AFA

FINAL COURSE – FAST (Part) Paper – 3: Advanced Auditing,

Test Series – Paper 1 Assurance and Professional Ethics
Total No. of Questions in Part I – 20 Maximum Marks – 30
Total No. of Questions in Part II – 6 Maximum Marks – 70
Total No. of Pages – 34
GENERAL INSTRUCTIONS TO CANDIDATES
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Multiple Choice Questions (MCQs).
3. Part II comprises questions which require descriptive type answers.
4. Ensure that you receive the question paper relating to both the parts. If you have
not received both, bring it to the notice of the Institute.
5. Answers to MCQs in Part I are to be mentioned in the first page of your answer
copy. Students need to only mention their choice of correct option like (a) or (b) or
so. No explanations or reasonings are required for MCQs.
6. Answers to descriptive questions in Part 2 should be given from the next page of
your answer sheet
7. Student should mention their Name, Batch, Course (CA Inter / Final), Subject
Name, Date of Test and Test Code as given on top of this sheet on the first
page before answering the MCQs.
8. Once the test is complete, student need to scan the answer sheet and make single
pdf file for all the pages and email it to [email protected] and
[email protected] with Subject Line – Answers Sheet for Test (Code) and
Your Name.
9. Duration of the examination is 1.5 hours. You will be required to upload the
answer sheets on the same date / time of test as defined in your live class else the
answer sheet will not be evaluated. In such case you should do a self-evaluation
using the suggested answer which will be posted in the same folder after one day
of the date of test.
10. The FAST examiner team will check the copy and give the marks alongwith
feedbacks for your improvements. We take utmost care in checking however being
subjective in nature the checking may differ from examiner to examiner.
11. Candidate are advised not to cheat and have self-discipline as these tests are
preparing you better for your real exams and hence realistic assessment will help
you take corrective actions at the right time.
12. FAST reserves the right to display any answers or answer sheets or share with
other students for your benefits without any prior written or express consent.
13. You suggestions on the test paper or evaluation or else can be shared at
[email protected]
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PART 1
1. A small concern has approached CA. Ajeet Nath for audit of accounts for
year 2021-22. It later on transpired that preparation of accounts of the
concern was outsourced to a third party which was engaged in preparation
of books of this concern on a cloud server and was also preparing financial
statements. The discussion amongst partners regarding agreeing to audit
engagement remained inconclusive. Which of the following statements is
most appropriate regarding agreeing to audit engagement of small concern?
a) The management is responsible for preparation of books and financial
statements. If management is not willing to acknowledge it, audit
engagement should not be accepted.
b) The third party has prepared the books and financial statements. It
should be acknowledged by third party and then audit engagement
should be accepted.
c) It is implied that management is responsible for preparation of books
and financial statements. No express acknowledgment from
management is necessary. Hence, audit engagement should be accepted.
d) The management as well as third party should acknowledge joint
responsibility for preparation of books and financial statements. Only
then, audit engagement should be accepted. 1

2. You have been given an assignment of audit of it department of a PSU. A

checklist was handed over to you which contained many questions such as,
 Are separate user names and passwords assigned to individual users?
 Are periodical changes of passwords ensured?
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 Are external (offsite) data backups maintained at a place outside the
premises?
The type of audit being conducted is likely to be:
a) Comprehensive audit. b) Propriety audit.
c) Compliance audit. d) Financial audit. 1

3. JIN ltd. which is based in Mumbai, is in the business of manufacturing

leather products since 1995 and wants to acquire OM Leathers Private
Limited, which is based in Pune and engaged in the business of selling
leather products manufactured by different companies. Before acquisition
JIN Ltd. Wants to get a due diligence review to be done of OM Leathers. JIN
Ltd. appointed S & S Associates for conducting overall due diligence of OM
Leathers. During review, the accountant asked OM Leathers to provide
financial projections of the company for next five years, but Om leathers
refused to provide the same and claimed that financial projections are not
part of due diligence review. Whether the objection raised by the
management of OM Leathers is correct? Give reason.
a) The objection raised by OM Leathers is correct, as due diligence doesn’t
include review of financial projections.
b) The objection raised by OM Leathers is not correct, as due diligence refers
to an examination of a potential investment to confirm all material facts of
the prospective business which a company wants to acquire and financial
projection is a part of same.
c) The objection raised by OM Leathers is correct, as reviewer cannot
comment on financial projections in his report.
d) The objection raised by OM Leathers is not correct, as the target company
cannot refuse in providing any information required by the reviewer. 1

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4. CA Kamal is the statutory auditor of Auto Cover Ltd. For the FY 2020-21.
The company is engaged in the business of manufacture of car accessories.
CA Kamal noticed that the inventories of the company amounting to ` 46
crores (equal to 25% of the total assets of the company) at the end of the
year do not exist. Also, sales amounting to ` 33 crores (equal to 10% of the
total sales during the year) have not actually occurred.

