whether the Board of Directors could fill up the vacancy?
Answer: Refusal of Auditors to accept reappointment:
Section 224(3) of the Companies Act, 1956 empowers the Central Government to
fill a vacancy in case no auditors are appointed or reappointed at an AGM.
Since the appointment of an auditor is complete only on the acceptance of the office
by the auditor, it can be deemed that in case an auditor refuses to accept the
appointment then in that case no auditor has been appointed and the C. G. may
appoint a person to fill the vacancy as provided in Section 224(3).
Thus, the non-acceptance of appointment by the auditor does not result in any
casual vacancy. As a general principle, the shareholders have to exercise this power
in all cases, except in the case of filling a casual vacancy or appointing the first
auditors.
Conclusion: The BOD are not authorised to fill up the vacancy in case the existing
auditors appointed at the AGM refuse to accept the appointment.
Q. No. 5
As an auditor, comment on the following: At the AGM of a company, in which a Nationalised

Bank held 25% of the subscribed capital, Krishna & Co., chartered Accountants, were
appointed as auditor by passing an ordinary resolution.
Answer: Appointment of Auditor by Passing an Ordinary Resolution:
Section 224A of the Companies Act, 1956, provides that in case of a company in
which not less than 25% of the subscribed share capital is held whether singly or in
any combination, amongst others, by a public financial institution or Govt. Co. or C.
G. or S.G. or nationalised bank or an insurance company carrying on general
insurance business, the appointment or re-appointment of an auditor or auditors at
each AGM shall be made by a special resolution only.
In the given case, the nationalised bank held 25% of the subscribed share capital
which is equal to the prescribed limit of 25%.
Conclusion: The appointment of Krishna & Co., Chartered Accountants, as auditor of

the company is not valid, since as per law, special resolution is required in such
circumstances. In such cases, it shall be deemed that no auditor has been appointed
and thereupon the Central Governments power to appoint the auditor pursuant to
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Section 224(3) will become operative.

Q. No. 6
As an auditor, comment on the following: The first auditors of Health and Wealth Ltd., a
Government company, was appointed by the Board of Directors.
Answer: Appointment of first auditors by the directors:
Section 224(5) of the Companies Act, 1956 lays down that the first auditor or
auditors of a company shall be appointed by the BOD within one month of the date
of registration of the company. Thus, the first auditor of a company can be
appointed by the Board of Directors within one month from the date of registration
of the company.
However, in the case of a Government Company, the appointment or reappointment of auditor is governed by the provisions of Section 619 of the
Companies Act, 1956. Hence in the case of M/s Health and Wealth Ltd., being a
government company, the first auditors shall be appointed by the CAG of India.
Conclusion: The appointment of first auditors made by the BOD of M/s Health and
Wealth Ltd., is null and void.
Q. No. 7
Give your comments on the following: White Star Ltd. was incorporated on 01.08.2010 and Mr.
T who is related to the Chairman of the Company appointed as auditor by the Board of
Directors in their meeting on 04.09.2010.
Answer: Appointment of First Auditors by the Board:
Apparently, there are two issues arising out of this situation, viz., first one relates to
appointment of first auditor by the Board of Directors; and second, pertains to
relation of such an auditor with the Chairman of the company.
Regarding the first issue relating to appointment of auditor, particularly, in this

case relating to appointment of first auditors, it may be noted that as per the
provisions of section 224(5) of the Companies Act, 1956, the first auditor of a
company shall be appointed by the Board of Directors within one month of the date
of registration of the company.
As per the facts given in the case, the Board has failed to appoint the first auditor
within one month of the registration of company because the date of incorporation
of White Star Ltd. is 01-08-2010 and the date of appointment of auditors by the
Board of Directors is 04.09.2010. Therefore, proviso of section 224(5) becomes
operational. Accordingly if the Board fails to appoint the first auditor, the Blue star
Ltd. in general meeting has to make the appointment.
Conclusion: Thus the appointment of Mr. T is not valid. Under the circumstances, the
second issue relating to relationship of auditor with the Chairman is of no significance.
Q. No. 8
As an auditor, comment on the following: Mr. A was appointed auditor of AAS Ltd. by Board to
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fill the casual vacancy that arose due to death of the auditor originally appointed in AGM.
Subsequently, Mr. A also resigned on health grounds during the tenure of appointment. The
Board filled this vacancy by appointing you through duly passed Board resolution.
Answer: Filling of Casual Vacancy:
As per Sec. 224(6) of the Companies Act, 1956, Board of directors of the company
may fill any casual vacancy (other than that which is caused due to resignation) in
the office of an auditor; but while any such vacancy continues, the remaining
auditor or auditors, if any, may act.
In the present case vacancy has arisen due to resignation of Mr. A, and the vacancy
had been filled in by Board. But, the vacancy caused by resignation can only be
filled by shareholders in general meeting.
Conclusion: The appointment made by Board is invalid.

Q. No. 9
Give your comment on the following: You have been appointed the sole auditor of a company
where you were one of the joint auditors for the immediately preceding year and the said joint
auditors is not reappointed.
Answer: Appointment of Sole Auditor: When one of the joint auditors of the previous year is
appointed as the sole auditor for the next year, it is similar to non re-appointment of
one of the retiring joint auditors. Accordingly, provisions of the Companies Act, 1956 to
be complied with are as under:
1. Ascertain that special notice u/s 225(1) of the Companies Act, 1957 was received by
the company from a member at least 14 days before the AGM date.
2. Check whether the said notice has been sent to all the members at least 7 days
before the date of the AGM.
3. Verify that the notice contains an express intention of a member for proposing the
resolution for appointing a sole auditor in place of both the joint auditors who retire
at the meeting but are eligible for re-appointment.
4. The notice is also sent to the retiring auditor as per section 225(2) of the Companies
Act, 1956.
5. Verify whether any representation, received from the retiring auditor was sent to
the members of the company.
Verify from the minutes book whether the representation received from the retiring joint
auditor was considered at the AGM.
Q. No. 10
No Annual General Meeting (AGM) was held for the year ended 31st March, 2011, in XYZ Ltd. X
is the auditor for the previous year, whether he is continuing to hold office for current year or
not.
Answer: Auditor tenure in case no AGM is held:
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Section 224(1) provides that an auditor is appointed for a particular period, i.e.,
from conclusion of one AGM until conclusion of the next AGM.
In case the AGM is not held within the period prescribed, the auditor will continue in
office till the AGM is actually held and concluded.
Conclusion: X shall continue to hold office till the conclusion of the AGM.
Q. No. 11
Managing Director of PQR Ltd. himself wants to appoint Shri Ganpati, a practicing Chartered
Accountant, as first auditor of the company. Comment on the proposed action of the Managing
Director.
Answer: Appointment of First auditor:
Section 224(5) of the Companies Act, 1956 provides that the first auditor of a
company can be appointed by the Board of Directors within one month of the date of
registration of the company.
If the Board fails to appoint the first auditor or auditors, the company, in general
meeting, is empowered to make such appointment. This authority is not available to
the Managing Director of the company. Such appointment should be made only
through Board of Directors with specified period or by shareholders in the general
meeting after expiry of specified period
Conclusion: Managing Director is advised not to appoint first auditors himself and let
the Board to take decision in this regard, otherwise it will be considered as violation of
section 224(5) of the Companies Act, 1956.
Q. No. 12
Give your comment on the following: M/s A & Co. chartered accountants, were appointed first
auditors of KLM Ltd. by its Board of Directors. The shareholders of the company removes M/s
A & Co. before the expiry of the term, by an ordinary resolution. In an extraordinary general
meeting. And appointed another auditor in their place. M/s A & Co. have objected that without
prior approval of Central Government their removal is illegal.
Answer: Removal of First Auditors:
Section 224(5) of the Companies Act, 1956, provides that the company at a general
meeting may remove the first auditor before the expiry of the term. To remove the
first auditors prior approval of Central Government is not required.
As per Sec. 224(7) any auditor appointed under this section other than first auditor
may be removed from office before the expiry of his term only by the company in
general meeting, after obtaining the previous approval of the Central Government
in that behalf.
Conclusion: Removal of M/s A & Co. the first auditors by the company in general
meeting is not illegal.
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Q. No. 13
P, the first auditor of XYZ Ltd. resigned as auditors of the Co. Board of Directors appointed Mr.
Q as statutory auditors in their place.
Answer: Resignation of First Auditor:
The first auditor appointment by the Board holds the office till the conclusion of the
first AGM.
If P, the first auditor resign, the board of directors has still power to appoint Mr. Q
as auditor till conclusion of first AGM. The company at the AGM may remove
auditor so appointed and appoint another auditor.
Q. No. 14
A, B & C Company Ltd. removed its first Auditor before the expiry of his term without obtaining
approval of the Central Government.
Answer: Removal of First Auditor:
Sec. 224(5) provides that the company at a general meeting may remove the first
auditors before the expiry of his term. To remove the first auditors, prior approval
of C.G. is not required.
Approval of Central Government is required to remove an auditor (other than first

auditor) before the expiry of his tenure.
Conclusion: Removal of first auditor by the company before the expiry of term without
approval of Central Government is well within ambit of Law.
Q. No. 15
Comment on the following situations: XYZ Co. Ltd. reappointed A and B as their joint auditors
in the AGM. The AGM authorised the Board to fill up the vacancy at their own in the event of
both or either of auditors declined to accept the assignment. The Board passed a resolution to
appoint C if any of the auditors declined to accept the assignment.
B declined to accept the assignment and Board of Directors appointed C in place of B as per its
resolution.
Answer: Filling up of vacancy caused due to non-acceptance:
As per Sec. 224(1), the power to appoint the auditor vests with the company and
needs to be exercised at AGM. However if any casual vacancy arises (Otherwise
than due to resignation) in the office of auditor, it can be filled by Board of
Directors as provided in Sec. 224(6).
In the present case, the vacancy created by B is neither caused by resignation nor is
it a casual vacancy because Bs appointment had not become effective.
Conclusion: Appointment of C as joint auditor by board is not valid.

Q. No. 16
PQR Co. Ltd. removed their first auditor by passing a resolution in the meeting of BOD for his
removal without obtaining prior approval from the central Govt.
Answer: Removal of First Auditor:
Sec. 224(5) provides that the company at a general meeting may remove the first
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auditors before the expiry of his term. To remove the first auditors, prior approval
of C.G. is not required.
Approval of Central Government is required to remove an auditor (other than first

auditor) before the expiry of his tenure.
Conclusion: Removal of first auditor by the BOD before the expiry of term is invalid as
the powers to remove the first auditor before expiry of tenure vests with the
shareholder, without approval of Central Government.
QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITOR
Q. No. 17
State with reasons your views on the followings: Ram and Hanuman Associates, Chartered
Accountants in practice have been appointed as Statutory Auditor of Krishna Ltd. for the
accounting year 2006-2007. Mr. Hanuman holds 100 equity shares of Shiva Ltd., a subsidiary
company of Krishna Ltd.
or
Give your comments on the following: Nene and Sane Associates, Chartered Accountants in
practice have been appointed as statutory auditor of Do Good Ltd. for the accounting year
2004-05. Mr. Nene holds 200 equity shares of DDA Ltd. a subsidiary company of Do Good Ltd.
Answer: Holding Company's Auditor as a Shareholder in the Subsidiary Company:
As per sub-section (3) (e) of Section 226, a person holding any security of the
company is not qualified for appointment as auditor of that company.
For the purpose of this section, "security" means an instrument which carries
voting rights.
It is further laid down in sub-section (4) of section 226 that a person is not eligible
for appointment as auditor of any company, if he is disqualified from acting as
auditor of that company's subsidiary or holding company or of any other
subsidiary of the same holding company.
Sub-section (5) of Section 226 provides that if an auditor, after his appointment,
becomes subject to any of the disqualification specified in sub-sections (3) and (4),
he shall be deemed to have automatically vacated his office.
A firm would also be disqualified to be appointed as an auditor even when one

partner is disqualified under clause (e) of sub-section (3) of section 226.
In the present case, Mr. Hanuman, Chartered Accountant, a partner of M/s Ram
and Hanuman Associates, holds 100 equity shares of Shiva Ltd. which is a
subsidiary of Krishna Ltd.
Conclusion: As such, the firm, M/s Ram and Hanuman Associates would be
disqualified to be appointed as statutory auditor of Krishna Ltd., which is the holding
company of Shiva Ltd., even when one partner is disqualified under this clause.
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Q. No. 18
X, a member of the ICAI, does not hold a Certificate of practice. Is her appointment as an
auditor valid?
Answer: Validity of appointment:
A person shall be qualified for appointment as an auditor of a company, only if he

is a Chartered Accountant within the meaning of the Chartered Accountants Act,
1949.
Under the Chartered Accountants Act, 1949, only a chartered accountant holding
the certificate of practice can engage in public practice.
Conclusion: X does not hold a certificate of practice and hence cannot be appointed as
an auditor of a company.
Q. No. 19
B owes `1001 to C Ltd., of which he is an auditor. Is his appointment valid? Will it make any
difference, if the advance is taken for meeting out travelling expenses?
Answer: Validity of appointment due to Indebtedness:
As per section 226(3) of the Companies Act, 1956, a person who is indebted to the
company for an amount exceeding `1000/- or who has given any guarantee or
provided any security in connection with the indebtedness of any third person to the
company for an amount exceeding `1000/- then he is not qualified for appointment
as an auditor of a company.
Conclusion: Bs appointment is not valid and he is disqualified as the amount of debt
exceeds `1000.
It does not make any difference, even if the advance was taken for meeting out
traveling expenses particularly before commencement of audit work, his appointment
is not valid because in such a case also the auditor shall be indebted to the company.
The auditor is entitled to recover fees on a progressive basis only.
Q. No. 20
Give your comment on the following: Mr. Aditya, a practicing chartered accountant is
appointed as a Tax Consultant of ABC Ltd., in which his father Mr. Singhvi is the Managing
Director.
Answer: Appointment as Tax Consultant:
A member of the ICAI will be held guilty of professional misconduct if he or partner
of his firm or their relatives hold substantial interest in an enterprise and he
expresses his opinion on the F.S. of such enterprise.
Conclusion: In this case, Mr. Aditya is a Tax Consultant and not a Statutory Auditor
of ABC Ltd., hence he is not disqualified to be appointed as tax consultant.
Q. No. 21
W Ltd. Approached SB & Co. a leading firm of chartered accountants having two partners S & B
to conduct the audit for the year ended 31st March 2011. Mr. B is holding 500 equity shares @
Rs. 50 each in W Ltd. Can SB & Co. accept audit of W Ltd.
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Answer: Qualifications of auditor:

As per sub-section (3)(e) of Section 226, a person holding any security of the
company is not qualified for appointment as auditor of that company.
For the purpose of this section, "security" means an instrument which carries voting
rights.
A firm would also be disqualified to be appointed as an auditor even when one
partner is disqualified u/s 226(3)(e).
In the present case, Mr. B, a partner of M/s SB & Co. holds 500 equity shares of W
Ltd.
Conclusion: The firm, M/s SB & Co. would be disqualified to be appointed as statutory
auditor of W Ltd.
Q. No. 22
Comment on the following: Mr. A was appointed as an auditor of X Ltd. for the year ended
31.03.2011 in the AGM held on 16.08.2010. Mr. A had indebted to the company for a sum of
`2,500 as on 01.04.2010, the opening date of the accounting year which had been the subject of
his audit. Upon learning that he might be appointed as the auditor, he repaid the amount on
14.08.2010. Mr. B., a shareholder complained that the appointment of Mr. A as auditor was
invalid and he incurred disqualification under section 226 of the Indian Companies Act, 1956
and his independence had been vitiated in relation to the accounting year of his audit.
Answer: Debt as disqualification for auditor:
According to Section 226 of the Companies Act, 1956, a person who is indebted to
the company for an amount exceeding `1,000 shall be disqualified to be an auditor of
such company and he will vacate office when he incurs this qualification subsequent
to his appointment.
Though not expressly said, the fact clearly tells that the relevant date for reckoning
disqualification is the date of appointment viz the date of resolution passed by the
company to effect such appointment.
Where the person has liquidated his debt before appointment date, there is no
disqualifications to be construed for his appointment. In the given case, Mr. A was
appointed as an auditor of X Ltd. for the year ended 31-03- 2011 in the AGM held on
16-08-2010. He repaid the loan amount of `2500 fully to the company on 14-082010 before the date of his appointment.
Conclusion: Mr. As appointment as an auditor is valid and it is as per the provision of
the above section.
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Q. No. 23
Comment as an Auditor on the following: Sri & Co. a firm of CAs was appointed statutory
auditors of Aaradhna co. Ltd. Aaradhana Co. Ltd. holds 51 % shares in Sarang Ltd. Mr. Sri one
of the partners of Sri & Co. owed Rs. 1500 as on the date of appointment to Sarang Co. Ltd. for
goods purchased in normal course of business.
Answer: Debt in Subsidiary company:
Sec. 226(3) provides that a person shall be disqualified to act as auditor if he is
indebted to the company for an amount exceeding `1,000.
Sec. 226(4) states that a person is not qualified for appointment as auditor of a
company if he is disqualified for appointment as auditor of that company's
subsidiary or holding company or a subsidiary of that company's holding company.
Disqualification of any partner renders the firm disqualified to be appointed as
auditor.
Conclusion: Disqualification of Mr. Sri, renders the firm disqualified to be appointed as
auditor in Aaradhna Ltd. (Holding company of Sarang Co. Ltd.).
CEILING ON NUMBER OF AUDITS

Q. No. 24
Give your comments on the following: PQR & Co. a firm of Chartered Accountants has three
partners, P, Q and R; P is also in whole time employment elsewhere. The firm is already
holding audit of 40 companies including audit of one foreign company. The firm is offered the
audit of Z Ltd. and its 20 branches.
Answer: Number of Company Audits:
As per Section 224(1B) of Companies Act, 1956, if a firm is appointed as auditor of a
company, the number of audit the firm can take is computed on the basis of 20
companies per partner who is not in whole time employment elsewhere.
While counting 20 companies, not more than 10 companies may have a paid up share
capital of Rs. 25 lacs or more. Besides, while counting specified limit, the following
companies should not be considered as these companies are outside the scope of
section 224.
Branch audit
Special audit
Audit of foreign companies and
Audit of private companies.
In the firm of M/s PQR & Co., P is in whole-time employment elsewhere. Hence he will
be excluded in determining the number of company audits that the firm can hold. If Q
and R do not hold any audits in their personal capacity or as partners of other firms,
the total number of company audits that can be accepted by PQR & Co. is 40,
Total Audit at present
40
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Less: Audit of foreign company
Balance
39
Add: New Audit offered
01
(Branch audit not considered)

Total Audit of companies
40
Conclusion: M/s PQR & Co. can accept audit of Z Ltd. and its 20 branches which will be
considered well within the limit specified by section 224(1 B) of the Companies Act,
1956.
Q. No. 25
PBS & Associates, a firm of Chartered Accountants, has three partners P, B and S. The firm is
already having audit of 60 companies, which includes 2 branch audits of a company. The firm
is offered 3 company audits, out of which one is a private company, other is a foreign company
and the third one is a public company. Decide and advise whether PBS & Associates will exceed
the ceiling prescribed under Section 224(1B) by accepting the above audit assignments?
Answer: Ceiling Limit for accepting Audit of Companies: As per Section 224(1B) of Companies
Act, 1956, if a firm is appointed as auditor of a company, the number of audit the firm
can take is computed on the basis of 20 companies per partner who is not in whole
time employment elsewhere.
While counting 20 companies, not more than 10 companies may have a paid up share
capital of Rs. 25 lacs or more. Besides, while counting specified limit, the following
companies should not be considered as these companies are outside the scope of
section 224.
Branch audit
Special audit
Audit of foreign companies and
Audit of private companies.
In the given case if Mr. P, B and S do not hold any audits in their personal capacity or as
partners of other firms, the total number of companies audit that can be accepted by
M/s. PBS & Associates is 60.
Total Audit at present
60
Less: Branch Audit
Balance
58
Add: New Audit offered
01
(private co. audit and audit of foreign co. excluded)

Total Audit of companies
59
Conclusion: PBS Associates can accept additional audit of all above three companies as
given in the question.
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RIGHTS AND DUTIES OF AUDITORS

