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PAPER – 6: AUDITING AND ASSURANCE
PART – I : ACADEMIC UPDATE

Chapter 9 (Printed Copy)
At Page 10 - Topic “Shares issued at a discount” is revised and being given hereunder. Students
are advised to study this topic from here and not from printed copy of the study material.
Shares issued at a discount
According to Section 53 of the Companies Act, 2013,
(1) a company shall not issue shares at a discount, except in the case of an issue of sweat
equity shares given under Section 54 of the Companies Act, 2013.
(2) any share issued by a company at a discounted price shall be void.
(2A) Notwithstanding anything contained in sub-sections (1) and (2), a company may issue
shares at a discount to its creditors when its debt is converted into shares in pursuance of
any statutory resolution plan or debt restructuring scheme in accordance with any
guidelines or directions or regulations specified by the Reserve Bank of India under the
Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.
(3) Where any company fails to comply with the provisions of this section, such company and
every officer who is in default shall be liable to a penalty which may extend to an amount
equal to the amount raised through the issue of shares at a discount or five lakh rupees,
whichever is less, and the company shall also be liable to refund all monies received with
interest at the rate of twelve per cent. per annum from the date of issue of such shares to
the persons to whom such shares have been issued.
The auditor needs to check
(i) the movement in share capital during the year and wherever there is any issue,
(ii) he should verify that the Company has not issued any of its shares at a discount by reading
the minutes of meeting of its directors and shareholders authorizing issue of share capital
and the issue price.
(iii) Further, auditor should also verify that whether the company has issued shares at a
discount to its creditors when its debt is converted into shares in pursuance of any statutory
resolution plan or debt restructuring scheme in accordance with any guidelines or
directions or regulations specified by the Reserve Bank of India under the Reserve Bank
of India Act, 1934 or the Banking (Regulation) Act, 1949.
This topic has also been revised at page no. 10 of chapter 9 and students can refer at the link
given below:
https://resource.cdn.icai.org/66605bos53774-cp9.pdf
© The Institute of Chartered Accountants of India

2 INTERMEDIATE EXAMINATION: NOVEMBER, 2023
Chapter 10 – Company Audit

On Page number 10.36, point (j) to be read as under:
(j) such other matters as may be prescribed Rule 11 of the Companies (Audit and Auditors)
Rules, 2014 prescribes the other matters to be included in auditor’s report. The auditor’s
report shall also include their views and comments on the following matters, namely: -
(i) whether the company has disclosed the impact, if any, of pending litigations on its
financial position in its financial statement;
(ii) whether the company has made provision, as required under any law or accounting
standards, for material foreseeable losses, if any, on long term contracts including
derivative contracts;
(iii) whether there has been any delay in transferring amounts, required to be transferred,
to the Investor Education and Protection Fund by the company.
[(iv) (1) Whether the management has represented that, to the best of it’s knowledge
and belief, other than as disclosed in the notes to the accounts, no funds have
been advanced or loaned or invested (either from borrowed funds or share
premium or any other sources or kind of funds) by the company to or in any other
person(s) or entity(ies), including foreign entities (“Intermediaries”), with the
understanding, whether recorded in writing or otherwise, that the Intermediary
shall, whether, directly or indirectly lend or invest in other persons or entities
identified in any manner whatsoever by or on behalf of the company (“Ultimate
Beneficiaries”) or provide any guarantee, security or the like on behalf of the
Ultimate Beneficiaries;
(2) Whether the management has represented, that, to the best of it’s knowledge
been received by the company from any person(s) or entity(ies), including
foreign entities (“Funding Parties”), with the understanding, whether recorded in
writing or otherwise, that the company shall, whether, directly or indirectly, lend
or invest in other persons or entities identified in any manner whatsoever by or
on behalf of the Funding Party (“Ultimate Beneficiaries”) or provide any
guarantee, security or the like on behalf of the Ultimate Beneficiaries; and
(3) Based on such audit procedures that the auditor has considered reasonable and
appropriate in the circumstances, nothing has come to their notice that has
caused them to believe that the representations under sub-clause (1) and (2)
contain any material misstatement.
(v) Whether the dividend declared or paid during the year by the company is in
compliance with section 123 of the Companies Act, 2013.
(vi) Whether the company has used such accounting software for maintaining its books
of account which has a feature of recording audit trail (edit log) facility and the same

PAPER – 6: AUDITING AND ASSURANCE 3
has been operated throughout the year for all transactions recorded in the software
and the audit trail feature has not been tampered with and the audit trail has been
preserved by the company as per the statutory requirements for record retention.
Chapter 10 (Printed Copy) At Page 10.61 - Topic “Punishment for non-compliance” is
revised and being given hereunder. Students are advised to study this topic from here and not
from printed copy of the study material.
PUNISHMENT FOR NON-COMPLIANCE
Section 147 of the Companies Act, 2013 prescribes following punishments for
contravention:
(1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened, the company
shall be punishable with fine which shall not be less than twenty-five thousand rupees, but
which may extend to five lakh rupees and every officer of the company who is in default
shall be punishable with fine which shall not be less than ten thousand rupees, but which
may extend to one lakh rupees.
(2) If an auditor of a company contravenes any of the provisions of section 139, section 144
or section 145, the auditor shall be punishable with fine which shall not be less than twenty-
five thousand rupees, but which may extend to five lakh rupees or four times the
remuneration of the auditor, whichever is less.
It may be noted that if an auditor has contravened such provisions knowingly or willfully
with the intention to deceive the company or its shareholders or creditors or tax authorities,
he shall be punishable with imprisonment for a term which may extend to one year and
with fine which shall not be less than fifty thousand rupees but which may extend to twenty-
five lakh rupees or eight times the remuneration of the auditor, whichever is less.
(3) Where an auditor has been convicted under sub-section (2), he shall be liable to:
(i) refund the remuneration received by him to the company.
(ii) and pay for damages to the company statutory bodies or authorities or to members
or the creditors of the Company for loss arising out of incorrect or misleading
statements of particulars made in his audit report.
(4) The Central Government shall, by notification, specify any statutory body or authority of an
officer for ensuring prompt payment of damages to the company or the persons under
clause (ii) of sub-section (3) and such body, authority or officer shall after payment of
damages such company or persons file a report with the Central Government in respect of
making such damages in such manner as may be specified in the said notification.
(5) Where, in case of audit of a company being conducted by an audit firm, it is proved that
the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted
or colluded in an fraud by, or in relation to or by, the company or its directors or officers,
the liability, whether civil criminal as provided in this Act or in any other law for the time
being in force, for such act shall be the partner or partners concerned of the audit firm and

of the firm jointly and severally. However, in case of criminal liability of an audit firm, in
respect of liability other than fine, the concerned partner or partners, who acted in a
fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be
liable.
This topic has also been revised at page no. 10.61 of chapter 10 and students can refer at the
link given below:
Case study given at page no. 10.15 in Chapter 10 of Module 2 has been revised and is
given hereunder:
CASE STUDY
Facts of the Case: CA. Donald was appointed as the auditor of PS Ltd. at the remuneration of
` 30,000. However, after 4 months of continuing his services, he could not continue to hold his
office of the auditor as his wife got a government job at a distant place and he needs to shift
along with her to the new place. Thus, he resigned from the company and did not perform his
responsibilities relating to filing of statement to the company and the registrar indicating the
reasons and other facts as may be relevant with regard to his resignation.
How much fine may he be punishable with under section 140(3) for non -compliance of section
140(2) of the Companies Act, 2013?
Explanation: For non-compliance of sub-section (2) of section 140 of the Companies Act, 2013,
the auditor shall be punishable with fine, which shall not be less than fifty thousand rupees or
the remuneration of the auditor, whichever is less but which may extend to two lakh rupees,
under section 140(3) of the said Act.
Conclusion: Thus, the fine under section 140(3) of the Companies Act, 2013 shall not be less
than ` 30,000 but which may extend to ` 2,00,000.
The revision has also been made at Page no. 10.15 in Chapter 10 of the Study Material at the
link given below:
Note: Students are also advised to refer RTP of Paper-2: Corporate and Other Laws for
academic updates relating to Company Law and Other Laws.

