CHAPTER 8 CA INTER

AUDITING ETHICS
AUDIT REPORT

1 SA 700

SA 701 2

3 SA 705

SA 706 4

5 SA 710

SA 299 6

7 SA 600

Branch
8
Auditor

Reporting
9
under law

CARO
10
2020

1
 CA INTER
AUDITING ETHICS

FORMING AN OPINION &

SA 700
REPORTING ON FS

QUESTION 1

OBJECTIVES :

• Form an opinion on FS • Express clearly the

based on an evaluation opinion through a
of the conclusions written report that also
drawn from the audit describes the basics for
evidence obtained and the opinion

QUESTION 2

QUALITATIVE ASPECTS :
1. The auditor shall evaluate whether the FS are prepared, in all material respects, in
accordance with the requirements of the AFRF.

2. This evaluation shall include consideration of the qualitative aspects of the entity’s
accounting practices, including indicators of possible bias in management’s judgments.

3. In considering the qualitative aspects of the entity’s accounting practices, the auditor may
become aware of possible bias in management’s judgments.

4. The auditor may conclude that the cumulative effect of a lack of neutrality, together with the
effect of uncorrected misstatements, causes the FS as a whole to be materially misstated.
• The selective correction of misstatements brought to management’s attention during
the audit (e.g., correcting misstatements with the effect of increasing reported
earnings, but not correcting misstatements that have the effect of decreasing
reported earnings).
• Possible management bias in the making of accounting estimates.

2
 CA INTER
AUDITING ETHICS

QUESTION 3

SPECIFIC EVALUATION BY THE AUDITOR:

1. The FS adequately disclose the significant accounting policies selected and applied;

2. The accounting policies selected and applied are consistent with the AFRF and are
appropriate;

3. The accounting estimates made by management are reasonable;

4. The information presented in the FS is relevant, reliable, comparable, and understandable;

5. The FS provide adequate disclosures to enable the intended users to understand the effect
of material transactions and events on the information conveyed in the FS; and

6. The terminology used in the FS, including the title of each FS, is appropriate.

QUESTION 4

GENERAL AND FAIR PRESENTATION FRAMEWORK

3
 CA INTER
AUDITING ETHICS

QUESTION 5
BASIC ELEMENTS OF AUDIT REPORT:
• Title

• An addressee, as required by the circumstances of the engagement.

• Auditor’s Opinion:
The Opinion section of the auditor’s report shall also:
 Identify the entity whose financial statements have been audited;
 State that the financial statements have been audited;
 Identify the title of each statement comprising the financial statements;
 Refer to the notes, including the summary of significant accounting policies; and
 Specify the date of, or period covered by, each financial statement comprising the
financial statements

• Basis for Opinion:

 The auditor’s report shall include a section, directly following the Opinion section,
with the heading “Basis for Opinion”, that:

• States that the audit was conducted in accordance with Standards on Auditing;

• Refers to the section of the auditor’s report that describes the auditor’s responsibilities
under the SAs;

• 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.

• 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.

• Going Concern:
 Where applicable, the auditor shall report in accordance with SA 570 (Revised)

4
 CA INTER
AUDITING ETHICS

• Key Audit Matters:

 For audits of complete sets of general purpose financial statements of listed entities,
the auditor shall communicate KAM in the auditor’s report in accordance with
SA 701

• Other Information: Where applicable, the auditor shall report in accordance with
SA 720 (Revised).

• Management Responsibilities :
 The auditor’s report shall include a section with a heading “Responsibilities of
Management for the Financial Statements.”

(a) Preparing the financial statements in accordance with the AFRF, and for
such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to fraud or error

(b) Assessing the entity’s ability to continue as a going concern and whether
the use of the going concern basis of accounting is appropriate as well as
disclosing, if applicable, matters relating to going concern.

Oversight of the financial reporting process:

This section of the auditor’s report shall also identify those responsible for
the oversight of the financial reporting process, when those responsible for
such oversight are different from Management. In this case, the heading of
this section shall also refer to “Those Charged with Governance”

• AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS:

(I) This section of the auditor’s report shall:
(a) State that the objectives of the auditor are to:
(i) Obtain reasonable assurance about whether the financial statements as
a whole are free from material misstatement, whether due to fraud or
error; and
(ii) Issue an auditor’s report that includes the auditor’s opinion.

5
 CA INTER
AUDITING ETHICS

(b) State that reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with SAs will always detect a material
misstatement when it exists; and

(c) State that misstatements can arise from fraud or error, and either:
(i) Describe that they are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users
taken on the basis of these financial statements; or
(ii) Provide a definition or description of materiality in accordance with the AFRF.