Q. No. 26
State your opinion on the following: The duties of auditors are limited to the verification of the
arithmetical accuracy of the books of account.
Answer: Duties of the Auditor:
The duties of auditors are not limited to the verification of the arithmetical accuracy of
the books of accounts kept by his client, because, the verification of arithmetical
accuracy would amount to certification of accounts only which would not serve much
purpose.
Auditor is required to report in the manner of selection of accounting policies or to

assess the judgement made by the enterprise in arriving at certain accounting
estimates or how the final accounts have been ultimately prepared to portray the
financial statements.
Accordingly, he must examine all vouchers, invoices, minutes of meetings,

correspondence and other documentary evidence that is available to establish the
nature and authenticity of the transactions.
Furthermore, he must verify that there exists a proper authority in respect of each
transaction and that they are properly recorded.
An important aspect would involve valuation of different assets and liabilities shown
in the balance sheet.
Finally, the auditor must verify that the form in which the final accounts have been
drawn up is the one prescribed by law and as per professional pronouncements and
exhibit a 'true and fair view'.
Thus, the duty of the auditor is just not restricted to mere checking arithmetically
accuracy of accounts but to report on the same.
Q. No. 27
Mr. Rajendra, a fellow member of the ICAI, working as Manager of Shrivastav and Co., a CA firm,
signed the audit report of Om Ltd. on behalf of Shrivastav & Co.
Answer: Signature on Audit Report:
Sec. 229 of the Companies Act, 1956 requires that only a person appointed as the
auditor of the company or where a firm is so appointed, a partner in the firm practising
in India, may sign the auditor's report.
Conclusion: Mr. Rajendra, a fellow member of the Institute and a manager of M/S
Shrivastav & Co., cannot sign on behalf of the firm in view of the requirements of the
Companies Act, 1956.
If any auditor's report is signed otherwise than in conformity with the requirements of
Sec. 229, the auditor concerned and the person, if any, other than the auditor who signs
the report shall, if the default is willful, be punishable with a fine.
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Q. No. 28
Give your comments on the following: The auditors were requested by the management to accept
the draft minutes of Board, since the minutes book has been misplaced.
Answer: Right of Access to Minute Books:
Sec. 227 of the Companies Act, 1956 grants powers to the auditor that every
auditor has a right of access, at all times, to the books and account including all
statutory records such as minutes book, fixed assets register, etc. of the company
for conducting the audit.
In order to verify actions of the company and to vouch and verify some of the
transactions of the company, it is necessary for the auditor to refer to the decisions
of the shareholders and/or the directors of the company: It is, therefore, essential
for the auditor to refer to the Minutes Book.
Conclusion: In the absence of the Minutes Book, the auditor may not be able to
vouch/verify certain transactions of the company. In case the directors have refused
to produce the Minutes Book, the auditor may consider extending the audit procedure
as also consider qualifying his report in any appropriate manner.
Q. No. 29
As an auditor comment on the following situations/statements: The sale and purchases of

investments of A Ltd., was controlled through a committee. Shri B sold some of the
investments without discussing the same with the other members of the committee' as they
were out of station and Shri B believed that its price would fall and the company would suffer
a loss if it is not sold. A Ltd. earned a profit of Rs. 1 lakh from such sale.
Answer: Sale of Investments without Proper Authorisation
There should be proper authority for sale of investments. Detailed records

regarding disposal of investments should be maintained along with proper
documentation.
Q. No. 30
In the instant case, Mr. B had sold the investments without discussing the matter
As an auditor, comment on the following: The auditor of Trilok Ltd. did not report on the
matters specified in sub-section (1A) of Section 227 of the companies Act, 1956, as he was
satisfied that no comment is required.
Answer: Comment on Matters Contained under Section 227(1A) of the Companies Act, 1956
Section 227(1A) of the Act deals with duties of an auditors requiring auditor to
make an enquiry in respect of specified matters.
The matters in respect of which the enquiry has to be made by the auditor include
relating to loans and advances, transactions represented merely by book entries,
investments sold at less than cost price, loans and advances shown as deposits,
personal expenses, etc.
Since the law requires the auditor to make an enquiry, the Institute opined that
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the auditor is not required to report on the matters specified in sub-section (1A)
unless he has any special comments to make on any of the items referred to
therein.
Conclusion: If the auditor is satisfied as a result of the enquiries, he has no further
duty to report that he is so satisfied. Therefore, the auditor of Trilok Ltd. is correct in
non-reporting on the matters specified in Section 227(1A).
Q. No. 31
As an auditor, comment on the following: The members of C. Ltd. preferred a complaint

against the auditor stating that he has failed to send the auditors report to them.
Answer: Dispatch of Auditors report to the shareholders
Section 227 of the Companies Act, 1956 lays down the powers and duties of
auditor. As per provisions of the law, it is no part of the auditor's duty to send a
copy of his report to members of the company.
The auditor's duty concludes once he forwards his report .to the company. It is the
responsibility of company to send the report to every member of the company.
In Allen Graig and Company (London) Ltd., it was held that duty of the auditor
after having signed the report to be annexed to a balance sheet is confirmed only
to forwarding his report to the secretary of the company. It will be for the
secretary or the director to convene a general meeting and send the balance sheet
and report to the members (or other person) entitled to receive it.
Conclusion: The auditor cannot be held liable for the failure to send the report to the
shareholders.
Q. No. 32
As an auditor, comment on the following: One of the directors of Hitech Ltd. is attracted by the
disqualification under Section 274(1)(g).
Answer: Disqualification of a director u/s 274 (1)(g)
Sec. 227(3)(f) of Companies Act, 1956 imposes a specific duty on the auditor to
report whether any director is disqualified from being appointed as directors under
Section 274(1)(g) of the Companies Act, 1956.
To this end, the auditor has to ensure that written representation have been
obtained by the Board from each director that one is not hit by Section 274(1)(g).
Conclusion: As one of the director is attracted by disqualification u/s 274(1)(g) of the
Act, the auditor shall state in his report u/s 227 about the disqualification of the
particular director.
Q. No. 33
The auditor of a limited company has given a clean report on the financial statement on the
basis of Xerox copies of the books of accounts, vouchers and other records which were taken
away by the Income-tax department in search under section 132 of the I. T. Act, 1961.
Answer: Non availability of original Books of accounts:
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CA Inter (Paper 6)
Under the present circumstances, auditor may insist on the followings:

(a)
to get the Xerox copies certified by Income tax Department.
(b)
to get a certificate to this effect from the management.
Further, the auditor is required to use other audit procedures like confirmation
of balances from third parties, inspection of tangible assets etc., and obtain
evidence which corroborates the documentary evidence available.
In any case, the auditor has to satisfy himself that he has obtained sufficient and
appropriate audit evidence to support the figures contained in the financial
statements and formulate his opinion accordingly.
Conclusion: Under such circumstances, the auditor should have appropriately

modified his report and bring this fact to the attention of shareholders. In case he was
satisfied, a simple paragraph of information was enough but in case the auditor failed
to establish the reliability of evidence available, he would be required to issue a
disclaimer of opinion
Q. No. 34
As an auditor, comment on the following situations/statements: The Board of Directors of a

company have filed a complaint with the ICAI India against their statutory auditors for their
failing to attend the AGM of the Shareholders in which audited accounts were considered.
Answer: Right to attend AGM:
Sec. 231 of the Companies Act, 1956 provides the followings:
(a) All notices of, and other communications relating to, any general meting of a
company which any member of the company is entitled to have sent to him shall
also be forwarded to the auditor of the company; and
(b) Auditor is entitled to attend any general meeting and to be heard at any general
meeting which he attends on any part of the business which concerns him as
auditor.
The right of the auditor to attend any general meeting and to be heard there is only
permissive. It is not his duty to attend or to take part in the discussion.
Conclusion: Complaint filed by the BOD is based on mis-conception of the law and
not valid.
Q. No. 35
As an auditor, comment on the following situations/statements: The auditor of a company

wanted to see the minutes book of Directors meetings. The Chairman of the company refused
for the same on the ground that matters of confidential nature were contained therein.
Answer: Access to Minutes books:
Sec. 227(1) provides that every auditor of a company shall have a right of access
at all times to the books and accounts and vouchers of the company, whether kept
at the head office of the company or elsewhere.
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Books and accounts include all books, which have any bearing or are likely to
have any bearing on the accounts whether these are usual financial books or the
statutory or statistical books. Therefore, he has a statutory right to inspect the
directors minutes book.
The refusal by Chairman to provide access to Directors Minutes Book shall

constitute limitation of scope as far as the auditors duties are concerned.
Conclusion: Under the present circumstances, auditor can do the following things:
(a) he may consider extending the audit procedures, if possible, and to qualify his
report in appropriate manner.
(b) Auditor is also required to report whether he has obtained all information and
explanations which to the best of his knowledge and belief were necessary for the
purpose of his audit. If the minutes book is not produced for his audit, this has to
be answered in the negative or with a qualification.
Q. No. 36
Give your comments on the following: The auditors of ABC Ltd. Issued a qualified opinion
about the truth and fairness of the accounts of the company for the year ended 31.3.2011.
They typed out the matters of qualifications in a bold font so as to invite the attention of the
readers to them. The Board objected to it and required them to be typed out in the same
normal font as other paragraphs of the report appear.
Answer: Form of Qualified observations

Sec. 227(3)(e) requires that the observations or comments of the auditors which
have any adverse effect on the functioning of the company, should be given in the
auditors report in thick type or in italics so that these are identified readily and
clearly by the users.
It requires the auditor to evaluate his qualifications and make a judgement
regarding which of them deal with matters that may have an adverse effect on the
functioning of the company.
Conclusion: Since auditor is of the view that such qualifications need to be highlighted
in bold in conformity with the provisions of the Act, the management has no right to
object on the same.
Q. No. 37
As an auditor, comment on the following situations/statements: Travelling expenses of `2.25

lakhs shown in Profit and Loss Account of X Ltd., including a sum of `1.10 lakhs spent by a
Director on his foreign travel for companys business accompanied by his mother for her
medical treatment.
Answer: Charging Personal Expenses to revenue account:
Sec. 227(1A) of the Companies Act, 1956 requires that the auditor shall enquire
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whether personal expenses have been charged to revenue account and make a
report to the members in case he is not satisfied with the answer.
In the present case, personal expenses of `1.10 Lacs has been charged to revenue
account, and hence the auditor should examine documentary evidence in support
of the travelling expenses of `1.10 lakhs incurred by the director. It needs to be
ascertained that such expenses are covered by contractual obligations or by any
accepted business practices.
Conclusion: In case, the answer is negative, the auditor should make a report thereon
and qualify his audit report.
Q. No. 38
Give your comments on the following: Mr. X, a Director of M/s KP Private Ltd., is also a
Director of another company viz., M/s GP Private Ltd., which has not filed the annual accounts
and annual return for last three years 2007-08 to 2009-10. Mr. X is of the opinion that he is
not disqualified u/s 274(1)(g) of the Companies Act, 1956, and auditor should not mention
disqualification remark in his audit report.
Answer: Reporting on Directors Disqualifications:
Section 227(3) of the Companies Act, 1956 imposes a duty on the auditor to report
whether any director is disqualified from being appointed as director u/s
274(1)(g) of the Companies Act, 1956.
As per provisions of Section 274(1)(g), if a director is already holding a

directorship of a public company which has not filed the annual accounts and
annual returns for any continuous three financial years shall not be eligible to be
appointed as a director of any other public company.
In this case since Mr X is a director of Private Ltd. Company, hence the provisions
of section 274(1)(g) are not applicable to him and as such he is not disqualified
from directorship of both the companies.
Conclusion: Auditor is not required to report about the disqualification u/s 227(3)(f)
of the Companies Act, 1956.
Q. No. 39
Comment on the following: AB & Associates the Auditor of Ajanta Ltd. refused to deliver the
Books of account of the company, which were given to them for the purpose of audit, as the
audit fees is not paid to them in full.
Answer: Exercising Right of lien:
Under the general principles of law, if any person has lawful possession of the
property of another person, on which he has worked, he may retain such
property for non payment of any amount outstanding in respect of work done
on the property.
Accordingly, the auditor may exercise lien on the clients documents in his
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possession for non payment of fees for work done for the client. However,
following conditions must be satisfied:
a. Documents must belong to the client who owes the money.
b. documents must come to the possession of the auditor on the clients
authority.
c. Auditor has done work on such documents, on which fees have not been
paid.
Q. No. 40
State your views on the following: The Auditor does not agree with affirmations made in the
F.S.
Answer: Disagreement with affirmations made in financial statements:
The financial information contained in the F.S. represents affirmations made by

the management in respect of various assets and liabilities included therein as to
their valuation, existence, completeness, proper presentation and disclosure by
the management to arrive at the final amounts being included in the financial
statements.
Sometimes, an auditor may not agree with such affirmations made in the F.S.,
when, in his opinion, the F.S. do not present a true and fair view of the state of
affairs and the working results of the organisation.
Under these circumstances, an adverse or negative report may be issued when the
reservation or objections of the auditors are so material that he feels that overall
view of the accounts as presented would be a serious distortion.
Q. No. 41
State your views on the following: The auditor fails to obtain sufficient information to form an
overall opinion on the matters contained in the financial statements.
Answer: Failure to obtain sufficient information:
Sec. 227(1) provides that auditor is entitled to require from the officers of the
company such information and explanations as he think necessary for the
performance of his duties as auditor.
However, there may be instances when an auditor fails to obtain sufficient
information to form an overall opinion on the matters contained in the financial
statements. Such a situation may happen due to following reasons:
(a) limitation on the scope of duties of auditors imposed by the management, or
(b) the auditor is not able to verify books of account or evidence due to
circumstances beyond one's control, say for example, books of accounts are
seized by the Income-tax authorities.
In view of these situations, the auditor would not be able to obtain sufficient
information to reach at any conclusion. Under these circumstances, auditor is not in a
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position to express any opinion on the financial statements, hence, he may issue a
disclaimer of opinion based on the circumstances.
CARO
Q. No. 42
Comment: No cost accounting records are maintained though the company is required to
maintain the same.
Answer: Non maintenance of Cost Records:
Section 209(1)(d) of the Companies Act, 1956 requires that every company shall
maintain books of accounts containing particulars relating to the utilisation of
material or labour or to other items of cost if such class of companies are notified
by the Central Government.
As per the CARO, 2003, where maintenance of cost records has been prescribed by
the C. G., auditor of the company is specifically required to state whether such
accounts and records as prescribed have been made and maintained.
Though the auditor is not required to conduct detailed audit but the auditor is
expected to conduct a general review of the cost records to determine whether the
prescribed accounts and records are prima facie complete.
Therefore whether cost audit is ordered or not the auditor should report upon the
non-maintenance of the cost records.
Q. No. 43
Comment on the following: ABC Ltd. has not deposited provident fund contributions of Rs.20
lakhs to the authorities, but accounted in the books.
Answer: Non-Deposit of Provident Fund Dues:
The auditor's report under CARO, 2003 has to specifically state whether the
company is regular in depositing undisputed statutory dues including PF with the
appropriate authority and, if not, the extent of the arrears of outstanding statutory
dues as at the last day of the FY year concerned for a period of more than six
months from the date they became payable, shall be indicated by the auditor.
In this case, the failure of ABC Ltd. to deposit provident fund of `20 lakhs will be
reported by the auditor as per CARO, 2003 issued u/s 227(4A) of the Companies
Act, 1956.
In indicating the arrears, the period to which the arrears relate should preferably
be also given.
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Q. No. 44
As an auditor, comment on the following: SK Ltd. has fully computerised its accounting
operations. The stock records are maintained up to date with timely entries passed for all
receipts and issues. The company has hired a professional security agency, which monitors
and implements a close vigilance over the operations of the company. As such, the company
had dispensed with the practice of taking stock of their inventories at the year end as in their
opinion the exercise is redundant, time consuming and intrusion to normal functioning of the
operations.
Answer: Auditor is required to obtain sufficient appropriate audit evidence in relation to
inventories through the performance of compliance and substantive procedures. These
procedures include examination of records, attendance at stock-taking, examination of
valuation and disclosure of inventories, carrying out analytical procedures, and
obtaining confirmations from third parties and representations from the management.
CARO 2004 requires auditor comment on the following matters:
1. whether physical verification of inventory has been conducted at reasonable
intervals by the management;
2. are the procedures of physical verification of inventory followed by the
management reasonable and adequate in relation to the size of the company and
the nature of its business. If not, the inadequacies in such procedures should be
reported; and
3. whether the company is maintaining proper records of inventory and whether any
material discrepancies were noticed on physical verification and if so, whether the
same have been properly dealt with in the books of account.
In view of above, an auditor should insist the management for physical verification of
inventory at reasonable intervals. Dispensing with physical verification altogether is
not acceptable.
Hiring a professional security agency to monitor close vigilance over the operations
does not ensure that no discrepancy exists. Discrepancies may arise due to other
reasons like shrinkage, evaporation, handling loss, etc. The auditor should require the
management to conduct physical verification by or near the year end. If the
management does not accept to the auditor's view the auditor may appropriately
modify his audit report.
Q. No. 45
As an auditor, comment on the following situations/statements: X Ltd., to whom CARO is

applicable, has issued 9% Debenture of ` 5 crores, redeemable after 5 years and used the
proceeds of issue for payment of Sundry Creditors and other Current Liabilities of ` 2.80
crores.
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Answer: Application of Long term funds for short term purpose:
CARO 2004 required from the auditor to report whether funds raised on shortterm basis have been used by the company for long-term investment and not vice
versa.
In the present case, X Ltd., issued 9% debentures of ` 5 crores and out of the
proceeds, it used ` 2.80 crores for payment of sundry creditors and other current
liabilities.
Conclusion: The auditor is not required to look into application of long-term funds.
Q. No. 46
As an Auditor, comment on the following situations/statements: JKT Ltd. having `40 lacs paid
up capital, `9.50 lacs reserves and turnover of last three consecutive financial years,
immediately preceding the financial year under audit, being `4.90 crores, `4.50 crores and `6
crores, but does not have any internal audit system. In view of the management, internal audit
system is not mandatory.
Answer: Requirement of Internal audit System:
As per CARO-2003, statutory auditor is required to comment whether the auditee
company has an internal audit system commensurate with the size and nature of
companys business. Internal audit system is mandatory where:(a) The company has a paid up capital and reserve exceeds 50 lakhs as at the
commencement of the financial year, or
(b) The company has an average annual turnover of rupees 5 crores or more for a
period of 3 consecutive financial year preceding the current financial year.
In the present case, second condition is fulfilled and the company is required to
maintain an internal audit system commensurate with its size and the nature of its
business.
Conclusion: Management view that internal audit system in their case is not
mandatory is wrong. The auditor will have to mention the fact of not having such
internal audit system in his report.
Q. No. 47
As an auditor how would you react to the following situation: A company has `60 Lacs of paid
up capital and `3 Cr. of average annual turnover of past three years preceding the Financial
Year under Audit. The Company does not have Internal Audit System because management
does not think it necessary.
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Answer: CARO 2004 requires that an company auditor is required to report whether the
company has an internal audit system commensurate with its size and nature of its
business in the following cases:
(b)
In case of listed companies;
(c)
In case of other companies having a paid up capital and reserves exceeding `50
lakhs as at the commencement of the financial year concerned,
or
Having an average annual turnover exceeding `5 Cr. for a period of 3 consecutive FY

immediately preceding the FY concerned.
Conclusion: Auditor is required to report on non existence of internal audit system.
Q. No. 48
XYZ Ltd. has purchased plant and machinery costing `1 crore in the month of October, 2010
out of working capital limits sanctioned by Bank.
What are reporting requirements by Statutory Auditors of the Company in this regard,
keeping in mind the provisions of CARO 2003.
Answer: Application of short term funds for long term purpose:
CARO 2004 required from the auditor to report whether funds raised on shortterm basis have been used by the company for long-term investment.
In the present case, company purchased plant and machinery out of working
capital limits and hence applied short terms funds for long term investment.
Conclusion: Auditor is required to mention the fact of application of short term funds
for long term investment.
BRANCH AUDIT
Q. No. 49
As an auditor, comment on the following: You are a Principal auditor of Sri Company Limited
which has three branches the accounts of which are subject to audit by qualified branch
auditors. One of the branch auditors qualified his report for non-provision of doubtful debts
which he considered to be material for the company as a whole. Subsequent to their reporting,
but before you could sign the audit report on the accounts of the company as a whole, the
management informed you that the debt under the subject-matter of qualification in Branch
Auditors report had been fully recovered.
Answer: In general it is required that the company auditor should normally incorporate the
qualifications made in the branch auditors report in his own report, unless he is
satisfied that:
(a) the objections of the branch auditor have been met while preparing the accounts
of the company or during the conduct of companys audit, or
(b) the subject matter of the qualification is not material in the context of the
accounts of the company as a whole; or
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(c) in the light of information and explanation given to him, which were not available
to the branch auditor, he is satisfied that the qualification is not called for.
Conclusion: Principal auditor need not qualify his report for qualifications pointed by
branch auditor. However, it is his duty u/s 227(3) to provide the manner how he
deals with branch auditor report in his report.
Q. No. 50
Comment on the following: M/s Seeman & Co. had been the company auditor for Amudhan
Company Limited for the year 2010-11. The company had three branches located at Chennai,
Delhi and Mumbai. The audits of branches Chennai, Delhi were looked after by the company
auditors themselves. The audit of Mumbai branch had been done by another auditor M/s
Vasan & co., a local auditor situated at Mumbai. The branch auditor had completed the audit
and had given his report too. After this, but before finalization, the company auditor wanted to
visit the Mumbai branch and have access to the inventory records maintained at the branch.
The management objects to this on the grounds of the company auditor is transgressing the
scope of audit areas agreed.
Answer: Right of access of company auditor for branch records:
The audit of the branch of a company is dealt with in section 228 of the Companies
Act, 1956. According to this section, the audits of the branches can be done by the
company auditor himself or by another auditor.
Even where, the branch accounts are audited, the company auditor has right to
visit the branch if he deems it necessary to do so for the performance of his duties.
He has also right of access at all times to the books and accounts and vouchers of
the company maintained at the branch office. He can appropriately deal with the
repot of the branch auditor in framing his main repot. He will disclose how he had
dealt with the branch audit report.
Conclusion: Managements objection that the company auditor is transgressing the

scope of audit areas agreed, is absolutely, wrong. The right of company auditor in
visiting and accessing the records of branch can not be forfeited. Even where the
branch accounts are audited by an another local auditor, the company auditor has
right to visit the branch and can have access to the books and vouchers of the company
maintained at the branch office.
JOINT AUDIT
Q. No. 51
E and S were appointed as Joint Auditors of X and Y Ltd. What will be their professional
responsibility in a case where the company has cleverly concealed certain transactions that
escaped the notice of both the Auditors?
Answer: Responsibilities of Joint Auditor:
SA 299 Responsibility of Joint Auditors deals with the professional responsibilities
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which the auditors undertake in accepting appointments as joint auditors.