PART – II: QUESTIONS AND ANSWERS
PART – II A: Multiple Choice Questions based on Case Scenarios

Case Scenario - 1
Kartik, a CA student undergoing his articled training, is part of an engagement team conducting
statutory audit of MSE Auto Private Limited, a company engaged in manufacturing of automobile
spare parts. The company has its manufacturing facilities located in Pimpri - Chinchwad
industrial belt near Pune. It is a profit making company and one of the most sought after by
banks in the area due to its good track record. The following is extract of financial information
taken from its pre-audit financial statements for year 2022-23. Figures have been rounded off
in ` 000’s.
Particulars Year 2022-23 Year 2021-22
Share capital 2500.00 2500.00
Long term borrowings 0.00 15000.00
Short term borrowings 55000.00 15000.00
Inventories 35000.00 27000.00
Trade receivables 60000.00 25000.00
Revenue from Operations 300000.00 100000.00
Profit before tax 60000.00 18000.00
While going through schedule of long term borrowings and books of accounts, he finds that
reduction of long term borrowings of the company is on account of full payment of a term loan
in month of April 2022 taken from a bank in past. However, he finds that charge in respect of
above term loan in favour of bank is still subsisting on MCA portal beyond statutory period due
to non-registration of charge satisfaction.
He had read about assertions pertaining to balance sheet and income statement. However, he
was not sure about nomenclatures assigned to assertions pertaining to balance sheet and
income statement.
The team had also attended physical inventory count of the company as at year end in
accordance with SA 501.
Besides, company’s trade receivables have increased from ` 25000 in year 2021-22 to ` 60000
in year 2022-23 (both figs in ‘000s). His understanding is that increase in company’s trade
receivables as compared to last year signifies longer time taken by company’s customers to
make their payments.
Considering substantial rise in revenue from operations of the company in the year under audit,
team wants to ensure that revenues of company are not overstated.

Based on above, answer the following questions: -

1.1 Keeping in view description regarding full payment of term loan in April 22 taken from a
bank in past and non-registration of satisfaction of charge, which of following statements
is correct?
(a) The above fact may be disclosed by the company’s management in its financial
statements at its discretion along with reasons as such disclosure would bring
transparency.
(b) The above fact along with reasons is required to be disclosed by the company in its
financial statements in accordance with requirements of Standards on Auditing.
(c) The above fact along with reasons is required to be disclosed by the company in its
financial statements in accordance with requirements of Schedule III of Companies
Act, 2013.
(d) The above fact is not required to be disclosed as term loan has already been repaid
in full and there are no outstanding long term borrowings.
1.2 The company’s short-term borrowings have increased during the year 2022-23 as
compared to last year. One of following assertions is not relevant to verification of short-
term borrowings. Which odd one you would suggest to Kartik in this regard?
(a) Existence
(b) Occurrence
(c) Completeness
(d) Valuation
1.3 As regards team’s attendance at physical inventory count process of company’s
inventories in accordance with SA 501 is concerned, which of following is not a relevant
audit procedure?
(a) Inspection of inventories
(b) Checking appropriateness of method employed for valuation of inventories
(c) Evaluating management’s instructions for recording results of physical inventory
count
(d) Performing test counts
1.4 The company’s trade receivables have increased during year 2022-23 as compared to last
year. Which of following statements is most appropriate regrading understanding of Kartik
on this issue?
(a) The view of Kartik is correct and it has led to increased audit risk pertaining to
valuation of trade receivables. Therefore, team needs to go through trade receivables
ageing schedule to confirm it.

(b) The view of Kartik is incorrect.

(c) The view of Kartik is correct and it has led to increased audit risk pertaining to
valuation of trade receivables. Therefore, team needs to perform direct confirmation
procedures to confirm it.
(d) The view of Kartik is correct and it has led to increased audit risk pertaining to
valuation of trade receivables. Therefore, team needs to perform cut-off procedures
to confirm it.
1.5 The team wants to ensure that revenues of company are not overstated. Which of following
is not likely to be a relevant audit procedure in this regard?
(a) Obtaining confirmations from customers
(b) Reviewing GST returns and their reconciliation with revenue stated in statement of
profit & loss
(c) Reviewing credit notes issued by company post year end
(d) Reviewing debit notes issued by company post year end
Case Scenario - 2
CA X has accepted offer of conducting statutory audit of financial statements of DOS Solutions
Private Limited. Keeping in mind requirements of Standards on Auditing including those relating
to SA 300, he plans audit so that it is conducted in an effective manner. He knows that because
of inherent limitations of an audit, there is audit risk in audit of financial statements even though
audit is properly planned and performed in accordance with Standards on Auditing.
Considering nature of operations of the company, he has decided to use audit sampling in
performing audit procedures. The various areas of his testing include testing controls over
revenues, expenditures, assets and liabilities of the company. Besides, he has decided to
perform tests of details in respect of all these areas of financial statements.
While verifying tests of controls over purchase orders placed by the company based
on selected audit samples, he has erroneously concluded that Standard operating procedures
(SOP) for placing purchase orders are not being followed strictly and controls are less effective
than they actually are.
Further, while testing controls over wage payments, he has tested 20 sample wage sheets of
different sections of company and finds that one wage sheet has not been signed by authorized
officer of the company. The rate of deviation was earlier set by him at 3%.
During the course of designing procedures for selecting samples for verification of trade
receivables, he has decided to divide trade receivable balances into groups viz. balances in
excess of ` 10 lakh, balances in range of ` 7,50,001 to ` 10,00,000, balances in range of
` 5,00,001 to ` 7,50,000, balances in range of ` 2,50,001 to ` 5,00,000 and balances of
` 2,50,000 and below. He has planned to pick up different percentage of items from each of
above groups. Random sample is chosen from each group using random number tables.

Some of the trade payables of the company were outstanding since long. He has decided to
merely verify arithmetical accuracy of ageing schedule and its reconciliation with books of
accounts.
Therefore, nature of audit procedures, nature of financial reporting itself and need for audit to
be conducted within a reasonable period of time and at a reasonable period of cost all lead to
inherent limitations of audit.
2.1 The auditor has erroneously concluded that Standard operating procedures (SOP) for
placing purchase order are not being followed strictly and controls are less effective than
they actually are. Which of the following statements is likely to be true in this regard?
(a) It is a sampling risk and might lead to auditor expressing inappropriate audit opinion.
(b) It is a sampling risk and affects audit effectiveness.
(c) It is a sampling risk and affects audit efficiency.
(d) It is a control risk and affects audit effectiveness.
2.2 The auditor has tested 20 sample wage sheets in different sections of the company and
finds that one wage sheet has not been signed by authorized officer of the company. It
represents________?
(a) Tolerable misstatement
(b) Misstatement
(c) Tolerable rate of deviation
(d) Actual rate of deviation
2.3 Which method of selecting samples for verification of trade receivables has been planned
by auditor?
(a) Simple random sampling
(b) Systematic sampling
(c) Block sampling
(d) Stratified sampling
2.4 The auditor has decided to merely verify arithmetical accuracy and reconciliation of ageing
schedule relating to trade payables. The use of above audit procedure can lead to
_______?
(a) Sampling risk
(b) Non-sampling risk
(c) Inherent risk
(d) Control risk