CA Kamal noticed both the material discrepancies just before the

finalisation of the audit report for the year ending 31.03.2021. CA. Kamal
considers that the above misstatement would distort the true and fair view to
a greater extent.
What is correct course of action that CA Kamal should consider in such a
situation?
a) CA Kamal should consider withdrawing from the audit engagement or
issuing a disclaimer of opinion for the FY 2020-21.
b) CA Kamal should consider issuing an adverse opinion and mentioning
both the material discrepancies in the basis for adverse opinion paragraph
of the auditor’s report.
c) CA Kamal should ask the management to explain both the discrepancies
in the notes to accounts and he himself should highlight the matter in the
Key Audit matter paragraph of the auditor’s report.
d) CA Kamal should give a qualified opinion along with the specific
mention of the matters in the Emphasis of matter paragraph in the
auditor’s report along with appropriate disclosure in the notes to accounts
to be made by the management of Auto cover Ltd. 1

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5. Preparation of the financial statements in accordance with the applicable
financial reporting framework is the responsibility of the management of
ABC Ltd. Which of the following is correct in regard to the disclosure of
such management responsibility
(a) This is implied responsibility of management and is presumed in an
audit of financial statements and therefore need not be specifically
mentioned anywhere.
(b) The management may undertake to accept such responsibility through an
engagement letter itself.
(c) The auditor report should describe the management responsibility in a
section with heading “responsibility of management for financial
statements”.
(d) The auditor’s report should refer to the responsibility of auditors and not
that of the management as the same is obvious. 1

6. The firm from which you are pursuing your articleship training is the
internal auditor of Shanti Ltd. While conducting the audit of the medical
expense reimbursements of the company employees, you come across some
bills which are clearly not medical in nature, and some others which have
been overwritten. During the discussions, the accountant points out that the
employee is a functional head who enjoys a significantly higher medical
expense reimbursement limit, and that you should ignore those bills as the
amount is not material. You will:
a) Accept the explanation and the bills.
b) Recommend that the claim should be reduced, and clear guidelines
should be issued to all employees on the matter, with a provision for
disciplinary action.
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c) Recommend that the employee be asked to submit fresh bills to avail
the tax benefit.
d) Recommend that the employee be taxed on the aggregate amount of the
suspect bills. 1

7. The acceptable detection risk needs to be ______ in order to reduce the

audit risk to ______ in the area of inventories management and handling.
a) Low in order to reduce audit risk to an acceptably high level.
b) High in order to reduce audit risk to an acceptably high level.
c) Low in order to reduce audit risk to an acceptably low level.
d) High in order to reduce audit risk to an acceptably low level. 1

8. Pradyuman & Co. was one of the joint auditors of Lok Sahay Insurance Co.
Ltd. Mr. Vicky, one of the engagement team members, of the said joint
auditor, was examining the expenses included in different accounts.
While verifying the expenses incurred in relation to employees, Mr. Vicky
made a list of the same as follows, which he was going to discuss with his
senior: -
Particulars ` Included in which account?
Payment of Salaries to 100 lakh Employees’ Remuneration
employees and Welfare Benefits
Account
Reimbursement of premium in 20 lakh Employees’ Remuneration
respect of employees’ health and Welfare Benefits
cover Account

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Training and non-training 30 lakh Employees’ Remuneration
expenses incurred for employees and Welfare Benefits
Account
Expenses incurred towards 10 lakh Employees’ Remuneration
medical treatment of employees and Welfare Benefits
not having health cover Account
Incentives paid to employees of 40 lakh Commission account
the company who have solicited
insurance policies
Whether it can be said that Lok Sahay Insurance Co. Ltd. has properly
accounted for the expenses incurred in relation to employees?
(a) No, reimbursement of premium in respect of employees’ health cover
should be included in ‘Others’ account and incentives paid to
employees should be included in Employees’ Remuneration and
Welfare Benefits Account.
(b) No, non-training expenses have to be shown separately and incentives
paid to employees should be included in Employees’ Remuneration
and Welfare Benefits Account.
(c) No, expenses incurred towards medical treatment of employees not
having health cover should be included in ‘Others’ account and non-
training expenses have to be shown separately.
(d) No, training and non-training expenses incurred for employees should
be bifurcated and shown separately and expenses incurred towards
medical treatment of employees not having health cover should be
included in ‘Others’ account. 1

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9. While auditing Veer Ltd., CA. Vardhman divided the whole population of
trade receivables balances to be tested in a few separate groups called
‘strata’ and started taking a sample from each of them. He treated each
stratum as if it was a separate population. He divided the trade receivables
balances of Veer Ltd. For the financial year 2020-21 into groups on the
basis of personal judgment as follows:

S.No. Particulars
1 Balances in excess of ` 10,00,000;
2 Balances in the range of `7,75,001 to `10,00,000;
3 Balances in the range of `5,50,001 to `7,75,000;
4 Balances in the range of `2,25,001 to `5,50,000;
5 Balances `2,25,000 and below

From the abovementioned groups, CA. Vardhman picked up different

percentage of items for examination from each of the groups, for example,
from the top group i.e. balances in excess of `10,00,000, he selected all the
items to be examined; from the second group, he opted for 25 % of the items
to be examined; from the lowest group, he selected 2% of the items for
examination; and so on from rest of the groups. Which one of the following
methods of sample selection is he following?
a) Systematic sampling. b) Stratified sampling.
c) Section sampling. d) Selection sampling. 1