Accordingly, where joint auditors are appointed, they should, by mutual discussion,
divide the audit work among themselves.
In conducting a joint audit, the auditor(s) should bear in mind the possibility of
existence of any fraud or error or any other irregularities in the accounts under
audit. The principle of joint audit involves that each auditor is entitled to assume
that other joint auditor has carried out his part of work properly.
In this case, if it can be assumed that the joint auditors E and S have exercised
reasonable care and skill in auditing the accounts of X & Y Ltd. and yet the
concealment of transaction has taken place, both joint auditors cannot be held
responsible for professional negligence.
However, if such concealment could have been discovered by the exercise of
reasonable care and skill, both the auditors would be responsible for professional
negligence. Therefore, it has to be seen that while dividing the work, the joint
auditors have not left any area unattended and exercised reasonable care and skill
while doing their work.
Q. No. 52
A joint auditor is not bound by the views of the majority of the joint auditors regarding
matters to be covered in the report. Justify this statement in the light of responsibilities of
Joint Auditors under SA 299.
Answer: Reporting requirement in case of Joint Audit:
The Statement that a joint auditor is not bound by the views of the majority of the joint
auditors regarding matters to be covered in the report, is absolutely correct. The SA
299 Responsibilities of joint Auditor prescribes the reporting responsibilities of Joint
auditors as given below:
(a) Normally, the joint auditors are able to arrive at an agreed report.
(b) However, where the joint auditors are in disagreement with regard to any matters
to be covered by the report, each one of them should express his own opinion
through a separate report.
(c) A joint auditor is not bound by the views of the majority of the joint auditors
regarding matters to be covered in the report and should express his opinion in a
separate report in case of a disagreement.
SPECIAL AUDIT
Q. No. 53
Govt. of India has appointed Mr. M a retired Finance Director and a non- practicing member of
ICAI as an auditor to conduct special audit of ABC ltd. on the ground that the company was not
being managed on sound business principles. The MD of the company contends that the
appointment of Mr. M is not valid because he does not hold a certificate of practice.
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Answer: Appointment of Special Auditor:

Sec. 233A of the Companies Act, 1956, empowers the Central Government to
direct for special audit of the accounts of a company under special circumstances.
Amongst others, one of the circumstances specified is in case a company is not
being managed in accordance with sound business principles or prudent

commercial practices.
For this purpose, Central Government may appoint a Chartered Accountant,
whether or not he is in practice, or the companys auditor itself to conduct such

special audit.
Conclusion: Appointment of Mr. M, a non-practising member of ICAI is within the
provisions of law and, accordingly, the contention of M.D. is not correct.
BOOKS OF ACCOUNTS
Q. No. 54
Comment on following: X Ltd. has its registered office at Mumbai. During the current
accounting year it shifted its Corporate office to Delhi. The Managing Director of the company
wants to shift companys books of account to Delhi because he holds the view that there is no
legal bar in doing so.
Answer: Location of Books of accounts:
Sec. 209(1) of Companies Act, 1956 requires every company to keep at its registered
office or at such other place in India as the Board of directors may decide, proper
books of accounts with respect to:
(a)
all sums of money received and spent and the details thereof;
(b)
all sales and purchases of goods;
(c)
the assets and liabilities; and
(d)
such particulars relating to utilisation of material or labour or items of cost as

may be prescribed by the Central Govt. in the case of a company engaged in
production, processing, manufacturing or mining activities.
If the directors decide to keep the books or any of the books at a place other than
registered office, the Registrar must be notified within seven days of the decision.
Conclusion: The Board of Directors of the company may decide to keep the books of
accounts at a place other than the registered office of the company.
SHARE CAPITAL AND DIVIDEND
Q. No. 55
As an auditor comment on the following situations/statements: A portion of Share Premium

utilised to declare 40% dividend.
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Answer: Utilization of Share Premium

Section 78 of the Companies Act, 1956 deals with application of premium received on
issues of shares. Accordingly, securities premium account may be applied by the
company:
(a) in paying up unissued shares of the company to be issued to members of the
company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any
issue of shares or debentures of the company; or
(d) in providing for the premium payable on the redemption of any redeemable
preference shares or of any debentures of the company.
Thus, it is clear from the above that share premium can be utilised only for specific
purposes. Further, section 205 of the Companies Act, 1956 also specifies the sources
from which dividends can be paid and requires the same to be only paid out of past
profits, general reserve or any other free reserve.
Conclusion: Declaration of dividends out of share premium is not proper and,
consequently, the auditor shall have to qualify the audit report.
Q. No. 56
Comment on the following: Directors of Speedway Ltd. declared a final dividend at 30% for
2010-11 in their meeting held on 11-8-2011.
Answer: Declaration of Dividend
As per provisions of the law, the final dividend of a company shall be declared only
by the shareholders based on the recommendation of Board of Directors.
The Board can only propose the dividend which shall become final only after
approval by shareholders at the AGM. The Board is empowered to declare the
interim dividend only.
Conclusion: The action of Speedway Ltd. directors is not in accordance with the law and
the auditor should have qualified his report to this effect.
Q. No. 57
Comment on the following: During the year under audit, A Ltd. credited to the Profit & Loss
Account, the entire profit of `5 lakhs on the sale of land not required for its use. You are
informed that the directors would like to propose dividend out of the above profit.
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Answer: Proposed Dividend Out Of Profit

Profit of `5 lakhs on the sale of land is a capital profit. It represents the excess of sale
value over the original cost of the asset, i.e capital profits. The capital profits can be
distributed by a company only if all the following conditions are fulfilled:
The articles of association should permit distribution of capital profits.
The capital profit which is sought to be distributed should have actually been
realised.
The capital profit should remain after a proper valuation has been fairly taken of the
whole of the assets and liabilities.
Conclusion: The profit arise on sale of land is realized in cash and hence subject to
satisfaction of other conditions can be distributed as dividend.
Q. No. 58
As an Auditor, comment on the following situation/statement: The Finance Manager of Belt

Ltd. is of the opinion that before declaration of dividends it would not be necessary to set off
the carried forward amount of debit balance in the Profit and Loss Account against current
revenue profit but the same could be set-off against existing revaluation reserve. Do you agree?
Answer: Adjustment of Carried Forward Losses against Revaluation Reserves
The Guidance Note on Treatment of Reserve Created on Revaluation of Fixed

Assets recommends that the accumulated losses should not be adjusted against
such revaluation reserve, since this would amount to setting of actual losses
against unrealised gains.
Debit balance in the Profit and Loss Account is a fictitious asset. There is neither
mandatory rule in accounting nor any legal requirement that fictitious assets must
be written off before declaration of dividend.
Since, mere revaluation of asset does not result in realised gain, and, thus, as per
the sound accounting practice, the accumulated losses should not be adjusted
against revaluation reserve because this would amount to setting off actual losses
against unrealised gains.
Conclusion: If the debit balance in Profit and Loss Account is set off against revaluation
reserve, and then dividend is declared from out of revenue profits, it would amount to
payment of dividend out of capital without making good the amount of loss or
depreciation whichever is less. Such a declaration will be violation of the provisions of
Section 205 of the Companies Act, 1956. Hence, the opinion of the finance Manager of
Belt Ltd. is not correct.
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Q. No. 59
As an auditor, comment on the following situations/statements: X Ltd. is good in profits, but

suffers temporarily in liquidity. It proposes to declare dividend of 10% in annual general
meeting, but the Board proposes to defer payment of dividend by two months from the date of
annual general meeting by getting a resolution passed in AGM.
Answer: Revocation of Dividend
Sec. 205A provides that, dividend once declared cannot be revoked. In the present case,
X Ltd. has not declared the dividends so far, only the Board proposed to recommend
declaration of 10% dividend in AGM but in view of liquidity problem it proposes to
defer the payment of dividend by two months from the date of AGM by getting a
resolution passed in AGM.
Conclusion: Hence, till date it is only a proposal and has not been passed by the
shareholders. Therefore, in such case, X Ltd. may declare dividends at a subsequent
general meeting.
Q. No. 60
Give your comments on the following: The Articles of Association of ABC Ltd. do not authorise
the company to buy back its own shares. However, a special resolution has been passed in
general meeting of the company authorizing the buy-back. The directors of the company are of
the opinion that even without authority in the Articles of Association the buy-back is possible
due to special resolution passed in general meeting authorising the buy-back.
Answer: Buy Back of Shares
Sec. 77A of the Companies Act, 1956 provides that a company can purchase its own
shares or other specified securities if following conditions are satisfied:
(a) The buy back is authorised by its Articles;
(b) A special resolution has been passed in general meeting of the company
authorizing the buy back.
Hence to purchase own shares, articles must authorise the transaction.
Conclusion: In absence of such authorization, purchase of own shares or securities are
in contravention of Sec. 77A of Companies act, 1956 and attracts penal provisions. In
this case auditor needs to modify his report so as to cover the contravention of Sec. 77A
of Companies Act, 1956.
Q. No. 61
As an auditor comment on the following situations:

MNR Co. Ltd. did not provide for depreciation during the financial year 2009-10 due to
inadequacy of profits. The company declared dividend during the financial year 20010-11
without providing for the previous year deprecation.
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Answer: Declaration of Dividend without providing the depreciation:

Proviso to Sec. 205(1) provides that if the company has not provided for depreciation
for any previous financial year or years, it shall before declaring or paying the
dividend for any financial year provide for such depreciation out of the profits of that
financial year or out of the profits of any other previous financial years.
Conclusion: Under the present circumstances, the dividend declared by the company
without providing the depreciation is violation of Sec. 205(1) and hence auditor
should qualify his report thereon.
Q. No. 62
Comment on the following situation: C ltd. declared dividend amounting to Rs. 5 lacs out of
profits for the year ended 31.3.2009. Subsequently, it was noticed that company had failed to
make provisions for outstanding expenses of Rs. 7.80 lacs and closing stock was also
overvalued, which was not reported by auditors of the company. Management of C. Ltd. held
auditors responsible for this situation.
Answer: Failure to detect untrue and incorrect financial position of a company
In the given case, profit of the company has been inflated by non-provisioning of
outstanding expenses of Rs.7.80 lacs and by overvaluation of closing stock and
based on such inflated profit the company has declared and paid dividend of Rs.
5.00 lacs. Thus it can be said that dividend has been paid out inflated profit and
not out of real profit. If there is insufficient profit after above adjustment of
outstanding expenses and correction of stock valuation and there is no past
reserve, it would amount to payment of dividend out of capital.
It was the duty of auditor to ascertain whether the Balance Sheet and Profit and
Loss A/c of the company show a true and fair view of the financial position and
revenue earning capacity. For that he has to exercise proper audit procedure of
substantive test (i.e. vouching and verification) and valuation of various items of
Balance Sheet and Profit and Loss a/c. The auditor should have checked whether
all the outstanding expenses have been provided or not and whether closing stock
has been properly valued as per AS-2. If he was not satisfied, he should have
issued a qualified report or adverse report.

MISCELLANEOUS QUESTIONS
Q. No. 63
As an auditor, comment on the following situations/statements: The register of members of AP

Ltd. has not been written up-to-date and as a result, the balances in the register do not agree
with the amount of issued Share Capital.
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Answer: Maintenance of register of Members:

Register of members is required to be maintained by every company and it constitutes
important documentary evidence in the audit of share capital. While carrying out
audit of share capital, the auditor should ascertain whether the company updates the
register and then examine whether it is in agreement with the amount of issued
capital.
Failure of company to write the register up to date requires a disclosure in the report
of auditor.
Conclusion: However, in the present circumstances, auditor may consider for the
application of other audit procedures to ascertain the amount of issued share capital.
If the auditor fails to obtain sufficient appropriate audit evidence, he may qualify his
report.
Q. No. 64
Comment on the following situations:

Mr. X, a shareholder of the company pointed out that:
(i) The goodwill in the Balance Sheet of the company has appeared on same figure during the
past three years.
(ii) Premium received on issue of shares prior to the date of balance sheet has been
transferred to Profit and Loss account for arriving at the figure of commission payable to
the managing director.
Answer:
(i)
Non-Amortisation of Goodwill: Though not statutorily required, goodwill needs to be

amortised over a reasonable period as a matter of financial prudence.
Hence, the fact that goodwill in the balance sheet has appeared on same figure during
the past three years requires a proper attention of the auditor and auditor is required
to ascertain the reasons why the goodwill has not been written off in these years and
suitable report the matter in his Audit Report.
(ii)
Commission payable to Managing Director: As per Sec. 349(3) of Companies Act, 1956,
while computing the profits for the purpose of calculation of managerial remuneration,
the credit shall not be given for the profits, by way of premium on shares or debentures
of the company which are issued or sold by the company.
Hence the contention of the shareholder that premium has been transferred to the
Profit and loss account for calculating the commission payable to Managing Director is
correct and hence requires rectification.
Q. No. 65
XYZ Ltd. Co. gave a donation of ` 50,000 each to a Charitable Society running a school and a
trust set up for the service of Blinds during financial year ending on 31.03. 2011. The average
net profits of the company for the last 3 years were 15 lakhs.
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Answer: Contribution to Charitable institutions:

As per Sec. 293(1)(e) of Companies Act, 1956, a company is not allowed to contribute
to charitable and other funds not directly relating to the business of the company or
welfare of its employees, any amount the aggregate of which will in any FY exceed
`50,000 or 5% of its average profits during the preceding three financial years, which
ever is greater.
In the question given, XYZ Ltd. Co. donate `50,000 each to Charitable society and a trust,
together amounts to `1,00,000. Average net profits of the company during the last three
years were `15 Lacs, its 5% amounts to `75,000. Hence the company can contribute a
maximum of `75,000.
Hence, the auditor is required to disclose the fact in his report by qualifying it
Q. No. 66
Sri Limited charged depreciation on its plant and machinery comprised in fixed assets at rates
different from what had been specified in schedule XIV, to the Companies Act, 1956. The
auditor insisted that the rates of depreciation adopted should be mentioned in the notes to the
account, else, he would make qualification in his audit report. The Management of the company
contended that there is no impact in profits due to its omission to disclose the fact and hence
on considerations of principle of materiality, the auditor is wrong in mentioning this omission
in his report by way of qualification
Answer: It is permissible to the company to charge depreciation on its assets at rate different
from schedule XIV rates provided those rates are higher than the schedule rates
based on technical estimation or otherwise allowed under Section 205 of the Act.
However, when the rates adopted are different from the rates specified in the
schedule, the same need to be disclosed in the notes to the accounting.
Non-disclosure of variation in rates is a violation of AS 1 and also the Schedule XIV
which requires such disclosure.
Hence, the auditor, is right in his approach to qualify the same in his report.
Q. No. 67
M, Statutory Auditor of ABC Ltd wants to verify cash on hand as on 31st March, 2009. The
Management informs Mr. M. that it is not possible to cooperate, as cashier has been
hospitalised. Advise Mr. M. on how to deal with the situation.
Answer: The scope of audit may be limited for varied reasons, (i) the entity may impose
restriction on scope of audit, (ii) the limitation may be imposed by circumstances.
When the audit is carried out under and as per statute, the auditor should not accept
the assignment when his duties are curtailed by agreement, unless required by any
Law. When audit is carried out in accordance with the entitys terms voluntarily, the
auditor may indicate his scope in his audit report.
Sometimes, the circumstances may impose restrictions on audit scope. For example,
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if the auditor is appointed after the year end, he may not be able to participate in
inventory checking. Or sometimes, the records required may not be available so that
the auditor may not be able to check details in the manner he liked. Such limitations
in scope may warrant an auditor to express disclaimer of opinion or qualified opinion
in his audit report depending upon the circumstances.
The non co-operation of ABC Limited will amount to limitation on scope of auditors.
Q. No. 68
As an auditor of a Limited Company, you observe that during the month of March, 2009, sales
invoices were not recorded in books of accounts. You also observe that payment of wages was
much higher compared to last year. Keeping in mind the above, analyse possible ways of
manipulation of accounts.
Answer: Manipulation of Accounts: Accounts are falsified in order to conceal the true position
of the business for some purpose. They are always intentional, for a predetermined
purpose and are generally committed either by the owners or top management
personnel or senior officers of the business. This type of fraud is generally committed:
(i) to avoid incidence of income-tax or other taxes by showing profits at a lower
figure.
(ii) for delaying a dividend when there are insufficient profits by showing profits at
inflated figures.
(iii) to withhold declaration of dividend even there is adequate profit.
(iv) for receiving higher remuneration where managerial remuneration is payable by
reference to profits.
Such frauds are difficult to be detected as they are committed by persons holding
position of trust and use carefully guarded by them. Such frauds are generally of the
following nature:
(i) Recording fictitious sales or omission of sales
(ii) Recording fictitious purchases or suppression of purchases
(iii) Over valuation or under valuation of stock.
(iv) Recording fictitious expenses or omission of expenses
(v) Taking credit for accrued income not likely to be received or omission of income.
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Module IV - Engagement Standards
SA 200 (Revised) Overall Objectives of the Independent Auditor and Conduct of Audit in
accordance with SAs
Q. No. 1
Explain the Overall Objectives of Independent auditor.