2.5 Keeping in view inherent limitations of audit of financial statements, which of following
statements is likely to be most appropriate?
(a) Due to inherent limitations of audit, auditor obtains conclusive audit evidence.
(b) Due to inherent limitations of audit, auditor can be satisfied with less than persuasive
evidence.
(c) Due to inherent limitations of audit, subsequent discovery of material misstatement in
financial statements after audit, which was conducted in accordance with SAs, does
not indicate a failure of audit.
(d) Due to inherent limitations of audit, auditor can skip a difficult, time -consuming and
costly procedure.
General MCQs
1. Mr. A, auditor and Mr. B, Finance Manager of XYZ Pvt Ltd are friends. Mr. A prepares the
audit report according to the wishes and directions of Mr. B. In this situation which essential
quality of the auditor has been compromised:
(a) Professional Competence
(b) Independence
(c) Professional Skepticism
(d) Due care
2. ________ occur when auditors form relationships with the client where they end up being
too sympathetic to the client’s interests.
(a) Familiarity threats
(b) Advocacy threats
(c) Self Review threats
(d) Intimidation threats
3. The persons with responsibility for overseeing the strategic direction of the entity and
obligations related to the accountability of the entity are:
(a) management
(b) those charged with governance
(c) audit committee
(d) board of directors
4. Which of the following is a risk that arises from the use of IT systems?
(a) Direct data changes (backend changes).
(b) Limited/Monitored access.

(c) Adequate segregation of duties.

(d) Authorized access to data.
5. ABC Limited is engaged in manufacturing of electric two-wheelers. During the year, a
customer has gone to court due to incident of fire in battery-operated vehicle. The damages
claimed are to tune of `5 lakhs. The company insists that this incident was due to improper
charging of battery and has nothing to do with manufacturing design of vehicle. The
company’s lawyers advise that it is probable that company is not likely to be held liable. It
is likely to be reflected in financial statements of company under_____?
(a) Provisions
(b) Reserves
(c) Contingent liabilities
(d) Other current Liabilities
PART II B – DESCRIPTIVE QUESTIONS
1. State with reason (in short) whether the following statements are true or false:
(i) There is direct relationship between detection risks and the combined level of inherent
and control risks.
(ii) For auditor’s opinion, reasonable assurance is an absolute level of assurance.
(iii) Internally generated Goodwill can be recognized as an asset.
(iv) Sample size is not a valid criterion to distinguish between statistical and non-
statistical approaches.
(v) The inclusion of an Emphasis of Matter paragraph in the Auditor's Report affects the
auditor's opinion.
(vi) A perceived opportunity to commit fraud may exist when an individual believes
internal control can be overridden.
(vii) Control environment can prevent, detect and correct a material misstatement.
(viii) An unexplained decrease in GP Ratio may result due to fictitious sales.
Chapter 1 - Nature, Objective and Scope of Audit
2. (a) “An auditor who, before the completion of the engagement, is requested to change
the engagement to one which provides a lower level of assurance should consider
the appropriateness of doing so.” Discuss.
(b) Mr. Z, auditor of the Company, Different and Capable Limited for the financial year
2022-23, explained to audit team members about the objectives of the Independent
Auditor in accordance with the relevant Standard on Auditing. Explain those
objectives.

3. (a) There are practical and legal limitations on the auditor’s ability to obtain audit
evidence. Explain with examples.
(b) In case of certain subject matters, limitations on the auditor’s ability to detect material
misstatements are particularly significant. Discuss those subject matters.
Chapter 2 - Audit Strategy, Audit Planning and Audit Programme
4. (a) You have been appointed as an auditor of MKP Ltd. for the first time. Discuss briefly,
the factors to be considered by you while establishing overall audit strategy
(b) The audit plan includes the nature, timing and extent of audit procedures to be
performed by engagement team members. Explain.
5. In establishing the overall audit strategy, the auditor shall ascertain the reporting objectives
of the engagement. Explain with examples.
Chapter 3 - Audit Documentation and Audit Evidence
6. (a) Written representations are to be provided by the management to the auditor when
requested. Explain
(b) Audit Documentation refers to the record of three items. Explain stating clearly the
objective and nature of audit documentation.
7. (a) The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis. Explain in
detail.
(b) T Ltd has used the services of an expert for the purpose of physical verification of its
inventory which is appearing in the financial statements of the company at ` 75
Crores. Discuss the broad parameters auditor would take into consideration while
deciding about using the work performed by the Management’s Expert in physical
verification of company’s inventory.
8. SA 500 – “Audit Evidence”, explains what constitutes audit evidence in an audit of financial
statements. A combination of tests of accounting records and other information is generally
used by the auditor to support his opinion on the financial statements. Explain and discuss
the meaning of Audit Evidence in detail.
Chapter 4 - Risk Assessment and Internal Control
9. (a) Obtaining an understanding of the entity and its environment establishes a frame of
reference within which the auditor plans the audit and exercises professional
judgment throughout the audit. Explain by giving examples.
(b) Analytical procedures performed as risk assessment procedures may identify aspects
of the entity of which the auditor was unaware. Explain
10. Risk of material misstatement refers to the risk that the financial statements are materially
misstated prior to audit. Discuss the levels at which this risk exists.

Chapter 5 - Fraud and Responsibilities of the Auditor in this Regard.

11. Fraudulent financial reporting often involves management override of controls that
otherwise may appear to be operating effectively. Illustrate any three techniques by which
fraud can be committed by management overriding controls.
12. Write the circumstances that indicate the possibility of fraud due to problematic or unusual
relationship between the auditor and management.
Chapter 6 - Audit in an Automated Environment
13. When a business operates in a more automated environment, we are likely to see several
business functions and activities happening within the systems. List down the business
functions and activities happening within the systems.
14. List the points that an auditor should consider to obtain an understanding of the Company's
automated environment.
Chapter 7- Audit Sampling
15. Chintamani Ltd appoints Chintan & Mani as statutory auditors for the financial year 202 2-
2023. Chintan & Mani seem to have different opinion on audit approach to be adopted for
audit of Chintamani Ltd. Mani is of the opinion that 100% checking is not required and they
can rely on Audit Sampling techniques in order to provide them a reasonable basis on
which they can draw conclusions about the entire population.
Chintan is concerned whether the use of audit sampling has provided a reasonable basis
for conclusions about the population that has been tested.
You are required to guide Chintan about his role if audit sampling has not provided a
reasonable basis for conclusions about the population that has been tested in accordance
with SA 530.
16. The auditor is required to project misstatements for the population to obtain a broad vie w
of the scale of misstatement. Explain in detail.
Chapter 8 - Analytical Procedures
17. Flower Limited presented its financial statements for the F.Y. 2022-2023 to its auditor for
expressing an opinion thereon. The auditor while carrying out the audit sta rted comparing
various items of profit and loss account of the year under audit with previous financial
years. What is auditor trying to achieve by carrying out those comparisons?
18. When designing and performing substantive analytical procedures, either alone or in
combination with tests of details as substantive procedures in accordance with
SA 330, the auditor shall determine the suitability of particular substantive analytical
procedures for given assertions, taking account of the assessed risks of m aterial
misstatement and tests of details, if any, for these assertions. Discuss.