10. The notes to the account statement of Nemi Ltd. Shows the break-up of
accounts payable for the financial year 2020-21 as follows:
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Accounts Payable Amount(in`)
MR.K 1,20,000
MR.R 40,000
MR.B 14,56,000
Total 16,16,000
CA. Raju, the auditor of Nemi ltd., wants to investigate the valuation of
accounts payable of Mr. B amounting to ` 14,56,000. Which of the
following procedures is best fitted & more reliable to be followed by CA.
Raju to get more reliable evidence for the existence of such balance as on
31st March, 2021?
a) Inspect each and every journal entry passed in the books of Nemi Ltd.
b) Ask Nemi Ltd. to provide the details of payment made during the year
2021-22.
c) Inspect the invoices issued by Mr. B and the payments made.
d) Interrogate the cash manager of Nemi Ltd. 1

MCQ (11-15)
While preparing the financial statement for the year ended on 31 March 2022,
ABC Limited, a listed entity, provided the below information:
(in ` Lakhs)
Particulars Note As on As on
No 31.03.2022 31.03.2021
Equity and Liabilities
Current liabilities
(a) Financial Liabilities

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(i) Trade Payables: - 10
(A) total outstanding dues of micro 300
enterprises and small enterprises; and
(B) total outstanding dues of creditors other 210
than micro enterprises and small
enterprises.
(ii) Other financial liabilities (other than
those specified in item (c)

Note 10: Ageing of Trade Payables

Particulars Ageing of Trade Payables
Ageing Less 3-5 More Total Non- MSME Total
than Years than 5 MSME Trade Trade
3 Year Years Trade Payables Payables
Payables
Undisputed 100 50 30 180 160 340
Disputed 10 20 0 30 40 70
Total 110 70 30 210 200 410
Additional Information:
1. Mr. A while performing the statutory audit of ABC Ltd identified that the
total trade payables reported in the Balance Sheet as of 31 March 2022 and
the amount reported in Note 10: Ageing of Trade Payables are different.
Upon inquiry, management informed that the difference between both
amounts is the Intercompany Trade Payables which is eliminated as part of
consolidation Adjustment. Hence, there was no requirement to show
intercompany Trade Payables in the ageing schedule. Mr. A accepted the
explanation and did not perform any further procedures to validate the
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explanation.
2. When Audit Committee inquired with Mr. A as to how they have verified
and validated the segregation of the trade payables, Mr. A replied that they
purely relied upon the management representation as there was no alternate
procedure available to gather sufficient and appropriate audit evidence to
validate the said information. Moreover, they informed the management that
they have not qualified their audit opinion as they have relied in true faith
upon management representation.
3. While performing the audit procedure to validate the Trade Payables ageing,
Mr. A identified that management has calculated the due date of trade
payables from the end of 180 days from the date of transaction. Mr. A found
it appropriate based on the conservative approach.
4. Mr. A did not qualify his audit opinion on the financial statement prepared
for the period ending on 31 March 2022 on any grounds. Also, Mr. A
specified that :
“The financial statements for the year ended on 31 March give a true and
fair view of the state of affairs of the company, comply with the accounting
standards notified under section 133 and are in the form provided for the
company in Schedule III of the Act”
5. While preparing the audit report Mr. A, provided the following information in
Key Audit Matters.
Key Audit Matters How our audit addressed KAM
While auditing the Trade Payables, the We have relied upon the
auditor identified that the trade payables assessment performed by the
balance includes ` 100 lakh payable to management with respect to the
the intercompany which is aged more litigation and disputed Trade

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than 3 years. Payables Balance.
Upon Inquiry with management, it was
identified the same amount is not paid Moreover, the amount is not
on account of a dispute with respect to material and hence no further
commercial terms. procedure other than obtaining
However, no such amount was management representation was
outstanding as receivable in the performed on the said balance.
accounts statement shared by
Intercompany. The amount was already
written off by such an Intercompany in
past years.
6. Other than the disputed trade payables disclosed, there were claims against
the company which were not yet acknowledged as debt. The aggregate
amount and exposure for such claims were ` 25 Lakh. As per an expert hired
by the management, no amount is required to be provided in books of
accounts as in all the claims there are high chances that the decision will be
in favour of the company.
7. Following were the materiality levels decided by the auditor for the current
period’s audit:
 Overall Materiality: ` 50 Lakh;
 Performance Materiality: 5 Lakh;
 Materiality for Aggregate Uncorrected Misstatement: ` 1 Lakh.

Multiple Choice Questions

11. In the given situation whether Mr. A will be held guilty of professional
Misconduct.
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a) Yes, Mr. A, is guilty of professional misconduct under Clause 7 of Part I
of First Schedule.
b) Yes, Mr. A, is guilty of professional misconduct under Clause 7 & 8 of
Part I of First Schedule.
c) Yes, Mr. A, is guilty of professional misconduct under Clause 7 & 8 of
Part I of the Second Schedule.
d) No, Mr. A is not guilty of professional misconduct as he has performed all
the audit procedures appropriately. 2

12. Whether Financial statements given in the scenario are in confirmation with
the requirements of Division II of Schedule III?
(a) Yes, the financial statements are in confirmation with requirements
mentioned in Division II of Schedule III
(b) No, management should have eliminated the Intercompany Trade
Payables balance from the amount disclosed in the Standalone
Balance Sheet. This will bring Note 10: Ageing Schedule and
Standalone Balance Sheet in alignment.
(c) No, Management should not have disclosed the disputed trade
payables less than 3 years as these trade payables are still under the
period of limitation as per Limitation Act and they should not be
disclosed in Financial Statement.
(d) No, management should have added the Intercompany Trade
Payables balance to the ageing schedule. This will bring Note 10:
Ageing Schedule and Standalone Balance Sheet in alignment. 2