Answer:
Overall Objectives Independent Auditor:
SA 200 Overall Objectives of the Independent Auditor and Conduct of Audit in accordance
with SAs stats that in conducting an audit of financial statements, the overall objectives of the
auditor are:
(a) To obtain reasonable assurance about whether the F. S. as a whole are free from material
misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the F.S. are prepared, in all material respects, in accordance with an
applicable FRF, and
(b) To report on the F.S. and communicate as required by the SAs, in accordance with the
auditors findings.
In all cases when reasonable assurance cannot be obtained and a qualified opinion in the
auditors report is insufficient, the SAs require that the auditor disclaim an opinion or
withdraw from the engagement.
Q. No. 2
Comment on the following: The Auditor shall comply with relevant ethical
requirements including independence
Answer:
Compliance of Ethical requirements:
(a) As per SA 200 Overall Objectives of the Independent Auditor and Conduct of Audit in
accordance with SAs the auditor shall comply with relevant ethical requirements,
including independence.
(b) Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the ICAI.
The fundamental principles are:
Integrity;
Objectivity;
Professional competence and due care;
Confidentiality; and
Professional behavior.
(c) Independence comprises both independence of mind and independence of appearance.
(d) Independence enhances the auditors ability to act with integrity to be objective and to
maintain an attitude of professional skepticism.
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Q. No. 3
SA 200 requires that the auditor shall and perform an audit with professional
skepticism. Explain the statement.
Answer:
Professional Skepticism:
(a) SA 200 Overall Objectives of the Independent Auditor and Conduct of Audit in
accordance with SAs requires that the auditor shall plan and perform an audit with
professional skepticism.
(b) Meaning of Professional Skepticism: An attitude that includes a questioning mind, being
alert to conditions which may indicate possible misstatement due to error or fraud, and a
critical assessment of audit evidence.
(c) Professional Skepticism Reduces risk of:
Overlooking unusual circumstances.
Over generalising when drawing conclusions from audit observations.
Using inappropriate assumptions in determining N, T, E of audit procedures &
evaluating the results thereof.
(d) Professional skepticism includes being alter to:
Contradictory audit evidence.
Questions on reliability of documents.
Conditions indicating possible frauds.
Circumstances suggesting need for audit procedures in addition to those suggested in
SAs.
Q. No. 4
Comment on the following: The auditor shall exercise professional judgement in

planning and performing an audit of financial statements.
Answer:
Professional Judgement:
(a) SA 200 Overall Objectives of the Independent Auditor and Conduct of Audit in
accordance with SAs requires that the auditor shall exercise professional judgment in
planning and performing an audit of financial statements.
(b) Meaning of Professional Judgement: The application of relevant training, knowledge and
experience, within the context provided by auditing, accounting and ethical standards, in
making informed decisions about the courses of action that are appropriate in the
circumstances of the audit engagement.
(c) Exercise of professional judgement depends on facts & circumstances known to the
auditor.
(d) Professional Judgement is to be exercised throughout the audit and to be appropriately
documented.
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(e) Professional Judgement is important when deciding about:
Q. No. 5
Materiality & audit risk.
NTE of audit procedures.
Evaluating sufficiency & appropriateness of audit procedures.
Evaluating mngt judgment in applying applicable FRF.
Drawing conclusions based on audit evidence.
State your opinion on the following: The audit of financial statements relieves
management of its responsibilities.
Answer:
Management Responsibility for preparation of Financial statements:
SA 200 Overall Objectives of the Independent Auditor and Conduct of Audit in accordance
with SAs provides that an audit in accordance with SAs is conducted on the premise that
management and, where appropriate, TCWG have responsibility:
(1) For the preparation and presentation of the F.S. in accordance with the applicable FRF.
(2) This responsibility includes the design, implementation and maintenance of internal
control relevant to the preparation and presentation of F.S. that are free from material
misstatement, whether due to fraud or error.
(3) To provide the auditor with all information as required for the purpose of the audit.
(4) As part of their responsibility for the preparation and presentation of the financial
statements, management and, where appropriate, TCWG are responsible for:
The identification of the applicable FRF, in the context of any relevant laws or
regulations.
The preparation and presentation of the F.S. in accordance with that framework.
An adequate description of that framework in the financial statements.
(5) The preparation of the F.S. requires management to exercise judgment in making
reasonable accounting estimates, select and apply appropriate accounting policies.
Conclusion: Based on above discussion, it can be stated that audit of financial statements does
not relieve management of its responsibilities.
Q. No. 6
An opinion expressed by the auditor is neither an assurance as to the future viability of

the enterprise nor the efficiency or effectiveness with which management has
conducted the affairs.
Answer:
Auditors responsibility to express an opinion:
SA 200 Overall Objectives of the Independent Auditor and Conduct of Audit in

accordance with SAs stats that in conducting an audit of financial statements, the auditor
is required to express an opinion that whether the F.S. are prepared, in all material
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respects, in accordance with an applicable FRF.
The opinion expressed by the auditor is common to all audits of financial statements.
For this purpose of expressing opinion he is required to obtain reasonable assurance

about whether the F.S. as a whole are free from material misstatement, whether due to
fraud or error.
The term reasonable assurance has been defined as higher level of assurance but not
absolute.
The auditors opinion, therefore, does not assure, the future viability of the entity nor the
efficiency or effectiveness with which management has conducted the affairs of the entity.
SA 210 (Revised) Agreeing the Terms of Audit Engagement

Q. No. 7
What is an audit engagement letter? What are the principal contents of audit
engagement letter.
or
Draft an engagement letter accepting the appointment as auditor.
Answer:
Audit Engagement letter
To the Board of Directors
ABC Company Limited:
You have requested that we audit the F.S. of ABC Company Limited, which comprise the
Balance Sheet as at March 31, 20X1, and the Statement of Profit & Loss, and Cash Flow
Statement for the year then ended, and a summary of significant accounting policies and other
explanatory information.
We are pleased to confirm our acceptance and our understanding of this audit engagement by
means of this letter. Our audit will be conducted with the objective of our expressing an
opinion on the financial statements.
We will conduct our audit in accordance with Standards on Auditing (SAs), issued by the ICAI.
Those Standards require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free from
material misstatement.
An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the
overall presentation of the financial statements.
Because of the inherent limitations of an audit, there is an unavoidable risk that some material
misstatements may not be detected, even though the audit is properly planned and performed
in accordance with SAs.
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Our audit will be conducted on the basis that management and, where appropriate, TCWG
acknowledge and understand that they have responsibility for:
(i) the preparation of the F.S. in accordance with the applicable FRF.
(ii)
exercising necessary internal control to enable the preparation of F.S. that are free
from material misstatement, whether due to fraud or error.
(iii) To provide the auditor with all information necessary for the purpose of the audit.
As part of our audit process, we will request from management and, where appropriate,
TCWG, written confirmation concerning representations made to us in connection with the
audit.
We look forward to full cooperation from your staff during our audit.
Please sign and return the attached copy of this letter to indicate your acknowledgement of,
and agreement with, the arrangements for our audit of the financial statements including our
respective responsibilities.
XYZ & Co.
Chartered Accountants
__________________
Signature
Date :
(Name of the Member)
Place :
(Designation)
Acknowledged on behalf of ABC Company by

..
(Signature)
Name and Designation
Date
Q. No. 8
Write short note on: Preconditions for an audit

Answer:
Preconditions for an Audit:
As per SA 210 Agreeing the terms of Audit Engagement before accepting an audit
engagement auditor is required to ensure existence of preconditions.
Accordingly, Pre-conditions to be examined are:
(a)
Determine whether the financial reporting framework to be applied in the preparation of

the financial statements is acceptable; and
(b)
Obtain the agreement of management that it acknowledges and understands its

responsibilities for followings:
(i) the preparation of the F.S. in accordance with the applicable FRF.
(ii) exercising necessary internal control to enable the preparation of F.S. that are free
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from material misstatement, whether due to fraud or error.

(iii) To provide the auditor with:
a. Access to all relevant information such as records, documentation and other
matters;
b. Additional information that the auditor may request from management for the
purpose of the audit; and
c. Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
Q. No. 9
Comment on the following: It is not mandatory to send a new engagement letter in

recurring audit, but sometimes it become mandatory to send new letter. Explain those
situations where new engagement letter is to be sent.
Answer:
Situations in which new engagement letter is required in case of recurring audit:
1.
In case of recurring audits, the auditor shall assess whether circumstances require
revision in terms of the audit engagement and whether there is a need to remind the
entity of the existing terms of the audit engagement.
2.
The auditor may decide not to send a new audit engagement letter or other written
agreement each period. However, the following factors may make it appropriate to revise
the terms of the audit engagement or to remind the entity of existing terms:
Any indication that the entity misunderstands the objective and scope of the audit.
Any revised or special terms of the audit engagement.
A recent change of senior management.
A significant change in ownership.
A significant change in nature or size of the entitys business.
A change in legal or regulatory requirements.
A change in the financial reporting framework adopted in the preparation of the F.S.
A change in other reporting requirements.
SA 220 (Revised) Quality Control for an audit of Financial Statements

Q. No. 10
Comment on the following: The work performed by each assistant needs to be

reviewed by personnel of at least equal competence
Answer:
Review of work performed by Assistants:
(a) SA 220 Quality Control for an Audit of F.S. auditor is required to implement quality
control procedures at engagement level that provide reasonable assurance that audit
complies with professional standards and legal requirements.
(b) It is one of the requirement of SA 220 that work performed by the assistants needs to be
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reviewed.
(c) For this purpose, Engagement Partner shall take the following responsibilities:
Reviews are being performed in accordance with the firms review policies and
procedures.
Be Satisfied that Sufficient Appropriate Audit Evidence has been obtained to support
the conclusions reached and audit report to be issued through
Q. No. 11
Review of audit documentation.
Discussion with engagement team.
Write short note on: Engagement Quality Control review.

Answer:
Engagement Quality Control Review:
(a) SA 220 Quality Control for an Audit of F.S. auditor is required to implement quality
control procedures at engagement level that provide reasonable assurance that audit
complies with professional standards and legal requirements.
(b) It is one of the requirement of SA 220 that work performed by engagement team needs to
be reviewed by Reviewer.
(c) SA 220 defines the Engagement Quality Control review as a process designed to provide an
objective evaluation, before the report is issued, of the significant judgments the
engagement team made and the conclusions they reached in formulating the report.
(d) For the purpose of Engagement Quality control Review, Engagement Partner Shall:
Determine that an EQC Reviewer had been appointed.
Discuss significant matters arising during audit engagement with EQC reviewer.
Not date the audit report until completion of EQC Review.
(e) Matters to be evaluated by EQC Reviewer: The EQC reviewer shall evaluate the following:
Discussion of significant matters with ET.
Review of selected audit documentation resignificant judgments & conclusions of ET.
Evalution of conclusions reached.
Considering whether proposed audit report is appropriate.
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SA 230 (Revised) Audit Documentation

Q. No. 12
As an auditor how would you deal with the following: The statutory auditor of the
holding company demands for the working paper of the auditors of the subsidiary
company, of which you are the auditor.
Answer:
Demand of working papers:
As per SA 230, Audit Documentation working papers are the property of the auditor. The
auditor may, at his discretion, make portion of or extracts of his working papers available
to his client.
SA 600 Using the Work of Another Auditors also states that an auditor should respect the
confidentiality of information acquired during the course of his audit work and should not
disclose such information unless there is a legal or professional duty to disclose.
As per ICAI Guidelines, statutory auditor of an enterprise do not have right of access to the
audit working papers of the branch auditor. An auditor can rely on the work of another
auditor, without having any right of access to the audit working papers of other auditor.
Conclusion: Statutory auditor of Holding company can not have access to audit working
papers of the subsidiary companys auditor. He can however, ask the auditor to answer certain
questions about the manner in which the audit is conducted and certain other clarifications
regarding audit.
SA 240 (Revised) Auditors Responsibilities relating to fraud in an audit of financial statements
Q. No. 13
Explain briefly duties and responsibilities of an auditor in case of material

misstatements resulting from management fraud.
Answer:
Auditors duties in case of material misstatement resulting from management fraud:
(a) SA 240 Auditors Responsibilities relating to fraud in an audit of financial statements
requires that the auditor is responsible for obtaining reasonable assurance that the F.S.
taken as a whole are free from material misstatement, whether caused by fraud or
error.
(b) Management is in a unique position to perpetrate fraud because of managements ability to
manipulate accounting records and prepare fraudulent financial statements by overriding
controls.
(c) When obtaining reasonable assurance, the auditor is responsible for maintaining an
attitude of professional skepticism throughout the audit.
(d) The auditor should recognize the possibility that a material misstatement due to fraud
could exist, notwithstanding his past experience of the honesty and integrity of the entitys
management and those charged with governance
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(e) If conditions cause the auditor to believe that a document may not be authentic or that
terms in a document have been modified, the auditor shall investigate further.
(f) Where responses to inquiries of management or TCWG are inconsistent, the auditor shall
investigate the inconsistencies.
SA 250 (Revised) Consideration of Laws and regulations in an audit of Financial Statements

Q. No. 14
Comment on the following: Management is responsible for compliance with Laws and
regulations.
Answer:
Management Responsibility for compliance with laws and regulation:
1. SA 250 Consideration of Laws and Regulations in an audit of Financial Statements states
that it is the responsibility of management, with the oversight of TCWG, to ensure that the
entitys operations are conducted in accordance with the provisions of laws and
regulations.
2. For this purpose management may apply the following procedures:
(a) Monitoring legal requirements and ensuring that operating procedures are designed to
meet these requirements.
(b) Instituting and operating appropriate systems of internal control.
(c) Developing, publicising and following a code of conduct.
(d) Ensuring employees are properly trained and understand the code of conduct.
(e) Monitoring compliance with the code of conduct and acting appropriately to discipline
employees who fail to comply with it.
(f) Engaging legal advisors to assist in monitoring legal requirements.
(g) Maintaining a register of significant laws and regulations with which the entity has to
comply within its particular industry and a record of complaints.
Q. No. 15
As an auditor what are the indicators you would consider while verifying compliance
with laws and regulations.
Answer:
Indicators to be considered for verifying compliance with laws and regulations:
SA 250 Consideration of Laws and Regulations in an audit of Financial Statements deals with
the auditors responsibilities to consider laws and regulations when performing an audit.
To verify the compliance of laws and regulations, auditor is required to consider the following
indicators:
Investigation by regulatory organisations Government departments or payment of fines,

additional taxes or penalties.
Payments for unspecified services or loans to consultants related parties or employees.
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Sales commission or agents fees that appear excessive in relation to those ordinarily paid
by the entity or in its industry or to the services actually received.
Purchases at prices significantly above or below market price.
Unusual payments in cash.
Unusual payments towards legal and retainership fees.
Unusual transactions with companies registered in tax havens.
Payments for goods or services made other than to the country from which the goods or
services originated.
Q. No. 16
Payments without proper exchange control documentation.
Existence of an information system which fails to provide an adequate audit trail.
Unauthorised transactions or improperly recorded transactions.
Adverse media comment.
State briefly the reporting requirements as per SA 250 on non-compliance with laws
and regulations.
Answer:
Reporting requirements as per SA 250 on Non-Compliance with Laws and regulations:
(a) Reporting to TCWG:
The auditor shall communicate with TCWG matters involving non compliance with
laws and regulations that come to the auditors attention.
If, in the auditors judgment, the non-compliance is believed to be intentional and
material, the auditor shall communicate the matter to TCWG as soon as practicable.
If the auditor suspects that management or TCWG are involved in noncompliance, the
auditor shall communicate the matter to the next higher level of authority at the entity,
if it exists, such as an audit committee or supervisory board. Where no higher
authority exists the auditor shall consider the need to obtain legal advice.
(b) Reporting in Auditors Report:
If the auditor concludes that the non-compliance has a material effect on the financial
statements, and has not been adequately reflected in the financial statements, the
auditor shall, express a qualified or adverse opinion on the financial statements.
If the auditor is precluded by management or TCWG from obtaining sufficient
appropriate audit evidence, the auditor shall express a qualified opinion or disclaim an
opinion.
If the auditor is unable to determine whether non-compliance has occurred because of
limitations imposed by the circumstances rather than by management or TCWG, the
auditor shall evaluate the effect on the auditors opinion.
(c) Reporting to regulatory and Enforcement Authorities:
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If the auditor has identified or suspects non-compliance with laws and regulations, the
auditor shall determine whether the auditor has a responsibility to report the
identified or suspected non-compliance to parties outside the entity.
SA 260 (Revised) Communication with Those Charged with Governance

Q. No. 17
Explain the various matters that are required to be communicated by the auditor to
TCWG.
Answer:
Matters to be communicated to TCWG:
SA 260 Communication with Those Charged with Governance provides that the auditor shall
communicate with TCWG the followings:
(a) Auditors Responsibilities in relation to the Financial Statement Audit:
The auditor shall communicate with TCWG that:
The auditor is responsible for forming and expressing an opinion on the F.S.; and
The audit of the F.S. does not relieve management or TCWG of their responsibilities.
(b) Planned Scope and timing of Audit: It may include:
How the auditor proposes to address the significant risks of material misstatements,
whether due to fraud or error.
Auditors approach to internal control.
Application of concept of materiality.
(c) Significant Finds from the audit:
The auditor shall communicate with TCWG:
The auditors views about significant qualitative aspects of the entitys accounting
practices, including accounting policies, accounting estimates and F.S. disclosures.
Significant difficulties, if any, encountered during the audit;
(d) Auditors Independence: required in case of listed entities.
Q. No. 18
As per SA 260, auditor is required to communicate with TCWG various matters

significant to audit In this reference explain various forms of communication and
factors affecting mode of communication.
Answer:
Forms of Communication:
(a) Various forms of communication may be classified as:
Oral or Written;
Detail or Summarized;
Structured or Unstructured.
(b) The auditor shall communicate in writing with TCWG regarding significant matters, from
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the audit when, in the auditors professional judgment, oral communication would not
be adequate.
Factors affecting mode of Communication:
1.
Whether the matter has been satisfactorily resolved.
2.
Whether management has previously communicated the matter.
3.
The size, operating structure, control environment, and legal structure of the entity.
4.
In the case of an audit of special purpose F.S., whether the auditor also audits the entitys
general purpose F.S..
5.
Legal requirements. In some jurisdictions, a written communication with TCWG is

required in a prescribed form by local law.
6.
The expectations of TCWG, including arrangements made for periodic meetings or

communications with the auditor.
7.
The amount of ongoing contact and dialogue the auditor has with TCWG.
8.
Whether there have been significant changes in the membership of a governing body.
SA 265 (Revised) Communicating Deficiencies in Internal Control to TCWG and Management

Q. No. 19
What do you mean by deficiencies in Internal Control. Explain various indicators of

Significant deficiencies.
Answer:
Deficiencies in Internal Control:
SA 265 Communicating Deficiencies in Internal Control to Those Charged with Governance
and Management states that deficiency in internal control exists when:
(a) A control is designed, implemented or operated in such a way that it is unable to prevent,
or detect and correct, misstatements in the financial statements on a timely basis; or
(b) A control necessary to prevent, or detect and correct, misstatements in the financial
statements on a timely basis is missing.
Indicators of Significant Deficiencies:
1.
Evidence of ineffective aspects of control environment.
2.
Entitys Risk assessment process Absent/ineffective.
3.
Ineffective response to identified significant Risks.
4.
Correction of prior period misstatements arising due to fraud/error.
5.
Management inability to oversee F.S. Preparation.
6.
Misstatements detected by the auditors procedures were not prevented, or detected and
corrected by the entity internal control.
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SA 299 Responsibilities of Joint Auditors

Q. No. 20
A joint auditor is not bound by the views of the majority of the joint auditors regarding
matters to be covered in the report. Justify the statement in the light of SA 299.
Answer:
Reporting Responsibilities of Joint Auditor:
(a)
The statement that a joint auditor is not bound by the views of the majority of the joint
auditors regarding the matters to be covered in the report is true.
(b) SA 299 Responsibilities of Joint Auditor provides the following in respect of reporting
responsibilities of joint auditor:
Normally, the joint auditors are able to arrive at an agreed report.
However, where the joint auditors are in disagreement with regard to any matters
to be covered by the report, each one of them should express his own opinion
through a separate report.
A joint auditor is not bound by the views of the majority of the joint auditors
regarding matters to be covered in the report and should express his opinion in a
separate report in case of a disagreement.
Q. No. 21
Write short note on responsibilities of Joint Auditor.

Or
You have been appointed as an auditor of a company along with 2 other auditors. What
steps would you like to take to ensure a smooth and effective audit? To what extent do
you think you will be responsible in relation to the work performed by yours coauditors and vice versa?
Answer:
Responsibilities of Joint Auditor:
SA 299 Responsibilities of Joint Auditors deals with the responsibilities of joint auditors.
Accordingly, in respect of audit work divided among the joint auditors, each joint auditor is
responsible only for the work allocated to him, whether or not he has prepared a separate
report on the work performed by him.
On the other hand, all the joint auditors are jointly and severally responsible (a)
in respect of the audit work which is not divided;
(b) in respect of decisions taken by all the joint auditors concerning the nature, timing or
extent of the audit procedures to be performed by any of the joint auditors.
(c)
in respect of matters which are brought to the notice of the joint auditors by any one of
them and on which there is an agreement among the joint auditors
(d) for examining that the F.S. of the entity comply with the disclosure requirements of the
relevant statute; and
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(e)
Q. No. 22
for ensuring that the audit report complies with the requirements of the relevant statute
Comment on the following: ABC & Co. and DEF & Co. Chartered Accountant firms were
appointed as joint auditors of Good Health Care Ltd. for 2009-10. A special audit was
conducted U/s 233A of the companies Act 1956 during March 2011 and observed gross
understatement of Revenue. The revenue aspects were looked after by DEF & Co, but
there was no documentation for the division of work between the joint auditors.
Answer:
Responsibilities of Joint Auditor:
As per SA 299 Responsibilities of Joint Auditor where joint auditors are appointed, they
should, by mutual discussion, divide the work among themselves.
Further the work so divided should be adequately documented and preferable

communicated to the entity.
In respect of audit work divided among the joint auditors, each joint auditor is
responsible only for the work allocated to him, whether or not he has prepared a
separate report on the work performed by him.
However for the work not divided, all joint auditors are jointly and severally responsible.
In the present case, though the revenue aspects were looked after by DEF & Co., but as
there is no documentation for division of the work between them, both the joint auditors
will be held responsible for it.
Conclusion: Both Joint auditors are jointly and severally responsible.
SA 300 (Revised) Planning and Audit of Financial Statements

Q. No. 23
Write short note on: Factors to be considered in the development of overall audit plan.
Answer:
Factors to be considered in development of overall audit plan:
SA 300 Planning and Audit of Financial Statements deals with the auditors responsibilities
for planning an audit of financial statements.
While developing an overall audit plan, auditor is required to consider the followings:
(a) Terms of his engagement and any statutory responsibilities.
(b) Nature and timing of reports or other communications.
(c) Applicable Legal or Statutory requirements.
(d) Accounting policies adopted by the clients and changes, if any, in those policies.
(e) The effects of new accounting and auditing pronouncement on the audit.
(f) Identification of significant audit areas.
(g) Setting of materiality levels for the audit purpose.
(h) Conditions requiring special attention such as the possibility of material error or fraud.
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(i) Degree of reliance to be placed on the accounting system and internal control.
(j)
Possible rotation of emphasis on specific audit areas.
(k) Nature and extent of audit evidence to be obtained.