Chapter 9 - Audit of Items of Financial Statements

19. M/s MP & Co, Chartered Accountants, have been appointed as auditors of LMP Private
Limited. The partner of the firm asked the Audit assistant to carry out the 'examination-in-
depth' of the payment made to a creditor. Advise him about the documents to be v erified.
20. (a) As an auditor, how will you verify the hire purchase transaction in the case of an entity
engaged in the business of hire purchase?
(b) A junior accountant of a limited company has not separated transactions of one period
from those in the ensuing period. As an Auditor, state the correct procedure to be
followed and the areas in which it can be applied.
Chapter 10 - The Company Audit
21. Provisions regarding appointment of Auditors -
(i) First auditor of a Government company and a Non-Government company.
(ii) Subsequent auditor of a Government company and a Non- Government company.
22. As per Sec 143(3)(j) of the Companies Act, 2013, the auditor’s report shall also include
such other matters as may be prescribed by Rule 11 of the Companies (Audit and Auditors)
Rule, 2014. Discuss those matters on which views and comments of the auditor are
required.
23. State the matters to be included in the auditor's report as per CARO, 20 20 regarding:
(i) Nidhi Company.
(ii) Transactions with related parties.
Chapter 11 - Audit Report
24. Communicating key audit matters in the auditor's report is in the context of the auditor
having formed an opinion on the financial statements as a whole. Communicating key audit
matters in the auditor's report is not considered as a substitute or alternative for a number
of important items. What are those items?
25. What an auditor should state in the "Basis for opinion" section of auditor's report ? When
the auditor modifies the opinion on the financial statements, explain the amendments he
should make in this section?
Chapter 12 - Bank Audit
26. Your firm has been appointed as branch auditor of SP Bank Ltd. Discuss about the primary
evidence you will look into while carrying out verification of advances.
27. TEP Industries Private Limited, a company engaged in obtaining rice from paddy, is
enjoying a cash credit facility against hypothecation of paid stocks and book debts (eligible
up to 90 days only) from LMV Bank for ` 4.00 crore. The letter sanctioning the above credit

facility stipulates margin @ 25% on stocks and @ 40% on eligible book debts up to 90
days.
While preparing stock statement as on 30.6.23, accountant of the company calculates
value of stocks for ` 5 crore (including ` 1 crore of rice which was lying in a low lying
godown and was completely damaged during recent floods caused by river Yamuna).
Debtors outstanding as on 30.6.23 are ` 3 crore (including ` 50 lacs outstanding for last 6
months). Trade creditors outstanding as on date are ` 2 crore. He calculates DP as on
30.6.23 for ` 3.30 crore. Is he correct? Justify with your workings.
What does drawing power calculated by you signify to the borrower company?
Chapter 13 - Audit of Different Types of Entities
28. (a) "Public moneys should not be utilised for the benefit of a particu lar person or section
of the community". List out the exceptions to this rule while conducting audit against
propriety.
(b) State six important advantages of audit of accounts of a Partnership firm.
SUGGESTED ANSWERS
Case Scenario – 1
Answer Key- Case Scenario - 1
Question Answer
No.
1.1 (c) The above fact along with reasons is required to be disclosed by
company in its financial statements in accordance with requirements of
Schedule III of Companies Act, 2013.
1.2 (b) Occurrence
1.3 (b) Checking appropriateness of method employed for valuation of
inventories
1.4 (b) The view of Kartik is incorrect.
1.5 (d) Reviewing debit notes issued by company post year end
Answer Key- Case Scenario - 2
Question Answer
No.
2.1 (c) It is a sampling risk and affects audit efficiency.
2.2 (d) Actual rate of deviation
2.3 (d) Stratified sampling

2.4 (b) Non-sampling risk

2.5 (c) Due to inherent limitations of audit, subsequent discovery of material
misstatement in financial statements after audit which was conducted in
accordance with SAs does not indicate a failure of audit.
General MCQ’s
1. (b) Independence
2. (a) Familiarity threats
3. (b) those charged with governance
4. (a) Direct data changes (backend changes).
5. (c) Contingent liabilities
Descriptive Answers
1. (i) Incorrect: There is an inverse relationship between detection risks and the combined
level of inherent and control risks. For example, when inherent and control risks are
high, acceptable detection risks need to be low to reduce audit risk to an acceptably
low level. On the other hand, when inherent and control risks are low, an auditor can
accept a higher detection risk and still reduce audit risk to an acceptably low level.
(ii) Incorrect: Reasonable assurance is a high level but not an absolute level of
assurance, because there are inherent limitations of an audit which result in most of
the audit evidence on which the auditor draws conclusions and bases the auditor’s
opinion being persuasive rather than conclusive.
(iii) Incorrect: As per AS-26, internally generated goodwill is not recognized as an asset
because it is not an identifiable resource controlled by the enterprise that can be
measured reliably at cost.
(iv) Correct: The decision whether to use a statistical or non-statistical sampling
approach is a matter for the auditor’s judgment; however, sample size is not a valid
criterion to distinguish between statistical and non-statistical approaches.
Whatever may be the approach non-statistical or statistical sampling, the sample
must be representative. This means that it must be closely similar to the whole
population although not necessarily exactly the same. The sample must be large
enough to provide statistically meaningful results.
(v) Incorrect: When the auditor includes an Emphasis of Matter paragraph in the
auditor’s report, the auditor shall Indicate that the auditor’s opinion is not modified in
respect of the matter emphasized. Such a paragraph shall refer only to information
presented or disclosed in the financial statements. The inclusion of an Emphasis of
Matter paragraph in the auditor’s report does not affect the auditor’s opinion.

(vi) Correct: A perceived opportunity to commit fraud may exist when an individual
believes internal control can be overridden, for example, because the individual is in
a position of trust or has knowledge of specific deficiencies in internal control.
(vii) Incorrect: The control environment in itself does not prevent, or detect and correct,
a material misstatement. It may, however, influence the auditor’s evaluation of the
effectiveness of other controls (for example, the monitoring of controls and the
operation of specific control activities) and thereby, the auditor’s assessment of the
risks of material misstatement.
(viii) Incorrect: A fictitious sale will increase the GP Ratio, instead of decreasing it. GP
ratio normally comes down if there are unrecorded sales or reversal of fictitious sale
entries recorded in the previous year or fictitious purchase or decrease in closing
stock.
2. (a) Acceptance of a Change in Engagement: An auditor who, before the completion of
the engagement, is requested to change the engagement to one which provides a
lower level of assurance, should consider the appropriateness of doing so.
A request from the client for the auditor to change the engagement may result from a
change in circumstances affecting the need for the service, a misunderstanding as to
the nature of an audit or related service originally requested or a restriction on the
scope of the engagement, whether imposed by management or caused by
circumstances. The auditor would consider carefully the reason given for the request,
particularly the implications of a restriction on the scope of the engagement,
especially any legal or contractual implications.
If the auditor concludes that there is reasonable justification to change the
engagement and if the audit work performed complied with the SAs applicable to the
changed engagement, the report issued would be appropriate for the revised terms
of engagement. In order to avoid confusion, the report would not include reference
to-
(i) the original engagement; or
(ii) any procedures that may have been performed in the original engagement,
except where the engagement is changed to an engagement to undertake
agreed-upon procedures and thus reference to the procedures performed is a
normal part of the report.
The auditor should not agree to a change of engagement where there is no
reasonable justification for doing so.
If the terms of the audit engagement are changed, the auditor and management shall
agree on and record the new terms of the engagement in an engagement letter or
other suitable form of written agreement.