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13. In continuation to MCQ no 12, what is an appropriate way to report the
above-mentioned issues?
(a) Mr. A should have expressed a modified opinion if he was not able
to gather appropriate & sufficient audit evidence to validate the
disputed trade payables. Moreover, he should have modified or
issued an adverse opinion as Financial Statements were not in
confirmation with requirements of Division II of Schedule III.
(b) Mr. A should have expressed an unmodified opinion if he was not
able to gather appropriate & sufficient audit evidence to validate the
intercompany trade payables. Moreover, he should have been
unmodified as Financial Statements were not in confirmation with
requirements of Division II of Schedule III.
(c) Mr. A should have expressed an unmodified opinion as per SA 700,
as he was able to obtain all the explanation and information required
and sought by him. Moreover, he should have modified it as the Cash
Flow Statement was not in confirmation with the requirements of
Division II of Schedule III.
(d) Mr. A should have reported matters related to Trade Payables Ageing
as a qualification in Key Audit Matters, as he was not able to obtain
all the explanation and information required and sought by him. 2

14. Whether the reporting performed by Mr. A related to intercompany trade

payables under the paragraph/section of Key Audit Matter in the audit
report appropriate? Select from the below option to support your answer.
(a) Mr. A should have expressed an unmodified opinion if he was not
able to gather appropriate & sufficient audit evidence to validate the

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disputed intercompany trade payables. As per SA 701, those matters
that, in the auditor’s professional judgment, were of most
significance in the audit of the financial statements of the current
period are Key Audit Matters. The auditor shall not communicate a
matter in the Key Audit Matters section of the auditor’s report when
the auditor would be required to modify the opinion in accordance
with SA 705 (Revised) as a result of the matter.
(b) Mr. A should have expressed a modified opinion if he was not able
to gather appropriate & sufficient audit evidence to validate the
disputed intercompany trade payables. As per SA 701, those matters
that, in the auditor’s professional judgment, were of most
significance in the audit of the financial statements of the current
period are Key Audit Matters. The auditor shall not communicate a
matter in the Key Audit Matters section of the auditor’s report when
the auditor would be required to modify the opinion in accordance
with SA 705 (Revised) as a result of the matter.
(c) Mr. A should have expressed an unmodified opinion if he was not
able to gather appropriate & sufficient audit evidence to validate the
disputed intercompany trade payables. As per SA 701, the auditor
shall report the matter in Key Audit Matters in the auditor’s report
when the auditor concludes that, based on the audit evidence
obtained, the financial statements as a whole are not free from
material misstatement or the auditor is unable to obtain sufficient
appropriate audit evidence to conclude that the financial statements
as a whole are free from material misstatement.

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(d) The auditor shall express an adverse opinion and report the said
matter in Key Audit Matter Para when the auditor, having obtained
sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are both material and pervasive to
the financial statements. In the current case, the auditor has
appropriately disclosed the said matter in Key Audit Matter
Paragraph. 2

15. As per the expert appointed by the Auditor, the exposure for the company
can be ` 20 lacs as in past in similar cases, the judgement was delivered
against the company. However, the management of ABC Limited was of
the view that when management has already hired an expert, then there is
no need to hire another expert by the auditor. Seeking your advice, kindly
guide the auditor by selecting the below option, and what next steps should
perform.
(a) The auditor shall design and perform audit procedures in order to
identify litigation and claims involving the entity which may give
rise to a risk of material misstatement. Also, if expertise in a field
other than accounting or auditing is necessary to obtain sufficient
appropriate audit evidence, the auditor shall determine whether to
use the work of an auditor’s expert. Hence auditor can appoint his
expert to validate the assumption and estimate performed by the
management’s expert.
(b) The auditor shall rely upon the work performed by the management’s
expert. Management expert will be equivalent to the auditor’s expert
and hence no other expert is required to be appointed.

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(c) The auditor shall not rely upon the management’s expert unless he
evaluates the adequacy of the expert’s work for the auditor’s
purposes, including the relevance and reasonableness of that expert’s
findings or conclusions, and their consistency with other audit
evidence. Although in the current case, there is no consonance
between the management’s expert’s findings and other audit
evidence, the auditor is still required to rely upon the findings of the
management’s expert.
(d) The auditor shall rely upon the management’s expert without
evaluating the adequacy of the expert’s work for the auditor’s
purposes, including the relevance and reasonableness of that expert’s
findings or conclusions, and their consistency with other audit
evidence. Hence auditor is required to rely upon the findings of
management’s expert in the current case. 2

MCQ. 16-20
KKML & Associates was appointed statutory auditor for FY 2021-22 of AMPL
Limited (a steel & Iron manufacturing company and NSE-listed company) for the
first time. CA. Kush was engagement partner for this assignment. Last year, it
was audited by Ananya & Company Chartered Accountants. Ananya & Company
charged ` 7,00,000 for the statutory audit for FY 2020-2021. Over and above that,
Ananya & Company raised bills for overtime and out-of-pocket expense of `
1,50,000. AMPL Limited paid ` 7,00,000 to Ananya & Company but raised a
dispute over the calculation of overtime. As per AMPL Limited, the overtime on
account of additional work as recalculated along with OPE should be ` 95,000/-
and the same was paid on a day before proposing the appointment of CA. Kush as