(l)
Work of the internal auditors and extent of reliance on their work, if any in the audit.
(m) Involvement of other auditors in the audit of subsidiaries or branches.

(n) Allocation of works to be undertaken between joint auditors.
(o) Establishing and coordinating staffing requirements.
Q. No. 24
Write short note on: Preliminary Engagement Activities

Answer:
Preliminary Engagement Activities:
SA 300 Planning an Audit of Financial Statements requires the auditor to perform
preliminary engagement activities before planning an audit.
Preliminary engagement activities includes:
(a) Performing procedures required by SA 220 Quality control for audit work regarding the
continuance of the client relationship and specific audit engagement;
(b) Evaluating compliance with ethical requirements, including independence, as required by
SA 220; and
(c) Establishing an understanding of the terms of the engagement, as required by SA 210.
Q. No. 25
Comment on the following: Auditor shall establish an overall strategy that sets the
scope, timing and direction of the audit, and that guides the development of the audit
plan.
Answer:
Establishment of Audit Strategy:
(a) SA 300 Planning an Audit of Financial Statements requires that the auditor shall
establish an overall audit strategy that sets the scope, timing and direction of the audit,
and that guides the development of the audit plan.
(b) In establishing the overall audit strategy, the auditor shall:
Identify the characteristics of the engagement that define its scope;
Ascertain the reporting objectives of the engagement to plan the timing of the audit
and the nature of the communications required;
Consider the factors that are significant in directing the engagement teams efforts;
Consider the results of preliminary engagement activities and, where applicable,

whether knowledge gained on other engagements performed by the engagement
partner for the entity is relevant; and
Ascertain the NTE of procedures necessary to perform.
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SA 315 identifying and Assessing the Risk of material Misstatements through understanding the
Entity and its Environment
Q. No. 26
What are the points to be remembered while evaluating the knowledge of the business
in the conduct of an audit?
or
Auditor is required to identify and assess Risk of material misstatement through
understanding the entity and its environment. Explain the various matters of which
auditor should obtain understanding.
Answer:
Obtaining an understanding of the entity and its environment:
As per SA 315 Identifying and Assessing the Risk of Material Misstatements through
understanding the entity and its environment auditor is required to obtain an understating of
following as a part of risk assessment procedures:
(a) Industry, regulatory, and other external factors including applicable financial reporting
framework.
(b) The nature of the entity, including:
(a) its operations;
(b) its ownership and governance structures;
(c) the types of investments that the entity is making and plan to make; &
(d) the way that the entity is structured and how it is financed;
(c) The entitys selection and application of accounting policies, including the reasons for
changes thereto.
(d) The entitys objectives and strategies, and those related business risks that may result in
risks of material misstatement.
(e) The measurement and review of the entitys financial performance.
Q. No. 27
Write short note on: Risk Assessment procedures

Answer:
Risk assessment Procedures:
(a) SA 315 Identifying and Assessing the Risk of Material Misstatements through
Understanding the Entity and its Environment requires from the auditor to identify and
assess the risks of material misstatement, whether due to fraud or error, at the financial
statement and assertion levels, by performing risk assessment procedures.
(b) Meaning of Risk Assessment Procedures: Risk Assessment procedures may be defined
as audit procedures performed to
obtain an understanding of the entity and its
environment, including the entitys internal control, to identify and assess the risks of
material misstatement, whether due to fraud or error, at the financial statement and
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assertion levels.
(c) Components of Risk Assessment Procedures:
Inquiries of management, and of others within the entity.
Analytical procedures.
Observation and inspection.
Q. No. 28
What is Internal Control. Explain various components of Internal Control

Answer:
Meaning of Internal Control: Internal Control may be defined as the process designed,
implemented and maintained by TCWG, management and other personnel to provide
reasonable assurance about the achievement of an entitys objectives with regard to
-
reliability of financial reporting,
effectiveness and efficiency of operations,
safeguarding of assets, and
compliance with applicable laws and regulations.
Components of Internal Control: It includes the followings:

(a) Control Environment: The control environment includes the governance and
management functions and the attitudes, awareness, and actions of those charged with
governance and management concerning the entitys internal control and its importance
in the entity. The control environment sets the tone of an organization, influencing the
control consciousness of its people.
(b) Risk Assessment Process: The entitys risk assessment process forms the basis for how
management determines the risks to be managed. If that process is appropriate to the
circumstances, including the nature, size and complexity of the entity, it assists the auditor
in identifying risks of material misstatement. Whether the entitys risk assessment
process is appropriate to the circumstances is a matter of judgment.
(c) Information System: The information system relevant to financial reporting objectives,
which includes the accounting system, consists of the procedures and records designed
and established to:
Initiate, record, process, and report entity transactions;
Resolve incorrect processing of transactions;
Process and account for system overrides or bypasses to controls;
Transfer information from transaction processing systems to the general ledger;
Capture information relevant to financial reporting for events and conditions other
than transactions, such as the depreciation and amortisation of assets; and
Ensure information required to be disclosed by the applicable FRF is accumulated,
recorded, processed, summarized and appropriately reported in the F.S.
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(d) Control Activities relevant to Audit: Control activities are the policies and procedures
that help ensure that management directives are carried out. Control activities, whether
within IT or manual systems, have various objectives and are applied at various
organisational and functional levels.
(e) Monitoring of Controls: Monitoring of controls is a process to assess the effectiveness of
internal control performance over time. It involves assessing the effectiveness of controls
on a timely basis and taking necessary corrective actions.
SA 320 (Revised) Materiality in Planning and performing an audit
Q. No. 29
Explain the concept of materiality in planning and performing an audit

Answer:
Concept of Materiality in planning and performing an audit:
The concept of materiality is applied by the auditor both in planning & performing the audit, &
in evaluating the effect of identified misstatements on audit and of uncorrected misstatements,
if any, on the F. S. and in forming the opinion in auditors report.
The auditors determination of materiality is a matter of professional judgment, and is affected
by the auditors perception of the financial information needs of users of the F.S.
A discussion present in the FRF provides a reference to the auditor in determining materiality
for the audit.
Though the FRF may discuss materiality in different terms, they generally explain that:
Misstatements, including omissions, are considered to be material if they, individually or in
the aggregate, could reasonably be expected to influence the economic decisions of users of
the F.S.;
Judgments about materiality are made in the light of surrounding circumstances, and are
affected by the size or nature of a misstatement, or a combination of both; and
Judgments about matters that are material to users of the F. S. are based on a consideration
of the common financial information needs of users as a group. The possible effect of
misstatements on specific individual users, whose needs may vary widely, is not considered.
If the applicable FRF does not include a discussion of the concept of materiality, the
characteristics referred above provide the auditor with such a frame of reference.
Q. No. 30
Write short note on: Performance Materiality

Answer: Refer Notes
SA 330 The Auditors Responses to Assessed Risks

Q. No. 31
Write short note on: Tests of Controls and Substantive Procedures

Answer: Refer Notes
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SA 402 Audit Considerations relating to an entity using service organization

Q. No. 32
As per SA 402, the user auditor shall obtain an understanding of how user entity uses
the services of a service organization in the user entity operations Explain the various
matters of which understanding is required.
Answer:
Matters of which understanding is required by user auditor w.r.t. services of a services
organization:
As per SA 402 Audit Considerations relating to an entity using service organization the user
auditor is required to shall obtain an understanding of how user entity uses the services of a
service organization in the user entity operation, including:
(a) Nature of service provided by the service organization and the significance of those services
to the user entity.
(b) The nature and materiality of the transactions processed or financial reporting processes
affected by service organizations.
(c) The degree of interaction between activities of service organizations and those of the user
entity.
(d) The nature of relationship between user entity and the service organization.
Q. No. 33
In the course of audit of R Ltd. the audit manager of ABC & Co. observed that R Ltd. has
outsourced certain activities to an outsourcing agency. As the engagement partner guide
the audit manager in the assessment of services provided by the outsourcing agency in
relation to the audit.
Answer:
Assessment of services provided by the outsourcing Agencies:
SA 402 Audit Considerations relating to an entity using service organization deals with the
user auditors responsibility to obtain sufficient appropriate audit evidence when a user entity
uses the services of one or more service organisations. The auditor responsibility in this regard
as per SA 402 includes the following:
1. Evaluate the design and implementation of relevant controls of user entity that relate to the
services provided by service organization.
2. Determine whether a sufficient understanding of nature and significance of services provided
by service organization and their effect on the user entity internal control relevant to the
audit has been obtained, to provide basis for identification and assessment of risk of
Material Misstatement.
3. If user auditor is unable to obtain a sufficient understanding from the user entity, the user
auditor shall obtain that understanding from one or more of following procedures:
(a) Obtaining a Type 1 or Type 2 Report, if available.
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(b) Contacting the service organization, through the user entity, to obtain the sufficient
information.
(c) Visiting the service organization.
(d) Using another auditor to perform procedures that will provide the necessary
information about the relevant controls at the service organization.
SA 450 Evaluation of Misstatements identified during the Audit
Q. No. 34
Explain the various causes of misstatement.

Answer:
SA 450 Evaluation of Misstatements identified during the Audit deals with the auditors
responsibilities to evaluate the effect of identified misstatements on the audit.
Misstatement may be defined as a difference between the amounts, classification, presentation,
or disclosure of a reported financial statement item and the amount, classification, presentation,
or disclosure that is required for the item to be in accordance with the applicable financial
reporting framework. Misstatements can arise from error or fraud.
Causes of Misstatement: Misstatements may result from:
1. An inaccuracy in gathering or processing data from which the financial statements are
prepared;
2. An omission of an amount or disclosure;
3. An incorrect accounting estimate arising from overlooking, or clear misinterpretation of,
facts; and
4. Judgments of management concerning accounting estimates that the auditor considers
unreasonable or the selection and application of accounting policies that the auditor
considers inappropriate.
SA 500 (Revised) Audit Evidence

Q. No. 35
Write short note on: Sufficient Appropriate Audit Evidence

Answer:
Sufficient Appropriate audit Evidence:
SA 500 Audit Evidence requires that the auditor shall design and perform audit
procedures that are appropriate in the circumstances for the purpose of obtaining
sufficient appropriate audit evidence.
Sufficiency: It refers to the quantity of audit evidence and is affected by the auditors
assessment of the risks of material misstatement and also by the quality of such audit
evidence.
Appropriateness: It refers to the measure of the quality of audit evidence, that is its
relevance and its reliability in providing support for the conclusions on which the auditors
opinion is based.
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Q. No. 36
Y Ltd. Engaged an actuary to ascertain its employee cost, gratuity and leave encashment
liabilities. As the auditor of Y Ltd. You would like to use the report of actuary as audit
evidence. How do you evaluate the work of Actuary.
Answer:
Evaluation of work of Actuary engaged by the client:
As per SA 500 Audit Evidence if the auditor wants to use the work of management expert as
an audit evidence, he is required to evaluate the work of management expert. For this purpose
he is required to perform the followings:
(a) Evaluate the competency, capability and Objectivity of Expert:
Competence: Relates to nature & level of expertise.
Capability: Ability to exercise that competence.
Objectivity: Relates to possible effects that bias, conflict of interest or influence of
others may have on the professional/business objectivity of management expert.
(b) Understanding the Expert Work: It may include the following:
Areas of specialty within field of expertise.
Applicable professional or other standards, and regulatory or legal requirements.
Assumptions and methods used, their general acceptability within that experts field
and appropriateness for financial reporting purposes.
Nature of internal and external data or information the auditors expert uses.
(c) Evaluating appropriateness of Expert Work: It may include the following:
The relevance and reasonableness of that experts findings or conclusions;
Consistency with other audit evidence;
Whether they have been appropriately reflected in the FS;
Relevance and reasonableness of assumptions and methods; and
Relevance, completeness, and accuracy of the source data.
Q. No. 37
Explain various methods of obtaining audit evidence

Answer:
Methods to obtain audit evidence:
As per SA 500 Audit Evidence the following methods can be used by the auditor for the
purpose of obtaining audit evidence:
(a) Inspection: It involves examining records or documents, whether internal or external, in
paper form, electronic form, or other media, or a physical examination of an asset.
(b) Observation: It consists of looking at a process or procedure being performed by others,
for example, the auditors observation of inventory counting by the entitys personnel.
(c) External Confirmation: It represents audit evidence obtained by the auditor as a direct
written response to the auditor from a third party (the confirming party), in paper form,
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or by electronic or other medium.

(d) Recalculation: It consists of checking mathematical accuracy of documents or records. It
may be performed manually or electronically.
(e) Re-performance: It involves the auditors independent execution of procedures or
controls that were originally performed as part of the entitys internal control.
(f) Analytical Procedures: It consists of evaluations of financial information made by a
study of relationships among both financial and non financial data.
(g) Inquiry: It consists of seeking information of knowledgeable persons, both financial and
non- financial, within the entity or outside the entity.
Q. No. 38
Write short note on: Reliability of Audit Evidence

Answer:
Reliability of Audit Evidence:
As per SA 500 Audit Evidence reliability of audit evidence is guided by following principles:
(a) The reliability of audit evidence is increased when it is obtained from independent
sources outside the entity.
(b) The reliability of audit evidence that is generated internally is increased when the related
controls, imposed by the entity are effective.
(c) Audit evidence obtained directly by the auditor is more reliable than audit evidence
obtained indirectly.
(d) Audit evidence in documentary form, whether paper, electronic, or other medium, is
more reliable than evidence obtained orally.
(e) Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies, or documents that have been filmed, digitised or otherwise
transformed into electronic form, the reliability of which may depend on the controls
over their preparation and maintenance.
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SA 501 (Revised) Audit Evidence Specific Considerations for selected items

Q. No. 39
Explain the procedures to be performed by auditor to obtain sufficient and appropriate

audit evidence regarding the existence and condition of inventory.
Answer:
Procedure to be performed to obtain sufficient and appropriate evidence regarding
existence and condition of inventory:
SA 501 Audit Evidence Specific Considerations for selected items deals with specific
considerations by the auditor in obtaining sufficient and appropriate audit evidence, with
respect to certain aspects of inventory, litigation and claims, and segment information in an
audit of financial statements.
Accordingly, when inventory is material to the F.S., the auditor shall obtain sufficient
appropriate audit evidence regarding the existence and condition of inventory by:
(a) Attendance at physical inventory counting, unless impracticable, to:
(b)
Evaluate mngt. instructions & procedures for recording & controlling the results of the
entitys physical inventory counting;
Observe the performance of managements count procedures;
Inspect the inventory;
Perform test counts;

Performing audit procedures over the entitys final inventory records to determine
whether they accurately reflect actual inventory count results.

Q. No. 40
Explain the auditors procedures w.r.t. determination of existence and condition of

inventory under the following circumstances:
(a) Inventory count conducted at a date other than balance sheet.
(b) To attend the inventory is impracticable.
Answer:
Auditors procedures w.r.t. determination of existence and condition of inventory:
SA 501 Audit Evidence Specific Considerations for selected items deals with specific
considerations by the auditor in obtaining sufficient and appropriate audit evidence, with
respect to certain aspects of inventory, litigation and claims, and segment information in an
audit of financial statements.
Inventory count conducted a a tae other than balance sheet:
If physical inventory counting is conducted at a date other than the date of the financial
statements, the auditor shall, in addition to the general procedures, perform audit procedures
to obtain audit evidence about whether changes in inventory between the count date and the
date of the financial statements are properly recorded.
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To attend the inventory is impracticable:

If attendance at physical inventory counting is impracticable, the auditor shall perform
alternative audit procedures to obtain sufficient appropriate audit evidence regarding the
existence and condition of inventory.
If it is not possible to do so, the auditor shall modify the opinion in the auditors report in
accordance with SA 705.
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SA 505 (Revised) External Confirmations

Q. No. 41
What is External Confirmation. Explain the process of obtaining external confirmation.

Answer:
External Confirmation:
SA 505 External Conformation deals with the auditors use of external confirmation
procedures to obtain audit evidence.
Meaning of External Conformation: SA 505 defined external confirmation as Audit evidence
obtained as a direct written response to the auditor from a third party (the confirming party),
in paper form, or by electronic or other medium.
Process of obtaining External Conformation:
(a) Determining the information to be confirmed or requested: It may be with respect to
Account balances & their elements.
Terms of agreements/ contracts/ transactions.
(b) Selecting the appropriate confirming party

(c) Designing the confirmation requests:
It also includes determining that requests are
properly addressed, and contain return information for responses to be sent directly to
the auditor.
(d) Sending the requests, including follow-up requests when applicable, to the confirming
party.
Q. No. 42
Comment on the following: Negative confirmation provides less persuasive audit

evidence than positive confirmation.
Answer:
Use of Negative Confirmation request:
SA 505 External Conformation deals with the auditors use of external confirmation
procedures to obtain audit evidence. Accordingly, a negative confirmation request is a
request that the confirming party respond directly to the auditor only if the confirming party
disagrees with the information provided in the request . The statement that Negative
confirmation provides less persuasive audit evidence than positive confirmation is true.
The failure to receive a response to a negative confirmation request does not explicitly
indicate receipt by the intended confirming party of the confirmation request or verification
of the accuracy of the information contained in the request. Accordingly, a failure of a
confirming party to respond to a negative confirmation request provides significantly less
persuasive audit evidence than does a response to a positive confirmation request.
Confirming parties also may be more likely to respond indicating their disagreement with a
confirmation request when the information in the request is not in their favour, and less
likely to respond otherwise.
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Accordingly, the auditor shall use negative confirmation requests as the sole substantive
audit procedure only when all of the following conditions are present:
(a) Low Risk of material misstatement and auditor has obtained sufficient appropriate
audit evidence regarding the operating effectiveness of controls.
(b) The population comprises a large number of small, homogeneous, account balances or
transactions.
(c) A very low exception rate is expected.
(d) The auditor is not aware of circumstances or conditions that would cause recipients of
negative confirmation requests to disregard such requests.
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Q. No. 43
Management of X Ltd. request you not to seek confirmation from its debtors. As the
auditor of X Ltd. what can be appropriate response.
Answer:
Management refusal not to seek external confirmation request:
(a) SA 505 External Conformation deals with the auditors use of external confirmation
procedures to obtain audit evidence.
(b) SA 505 provides that if management refuses to allow the auditor to send a confirmation
request, the auditor shall:
Inquire as to managements reasons for the refusal, and seek audit evidence as to their
validity and reasonableness;
Evaluate the implications of managements refusal on the auditors assessment of the
relevant risks of material misstatement, including the risk of fraud, and on the nature,
timing and extent of other audit procedures; and
Perform alternative audit procedures designed to obtain relevant and reliable audit
evidence.
(c) If the auditor concludes that managements refusal to allow the auditor to send a
confirmation request is unreasonable, or the auditor is unable to obtain relevant and
reliable audit evidence from alternative audit procedures, the auditor shall communicate
with TCWG in accordance with SA 260. The auditor also shall determine the implications
for the audit and the auditors opinion in accordance with SA 705.
SA 510 Initial Audit Engagements Opening Balances

Q. No. 44
What are the audit procedures to be followed by a statutory auditor in the audit of
opening balances if the financial statements for the preceding year were audited by
another auditor.
Answer: Refer Notes
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SA 520 Analytical Procedures

Q. No. 45
Write short note on: Analytical Procedures

Answer:
Analytical Procedures:
SA 520 Analytical Procedures deals with the auditors use of analytical procedures as
substantive procedures.
Meaning of Analytical Procedures: Analytical Procedures means evaluations of financial
information through analysis of relationships among both financial and non-financial data.
It also encompass such investigation as is necessary of identified fluctuations or relationships
that are inconsistent with other relevant information or that differ from expected values by a
significant amount.
Nature of Analytical Procedures:
(a) AP include the consideration of comparisons of the entitys financial information with
Comparable information for prior periods.
Anticipated results of the entity, such as, budgets or forecasts, or expectations of the
auditor.
Similar industry information.
(b) AP also include consideration of relationships, among:
elements of financial information, such as gross margin percentages.
financial information and relevant non-financial information, such as payroll costs to
number of employees.
Q. No. 46
What are the considerations to be kept in mind while performing analytical procedures
on data prepared by the client.
Answer:
Considerations to be kept in mind while performing Analytical Procedures:
SA 520 Analytical Procedures deals with the auditors use of analytical procedures as
substantive procedures. Accordingly, auditor is required to consider the following while
performing analytical procedures:
(a) Determine the suitability of particular substantive analytical procedures: Suitability of
Analytical Procedures is influenced by:
1. Nature of assertion.
2. Auditors assessment of Analytical Procedures effectiveness to identify material
misstatement.
3. In some cases unsophisticated predictive models may be useful.
4. Different types of Analytical Procedures provide different levels of assurance.
(b) Evaluate the reliability of data: Following factors affects the reliability:
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1. Source of information available.