If the auditor is unable to agree to a change of the terms of the audit engagement and
is not permitted by management to continue the original audit engagement, the
auditor shall-
(i) Withdraw from the audit engagement where possible under applicable law or
regulation; and
(ii) Determine whether there is any obligation, either contractual or otherwise, to
report the circumstances to other parties, such as those charged with
governance, owners or regulators.
(b) As per SA-200 “Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with Standards on Auditing”, in conducting an audit of financial
statements, the overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework; and
(b) To report on the financial statements, and communicate as required by the SAs,
in accordance with the auditor’s findings.
3. (a) The Nature of Audit Procedures: There are practical and legal limitations on the
auditor’s ability to obtain audit evidence. For example:
1. There is the possibility that management or others may not provide, intentionally
or unintentionally, the complete information that is relevant to the preparation
and presentation of the financial statements or that has been requested by the
auditor.
2. Fraud may involve sophisticated and carefully organised schemes designed to
conceal it. Therefore, audit procedures used to gather audit evidence may be
ineffective for detecting an intentional misstatement that involves, for example,
collusion to falsify documentation which may cause the auditor to believe that
audit evidence is valid when it is not. The auditor is neither trained as nor
expected to be an expert in the authentication of documents.
3. An audit is not an official investigation into alleged wrongdoing. Accordingly, the
auditor is not given specific legal powers, such as the power of search, which
may be necessary for such an investigation.
(b) In case of certain subject matters, limitations on the auditor’s ability to detect material
misstatements are particularly significant. Such assertions or subject matters include:
- Fraud, particularly fraud involving senior management or collusion.
- The existence and completeness of related party relationships and transactions.

- The occurrence of non-compliance with laws and regulations.

- Future events or conditions that may cause an entity to cease to continue as a
going concern.
4. (a) As per SA-300, “Planning an Audit of Financial Statements”, the auditor shall
establish an overall audit strategy that sets the scope, timing and direction of the
audit, and that guides the development of the audit plan. In establishing the overall
audit strategy, the auditor shall:
(i) Identify the characteristics of the engagement that define its scope;
(ii) Ascertain the reporting objectives of the engagement to plan the timing of the
audit and the nature of the communications required;
(iii) Consider the factors that, in the auditor’s professional judgment, are significant
in directing the engagement team’s efforts;
(iv) 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
(v) Ascertain the nature, timing and extent of resources necessary to perform the
engagement.
(b) The auditor shall develop an audit plan that shall include a description of
(a) The nature, timing and extent of planned risk assessment procedures, as
determined under SA 315 “Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment”.
(b) The nature, timing and extent of planned further audit procedures at the
assertion level, as determined under SA 330 “The Auditor’s Responses to
Assessed Risks”.
(c) Other planned audit procedures that are required to be carried out so that the
engagement complies with SAs.
The audit plan is more detailed than the overall audit strategy that includes the nature,
timing and extent of audit procedures to be performed by engagement team members.
Planning for these audit procedures takes place over the course of the audit as the
audit plan for the engagement develops.
5. In establishing the overall audit strategy, the auditor shall ascertain the reporting objectives
of the engagement to plan the timing of the audit and the nature of the communications
required.
For Example:
• The entity’s timetable for reporting, such as at interim and final stages.

• The organization of meetings with management and those charged with governance
to discuss the nature, timing and extent of the audit work.
• The discussion with management and those charged with governance regarding the
expected type and timing of reports to be issued and other communications, both
written and oral, including the auditor’s report, management letters and
communications to those charged with governance.
• The discussion with management regarding the expected communications on the
status of audit work throughout the engagement.
6. (a) Management from Whom Written Representations Requested: SA-580, “Written
Representations”, the auditor shall request written representations from management
with appropriate responsibilities for the financial statements and knowledge of the
matters concerned.
Written representations are requested from those responsible for the preparation and
presentation of the financial statements. Those individuals may vary depending on
the governance structure of the entity, and relevant law or regulation; however,
management (rather than those charged with governance) is often the responsible
party. Written representations may therefore be requested from the entity’s chief
executive officer and chief financial officer, or other equivalent persons in entities that
do not use such titles. In some circumstances, however, other parties, such as those
charged with governance, are also responsible for the preparation and presentation
of the financial statements.
If management does not provide one or more of the requested written
representations, the auditor shall-
(i) discuss the matter with management;
(ii) re-evaluate the integrity of management and evaluate the effect that this may
have on the reliability of representations (oral or written) and audit evidence in
general; and
(iii) take appropriate actions, including determining the possible effect on the opinio n
in the auditor’s report.
The auditor shall disclaim an opinion on the financial statements if management does
not provide the written representations.
(b) Audit Documentation refers to the record of audit procedures performed, relevant
audit evidence obtained, and conclusions the auditor reached.
The objective of the auditor is to prepare documentation that provides:
(i) A sufficient and appropriate record of the basis for the auditor’s report; and
(ii) Evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.

Nature of Audit Documentation

Audit documentation provides:
(a) evidence of the auditor’s basis for a conclusion about the achievement of the
overall objectives of the auditor; and
(b) evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.
7. (a) The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis after the
date of the auditor’s report.
 SQC 1 “Quality Control for Firms that perform Audits and Review of Historical
Financial Information, and other Assurance and related services”, requires firms
to establish policies and procedures for the timely completion of the assembly
of audit files.
 An appropriate time limit within which to complete the assembly of the final audit
file is ordinarily not more than 60 days after the date of the auditor’s report. The
completion of the assembly of the final audit file after the date of the auditor’s
report is an administrative process that does not involve the performance of new
audit procedures or the drawing of new conclusions.
 Changes may, however, be made to the audit documentation during the final
assembly process, if they are administrative in nature.
Examples of such changes include:
• Deleting or discarding superseded documentation.
• Sorting, collating and cross-referencing working papers.
• Signing off on completion checklists relating to the file assembly process.
• Documenting audit evidence that the auditor has obtained, discussed and
agreed with the relevant members of the engagement team before the date
of the auditor’s report.
 After the assembly of the final audit file has been completed, the auditor shall
not delete or discard audit documentation of any nature before the end of its
retention period.
 SQC 1 requires firms to establish policies and procedures for the retention of
engagement documentation. The retention period for audit engagements
ordinarily is no shorter than seven years from the date of the auditor’s report, or,
if later, the date of the group auditor’s report.

(b) When information to be used as audit evidence has been prepared using the
work of a management’s expert, the auditor shall, to the extent necessary,
having regard to the significance of that expert’s work for the auditor’s
purposes:
(a) Evaluate the competence, capabilities and objectivity of that expert;
(b) Obtain an understanding of the work of that expert; and
(c) Evaluate the appropriateness of that expert’s work as audit evidence for the
relevant assertion.
8. SA 500 – “Audit Evidence”, explains what constitutes audit evidence in an audit of financial
statements, and deals with the auditor’s responsibility to design and perform audit
procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the auditor’s opinion.
Audit evidence may be defined as the information used by the auditor in arriving at the
conclusions on which the auditor’s opinion is based. Audit evidence includes both
information contained in the accounting records underlying the financial statements and
other information.
Explaining this further, audit evidence includes:
(1) Information contained in the accounting records: Accounting records include
• the records of initial accounting entries and supporting records, such as checks
and records of electronic fund transfers;
• invoices;
• contracts;
• the general and subsidiary ledgers, journal entries and other adjustments to the
financial statements that are not reflected in journal entries; and
• records such as work sheets and spreadsheets supporting cost allocations,
computations, reconciliations and disclosures.
(2) Other information that authenticates the accounting records and also supports
the auditor’s rationale behind the true and fair presentation of the financial
statements: Other information which the auditor may use as audit evidence includes,
for example
• minutes of the meetings,
• written confirmations from trade receivables and trade payables,
• manuals containing details of internal control etc.
A combination of tests of accounting records and other information is generally used
by the auditor to support his opinion on the financial statements.