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a Statutory Auditor. This OPE was accounted only to the extent of ` 80,000 on a
provisional basis in books of accounts for FY 2020-21.
CA. Kush before accepting the appointment, communicated with Ananya &
Company, as to why he should not accept the appointment as a Statutory Auditor
for AMPL Limited. Ananya & Company replied on the same day stating the
reason for not accepting the appointment as there were pending audit fees of `
55,000/- (1,50,000 – 95,000) for FY 2020-21. After analysing the whole situation
CA. Kush communicated with Ananya & Company that this was a case of
disputed audit fees, and he cannot decline acceptance of the appointment on this
basis. Later, CA. Kush accepted the appointment.
Moreover, while proposing the appointment of CA. Kush, AMPL Limited issued
a general notice to pass a resolution at AGM for the appointment of CA. Kush.
The same was passed and a copy of the resolution and the notice were served to
Ananya & Company after the AGM. This resolution was proposed by the Audit
Committee consisting of 7 Directors i.e. Mr. Ram, Mr. Shyam, Mrs. Shweta, Mrs.
Komal, Mrs. Jaya, Mrs. Prabha and Mr. Anand. Out of these, Mr. Shyam, Mrs.
Shweta (Chairperson of the Audit Committee) and Mrs. Komal were not
independent directors. There was no change in this during the whole FY 2021 -22.
CA. Akash, the Engagement Quality Control Reviewer, insisted CA. Kush
analyse whether the opening balances reflect the application of appropriate
accounting policies. CA. Kush contented that he is not required to verify as he is
already testing for closing balances which contain opening balances and that will
give comfort over the application of accounting policies.
During the year, Mr. Shyam entered into an arrangement with the company
wherein the company will transfer the residential flat (originally purchased by the
company in his name) to Mr. Shyam for ` 4 Crore (originally purchased at ` 2

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Crore and having FMV ` 4 Crore). Instead of consideration, the company will
create a long-term loan due from Mr. Shyam in the books of accounts at ` 3 Crore
and for the rest (` 1 Crore) of the amount, Mr. Shyam will provide Plant and
Machinery to the company. No reporting or further disclosures were made by the
company for this transaction as this was at an arm’s length price.

On the basis of the abovementioned facts, you are required to answer the
following MCQs:
Multiple Choice Questions:
16. Ananya & Company raised the contention that the appointment of CA.
Kush is inappropriate as there were outstanding audit fees of ` 55,000 and
he should not have accepted the appointment as Statutory Auditor.
Considering the above scenario kindly guide CA. Kush on whether he
should have declined the appointment on grounds of pending audit Fees
(a) As per section 141 of the Companies Act, 2013, if another auditor
other than the retiring auditor is getting appointed as Statutory
Auditor in AGM then should not accept the appointment till the time
the previous auditor’s audit fees are paid in full.
(b) As per section 139 read with Rule 3, if another auditor other than the
retiring auditor is getting appointed as Statutory Auditor in AGM
then he should not accept the appointment till if the previous
auditor’s audit fees are outstanding for a period of 180 days or more.
(c) CA. Kush can accept a position as auditor previously held by another
chartered accountant or a certified auditor i.e., Ananya & Company
who has been issued a certificate under the Restricted Certificate
Rules, 1932 without first communicating with him in writing.

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(d) CA. Kush can accept the appointment as statutory auditor as the
pending fees are disputed fees and this would not constitute valid
professional reasons on account of which an audit should not be
accepted by the member to whom it is offered.

17. Ananya & Company contended that they were not given special notice and
hence the appointment of CA. Kush is invalid. Considering the above
scenario kindly guide CA. Kush on what course of action he should have
adopted in the current case.
(a) Clause (9) of Part I of the First Schedule to Chartered Accountants
Act, 1949 provides that a member in practice shall be deemed to be
guilty of professional misconduct if he accepts an appointment as
auditor of a Company without first ascertaining from it whether the
requirements of Sections 139 and 140 of the Companies Act, 2013
and hence CA. Kush is guilty of professional misconduct and his
appointment is invalid.
(b) Clause (8) of Part I of the First Schedule to Chartered Accountants
Act, 1949 provides that a member in practice shall be deemed to be
guilty of professional misconduct if he accepts an appointment as
auditor of a Company without first ascertaining from it whether the
requirements of Sections 139 and 140 of the Companies Act, 2013
and hence CA. Kush is guilty of professional misconduct and his
appointment is invalid.
(c) As per section 140(4) of the Companies Act, 2013, the company is
required to share the general resolution and notice of appointment of
another auditor once the resolution is passed in AGM. Hence, CA.

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Kush’s appointment is valid and hence is not required to perform
anything further.
(d) CA. Kush before getting appointed communicated with the previous
auditor which was sufficient and equivalent to special notice. Hence,
the contention of Ananya & company is incorrect.