2. Comparability of information available.
3. Nature & relevance of information available.
4. Controls over preparation of information that are designed to ensure Completeness,
accuracy & validity.
(c) Develop an expectation of recorded amounts or ratios and evaluate whether the expectation
is sufficiently precise to identify material misstatement.
(d) Determine the amount of any difference of recorded amounts from expected values that is
acceptable without further investigation.
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SA 530 Audit Sampling

Q. No. 47
While planning the audit of X Ltd, you want to apply sampling techniques. What are the
risk factors you should keep in mind.
Or
The auditor is faced with sampling risk in both tests of control and substantive
procedures. Comment on this statement with reference to SA 530 on Audit sampling.
Answer:
Sampling Risk:
SA 530 Audit Sampling deals with auditor use of sampling in performing audit procedures.
However, due to application of sampling in audit procedures, there arise risk of sampling.
Sampling Risk may be defined as the risk that the auditors conclusion based on a sample may
be different from the conclusion if the entire population were subjected to the same audit
procedure.
Sampling risk can lead to two types of erroneous conclusions:
(i) In the case of a test of controls, that controls are more effective than they actually are, or in
the case of a test of details, that a material misstatement does not exist when in fact it does.
The auditor is primarily concerned with this type of erroneous conclusion because it
affects audit effectiveness and is more likely to lead to an inappropriate audit opinion.
(ii) In the case of a test of controls, that controls are less effective than they actually are, or in
the case of a test of details, that a material misstatement exists when in fact it does not.
This type of erroneous conclusion affects audit efficiency as it would usually lead to
additional work to establish that initial conclusions were incorrect.
SA 540 Auditing Accounting Estimates, including Fair Value Accounting Estimates and related
Disclosures
Q. No. 48
While auditing X Ltd, you observe certain material financial statement assertions have
been based on estimates made by the management. As an auditor how do you identify
and assess risk of material misstatement.
Answer:
Identification and assessment of Risk of Material Misstatement when financial statement
assertions are based on estimates made by management:
SA 540 Auditing Accounting Estimates, including Fair Value accounting Estimates and related
disclosures deals with auditors responsibilities regarding accounting estimates.
In order to identify and assess risk of material misstatements for accounting estimates, the
auditor shall obtain an understanding of the following:
(a) The requirements of the applicable financial reporting framework.
(b) How management identifies those transactions, events and conditions that may give rise to
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the need for accounting estimates.

In obtaining this understanding, the auditor shall make inquiries of management about changes
in circumstances that may give rise to new, or the need to revise existing, accounting estimates.
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(c)
The estimation making process adopted by the management including:
The method, including where applicable the model used in making the accounting
estimates.
Relevant controls
Where management has used an expert.
Where there has been or ought to have been a change from the prior period in the
methods for making the accounting estimates, and if so why, and
Whether and if so, how the management has assessed the effect of estimation
uncertainty.
(d) The auditor shall review the outcome of accounting estimates included in the prior
period financial statements.
SA 550 (Revised) Related Parties
Q. No. 49
As a statutory auditor how do you verify the existence of Related Parties and
disclosures of Related Party Transactions.
Answer: Refer Notes
SA 560 (Revised) Subsequent Events

Q. No. 50
Write short note on: Subsequent Events

Answer:
Subsequent Events:
SA 560 Subsequent Events defined the term as:
(e) Events occurring between the date of the financial statements and the date of the
auditors report, and
(f) Facts that become known to the auditor after the date of the auditors report.
In respect of subsequent events, auditor is required to perform the followings:
(a) Obtain sufficient appropriate audit evidence about whether events occurring between
the date of the financial statements and the date of the auditors report that require
adjustment of, or disclosure in, the financial statements are appropriately reflected in
those financial statements; and
(b) Respond appropriately to facts that become known to the auditor after the date of the
auditors report, that, had they been known to the auditor at that date, may have caused
the auditor to amend the auditors report.
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SA 570 (Revised) Going Concern

Q. No. 51
Explain the procedures to be performed by the auditor in expressing opinion on going

concern assumption.
Answer: refer Notes
Q. No. 52
What are the financial indicators to be considered by an auditor for evolution of the
going concern assumption.
Answer:
Financial Indicators to be considered for evaluation of Going Concern Assumption:
SA 570 Going Concern deals with the auditors responsibility in the audit of financial
statements with respect to managements use of the going concern assumption in the
preparation and presentation of the financial statements. As per SA 570, financial indicators to
be considered for evaluation of going concern are listed below:
Net liability or net current liability position.
Fixed-term borrowings approaching maturity without realistic prospects of renewal or

repayment; or excessive reliance on short-term borrowings to finance long-term assets.
Indications of withdrawal of financial support by creditors.
Negative operating cash flows indicated by historical or prospective financial statements.
Adverse key financial ratios.
Substantial operating losses or significant deterioration in the value of assets used to

generate cash flows.
Arrears or discontinuance of dividends.
Inability to pay creditors on due dates.
Inability to comply with the terms of loan agreements.
Change from credit to cash-on-delivery transactions with suppliers.
Inability to obtain financing for essential new product development or other essential
investments.
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SA 580 (Revised) Written Representation

Q. No. 53
Write short note on: Written Representation

Answer:
Written Representation:
SA 580 Written Representation defines the term as a written statement by management
provided to the auditor to confirm certain matters or to support other audit evidence.
Written representations in this context do not include financial statements, the assertions
therein or supporting books and records.
Written representations are necessary information that the auditor requires in connection
with the audit, hence they are recognised as audit evidence as an response to inquiries.
Although written representations provide necessary audit evidence, they do not provide
sufficient appropriate audit evidence on their own about any of the matters with which they
deal.
Auditor requires the written representation from the management to support other audit
evidence relevant to the F.S. or specific assertions in the F.S.
Q. No. 54
In the course of audit of X ltd. its management refuses to provide written representation.
As an auditor what is your duty.
Answer:
Auditors duties if management refuses to provide written representation:
SA 580 Written Representation deals with the auditors responsibility to obtain written
representations from management and, where appropriate, TCWG.
Accordingly, if the management does not provide one or more of the requested written
representation, the auditor shall:
discuss the matter with management and
Re-evaluate the reliability and integrity of management.
Take appropriate action including the determining the possible effect on the opinion.
Under these circumstances the auditor shall issue a disclaimer of opinion.
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SA 600 Using the work of Another Auditor

Q. No. 55
There should be a sufficient liaison between a principal auditor and other auditors.
Discuss the above statement and state in this context the reporting consideration, when
the auditor uses the professional work performed by other auditor.
Answer:
Coordination between Principal Auditor and Other Auditor:
SA 600 Using the work of Another Auditor applies in situation where an auditor (principal
auditor), reporting on the financial information of an entity, uses the work of another auditor
(other auditor) with respect to the financial information of one or more components included in
the financial information of the entity. To ensure coordination among both of them, SA 600
provides the followings:
1. There should be sufficient liaison between the principal auditor and the other auditor.
2. For this purpose, the principal auditor may find it necessary to issue written
communication(s) to the other auditor.
3. The other auditor, knowing the context in which his work is to be used by the principal
auditor, should co-ordinate with the principal auditor.
Adhering to time-table.
Bringing to the attention of PA any significant finding.
Compliance with relevant statutory requirements.
Respond to detailed questionnaire.
Reporting Considerations:
1. When the principal auditor concludes, based on his procedures, that the work of the other
auditor cannot be used and
2. the principal auditor has not been able to perform sufficient additional procedures
regarding the financial information of the component audited by the other auditor,
3. the principal auditor should express a qualified opinion or disclaimer of opinion because
there is a limitation on the scope of audit.
SA 610 (Revised) Using the work of Internal auditors

Q. No. 56
You have been appointed auditor of a large Industrial Company which has an established
Internal Audit Department. You are required to state the main aspects that would be
considered to find out effectiveness of the department.
Answer:
Aspects to be considered to evaluate the effectiveness of Internal Audit Department:
SA 610 Using the work of Internal auditors deals with the external auditors responsibilities
regarding the work of internal auditors when the external auditor has determined, in
accordance with SA 315 that the internal audit function is likely to be relevant to the audit.
For this purpose, external auditor is required to evaluate the following:
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(c)
The objectivity of the internal audit function;
(d) The technical competence of the internal auditors;

(e) Whether the work of the internal auditors is likely to be carried out with due professional
care; and
(f)
Whether there is likely to be effective communication between the internal auditors and
the external auditor.
Q. No. 57
Explain the following: Relationship between Statutory auditor and Internal Auditor.
Or
Can the statutory auditor rely upon the work of an internal auditor?
Answer:
Relationship between Statutory Auditor and Internal auditor:
SA 610 Using the work of Internal auditors deals with the external auditors responsibilities
regarding the work of internal auditors when the external auditor has determined, in
accordance with SA 315 that the internal audit function is likely to be relevant to the audit.
With respect to relationship between statutory auditor and internal auditor, SA 610 provides
the following:
(a) The role and objectives of the internal audit function are determined by management and,
where applicable, those charged with governance. While the objectives of the internal audit
function and the external auditor are different, some of the ways in which the internal audit
function and the external auditor achieve their respective objectives may be similar.
(b) Irrespective of the degree of autonomy and objectivity of the internal audit function, such
function is not independent of the entity as is required of the external auditor when
expressing an opinion on financial statements.
(c) Therefore, the external auditor has sole responsibility for the audit opinion expressed, and
that responsibility is not reduced by the external auditors use of the work of the internal
auditors.
SA 620 (Revised) Using the work of an Auditors Expert

Q. No. 58
While doing audit, Ram, the Auditor requires reports from experts for the purpose of
audit evidence. What types of reports/opinions he can obtain and to what extent he can
rely upon the same?
Or
List the matters in respect of which auditors can use the work of auditors expert.
Answer:
Matters where auditor can use the work of Auditors Expert:
SA 620 Using the work of an Auditors Expert the matters where the auditor can use the expert
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work are listed below:

(a) The valuation of complex financial instruments, land and buildings, plant and machinery,
jewelry, works of art, antiques, intangible assets, assets acquired and liabilities assumed in
business combinations and assets that may have been impaired.
(b) The actuarial calculation of liabilities associated with insurance contracts or employee
benefit plans.
(c) The estimation of oil and gas reserves.
(d) The valuation of environmental liabilities, and site clean-up costs.
(e) The interpretation of contracts, laws and regulations.
(f) The analysis of complex or unusual tax compliance issues.
Q. No. 59
What are the procedures to be followed by a statutory auditor for verifying the
provisions for accrued liability for retirement benefits which is based on a certificate of a
reputed actuary engaged by the auditor for the purpose.
Or
Explain the procedures to be performed for evaluating the work of auditors expert.
Answer:
Procedures to be followed for evaluating the work of Auditors Expert:
SA 620 Using the work of Auditors Expert deals with the auditors responsibilities regarding
the use of an auditors expert. The auditor shall evaluate the adequacy of the auditors experts
work for the auditors purposes, including:
(a) The relevance and reasonableness of that experts findings or conclusions, and their
consistency with other audit evidence;
(b) If that experts work involves use of significant assumptions and methods, the relevance
and reasoableness of those assumptions and methods in the circumstances; and
(c)
If that experts work involves the use of source data that is significant to that experts
work, the relevance, completeness, and accuracy of that source data.
Procedures to evaluate the adequacy of the auditors experts work:

(a) Inquiries of the auditors expert.
(b) Reviewing the auditors experts working papers and reports.
(c)
Corroborative procedures, such as:
Observing the auditors experts work;
Examining published data, such as statistical reports from reputable, authoritative

sources;
Confirming relevant matters with third parties;
Performing detailed analytical procedures; and
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Re-performing calculations.
(d) Discussion with another expert with relevant expertise when, for example, the findings or
conclusions of the auditors expert are not consistent with other audit evidence.
(e) Discussing the auditors experts report with management.
Q. No. 60
State your views on reference to an expert in the Auditor's report.

Answer:
Reference of Expert in Auditors Report:
(a) SA 620 Using the work of an Auditors Expert deals with the auditors responsibilities
regarding the use of an individual or organisations work in a field of expertise other than
accounting or auditing, when that work is used to assist the auditor in obtaining sufficient
appropriate audit evidence.
(b) With respect to reference of Expert in Auditors Report, SA 620 provides the following:
The auditor shall not refer to the work of an auditors expert in an auditors report
containing an unmodified opinion unless required by law or regulation to do so.
If such reference is required by law or regulation, the auditor shall indicate in the
auditors report that the reference does not reduce the auditors responsibility for the
audit opinion.
If the auditor makes reference to the work of an auditors expert in the auditors report
because such reference is relevant to an understanding of a modification to the auditors
opinion, the auditor shall indicate in the auditors report that such reference does not
reduce the auditors responsibility for that opinion.
SA 700 (Revised) Forming an Opinion and Reporting on Financial Statements

Q. No. 61
Draft Revised format of Unmodified Audit report.

Answer:
INDEPENDENT AUDITORS REPORT
To the Members of ABC Company Limited
Report on the Financial Statements
We have audited the accompanying financial statements of ABC Company Limited (the
Company), which comprise the Balance Sheet as at March 31, 20XX, and the Statement of Profit
and Loss and Cash Flow Statement for the year then ended, and a summary of significant
accounting policies and other explanatory information.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation of these financial statements that give a true and
fair view of the financial position, financial performance and cash flows of the Company in
accordance with the Accounting Standards. This responsibility includes the design,
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implementation and maintenance of internal control relevant to the preparation and

presentation of the financial statements that give a true and fair view and are free from material
misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with the Standards on Auditing issued by the ICAI. Those
Standards require that we comply with ethical requirements and plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free from material
misstatement.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion and to the best of our information and according to the explanations given to us,
the financial statements give the information required by the Act in the manner so required and
give a true and fair view in conformity with the accounting principles generally accepted in
India:
(a) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 20XX;
(b) in the case of the Profit and Loss Account, of the profit/ loss for the year ended on that
date; and
(c)
in the case of the Cash Flow Statement, of the cash flows for the year ended on that date.
Report on Other Legal and Regulatory Requirements

1.
As required by the Companies (Auditors Report) Order, 2003 (the Order) issued by the
Central Government of India in terms of sub-section (4A) of section 227 of the Act, we give
in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the Order.
2.
As required by section 227(3) of the Act, we report that:

a.
we have obtained all the information and explanations which to the best of our
knowledge and belief were necessary for the purpose of our audit;
b.
in our opinion proper books of account as required by law have been kept by the
Company so far as appears from our examination of those books;
c.
the Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement dealt with
by this Report are in agreement with the books of account;
d.
in our opinion, the Balance Sheet, Statement of Profit and Loss, and Cash Flow
Statement comply with the Accounting Standards;
e.
on the basis of written representations received from the directors as on March 31,
20XX, and taken on record by the Board of Directors, none of the directors is
disqualified as on March 31, 20XX, from being appointed as a director in terms of
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clause (g) of sub-section (1) of section 274 of the Companies Act, 1956.
f.
Since the Central Government has not issued any notification as to the rate at which
the cess is to be paid under section 441A of the Companies Act, 1956 nor has it issued
any Rules under the said section, prescribing the manner in which such cess is to be
paid, no cess is due and payable by the Company.
For XYZ and Co.
Chartered Accountants
Firms Registration Number
Signature
(Name of the Member Signing the Audit Report)
(Designation)
Membership Number
Place of Signature
Date
SA 705 Modifications to the opinion in the Independent Auditors Report

Q. No. 62
Explain the circumstances in which a modified opinion may be issued.

Answer:
Circumstances in which a modified opinion may be issued:
As per SA 705 Modifications to the Opinion in the Independent Auditors Report a modified
opinion may be expressed in the following circumstances:
(a)
The auditor concludes that, based on the audit evidence obtained, the F.S. as a whole are
not free from material misstatement, may be due to following reasons:
Inappropriate method of selection of Accounting Policies;
Accounting policies are not consistent with applicable FRF;
Disclosures as required by FRF are not given.
(b)
The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement, may be due to following
reasons:
Limitations imposed by management
Circumstances beyond entity control (For Ex.: Accounting records destroyed by fire)
Circumstances related to Nature and Timing of auditors work.
Types of Modified Opinion:

(g) Qualified opinion: It is issued under following circumstances:
Financial statements are materially misstated which in the auditors judgments are
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not pervasive.
Auditor is unable to obtain Sufficient and appropriate audit evidence which in the
auditor judgment are not pervasive
(h) Adverse Opinion: It is issued when financial statements are materially misstated which in
the auditors judgments is having pervasive effect.
(i)
Disclaimer of Opinion: It is issued when auditor is unable to obtain Sufficient and

appropriate audit evidence which in the auditor judgment are having pervasive effect.
SA 706 EOM Paragraph and Other Paragraphs in the Independent Auditors Report
Q. No. 63
What is Emphasis of Matter Paragraph. State the circumstances when EOM Para can be
included in Auditors Report.
Answer:
Emphasis of Matter Paragraph:
SA 706 Emphasis of matter Paragraph and Other Paragraphs in the Independent Auditors
Report defines Emphasis of Matter paragraph as Para included in Auditors Report that
refers to a matter appropriately presented/ disclosed in financial statement that in the
auditors judgment is of such importance that it is fundamental to users understanding of
financial statements.
EOM paragraph is not a substitute for need for expression of qualified opinion, adverse
opinion or Disclaimer of opinion or the disclosures to be made by management in Financial
statements as required by applicable FRF.
Circumstances when EOM Para can be included in Auditors Report:
An uncertainty relating to the future outcome of an exceptional litigation or regulatory

action.
Early application (where permitted) of a new accounting standard that has a pervasive
effect on the financial statements in advance of its effective date.
A major catastrophe that has had, or continues to have, a significant effect on the entitys
financial position.
SA 710 (Revised) Comparative Information Corresponding Figures and Comparative Financial

Information
Q. No. 64
What are the auditors procedures in respect of examination of corresponding figures.