9. (a) Obtaining an understanding of the entity and its environment, including the entity’s
internal control, is a continuous, dynamic process of gathering, updating and
analysing information throughout the audit. This understanding establishes a frame
of reference within which the auditor plans the audit and exercises professional
judgment throughout the audit, for example, when:
 Assessing risks of material misstatement of the financial statements;
 Determining materiality in accordance with SA 320;
 Considering the appropriateness of the selection and application of accounting
policies;
 Identifying areas where special audit consideration may be necessary, for
example, related party transactions, the appropriateness of management’s use
of the going concern assumption, or considering the business purpose of
transactions;
 Developing expectations for use when performing analytical procedures;
 Evaluating the sufficiency and appropriateness of audit evidence obtained, such
as the appropriateness of assumptions and of management’s oral and written
representations.
(b) Analytical procedures performed as risk assessment procedures may identify aspects
of the entity of which the auditor was unaware and may assist in assessing the risks
of material misstatement in order to provide a basis for designing and implementing
responses to the assessed risks. Analytical procedures performed as risk assessment
procedures may include both financial and non-financial information, for example, the
relationship between sales and square footage of selling space or volume of goods
sold.
Analytical procedures may help identify the existence of unusual transactions or
events, and amounts, ratios, and trends that might indicate matters that have audit
implications. Unusual or unexpected relationships that are identified may assist the
auditor in identifying risks of material misstatement, especially risks of material
misstatement due to fraud.
However, when such analytical procedures use data aggregated at a high level (which
may be the situation with analytical procedures performed as risk assessment
procedures), the results of those analytical procedures only provide a broad initial
indication about whether a material misstatement may exist. Accordingly, in such
cases, consideration of other information that has been gathered when identifying the
risks of material misstatement together with the results of such analytical procedures
may assist the auditor in understanding and evaluating the results of the analytical
procedures.

10. The risks of material misstatement may exist at two levels:

(i) The overall financial statement level - Risks of material misstatement at the overall
financial statement level refer to risks of material misstatement that relate pervasively
to the financial statements as a whole and potentially affect many assertions.
(ii) The assertion level for classes of transactions, account balances, and
disclosures - Risks of material misstatement at the assertion level are assessed in
order to determine the nature, timing, and extent of further audit procedures
necessary to obtain sufficient appropriate audit evidence. This evidence enables the
auditor to express an opinion on the financial statements at an acceptably low level
of audit risk.
11. Techniques of fraud committed by Management: Fraudulent financial reporting
often involves management override of controls that otherwise may appear to be operating
effectively. Fraud can be committed by management overriding controls using such
techniques as:
(1) Recording fictitious journal entries, particularly close to the end of an accounting
period, to manipulate operating results or achieve other objectives
(2) Inappropriately adjusting assumptions and changing judgments used to estimate
account balances
(3) Omitting, advancing or delaying recognition in the financial statements of events and
transactions that have occurred during the reporting period
(4) Concealing, or not disclosing, facts that could affect the amounts recorded in the
financial statements
(5) Engaging in complex transactions that are structured to misrepresent the financial
position or financial performance of the entity
(6) Altering records and terms related to significant and unusual transactions.
12. Problematic or unusual relationships between the auditor and management,
including:
1. Denial of access to records, facilities, certain employees, customers, vendors, or
others from whom audit evidence might be sought.
2. Undue time pressures imposed by management to resolve complex or contentious
issues.
3. Complaints by management about the conduct of the audit or management
intimidation of engagement team members, particularly in connection with the
auditor’s critical assessment of audit evidence or in the resolution of potential
disagreements with management.
4. Unusual delays by the entity in providing requested information.

5. Unwillingness to facilitate auditor access to key electronic files for testing through the
use of computer-assisted audit techniques.
6. Denial of access to key IT operations staff and facilities, including security, operations,
and systems development personnel.
7. An unwillingness to add or revise disclosures in the financial statements to make them
more complete and understandable.
8. An unwillingness to address identified deficiencies in internal control on a timely
basis.
9. Unwillingness by management to permit the auditor to meet privately with those
charged with governance
10. Accounting Policy that appears to be variance with industry norms
11. Frequent changes in accounting estimates that do not appear to result from changed
circumstances
12. Tolerance of variations in the entity’s code of conduct
13. Relevance of Information Technology in an Audit: When a business operates in a more
automated environment it is likely that we will see several business functions and activities
happening within the systems. Following are such types of functions and activities:
(i) Computation and Calculations are automatically carried out (for example, bank
interest computation and inventory valuation).
(ii) Accounting entries are posted automatically (for example, sub-ledger to GL postings
is automatic).
(iii) Business policies and procedures, including internal controls, are applied
automatically (for example, delegation of authority for journal approvals, customer
credit limit checks are performed automatically).
(iv) Reports used in business are produced from systems. Management and other
stakeholders rely on these reports and information produced (for example, debtors
ageing report).
(v) User access and security are controlled by assigning system roles to users (for
example, segregation of duties can be enforced effectively).
14. Understanding of the Company’s Automated Environment: Given below are some of
the points that an auditor should consider to obtain an understanding of the company’s
automated environment
• Information systems being used (one or more application systems and what they are)
• their purpose (financial and non-financial)
• Location of IT systems - local vs global

• Architecture (desktop based, client-server, web application, cloud based)

• Version (functions and risks could vary in different versions of same application)
• Interfaces within systems (in case multiple systems exist)
• In-house vs Packaged
• Outsourced activities (IT maintenance and support)
• Key persons (CIO, CISO, Administrators)
15. As per SA 530, “Audit Sampling”, the auditor shall evaluate:
(a) The results of the sample; and
(b) Whether the use of audit sampling has provided a reasonable basis for conclusions
about the population that has been tested.
If the auditor concludes that audit sampling has not provided a reasonable basis for
conclusions about the population that has been tested, the auditor may:
(I) Request management to investigate misstatements that have been identified and the
potential for further misstatements and to make any necessary adjustments; or
(II) Tailor the nature, timing and extent of those further audit procedures to best achi eve
the required assurance. For example, in the case of tests of controls, the auditor might
extend the sample size, test an alternative control or modify related substantive
procedures.
16. The auditor is required to project misstatements for the population to obtain a broad view
of the scale of misstatement but this projection may not be sufficient to determine an
amount to be recorded.
 When a misstatement has been established as an anomaly, it may be excluded
when projecting misstatements to the population. However, the effect of any such
misstatement, if uncorrected, still needs to be considered in addition to the projection
of the non-anomalous misstatements.
 For tests of details, the auditor shall project misstatements found in the sample to the
population whereas for tests of controls, no explicit projection of deviations is
necessary since the sample deviation rate is also the projected deviation rate for the
population as a whole.
17. Purpose of Applying Analytical Procedure: Analytical procedures use comparisons and
relationships to assess whether account balances or other data appear reasonable.
The auditor of Flower Ltd. would achieve the following by carrying out the comparison
stated in the question:
(i) If balances included in the Statement of Profit and Loss of an entity are compared
with those contained in the Statement of Profit and Loss with that of the previous

period, it would be possible to find out the reasons for increase or decrease i n the
amount of profits of those years.
(ii) By setting up certain expenses’ ratios on the basis of balances included in the
Statement of Profit and Loss, for the year under audit, comparing them with the same
ratios for the previous year, it is possible to ascertain the extent of increase or
decrease in various items of expenditure in relation to sales and that of trading profit
in relation to sales.
(iii) If differences are found to be material, the auditor would ascertain the reasons thereof
and assess whether the accounts have been manipulated to inflate or suppress
profits.
(iv) It would be possible to identify the existence of unusual transactions, amounts, ratios
and trends that might indicate matters that have audit implications.
18. Substantive analytical procedures are generally more applicable to large volumes of
transactions that tend to be predictable over time.
 The application of planned analytical procedures is based on the expectation that
relationships among data exist and continue in the absence of known conditions to
the contrary.
 However, the suitability of a particular analytical procedure will depend upon the
auditor’s assessment of how effective it will be in detecting a misstatement that,
individually or when aggregated with other misstatements, may cause the financial
statements to be materially misstated.
 In some cases, even an unsophisticated predictive model may be effective as an
analytical procedure.
Different types of analytical procedures provide different levels of assurance. Analytical
procedures involving, for example, the prediction of total rental income on a building
divided into apartments, taking the rental rates, the number of apartments and vacancy
rates into consideration, can provide persuasive evidence and may eliminate the need for
further verification by means of tests of details, provided the elements are appropriately
verified. In contrast, calculation and comparison of gross margin percentages as a means
of confirming a revenue figure may provide less persuasive evidence, but may provide
useful corroboration if used in combination with other audit procedures.
The determination of the suitability of particular substantive analytical procedure is
influenced by the nature of the assertion and the auditor’s assessment of the ris k of
material misstatement. For example, if controls over sales order processing are weak, the
auditor may place more reliance on tests of details rather than on substantive analytical
procedures for assertions related to receivables.
Particular substantive analytical procedures may also be considered suitable when tests
of details are performed on the same assertion. For example, when obtaining audit