18. Whether contention of CA. Akash, the Engagement Quality Control

Reviewer regarding analysis of the opening balances is correct. Kindly
guide CA. Kush with the correct course of action as per SA 510.
(a) The auditor shall obtain sufficient appropriate audit evidence about
whether the accounting policies reflected in the opening balances
have been consistently applied in the current period’s financial
statements, and whether changes in the accounting policies have
been properly accounted for and adequately presented and disclosed
in accordance with the applicable financial reporting framework.
(b) The auditor shall obtain sufficient appropriate audit evidence about
whether the material accounting policies reflected in the closing
balances have been consistently applied in the current period’s
financial statements when there is a material change.
(c) If the auditor has identified misstatement in the drafting of
accounting policies in the current period, then he shall obtain
sufficient appropriate audit evidence about whether the accounting
policies reflected in the opening balances were appropriately drafted
and applied.
(d) The auditor is not required to obtain sufficient appropriate audit
evidence about whether the accounting policies reflected in the

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opening balances have been consistently applied in the current
period’s financial statements, and whether changes in the accounting
policies have been properly accounted for and adequately presented
and disclosed in accordance with the applicable financial reporting
framework.

19. In the current case, Audit Committee of AMPL Limited is consisting of 7

Directors i.e. Mr. Ram, Mr. Shyam, Mrs. Shweta, Mrs. Komal, Mrs. Jaya,
Mrs. Prabha and Mr. Anand. Out of these, Mr. Shyam, Mrs. Shweta
(Chairperson of the Audit Committee) and Mrs. Komal were not
independent directors. Chief Compliance Officer of the company raised an
issue that the company has not complied with SEBI LODR Regulations. He
also, insisted CA. Kush focus on this while performing the audit. You are
required to verify the compliance with SEBI LODR Regulations based on
the above-mentioned scenario. Kindly select the appropriate option from
below depicting the correct provision of SEBI LODR regulation with
respect to the Audit Committee:
(a) As per Regulation 17 of SEBI LODR Regulation, the audit
committee shall have a minimum of two directors as members. At
least one-third of the members of the audit committee shall be
independent directors and the Chairperson of the audit committee
shall be an independent director.
Thus, contention of Chief Compliance Officer is correct.
(b) As per Regulation 18 of SEBI LODR Regulation, the audit
committee shall have a minimum of five directors as members. At
least one-third of the members of the audit committee shall be

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independent directors and the chairperson of the audit committee can
be a non –independent director provided not more than one-third of
directors shall be executive directors. Thus, contention of Chief
Compliance Officer is not correct.
(c) As per Regulation 19 of SEBI LODR Regulation, the audit
committee shall have a minimum of five directors as members. At
least one-third of the members of the audit committee shall be non-
executive directors and the chairperson of the audit committee shall
be an independent director. If the chairperson is an executive
director, then not more than one-third of directors shall be executive
directors. Thus, contention of Chief Compliance Officer is correct.
(d) As per Regulation 18 of SEBI LODR Regulation, the audit
committee shall have a minimum of three directors as members. At
least two-thirds of the members of the audit committee shall be
independent directors and the Chairperson of the audit committee
shall be an independent director. Thus, contention of Chief
Compliance Officer is correct.

20. CA. Kush was perplexed concerning reporting a transaction entered

between Mr. Shyam and the Company for the transfer of the Immovable
Property. You are being the Engagement Quality Control Reviewer, kindly
guide CA. Kush concerning the appropriate reporting of the said transaction
as per CARO 2020.
(a) As per para 3(xv) of CARO 2020, Auditor is required to report
whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the

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provisions of section 192 of the Companies Act have been complied
with.
(b) As per para 3(xiv) of CARO 2020, Auditor is required to report
whether the company has entered into any non-cash transactions,
other than being at arm’s length price, with directors or persons
connected with him and if so, whether the provisions of section 192
of Companies Act have been complied with.
(c) As per para 3(ix) of CARO 2020, Auditor is required to report
whether the company has raised loans during the year on the pledge
of securities held in its subsidiaries, joint ventures or associate
companies, if so, give details thereof and also report if the company
has defaulted in repayment of such loans raised.
(d) As per para 3(ix) of CARO 2020, Auditor is required to report
whether the company has revalued its Property, Plant and Equipment
(including Right of Use assets) or intangible assets or both during the
year and, if so, whether the revaluation is based on the valuation by a
Registered Valuer; specify the amount of change, if the change is
10% or more in the aggregate of the net carrying value of each class
of Property, Plant and Equipment or intangible assets.

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PART 2
DESCRIPTIVE QUESTIONS
1. Question paper comprises 6 questions. Answer Question No. 1 which is
compulsory and any 4 out of the remaining 5 questions
2. Working notes should form part of the answer.
3. Answers to the questions are to be given only in English except in the case of
candidates who have opted for Hindi Medium. If a candidate has not opted
for Hindi Medium, his/her answers in Hindi will not be evaluated.
4. Maximum Mark 70

1.
(A) AKY Ltd. is a listed company engaged in the business of software and is
one of the largest company operating in this sector in India. The
company’s annual turnover is ` 40,000 crores with profits of ` 5,000
crores. Due to the nature of the business and the size of the company, the
operations of the company are spread out in India as well as outside India.
The company’s contracts with its various customers are quite complicated
and different. During the course of the audit, the audit team spends
significant time on audit of revenue – be it planning, execution or
conclusion. This matter was also discussed with management at various
stages of audit. The efforts towards audit of revenue also involve
significant involvement of senior members of the audit team including the
audit partner. After completion of audit for the year ended 31 March 2022,
the audit partner was discussing significant matters with the management
wherein they also communicated to the management that he plans to
include revenue recognition as key audit matter in his audit report. The
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management did not agree with revenue recognition to be shown as key
audit matter in the audit report. Comment. 5