Answer:
Auditors Procedures in respect of examination of corresponding figures:
1. SA 710 Comparative Information Corresponding Figure and Comparative Financial
Information deals with the auditors responsibilities regarding comparative information in
an audit of financial statements.
2. The term Corresponding Figures refers to Comparative information where amounts and
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other disclosures for the prior period, are included as an integral part of current period
F.S., and are intended to be read only in relation to the amounts and other disclosures
relating to the current period.
3. To examine the corresponding figures, auditor is required to perform the following
procedures:
(j)
Determine whether F.S. include Comparative information required by FRF, & Whether
such information is classified appropriately.
(k)
Evaluate the following:

Whether the comparative information agrees with the amounts and other
disclosures presented in the prior period; and
Whether the accounting policies reflected in the comparative information are
consistent with those applied in the current period.
Whether, changes in accounting policies, if any, have been properly accounted for
and adequately presented and disclosed.
(l)
In case, auditor has doubt over existence of Possible Material Misstatement, then
auditor is required to perform additional audit procedures to obtain sufficient
appropriate audit evidence to determine existence of material misstatement.
(m) Obtain Written Representation from management to re-affirm that the Written
Representation it previously made with respect to the prior period remain
appropriate.
SA 720 The Auditors Responsibility in relation to other Information in Documents containing

Audited F.S.
Q. No. 65
Comment on the following: While reading the other information, auditor finds certain
misstatement which requires revision of audited financial statements, but management
refuses.
Answer:
Auditors responsibility with respect to misstatements identified in Financial Statements:
SA 720 The auditors Responsibility in relation to other information in Documents

containing audited F.S. deals with the auditors responsibility in relation to other
information in documents containing audited financial statements and the auditors report
thereon.
When material inconsistencies identified in Other Information which requires revision of

audited financial statements, the auditors procedures depends upon the timing of
availability of other information.
If other information was obtained prior to the date of the Auditors Report and
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misstatements identified by the auditor which requires revision of audited financial

statements, but management refuses to make the revision, the auditor shall modify the
opinion in accordance with SA 705.
If Other Information was obtained Subsequent to the Date of the Auditors Report and
misstatements identified by the auditor which requires revision of the audited financial
statements, the auditor shall follow the relevant requirements in SA 560.
Q. No. 66
Comment on the following: While reading the other information, auditor finds certain
misstatement which requires revision of other information but management refuses.
Answer:
Auditors responsibility with respect to misstatements identified in Financial Statements:
SA 720 The auditors Responsibility in relation to other information in Documents

containing audited F.S. deals with the auditors responsibility in relation to other
information in documents containing audited financial statements and the auditors report
thereon.
When material inconsistencies identified in Other Information which requires revision of

other information, the auditors procedures depends upon the timing of availability of other
information.
If other information was obtained prior to the date of the Auditors Report and
misstatements identified by the auditor which requires revision of other information the
auditor shall communicate this matter to those charged with governance and Include in the
auditors report an Other Matter paragraph describing the material inconsistency in
accordance with SA 706.
If Other Information was obtained Subsequent to the Date of the Auditors Report and
misstatements identified by the auditor which requires revision of the other information,
but the management refuses, the auditor the auditor shall notify his concerns to TCWG and
take any further appropriate action.
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TRUE / FALSE QUESTIONS
Q. No. 1: State which of the following statements is true:

(a)
Unless an auditor is able to discover all frauds and errors, he has not performed its main
function.
(b)
There is a little difference between auditing and accounting as both deal with financial
statements.
(c)
An auditor is expected to point out to the management, flaws and loopholes in the system of
accounting.
(d)
Basically an auditor reports on the truth or otherwise of the financial statements;

prevention and detection of frauds and errors are secondary to this.
(e)
The auditor compares entries in the books of account with the vouchers; and if the two
agree, his work is done.
(f)
Safeguarding the companys property is the function of management; hence the auditor is
not concerned with verification of assets and liabilities.
(g)
The auditor must see to it that there is compliance with the Companies Act or other
enactment, if applicable; otherwise, he has to mention the fact of non-compliance in the
report.
(h)
Compliance with the accounting principles generally need not be insisted upon by the
auditor.
(i)
Fraud means misappropriation of goods or cash and artificial manipulation of accounts.
(j)
The internal auditor as well as the statutory auditor are both appointed by the members in
general meeting. Comment.
(k)
The primary responsibility for the prevention and detection of fraud and error rests with
auditor of the company. Comment.
{Ans.: (a) False
(b) False
(c) Partly True (d) True
(f) False
(h) False
(i) True
(k) False
(j) False
(g) Partly True
Q. No. 2: State which of the following statements is true:

(a)
The concept of evidence is fundamental to all auditing situations since an auditor basically
seeks to obtain sufficient appropriate evidence to form his opinion.
Answer: True
(b)
Anything which influences the mind of an auditor and affects his judgement about the
truthfulness of propositions submitted to him for examination can be termed as audit
evidence.
Answer: True
(c)
In all auditing situations, the only evidence available is books and vouchers.
Answer: False
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(d)
An auditor should collect evidence which assures a reasonable and competent man that the
data, statements etc., under report fairly represent the reality as far as it can be determined.
Accordingly, he seeks evidence which is persuasive rather than conclusive in nature.
Answer: True
(e)
An auditor is considered to lack independence, if the partner of the audit firm owns the
building in which the clients business is situated.
Answer: False, as per Guidance note on Independence of Auditor, independence implies
that the judgement of a person is not subordinate to the wishes or directions of another
person who might have engaged him. Hence, in this case renting of building to the client
does not affect the independence.
(g)
If internal control is satisfactory, external evidence is more reliable than internal evidence.
Answer: False, as per SA 500 Audit Evidence if internal control system is satisafctory,
internal evidence is more reliable since the situation will reveal appropriate evidence.
(h)
One of the techniques used for gathering evidence is substantial review.

Answer: False, as per SA 500 Audit Evidence technique used for gathering evidence is
analytical review procedure not substantial review.
Q. No. 3: State with reasons (in short) whether the following statements are true or false:
(a)
Test checks refers to the out of routine checks that are carried out in the normal course of
audit.
Answer: False, Test Checks refers to an audit procedures wherein an audit is conducted on
the basis of a part checking. It is based on the assumption that audit satisfaction can be
obtained by checking a part only, because the part, if suitable selected, is supposed to
possess the characteristics of the whole population.
(b)
There is a direct relationship between detection risk and combined level of inherent and
control risk.
Answer: False, there exists inverse relationship between detection risk and combined level
of inherent and control risk. When inherent and control risk are low, detection risk tends to
be high.
(c)
SA 580 is related to audit materiality.

Answer: Audit Materiality is covered by SA 320. SA 580 is related to Written
Representations.
(d)
Audit Working Papers is to be kept atleast for three years.

Answer: False, As per SQC -1, audit working papers are required to be kept for atleast 7
years.
(e)
Management certificate obtained by the Auditor is enough for verification of inventories.

Answer: False, an auditor should resorts to management certificate when other evidences
are not available. Hence by virtue of SA 580 Written Representation certificate of
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management cannot be a substitute for other evidence that the auditor could expect to be
reasonable available.
(f)
When the auditor uses more professional judgement, the degree of inherent risk is lower.
Answer: True, as the auditor uses his professional judgement to assess inherent risk by
evaluating different factor relating to the organization, on the basis of which he tries to
ensure lower level of inherent risk.
(g)
Taking management representation is a convenient, economical and equally acceptable

auditing method even where the direct access by auditor to audit evidence is possible.
Answer: False, where it is possible for auditor to check the transaction by himself through
direct access, it is not fair for him to merely rely the management representation as prime
audit evidence.
(h)
While auditing the accounts of a company, it is obligatory that the auditor must adopt
sampling technique.
Answer: False, as the extent of checking to be undertaken is primarily a matter of judgement
of the auditor; there is nothing statutorily stated anywhere which specifies what work is to be
done, how it is to be done and to what extent. Hence it is not obligatory that the auditor must
adopt sampling techniques. But he should ensure that the relevant standards on auditing has
been followed.
(i)
The auditee firm has no right to compel the auditor to provide copies of the working papers.
Answer: True, as per SA 230 Audit Documentation unless otherwise specified by law or
regulation, audit documentation is the property of the auditor. He may at his discretion, make
portions of, or extracts from, audit documentation available to clients, provided such
disclosure does not undermine the validity of the work performed.
Q. No. 4: State with reasons whether the following statements are true or false:
(a)
The environment in which internal control operates has no relationship with the
effectiveness of the specific control procedure.
Answer: False, The environment in which internal control operates has an direct relationship
with the effectiveness of specific control procedure, e.g. effective internal audit system or
internal check in the organisation strengths the internal control systems.
(b)
Auditing in-depth implies that the auditor vouches almost all transactions in a manner that
the chances of not checking any transaction are left at minimum.
Answer: False: Auditing in depth does not mean cent percent or near cent percent vouching.
It is checking selected transactions from beginning to end to understand and vet the system
within which the transaction passes through.
(c)
The overall objective of audit changes in Computer Information System (CIS) environment.
Answer: False, the overall objective of audit does not change in an CIS Environment.
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Q. No. 5: State whether the following statement is true or false:

(a)
Procedural error arises as a result of transactions having been recorded in a fundamentally incorrect
manner.
Answer: False, recording of a transaction in a fundamentally incorrect manner results into an error
of principle. Procedural errors arises when there is error in implementation of the procedure.
(b)
Auditor is not an Insurer.

Answer: True, as an auditors duty is limited to the verification of the evidences that is made
available to him in ordinary course of audit or that which he would call upon to examine on a doubt
having arisen that there is something wrong.
(c)
The principle of confidentiality precludes auditor to disclose the information about the client to a
third party at all circumstances without any exception.
Answer: False, the principle of confidentiality is one of the basic principles of auditing. Auditor is
generally not expected to divulge the information of his client to others. But it is not the case always.
He can disclose the information to others if (a) permitted by his client and (b) if he has to disclose it
as per any statutory obligation dictated by any law.
(d)
Cut-off procedures are generally applied to trading transactions.

Answer: True, cut off procedures refers to segregation of transaction of one period from the other so
that the result of working of each period can be determined correctly and these procedures are
applied over the purchases, sales, inventories to ensure true and fair view of accounts.
(e)
An unexplained decrease in the Gross profit ratio may result due to fictitious sales.
Answer: False, fictitious sale will increase the gross profit ratio instead of decreasing it.
(f)
Secret reserve strengthens Financial position, hence they are allowed.

Answer: False, A secret reserve is that whose existence is not disclosed on the face of the Balance
Sheet. Its existence strengthens the financial position. However, in the light of Provisions Contained
in Part-III of Schedule VI to the Companies Act, 1956, it is not possible for a company to create secret
reserve.
(i)
Refusal to accept an appointment by an auditor results in a casual vacancy.

Answer: False, casual vacancy implies a vacancy caused by the auditor ceasing to act as such after
accepting a valid appointment.
(ii)
X, is a member of the Institute of Chartered Accountants of England and Wales. Is she qualified to be
appointed as auditor of Indian Companies?
Answer: X is not qualified to be appointed as an auditor of an Indian company, since he is not a
Chartered Accountant within the meaning of the Chartered Accountants Act, 1949 and hence not a
member of the ICAI.
(iii)
If the auditor appointed at the AGM refuses to accept the same, the Company can appoint another
person by holding General Meeting.
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Answer: False, the refusal of appointed auditor to accept the appointment did not create a vacancy
either casual or by resignation since auditors appointment had not become effective. The
appointment of an auditor is complete and effective only on the acceptance of the office by the
auditor. Under these circumstances, Sec. 224(3) will be invoked and vacany will be filled by Central
Government.
(iv)
The first auditor appointed by the Board of Directors can be removed by the board at its subsequent
meeting.
Answer: False, as per Sec. 224(5) first auditor of the company may be removed by company in
general meeting of the members.
(v)
Government companies are also to be considered for the ceiling on number of audits.
Answer: True, Sec. 619 (2) provides that the auditor of a Government company shall be appointed or
re-appointed by the Central Government on the advice of the Comptroller and Auditor-General of
India and the limits specified in sub-sections (1B) and (1C) of section 224 shall apply in relation to
the appointment or re-appointment of an auditor u/s 619.
(vi)
If appointment of a person as an auditor is void ab initio, it should be treated as a casual vacancy.

Answer: False, casual vacancy has not been defined in the Act. It may stands for a vacancy created by
the auditor ceasing to act after he was validly appointed and the appointment was accepted. This
may arise due to death, resignation, dissolution of firm of auditors etc.
(vii)
An auditor can be appointed as first auditor of a newly formed company simply because his name
has been stated in the Articles of Association.
Answer: False, First auditor of a newly formed company is to be appointed by the BOD within one
month from the date of incorporation. An auditor cannot be appointed as first auditor simply
because his name has been stated in the articles of association.
(viii)
An auditor may be removed from office before the expiry of his term, by the company in general
meeting.
Answer: False, as per Sec. 224 (7) any auditor other than first auditor may be removed from office
before the expiry of his term only by the company in general meeting, after obtaining the previous
approval of the Central Government in that behalf.
(ix)
CA Mr. X is the auditor of PQ Ltd. In which one of his relative is having substantial interest, whether
Mr. X is qualified to be an auditor.
Answer: No, as per Chartered Accountant Act, a member of the Institute is not qualified to be
appointed as an auditor in an company in which any of his relative is having substantial interest.
(x)
An auditor of a company in which not less than 25% of authorized capital is held by public financial
institution is to be appointed by a special resolution in general meeting.
Answer: False, the auditors appointment by special resolution is required in cases of companies in
which not less than 25% of subscribed capital and not less than 25% of authorized capital is held by
public financial institutions.
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(xi)
A casual vacancy caused by resignation of the auditor can be filled by the Board of Directors.
Answer: False, as per proviso to Sec. 224(6) of the Companies Act, 1956, any casual vacancy caused
due to resignation of the auditor shall only be filled by the company in the General Meeting.
(i)
Auditors lien on his clients books and record is not unconditional.

Answer: True, The auditor can exercise lien on clients books and records subject to following
conditions:
1.
Documents must belong to the client who owes the money,
2.
These documents must come to the possession of the auditor on the clients authority.
3.
The auditor can retain such documents, only if he has done work on such documents, on
which fees have not been paid.
(ii)
The auditors of a company is entitled to attend any general meeting of the company as his duty.
Answer: False, The right of the auditor to attend any general meeting of the company is only
permissive, it is not his duty to attend or to take part in the discussion.
(iii)
Mr. X, a Chartered Accountant, is an employee of M/s M & N Co., a firm of Chartered Accountants of
India. The firm is the Auditors of ABC & Co. Ltd. After auditing the accounts of the Company the
Auditor firm allowed Mr. X, their employee, to sign the audit report which he did
Answer: False, as per Sec. 229 of the Companies Act, 1956, a person appointed as auditor of the
company, or where a firm is so appointed, only a partner in the firm practising in India, may sign the
auditor's report, or sign or authenticate any other document of the company required by law to be
signed or authenticated by the auditor.
(i)
An adverse report is one where an auditor gives an opinion subject to certain reservation.
Answer: False, the report where an auditor given an opinion subject to reservations is known as
qualified report. Adverse report is given when the auditor concludes that based on his examination
he does not agree with the affirmation made in financial statements.
(ii)
CARO, 2004 does not applies to foreign company.

Answer: False, CARO, 2004 applies to all companies including foreign companies except Banking,
Insurance, Sec. 25 Companies and Private Ltd. Companies subject to certain conditions.
(iii)
If the auditor believes that the concern will not continue as going concern, he should issue disclaimer
of opinion.
Answer: False, as per SA 570 Going Concern, if the auditor believes that going concern assumption
is inappropriate and the entity will not be able to continue its operation in future, he should express
an adverse opinion.
(iv)
Where the accounts of the company do not present a true and fair view, the auditor should express
disclaimer of opinion.
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Answer: False, where the accounts of the company do not represent a true and fair view, the
auditor is required to issue adverse report.
(v)
CARO 2004 is also applicable to the audit of branch of a company, except where the company is
exempt from the applicability of the order.
Answer: True, CARO 2004 is also applicable to the audit of branch of a company since subsection
3(a) of the section 228 of the Companies Act clearly specifies that a branch auditor has the same
duties as the companys auditor.
(vi)
Disclaimer of opinion is issued when an auditor confronts a different stand by management in

respect of a material issue which auditor does not approve of.
Answer: False, Disclaimer of opinion is issued when the auditor is unable to frame an opinion in view
of certain reasons like non-availability of information, non-performance of procedure etc. Where the
auditor is positively in disagreement with management on certain issue, he would issue qualified
report.
(vii)
Provisions of Companies (Auditors Report) order 2003 as amended upto date apply to clubs,
chambers of commerce, research institutes etc. which have been established under Section 25 of the
Answer: False, provisions of CARO, 2003 does not apply over a company licensed to operate under
Section 25 of the Companies Act, 1956.
(viii)
The Auditor disagreed with the management with regard to the acceptability of the Accounting
Policies and the inadequacy of disclosures in the financial statements and issued a disclaimer.
Answer: False, as per SA 705 Modifications to the Opinion in the Independent Auditors Report
where an auditor is disagreed with the management with regard to acceptability of the Accounting
Policies and the inadequacy of disclosures in the financial statements, based on the materiality and
pervasiveness, he should express qualified or adverse opinion.
(i)
If there is difference of opinion among the joint auditors with regard to any matter, majority joint
auditors opinion will prevail while reporting.
Answer: False, SA 299 Responsibility of Joint Auditors provides that where the joint auditors are in
disagreement with regard to any matters to be covered by the report, each one of them should
express his own opinion through a separate report. A joint auditor is not bound by the views of the
majority of the joint auditors regarding matters to be covered in the report and should express his
opinion in a separate report in case of a disagreement.
(ii)
Internal auditor of the company cannot also be its cost auditor.

Answer: True, as under section 226(3) an officer or employee of the company is disqualified to be
appointed as auditor of the company. These disqualifications are equally applicable over cost
auditor.
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(iii)
A company running a departmental store and having total turnover of Rs. 100 crores during the
financial year 2012-13, need not get its branch audited whose turnover is Rs. 1.90 crores during the
same year.
Answer: True, as per Rule 3 of Companies (Branch Audit Exemption) Rules, 1961, where a company
carrying on any manufacturing, processing or trading activity has a branch office whose average of
the quantum of activity during the relevant financial year does not exceed rupees two lakhs or two
per cent of the average of the total turnover of the company including all its branch and other offices
and the earning from services rendered and from any other source during the same period
whichever is higher, the branch office shall be exempt from provisions of section 228.
(iv)
All the joint auditors are jointly and severally responsible for the work, which is not divided and
carried on jointly by all the joint auditors.
Answer: True, As per SA 299 on responsibility of joint auditors all the joint auditors are jointly and
severally responsible for the audit work which is not divided and carried on jointly by all the joint
auditors.
(v)
A branch auditor is a joint auditor according to SA 299 and his relationship with the company auditor
is governed by the said Standard.
Answer: False, Branch auditor is not a joint auditor within the meaning of SA 299. He is another
auditor within the meaning of SA 600 using the work of Another Auditor.
Q. No. 10: State with reasons (in short) whether the following statements are True or False:
(a)
Surplus on the re-issue of forfeited shares standing to the credit of share forfeited account can be
distributed as dividend.
or
Capital profits realized in cash may be distributed as dividend, provided the articles do not prohibit,
hence profit on reissue of Forfeited shares may be distributed as Dividend.
Answer: False, a company can pay dividend out of its capital profits subject to the fulfilment of
following conditions:
(a) The AOA of the company do not forbid such declaration.
(b) Such profits have been actually realised in cash.
(c) Surplus remains after a fair revaluation of all the assets of the company.
However, amounts like profits on reissue of forfeited shares, which are required to be transferred to
capital reserve cannot be used for paying dividends.
(b)
Interim dividend is not a part of dividend.

Answer: False, as per Sec. 2(14A) of Companies Act, Dividend includes interim dividend. Therefore,
the procedures which are applicable to final dividend also applies to interim dividend.
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Q. No. 11: State with reasons (in short) whether the following statements are true or false:
(i)
The auditor, in the interest of the users, while explaining the nature of his reservation, can describe
the work of the expert with his name in the audit report without obtaining prior consent of the
expert.
(ii)
Comptroller and Auditor General of India can be removed by the Prime Minister of India on the
recommendation of his Council of Ministers.
(iii)
Analytical procedures are unable to help the Auditor in determining the nature, timing and extent of
other audit procedures at the planning state.
(iv)
A Company which has been unable to negotiate borrowing from its bankers claims that it will be able
to continue as a going concern.
Answer to Q. No. 11:

(i)
False, as per SA 620 Using the work of Auditors Expert, where the auditor considers it appropriate
to disclose the identity of the expert, he should obtain prior consent of the expert for such disclosure
if such consent has not already been obtained.
(ii)
False, the CAG can be removed only when each house of the Parliament decides to do so by majority
of not less than two third of the members present and voting.
(iii)
False, as per SA 520 Analytical Procedures the auditor should apply analytical procedures at the
planning stage to assist in understanding the business and identifying areas of potential risk which
helps in determining the nature, timing and extent of other audit procedures.
(iv)
True, as per SA 570 Going Concern a company which has been unable to negotiate borrowings from
its bankers may continue as going concern because of other mitigating factors that may exist for
example, managements plans to maintain adequate cash flows by alternative means, such as by
disposing of assets or obtaining additional capital.
Q. No. 12: State with reasons (in short) whether the following statements are True or False:
(i)
While conducting audit of government companies, the auditors are paid their professional fees as
prescribed by the govt.
Answer: False, In the case of audit of Government companies, the auditors remuneration is fixed by
the company in general meeting or in such manner as the company in general meeting may
determine.
(ii)
The auditor compares entries in the books of accounts with vouchers and if two agrees, his work is
done.
Answer: False, the scope of auditors duties is not limited to compare entries in the books of
accounts, his duties extends to checking and reporting on a number of areas prescribed by letter of
engagement and statutory provisions.
(iii)
Confirmations received by the auditor directly from third parties are conclusive evidence in support
of a transaction.
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CA Inter (Paper 6)
Answer: False, Though external confirmations received from third parties directly by the auditor
provides strong evidence regarding the existence of the account as at a certain date, however, such
confirmation does not ordinarily provide all the necessary audit evidence relating to the assertion
regarding valuation, since it is not practicable to ask the third parties to confirm detailed
information.
(iv)
Audit Committee is to be formed by each and every company and the auditor has no compulsion to
attend the meeting of the Audit Committee.
Answer: False, As per Sec. 292A of Companies act, 1956, Audit committee is required to be formed by
every public company having paid up capital of not less than Rs. 5 crores, and further, auditors are
required to attend the meeting.
(v)
A company cannot declare dividends without providing for depreciation.