evidence regarding the valuation assertion for accounts receivable balances, the auditor
may apply analytical procedures to an aging of customers’ accounts in addition to
performing tests of details on subsequent cash receipts to determine the collectability of
the receivables.
19. Examination – in depth of the payment made to creditor: The Audit Assistant of M/s
MP & Co., should verify the following documents of LMP Private Limited in case of payment
to a creditor is to be verified “in depth”:
(i) The invoice and statement of account received from the supplier.
(ii) The entry in the inventory record showing that the goods were received.
(iii) The Goods Received Note and Inspection Certificate showing that the goods on
receipt were verified and inspected.
(iv) The copy of the original order and authority showing that the goods in fact were
ordered by an authority which was competent to do so.
20. (a) Verification of Hire-purchase transactions: While checking the hire-purchase
transaction, the auditor may examine the following:
1. Hire purchase agreement is in writing and is signed by all parties.
2. Hire purchase agreement specifies clearly -
(i) The hire-purchase price of the goods to which the agreement relates;
(ii) The cash price of the goods, that is to say, the price at which the goods
may be purchased by the hirer for cash;
(iii) The date on which the agreement shall be deemed to have commenced;
(iv) The number of instalments by which the hire-purchase price is to be paid,
the amount of each of those instalments, and the date, or the mode of
determining the date, upon which it its payable, and the person to whom
and the place where it is payable; and
(v) The goods to which the agreement relates, in a manner sufficient to identify
them.
3. Ensure that payments are being received regularly as per the agreement.
(b) Cut-off Arrangement:
1. Accounting is a continuous process because the business never comes to halt.
It is, therefore, necessary that transactions of one period would be separated
from those in the ensuing period so that the results of the working of each period
can be correctly ascertained. The arrangement that is made for this purpose is
technically known as “cut-off arrangement”.
2. It essentially forms part of the internal control system of the organisation.

3. Accounts, other than sales, purchase and inventory are not usually affected by
the continuity of the business and therefore, this arrangement is generally
applied only to sales, purchase and inventory.
4. The auditor satisfies by examination and test-checks that the cut-off procedures
are adequately followed and ensure that:
(i) Goods purchased, property in which has already been passed on to the
client, have in fact been included in the inventories and that the liability has
been provided for in case credit purchase.
(ii) Goods sold have been excluded from the inventories and credit has been
taken for the sales. If the value of sales is to be received, the concerned
party has been debited.
5. The auditor may examine a sample of documents, evidencing the movement of
inventory into and out of stores, including documents pertaining to period shortly
before and after the cut-off date and check whether inventories represented by
those documents were included or excluded as appropriate during inventory
taking for perfect and correct presentation in the financial statements.
21. (i) Appointment of First Auditor of a Government Company: Section 139(7) of the
Companies Act, 2013 provides that in the case of a Government company or any
other company owned or controlled, directly or indirectly, by the Central Government,
or by any State Government, or Governments, or partly by the Central Government
and partly by one or more State Governments, the first auditor shall be appointed by
the Comptroller and Auditor-General of India within 60 days from the date of
registration of the company.
In case the Comptroller and Auditor-General of India does not appoint such auditor
within the above said period, the Board of Directors of the company shall appoint
such auditor within the next 30 days. Further, in the case of failure of the Board to
appoint such auditor within next 30 days, it shall inform the members of the company
who shall appoint such auditor within 60 days at an extraordinary general meeting.
Auditors shall hold office till the conclusion of the first annual general meeting.
Appointment of First Auditor of a Non-Government Company: As per Section
139(6) of the Companies Act, 2013, the first auditor of a company, other than a
Government company, shall be appointed by the Board of Directors within 30 days
from the date of registration of the company.
In the case of failure of the Board to appoint the auditor, it shall inform the members
of the company.
The members of the company shall within 90 days at an extraordinary general
meeting appoint the auditor. Appointed auditor shall hold office till the c onclusion of
the first annual general meeting.

(ii) Appointment of Subsequent Auditor of a Government Company: As per Section

139(5) of the Companies Act, 2013, in the case of a Government company or any
other company owned or controlled, directly or indirectly, by the Central Government,
or by any State Government or Governments, or partly by the Central Government
and partly by one or more State Governments, the Comptroller and Auditor-General
of India shall, in respect of a financial year, appoint an auditor duly qualified to be
appointed as an auditor of companies under this Act, within a period of 180 days from
the commencement of the financial year, who shall hold office till the conclusion of
the annual general meeting.
Appointment of Subsequent Auditor of a Non-Government Company: As per
section 139(1) of the Companies Act, 2013, every company shall, at the first annual
general meeting appoint an individual or a firm as an auditor who shall hold office
from the conclusion of that meeting till the conclusion of its sixth annual general
meeting and thereafter till the conclusion of every sixth meeting.
22. Rule 11 of the Companies (Audit and Auditors) Rules, 2014 prescribes the other matters
to be included in auditor’s report. The auditor’s report shall also include their views and
comments on the following matters, namely:
(i) whether the company has disclosed the impact, if any, of pending litigations on its
financial position in its financial statement;
(ii) whether the company has made provision, as required under any law or accounting
standards, for material foreseeable losses, if any, on long term contracts including
derivative contracts;
(iii) whether there has been any delay in transferring amounts, required to be transferred,
to the Investor Education and Protection Fund by the company.
(iv) (1) Whether the management has represented that, to the best of it’s knowledge
been advanced or loaned or invested (either from borrowed funds or share
premium or any other sources or kind of funds) by the company to or in any other
person(s) or entity(ies), including foreign entities (“Intermediaries”), with the
understanding, whether recorded in writing or otherwise, that the Intermediary
shall, whether, directly or indirectly lend or invest in other persons or entities
identified in any manner whatsoever by or on behalf of the company (“Ultimate
Beneficiaries”) or provide any guarantee, security or the like on behalf of the
Ultimate Beneficiaries;
(2) Whether the management has represented, that, to the best of it’s knowledge
been received by the company from any person(s) or entity(ies), including
foreign entities (“Funding Parties”), with the understanding, whether recorded in
writing or otherwise, that the company shall, whether, directly or indirectly, lend