(B) You are part of engagement team conducting statutory audit of a branch of
nationalized bank. During the course of audit, it has come to your notice that
there are large number of cash credit accounts in the branch. Many of the
cash credit accounts are only partially utilized during substantial part of
year. However, in the month of March, the accounts are fully utilized. On
further scrutiny, it is observed that these account holders have made fixed
deposits from these utilized amounts at the end of year. These deposits have
been liquidated in first week of April of next financial year. Comment upon
how this situation would be dealt by you as a statutory branch auditor? 5

(C) The audit report of Kolsi (P) Ltd. for F.Y. 2021-22 was issued by Bishnoi &
Co. on 25th July, 2022. However, a case was filed against Kolsi (P) Ltd. on
4th August, 2022, with the Civil Court, with respect to an incident caused in
its factory on 17th January, 2022, the outcome of which may result in paying
heavy penalty by Kolsi (P) Ltd.
Mr. Raj Bishnoi, the partner of Bishnoi & Co., discussed the said matter
with the management and it was determined to amend the financial
statements for F.Y. 2021-22. Further, Mr. Raj inquired how the management
intended to address the said matter in the financial statements to which he
was told that the said matter was going to be disclosed as a “Contingent
Liability for a Court case” to the foot note in the balance sheet with no
additional disclosures.
The management told Mr. Raj that such disclosure was enough as he would

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further going a description of the said court case and its outcome in the
‘Emphasis of Matter’ paragraph in his amended audit report.
In the context of aforesaid case scenario, please answer the following
questions:-
(a) Whether Mr. Raj on behalf of Bishnoi & Co., has properly adhered to
his responsibilities in accordance with SA 560, on becoming aware of
the court case filed against Kolsi (P) Ltd.?
(b) Whether the contention of management of Kolsi (P) Ltd. is valid with
respect to the disclosure of the court case in the financial statements? 4

2.
(A) Mr. Z, a newly qualified chartered accountant started his practice in
February 2018 by setting up an office in the hill station Kodaikanal.
Initially, since he was getting very less assignments, he decided to set up a
temporary office in the nearby city Marudai, situated at about 100 kms
from the main office. As planned, he took an office space on rent for the
months of April, May & June. During these months, his regular office was
not closed and Mr. Z was in-charge for both the offices. Mrs. A, another
newly qualified chartered accountant who is also in practice in Marudai
came to know about the new office of Mr. Z. Thinking that he could be a
potential competitor, she informed the institute stating that Mr. Z had
violated the provisions of the Chartered Accountant Act. As a member of
the Board of Discipline of ICAI, you are requested to analyse this
complaint. 5

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(B) In an automated environment, the data stored and processed in systems can
be used to get various insights into the way business operates. This data can
be useful for preparation of management information system (MIS) reports
and electronic dashboards that give a highlevel snapshot of business
performance. In view of above you are required to briefly discuss the
meaning of data analytics and example of such data analytics techniques. 5

(C) J.A.C.K. & Co., a Chartered Accountant firm was appointed as the
statutory auditor of Falcon Ltd. after ensuring the compliance with relevant
provisions of the Companies Act, 2013. Mr. Jay was the engagement
partner for the aforesaid audit and prior to commencement of the audit, Mr.
Jay had called for a meeting of the engagement team in order to direct them
and assign them their responsibilities. At the end of meeting, Mr. Jay
assigned review responsibilities to two of the engagement team members
who were the most experienced amongst all, for reviewing the work
performed by the less experienced team members. While reviewing the
work performed by the less experienced members of the engagement team,
what shall be the considerations of the reviewers? 4
3.
(A) PQS & Associates are one of the joint auditors of KNO Bank for the year
2022 -23. While auditing KNO Bank, they are analysing industry data
relating to NPAs in select public sector banks as part of risk assessment
procedures:-

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Name of Gross NPAs Net NPAs (in Ratio of Net NPAs

Bank (in ` crore) ` crore) to Net advances
BBI Bank 55,000 13,000 1.72%
DAB Bank 45,000 10,000 2.34%
CNI Bank 55,000 18,000 2.65%
KNO Bank 28,000 6,500 3.97%
BRB Bank 35,000 8,800 2.27%
In the above context, what do you understand by “Gross NPAs” and “Net
NPAs” as on reporting date in the context of financial statements of a
Bank? As an auditor of KNO Bank, what inference would you draw by
comparing the “Ratio of net NPAs to net advances” with other public sector
banks? 4

(B) A Ltd. holds the ownership of 10% of voting power and control over the
composition of Board of Directors of B Ltd. While planning the statutory
audit of A Ltd., what factors would be considered by you as the statutory
auditors of A Ltd for the audit of its consolidated financial statements
prepared under Ind AS? 5