Answer: True, as per Sec. 205(1), no dividend shall be declared or paid by a company for any
financial year except out of the profits of the company for that year arrived at after providing for
depreciation.
However, the Central Government may allow the company to declare dividend for any financial year
without providing for depreciation.
(vi)
When an Auditor identifies a misstatement resulting from fraud, it is his responsibility to

communicate it to regulatory and enforcement authorities apart from those charged with
governance.
Answer: True, as per SA 240 Auditors Responsibility of Detection of Fraud and Error in an Audit of
Financial Statements when the auditor identifies a misstatement resulting from fraud, he should
consider his responsibility to communicate that information to management, those charged with
governance and, in some circumstances, when so required by the laws and regulations, to regulatory
and enforcement authorities also.
(vii)
The auditor should study the memorandum and articles of association to see the validity of his
appointment.
Answer: False, to check the validity of appointment, the auditor need to observe the compliance of
Sec. 224, passing of necessary resolutions in the company meetings etc. for which minute book need
to be checked.
(viii)
A special resolution is required by company to authorize issue of shares at discount.

Answer: False, A company may issue shares at discount by passing an ordinary resolution.
(ix)
The Investments made by the company in Government Securities like NSC, Govt. Bonds, etc. should
be kept in personal custody of Financial Controller of the company.
Answer: false, it is not necessary that investments should be kept in personal custody of Financial
Controller, they may be kept in the custody of the person to whom the Board of Directors of eth
company entrusts.
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CA Inter (Paper 6)
(x)
The company in which 15% of subscribed capital is held by state financial corporation and 10% of
subscribed capital is held by General Insurance Co. the appointment of auditor can be done by
passing a general resolution at annual general meeting.
Answer: false, Sec. 224A requires passing of special resolution for appointment of auditor in case of a
company in which not less than 25% of subscribed share capital is held either singly or in
combination by a public financial institution, government company, Central Govt., State Govt., State
Financial institution, nationalized Bank or general Insurance.
--------------------------
Page 95
CA Inter (Paper 6)
List of Important Questions IPCC Auditing (Except SA)

Chapter 1 Nature of Auditing
Q. No. 1
Distinguish between: Audit and Investigation
Q. No. 2
State important aspects to be considered by an auditor while conducting an audit.
Q. No. 3
Distinguish between: Internal Auditor and Statutory Auditor
Q. No. 4
What are the basic principles which govern the Auditor's professional responsibilities
while doing Audit?
Q. No. 5
Mention briefly the conditions or events, which increase the risk of fraud or error leading
to material misstatement in financial statements.
Chapter 2 Basic Concepts in Auditing

Q. No. 6
Distinguish between: Internal Evidence and External Evidence
Q. No. 7
Comment on the following: Independence of auditors must not only exist infact, but
should also appear to exist to all reasonable persons.
Q. No. 8
State the Advantages of Independent Audit
Q. No. 9
Discuss concept of True and Fair View.
Q. No. 10
Write short note on: Fundamental Accounting Assumptions
Q. No. 11
State areas in which different accounting policies may be encountered.
Chapter 3 Preparation for an Audit

Q. No. 12
Distinguish between: Audit Procedures and Audit techniques
Q. No. 13
What is Audit Programme. State the various advantages and disadvantages of Audit
programme.
Q. No. 14
Comment on the following: Concurrent Audit provides a supplementary management tool.
Q. No. 15
Mention various items which are not suitable for test-checking
Q. No. 16
Explain the following in brief: Precautions to be taken in applying test check technique
Q. No. 17
What is Stratified Sampling. List various advantages of stratified sampling.
Q. No. 18
State various components of Audit Risk.
Q. No. 19
Write short note on: Surprise Check.
Chapter 4 Internal Control

Q. No. 20
What is Internal Control. State its Objectives and Limitations.
Q. No. 21
What are the aims of internal control so far as Financial and Accounting aspects are
concerned.
Q. No. 22
Write short note on: Review and Testing of the Internal Control System
Q. No. 23
Write short note on: Examination in Depth.
Q. No. 24
Write short note on: Letter of weakness
Q. No. 25
Explain briefly the technique of "Internal Control Questionnaire" to facilitate the

accumulation of information necessary for proper evaluation of internal control.
Page 96
CA Inter (Paper 6)
Q. No. 26
Is there any change in audit approach in the audit of computerised accounts as compared
to audit of manual accounts?
Q. No. 27
What are the different design and procedural aspects of CIS systems?
Q. No. 28
Discuss Internal Controls in a CIS Environment
Q. No. 29
Write short note on: Audit Trail in a Computerised accounting environment.
Q. No. 30
Why are computer assisted audit techniques (CAAT) needed in a CIS environment and
how it helps the auditor in obtaining and evaluating audit evidences ?
Q. No. 31
What do you understand by Audit around the computer and audit through the Computer.
Q. No. 32
What are the special steps involved in framing a system of Internal Check?
Q. No. 33
Doing an audit in an CIS environment is simpler since the trial balance always tallies?
Analyse critically.
Q. No. 34
Comment on the following: The use of computer facilities by a small enterprise may
increase the control risk.
Chapter 5 Vouching
Q. No. 35
How will you vouch the following:

(a) assets acquired on Hire Purchase
(b) Research and Development Expenditure
(c) Sale proceeds of junk material
(d) Recovery of Bad Debts written off
(e) Goods sold on Approval basis
Q. No. 36
Give various factors which result in increase in gross profit
Q. No. 37
Write short note on: Cut Off procedures.
Q. No. 38
Write short note on: Scrutiny of General Ledger
Chapter 6 Verification
Q. No. 39
Distinguish between Capital expenditure and Deferred revenue expenditure
Q. No. 40
Write short note on: Depreciation on low value items.
Q. No. 41
Distinguish Between: Reserves and Provisions
Q. No. 42
Write short note on: General Principles of Verification of Assets
Q. No. 43
How will you verify the followings:

(a) Leasehold Property
(b) Patents
(c) Capital Work in Progress
(d) Advances given to suppliers
(e) Contingent Liabilities
(f) Bank Overdraft
Q. No. 44
Write short notes on: Physical attendance by auditor during inventory taking.
Page 97
CA Inter (Paper 6)
Chapter 7 Company Audit I

Q. No. 45
Give your comments on the following: M/s Verma and Sharma, Chartered Accountants
were appointed as the first auditors of Good Luck Ltd. by virtue of their name being
included as auditors in the Articles of Association.
Q. No. 46
Give your comments on the following: The Board of Directors removed the first auditors
before the expiry of the term and appointed another auditor in his place.
Q. No. 47
As an auditor, comment on the following: At the AGM of a company, in which a

Nationalised Bank held 25% of the subscribed capital, Krishna & Co., chartered
Accountants, were appointed as auditor by passing an ordinary resolution.
Q. No. 48
As an auditor, comment on the following: Mr. A was appointed auditor of AAS Ltd. by
Board to fill the casual vacancy that arose due to death of the auditor originally appointed
in AGM. Subsequently, Mr. A also resigned on health grounds during the tenure of
appointment. The Board filled this vacancy by appointing you through duly passed Board
resolution.
Q. No. 49
Give your comment on the following: M/s A & Co. chartered accountants, were appointed
first auditors of KLM Ltd. by its Board of Directors. The shareholders of the company
removes M/s A & Co. before the expiry of the term, by an ordinary resolution. In an
extraordinary general meeting. And appointed another auditor in their place. M/s A & Co.
have objected that without prior approval of Central Government their removal is illegal.
Q. No. 50
Give your comments on the following: Nene and Sane Associates, Chartered Accountants in
practice have been appointed as statutory auditor of Do Good Ltd. for the accounting year
2004-05. Mr. Nene holds 200 equity shares of DDA Ltd. a subsidiary company of Do Good
Ltd
Q. No. 51
Comment as an Auditor on the following: Sri & Co. a firm of CAs was appointed statutory
auditors of Aaradhna co. Ltd. Aaradhana Co. Ltd. holds 51 % shares in Sarang Ltd. Mr. Sri
one of the partners of Sri & Co. owed Rs. 1500 as on the date of appointment to Sarang Co.
Ltd. for goods purchased in normal course of business.
Q. No. 52
Give your comments on the following: PQR & Co. a firm of Chartered Accountants has
three partners, P, Q and R; P is also in whole time employment elsewhere. The firm is
already holding audit of 40 companies including audit of one foreign company. The firm is
offered the audit of Z Ltd. and its 20 branches.
Q. No. 53
Write short notes on the following: Audit enquiry under Section 227(1A).
Q. No. 54
Explain the term Auditors Lien.
Q. No. 55
State your opinion on the following: The duties of auditors are limited to the verification
of the arithmetical accuracy of the books of account.
Q. No. 56
Mr. Rajendra, a fellow member of the ICAI, working as Manager of Shrivastav and Co., a CA
Page 98
CA Inter (Paper 6)
firm, signed the audit report of Om Ltd. on behalf of Shrivastav & Co.
Q. No. 57
As an auditor, comment on the following: The auditor of Trilok Ltd. did not report on the
matters specified in sub-section (1A) of Section 227 of the companies Act, 1956, as he was
satisfied that no comment is required.
Q. No. 58
As an auditor, comment on the following: One of the directors of Hitech Ltd. is attracted by
the disqualification under Section 274(1)(g).
Q. No. 59
As an auditor, comment on the following situations/statements: The Board of Directors of

a company have filed a complaint with the ICAI India against their statutory auditors for
their failing to attend the AGM of the Shareholders in which audited accounts were
considered.
Q. No. 60
As an auditor, comment on the following situations/statements: Travelling expenses of Rs.

2.25 lakhs shown in Profit and Loss Account of X Ltd., including a sum of Rs. 1.10 lakhs
spent by a Director on his foreign travel for companys business accompanied by his
mother for her medical treatment.
Q. No. 61
On what companies the CARO, 2003 is applicable and what companies are not covered by
it?
Q. No. 62
Comment on the following: ABC Ltd. has not deposited provident fund contributions of
Rs.20 lakhs to the authorities, but accounted in the books.
Q. no. 63
As an auditor, comment on the following situations/statements: X Ltd., to whom CARO is

applicable, has issued 9% Debenture of ` 5 crores, redeemable after 5 years and used the
proceeds of issue for payment of Sundry Creditors and other Current Liabilities of ` 2.80
crores.
Q. No. 64
As an Auditor, comment on the following situations/statements: JKT Ltd. having `40 lacs
paid up capital, `9.50 lacs reserves and turnover of last three consecutive financial years,
immediately preceding the financial year under audit, being `4.90 crores, `4.50 crores and
`6 crores, but does not have any internal audit system. In view of the management, internal
audit system is not mandatory.
Q. No. 65
XYZ Ltd. has purchased plant and machinery costing Rs. 1 crore in the month of October,
2011 out of working capital limits sanctioned by Bank.
What are reporting requirements by Statutory Auditors of the Company in this regard,
keeping in mind the provisions of CARO 2003.
Q. No. 66
State the circumstances under which special audit may be called under section 233A of the
Q. No. 67
Write short note on: Cost Audit
Chapter 8 Company Audit II

Q. No. 68
Comment on following: X Ltd. has its registered office at Mumbai. During the current
Page 99
CA Inter (Paper 6)
accounting year it shifted its Corporate office to Delhi. The Managing Director of the
company wants to shift companys books of account to Delhi because he holds the view
that there is no legal bar in doing so
Q. No. 69
Explain the powers of company to purchase its own securities
Q. No. 70
How will you vouch and/or verify: Re-issue of Forfeited Shares
Q. No. 71
As an Auditor, comment on the following situation/statement: The Finance Manager of

Belt Ltd. is of the opinion that before declaration of dividends it would not be necessary to
set off the carried forward amount of debit balance in the Profit and Loss Account against
current revenue profit but the same could be set-off against existing revaluation reserve.
Do you agree?
Q. No. 72
How will you vouch the payment of dividend?
Chapter 9 Government Audit and Special Audit

Q. No. 73
Write short note on: Audit of Expenditure in Government Audit.
Q. No. 74
Explain propriety audit in the context of Government Audit
Q. No. 75
What are the powers of C&AG in relation to the accounts of Government Companies
audited by the statutory auditors?
Q. No. 76
Draft an Audit programme for conducting audit of accounts of a local body.
Q. No. 77
What important points should an auditor keep in mind while checking receipt of income of
a Non-Governmental Organization (N.G.O)
Q. No. 78
Mention any eight special points which you as an auditor would look into while auditing
the books of a partnership firm.
Q. No. 79
What is the ideal approach while carrying out audit of Incomplete Records?
Q. No. 80
Draft a comprehensive Audit Programme for auditing the receipt of fees from the students
of a school run by a Charitable Trust.
Q. No. 81
Mention any 8 special points which you as an auditor would look into while auditing the
books of accounts of Hospital.
Q. No. 82
What special steps will you take into consideration in auditing the accounts of a hotel.
Page 100
CA Inter (Paper 6)
List of Important Sections Companies Act, 1956

Sec. 77
Restrictions on company to purchase its own shares
Sec. 77A
Powers of company to purchase its own securities
Sec. 77AA
Transfer of sum to Capital redemption Reserve Account
Sec. 78
Issue of Securities at Premium
Sec. 79
Issue of Shares at Discount
Sec. 79A
Issue of Sweat Equity Shares
Sec. 80
Power to Issue Redeemable Preference Shares
Sec. 81
Further Issue of Capital
Sec. 94
Alteration of Share Capital
Sec. 100
Reduction of Share Capital
Sec. 117C
Creation of Debenture Redemption Reserve
Sec. 121
Reissue of Redeemed Debentures
Sec. 198
Overall Maximum Managerial remuneration
Sec. 205
Payment of Dividend Out of Profits
Sec. 205A
Transfer of Unpaid Dividend to Special Dividend Account
Sec. 208
Payment of Interest out of capital
Sec. 209
Books of Account to be kept by company
Sec. 210
Annual accounts and Balance sheet
Sec. 211
Form and contents of balance sheet and Profit and Loss Account
Sec. 217
Boards Report
Sec. 224(1)
Appointment of auditor by Shareholders in AGM
Sec. 224(1A)
Intimation by Auditor to ROC
Sec. 224(1B)
Specified No. of Companies
Sec. 224(2)
Re-appointment of Retiring auditor
Sec. 224(3) & (4)
Appointment of Auditor by Central Government
Sec. 224(5)
Appointment and Removal of First Auditors
Sec. 224(6)
Filling up of Casual vacancy
Sec. 224(7)
Removal of auditor before completion of tenure
Sec. 224(8)
Remuneration of Auditor
Sec. 224A
Special resolution for appointment of Auditor in case of certain companies
Sec. 225
Removal of Auditors
Sec. 226(1)
Qualifications for becoming a auditor
Sec. 226(3)
Persons disqualified for being appointed as auditor
Sec. 226(4)
Disqualifications in Group company
Sec. 226(5)
Subsequent Disqualifications
Page 101
CA Inter (Paper 6)
Sec. 227(1)
Right of access and information
Sec. 227(1A)
Inquiry and reporting on Propriety Matters
Sec. 227(2)
Reporting on Books of Accounts and Financial Statements
Sec. 227(3)
Reporting on Other matters
Sec. 227(4)
Reasons for Negative or Qualified remarks
Sec. 227(4A)
Statement on CARO
Sec. 228(1)
Persons qualified to be appointed as Branch auditor
Sec. 228(2)
Right of Company Auditor when branches were audited by other persons
Sec. 228(3)
Appointment, Powers and Duties of Branch Auditor
Sec. 228(4)
Power to frame rules for exemption of branch audit
Sec. 229
Signature of Audit Report
Sec. 230
Reading and Inspection of Auditors Report
Sec. 231
Right of Auditor to attend General Meetings
Sec. 232
Penalty for non-compliance with sections 225 to 231
Sec. 233
Penalty for non-compliance by auditor with sections 227 and 229
Sec. 233A
Special Audit
Sec. 233B
Cost Audit
Page 102
CA Inter (Paper 6)

CA IPCC Audit May 2013
Marks
1.
2.
(a)
Discuss with reference to SAs:

(i) The auditor shall communicate all significant findings with those charged with Governance.
(ii) Factors effecting form, contents and extent of audit.
(b)
Discuss the following:
(i) Is surprised checks desirable in audit, if so give important recommendations.
(ii) Inquiry is one of the audit procedure to obtain audit evidence.
Comment on any eight of the following:
5
5
5
5
8x2=16
(i)
(ii)
(iii)
(iv)
(v)
3.
4.
5.
6.
7.
PQR Ltd. include underwriting commission and stamp duty as preliminary expenses.
AGM is not held in time, auditor automatically vacates his office.
Selling and distribution cost included in the cost of inventories.
Internal check is part of internal control system.
Company can provide lower rate of depreciation than prescribed by Schedule XIV of the Companies
Act, 1956.
(vi) Compliance procedures are test designed to obtain audit evidence as to completeness, accuracy and
validity of data produced by accounting system.
(vii) ABC Ltd. having turnover of Rs. 100 crores during financial year 2011-12, need not get its branch
audited whose turnover is Rs. 1.5 crores during the same year.
(viii) Computer software which is the integral part of the related hardware can be treated as intangible
assets or fixed assets?
(ix) CARO, 2004 does not apply to a foreign company.
(x)
Define shortly arms length transaction.
(a)
What is continuous audit and what are the precautions which should be taken to avoid the
8
disadvantages of continuous audit?
(b)
Explain the basic principles governing audit.
8
(a)
To prepare an audit plan in CIS environment an auditor should gather information. Mention any four
4
such important which he has to collect.
(b)
How will you vouch/ verify the followings?
(i) Purchase with invoice
3x4=12
(ii) Patterns, dies, loose tools etc.
(iii) Work-in-Progress
(a)
State the circumstances which could lead to any of the following in an Auditors Report:
(i) A modification of opinion
4x2=8
(ii) Disclaimer of opinion
(iii) Adverse opinion
(iv) Qualified opinion
(b)
What are the cases in which special audit may be called by Central Government?
4
(c)
Anandbhai & Co. Ltd. issued shares to the equity shareholders in the proportion of one bonus share for
4
every three existing shares. As an auditor of the Company how would you verify this issue?
(a)
Mention important points which auditors will consider while conducting audit of accounts of a
8
partnership firm.
(b)
What are the points on which an auditor should concentrate while planning audit of an N.G.O.?
8
Write short notes on any four of the followings:
(i)
Audit Planning & Materiality
(ii)
Impairment of Assets
4x4=16
(iii) Internal Control Questionnaire
(iv) Letter of Weakness
(v)
Assertion about balance at the end of the reporting period.
---------------------
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CA Inter (Paper 6)

Auditing and Assurance Workbook

Contents - Auditing and Assurance Workbook

Practical Illustrations Module I Auditing Concepts

Practical Illustrations Module II Company Audit

Questions & Answers Module IV Engagement standards

True / False Questions (Objective questions)

List of Important Questions

List of Important Sections

May 2013 Exam Paper

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

Practical Illustrations Module I Concepts of auditing

he exercises adequate skill and care, and

(b) In respect of work delegated to assistants, auditor should carefully direct,

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

no unauthorised charge has been created, or

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

to the auditors as soon as he returns from business trip.

Obtaining audit evidence from substantive procedures is intended to reasonably

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

Answer: Acceptance of Changes in terms of Engagement:

Determine whether there is any obligation, either contractual or otherwise,

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

Answer: Ownership of Working Papers:

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

changing/modifying of programmes and data files as also operating systems; using or

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

Practical Illustrations Module II Company Audit

Conclusion: Both the removal of an auditor and subsequent appointment has no

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

As an auditor, comment on the following: At the AGM of a company, in which a Nationalised

Conclusion: The appointment of Krishna & Co., Chartered Accountants, as auditor of

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

Section 224(3) will become operative.

Regarding the first issue relating to appointment of auditor, particularly, in this

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

Conclusion: The appointment made by Board is invalid.

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

Approval of Central Government is required to remove an auditor (other than first

Conclusion: Appointment of C as joint auditor by board is not valid.

Compiled by: CA. Pankaj Garg

Auditing and Assurance Workbook

Approval of Central Government is required to remove an auditor (other than first

A firm would also be disqualified to be appointed as an auditor even when one

Auditing and Assurance Workbook

A person shall be qualified for appointment as an auditor of a company, only if he