or invest in other persons or entities identified in any manner whatsoever by or

on behalf of the Funding Party (“Ultimate Beneficiaries”) or provide any
guarantee, security or the like on behalf of the Ultimate Beneficiaries; and
(3) Based on such audit procedures that the auditor has considered reasonable and
appropriate in the circumstances, nothing has come to their notice that has
caused them to believe that the representations under sub-clause (1) and (2)
contain any material misstatement.
(v) Whether the dividend declared or paid during the year by the company is in
compliance with section 123 of the Companies Act, 2013.
(vi) Whether the company has used such accounting software for maintaining its books
of account which has a feature of recording audit trail (edit log) facility and the same
has been operated throughout the year for all transactions recorded in the software
and the audit trail feature has not been tampered with and the audit trail has been
preserved by the company as per the statutory requirements for record retention
23. As per clause (xii) of CARO, 2020, the following matters are required to be included
in the auditor’s report relating to Nidhi Company
(a) whether the Nidhi Company has complied with the Net Owned Funds to Deposits in
the ratio of 1:20 to meet out the liability;
(b) whether the Nidhi Company is maintaining ten per cent. unencumbered term deposits
as specified in the Nidhi Rules, 2014 to meet out the liability;
(c) whether there has been any default in payment of interest on deposits or repayment
thereof for any period and if so, the details thereof;
As per clause (xiii) of CARO, 2020, the following matter is required to be included in
the auditor’s report relating to transactions with the related parties:
whether all transactions with the related parties are in compliance with sections 177 and
188 of Companies Act where applicable and the details have been disclosed in the financial
statements, etc., as required by the applicable accounting standards;
24. As per SA 701, “Communicating Key Audit Matters in the Auditor’s Report”, communicating
key audit matters in the auditor’s report is in the context of the auditor having formed an
opinion on the financial statements as a whole. Communicating key audit matters in the
auditor’s report is not:
(i) A substitute for disclosures in the financial statements that the applicable financial
reporting framework requires management to make, or that are otherwise necessary
to achieve fair presentation;
(ii) A substitute for the auditor expressing a modified opinion when required by the
circumstances of a specific audit engagement in accordance with SA 705,
“Modifications to the Opinion in the Independent Auditor’s Report”;

(iii) A substitute for reporting in accordance with SA 570 when a material uncertainty
exists relating to events or conditions that may cast significant doubt on an entity’s
ability to continue as a going concern; or
(iv) A separate opinion on individual matters.
25. An auditor should state in “Basis for Opinion” section of Auditor’s Report as under:
Basis for Opinion:
The auditor’s report shall include a section, directly following the Opinion section, with the
heading “Basis for Opinion”, that:
(i) States that the audit was conducted in accordance with Standards on Auditing;
(ii) Refers to the section of the auditor’s report that describes the auditor’s responsibilities
under the SAs;
(iii) Includes a statement that the auditor is independent of the entity in accordance with
the relevant ethical requirements relating to the audit and has fulfilled the auditor’s
other ethical responsibilities in accordance with these requirements.
(iv) States whether the auditor believes that the audit evidence the auditor has obtained
is sufficient and appropriate to provide a basis for the auditor’s opinion.
Amendments an Auditor should make:
When the auditor modifies the opinion on the financial statements, the auditor shall,
in addition to the specific elements required by SA 700 (Revised):
(i) Amend the heading “Basis for Opinion” required by para of SA 700 (Revised) to “Basis
for Qualified Opinion,” “Basis for Adverse Opinion,” or “Basis for Disclaimer of
Opinion,” as appropriate; and
(ii) Within this section, include a description of the matter giving rise to the modification.
26. Verification of Advances: Advances generally constitute the major part of the assets of
the bank. There are large number of borrowers to whom variety of advances are granted.
The audit of advances requires the major attention from the auditors.
In carrying out audit of advances, the auditor is primarily concerned with obtaining evidence
about the following:
(i) Amounts included in balance sheet in respect of advances which are outstanding at
the date of the balance sheet.
(ii) Advances represent amount due to the bank.
(iii) Amounts due to the bank are appropriately supported by Loan documents and other
documents as applicable to the nature of advances.
(iv) The stated basis of valuation of advances is appropriate and properly applied, and
that the recoverability of advances is recognised in their valuation.

(v) The advances are disclosed, classified and described in accordance with recognised
accounting policies and practices and relevant statutory and regulatory requirements.
(vi) Appropriate provisions towards advances have been made as per the RBI norms,
Accounting Standards and generally accepted accounting practices.
(vii) There are no unrecorded advances.
27. The calculation of DP is as under:
Value of stocks as on 30.6.23 ` 5.00 crore
Less: value of damaged stocks ` 1.00 crore
Value of stocks considered as on 30.6.23 ` 4.00 crore
Less: Trade creditors ` 2.00 crore
Paid stocks ` 2.00 crore
Less: Margin @ 25% ` 0.50 crore
Drawing power for stocks [A] ` 1.50 crore
Value of Trade debtors ` 3.00 crore
Less: Debtors outstanding for more than 90 days ` 0.50 crore
` 2.50 crore
Less: Margin @ 40% ` 1.00 crore
Drawing power for Book debts [B] ` 1.50 crore
Total drawing power [A+ B] ` 3.00 crore
Accountant’s DP calculation is not correct. The drawing power of ` 3.00 crore signifies that
company can utilize funds to the tune of `3.00 crore only against sanctioned cash credit
limit of ` 4.00 crore.
28. (a) Exceptions to the rule – Audit Against Propriety: Public moneys should not be
utilised for the benefit of a particular person or section of the community unless:
(i) the amount of expenditure involved is insignificant; or
(ii) a claim for the amount could be enforced in a Court of law; or
(iii) the expenditure is in pursuance of a recognised policy or custom; and
(iv) the amount of allowances, such as travelling allowances, granted to meet
expenditure of a particular type should be so regulated that the allowances are
not, on the whole, sources of profit to the recipients.
(b) Advantages of Audit of Accounts of a Partnership: On broad considerations, the
advantages of audit of accounts of a partnership could be stated as follows:
(1) Audited accounts provide a convenient and reliable means of settling accounts
between the partners and, thereby, the possibility of occurrence of a dispute

among them is mitigated. On this consideration, it is usually provided in and

accepted by the partners, shall be binding upon them, unless some manifest
error is brought to light within a specified period subsequent to the accounts
having been signed.
(2) On the retirement or death of a partner, audited accounts, which have been
accepted by the partners, constitute a reliable evidence for computing the
amounts due to the retiring partner or to the representative of the deceased
partner in respect of his share of capital, profits and goodwill.
(3) The accounts of a partnership, which have been audited, are generally accepted
by the Income Tax Department as the basis for computing the assessable
income of the partners.
(4) Audited statement of accounts are relied upon by the banks when advancing
loans, as well as by prospective purchasers of the business, as evidence of the
profitability of the concern and its financial position.
(5) Audited statements of account can be helpful in the negotiations to admit a
person as a partner, especially when they are available for a number of past
years.
(6) An audit is an effective safeguard against any undue advantage being taken by
a working partner or partners especially in the case of those partners who are
not actively associated with the working of the firm.

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PAPER – 6: AUDITING AND ASSURANCE

PART – I : ACADEMIC UPDATE

© The Institute of Chartered Accountants of India

Chapter 10 – Company Audit

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

PART – II: QUESTIONS AND ANSWERS

PART – II A: Multiple Choice Questions based on Case Scenarios

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Based on above, answer the following questions: -

© The Institute of Chartered Accountants of India

(b) The view of Kartik is incorrect.

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(c) Adequate segregation of duties.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Chapter 5 - Fraud and Responsibilities of the Auditor in this Regard.

© The Institute of Chartered Accountants of India

Chapter 9 - Audit of Items of Financial Statements

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© The Institute of Chartered Accountants of India

2.4 (b) Non-sampling risk

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

- The occurrence of non-compliance with laws and regulations.

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© The Institute of Chartered Accountants of India

Nature of Audit Documentation

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

10. The risks of material misstatement may exist at two levels:

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© The Institute of Chartered Accountants of India

• Architecture (desktop based, client-server, web application, cloud based)

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(ii) Appointment of Subsequent Auditor of a Government Company: As per Section

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or invest in other persons or entities identified in any manner whatsoever by or

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

among them is mitigated. On this consideration, it is usually provided in and

© The Institute of Chartered Accountants of India

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