(C) Mr. S is a practising chartered accountant based out of Chennai. During the
weekends, he involved himself in equity research and used to advise his
friends, relatives and other known people who are not his clients. Apart
from this, he was also involved as a paper-setter for Accountancy subject in
the school in which he studied. He also owned agricultural land and was
doing agriculture during his free time. During the year 20X1, heavy losses
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were incurred in agricultural activity due to natural calamities and
misfortune, and he lost almost all of his wealth and became undischarged
insolvent. After a few court hearings, finally, in the year 20X3, he was
declared discharged insolvent and obtained a certificate from the court
stating that his insolvency was caused by misfortune without any
misconduct on his part. You are required to comment on the above situation
with reference to the Chartered Accountants Act, 1949 and Schedules
thereto, (especially from the point of section 8: Entry of name in Register of
Members). 5

4.
(A) The Comptroller and Auditor General of India has appointed a chartered
accountant firm to conduct the comprehensive audit of Metro Company
Limited (a listed government company) which is handling the Metro project
of the metropolitan city for the period ending 31-03-2022. The work to be
conducted under Project A handled by the Metro Company Limited was of
laying down railway line of 124 kilometers. [The chartered accountant firm
reviewed the internal audit report and observed the shortcoming reported
about the performance of Project A regarding the understatement of the
Current liabilities and Capital work in progress by ` 84.68 crore. Explain
some of the matters to be undertaken by the chartered accountant firm
while conducting the comprehensive audit of Metro Company Limited. 5

(B) MF Ltd., engaged in the manufacturing of various products in its factory, is

concerned with shortage in production and there arose suspicion of
inventory fraud. You are appointed by MF Ltd. to evaluate the options for

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verifying the process to reveal fraud and the corrective action to be taken.
As an investigating accountant what will be your areas of verification and
the procedure to be followed for verification of defalcation of inventory? 5

(C) One of the independent directors sought information regarding the

appointment of internal auditors for following Group Companies in
accordance with the Companies Act, 2013 of which certain Financial
Information are given below:

Figures are in ` crore and correspond to the previous year

Name Nature Equity Turnover Loan from Public
Share Bank and Deposits
Capital PFI
AADI Listed 100 190 50 24
Ltd.
AJIT Ltd. Unlisted 60 190 50 24
Public
NEMI Unlisted 60 190 50 -
Ltd. Private
You are required to evaluate the requirements of the Companies Act, 2013
regarding the appointment of internal Auditors for the Group Companies.
Discuss. 4

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5.
(A) CA. Aditya Jain is auditor of a listed company. He is also required to carry
out quarterly review of financial statements of company in terms of
regulatory requirements. He is already well-versed with business of
company and has deep understanding of the company. Discuss, any five
procedures, by which he can update his understanding of the company for
carrying out quarterly review. 5

(B) Mr. Arjun was appointed as the engagement partner on behalf of Bhism &
Co., a Chartered Accountant Firm, for conducting statutory audit
assignment of Sinwar Ltd., unlisted public company.
Mr. Brijesh, one of the senior engagement team members, was given the
responsibility to audit the matters as per the requirements of CARO, 2020
and in that connection, he made the following observations, that may be
relevant for reporting as per the said Order:-
Sr. Observations
No.
(a) One of the Plant and Equipment taken on a lease (‘right of use’
asset) by Sinwar Ltd. was revalued based on the valuation by a
registered valuer and the net carrying value of Plant and Equipment
in aggregate was changed from ` 4 crore to ` 4.45 crore.
(b) During the year under consideration, cash credit limit of ` 5.5 crore
was sanctioned to Sinwar Ltd. by DMC Bank based on the security
of current assets which was reduced to ` 4.5 crore after 6 months.
In this connection, quarterly returns have been filed by the company

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with the DMC bank which are in agreement with Books of
Accounts.
You are required to examine the contention of Mr. Brijesh regarding
reporting of the above observations in accordance with CARO 2020. 5

(C) Darshan Ltd. is a manufacturing company, provided following details of

wastages of raw materials in percentage, for various months. You have
been asked to enquire into causes of abnormal wastage of raw materials.
Draw out an audit plan.
Wastage percentage are:
July 2021 - 1.5% Aug 2021 - 1.7%
Sep 2021 - 1.4% Oct 2021 - 4.1% 4

6.
(A) CA Ragini is offered an appointment to act as Engagement Quality Control
Reviewer (EQCR) for the audit of the financial year 2022-23 of XPM
Limited, a listed company operating from a small town. She is also based in
the same town and was not engaged previously to conduct an audit of a
listed entity. She accepts the appointment to act as ECQR. She performs the
review by ticking a Yes/No checklist and signing on some of the working
papers prepared by the engagement team. The audit file does not contain any
material misstatement which shows that the work of EQCR is separate from
the work of the engagement team. Do you agree with the approach adopted
by EQCR? Comment. 5

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(B) Ayurda Ltd.is a fast-growing and award-winning SaaS software company
which is headquartered in Mumbai. It also has offices in the UK and
provides cloud-based professional services automation (PSA) software
solutions to professional services organizations around the world. They want
to engage you to provide an assurance report for one of its major clients over
the controls it operates as a service organisation. Can you provide such an
assurance report? 4

(C) KDK Bank Ltd., received an application from a pharmaceutical company for
takeover of their outstanding term loans secured on its assets, availed from
and outstanding with a nationalized bank. KDK Bank Ltd., requires you to
make a due diligence audit in the areas of assets of pharmaceutical company
especially with reference to valuation aspect of assets. State what may be
your areas of analysis in order to ensure that the assets are not stated at
overvalued amounts. 5

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