(ii) Auditor’s responsibility section to further

State that auditor exercises Describe an audit by Describe auditor’s

professional judgement and stating that auditors responsibility in
maintains professional responsibilities are group audit
skepticism

To identify and To obtain an To evaluate the To conclude the To evaluate

assess the risks understanding appropriateness appropriateness the overall
of the internal of accounting of manage- presentation,
of material ment’s use of structure
misstatement control system policies going concern and content
of financial
statements

(iii) THE AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL

STATEMENTS SECTION OF THE AUDITOR’S REPORT ALSO SHALL
(a) State that the auditor communicates with TCWG regarding, among other matters,
the planned scope and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that the auditor identifies during the audit

(b) For audits of FS of listed entities, state that the auditor provides TCWG with a
statement that the auditor has complied with relevant ethical requirements regarding
independence and communicate with them all relationships and other matters
that may reasonably be thought to bear on the auditor’s independence, and where
applicable, related safeguards; and

6
 CA INTER
AUDITING ETHICS

(c) For audits of financial statements of listed entities and any other entities for
which key audit matters are communicated in accordance with SA 701, state
that, from the matters communicated with those charged with governance, the
auditor determines those matters that were of most significance in the audit of
the financial statements of the current period and are therefore the key audit
matters. The auditor describes these matters in the auditor’s report unless law or
regulation precludes public disclosure.

• NOTE: Location of the description of the auditor’s responsibilities for the audit of the financial
statements
 Within the body of the auditor’s report
 Within an appendix to the auditor’s report, in which case the auditor’s report shall
include a reference to the location of the appendix or
 By a specific reference within the auditor’s report to the location of such a description
on a website of an appropriate authority, where law, regulation or national auditing
standards expressly permit the auditor to do so.

• Other Reporting Responsibilities:

 If the auditor addresses other reporting responsibilities in the auditor’s report on the
financial statements that are in addition to the auditor’s responsibilities under the
SAs, these other reporting responsibilities shall be addressed in a separate section
in the auditor’s report with a heading titled “Report on Other Legal and Regulatory
Requirements” or otherwise as appropriate to the content of the section,

 unless these other reporting responsibilities address the same topics as those presented
under the reporting responsibilities required by the SAs in which case the other reporting
responsibilities may be presented in the same section as the related report elements
required by the SAs.

• Signature of the auditor:

 The report is signed by the auditor (i.e. the engagement partner) in his personal name.
 Where the firm is appointed as the auditor, the report is signed in the personal name of
the auditor and in the name of the audit firm.
 The partner/proprietor signing the audit report also needs to mention the membership
number assigned by the Institute of Chartered Accountants of India

7
 CA INTER
AUDITING ETHICS

• Place of auditors report:

 The auditor’s report shall name specific location, which is ordinarily the city where the
audit report is signed.

• Date of auditors report:

 The auditor’s report shall be dated no earlier than the date on which the auditor has
obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on
the financial statements

• UDIN
 an auditor is required to mention the UDIN with respect to each audit report being
signed by him, along with his membership number while signing an audit report
UNQUALIFIED QUALIFIED ADVERSE DICLAIMER
PARTICLUAR OPINION OPINION OPINION OPINION
Opinion Para 1st We have audited We have audited We have audited We were engaged
line to audit
2nd Line Which comprises the balance sheet at March 31st20XX,and the P&L A/c,
(and statement of Cash flows) for the year ended, and notes to the FS,
including a summary of significant accounting policies.
3rd Line In our opinion and to the best of our information and according to the
explanations given to us,
4th Line Gives true and Except for the Because of the Because of the
fair view of the effects/possible significance of the significance of the
financial position effects of the matters described matters described
matter described in the basis of in the basis of
in the basis for adverse opinion disclaimer of opinion
Qualified opinion para the FS are para the auditor
para the FS are not true & fair doesnot express an
true & fair opinion on FS
Basis of opinion We believe we that We believe we that We believe we that Because of the
para Last line the audit evidence the audit evidence the audit evidence matters described
we have obtained we have obtained we have obtained in the basis of
is sufficient and is sufficient and is sufficient and disclaimer of
appropriate to appropriate to appropriate to opinion para, we
provide a basis for provide a basis provide a basis for were not able to
our opinion for our qualified adverse opinion obtain SAAE to
opinion provide a basis for
our opinion

8
 CA INTER
AUDITING ETHICS

Question 1
M/s Smart & Associates are the statutory auditors of Hotmeals Ltd. for the FY 2021-22. How
will the auditor address the audit report issued on the financial statements for the FY 2021-22?
Also give a title to the report

Answer:
• INDEPENDENT AUDITOR’S REPORT
 To the Members of Hotmeals Ltd.

Question 2
Richa International is a partnership firm dealing in export of blankets. The partners of the firm
are Richa and Ashish. Explain how the statutory auditor of the firm will address the auditor’s
report

Answer:
• INDEPENDENT AUDITOR’S REPORT
• To the Partners of Richa International

Question 3
M/s Amitabh & Associates are the statutory auditors of Ringston Ltd. which is a company
engaged in the business of manufacture of pen drives. The auditor has started drafting the
audit report for the FY 2021-22. CA Amitabh, the engagement partner is of the view that the
financial statements of Ringston Ltd. represent a true and fair view. Give the draft of the opinion
paragraph of the audit report.

Answer:
• We have audited the FS of Ringston Limited which comprise the Balance Sheet
as at 31.03.2022 and the statement of P&L and the notes to the FS, including a
summary of significant accounting policies and other explanatory information.

• In our opinion and to the best of our information and according to the explanations
given to us, the aforesaid FS give the information required by the Act in the manner
so required and give a true and fair view in conformity with the accounting principles
generally accepted in India, of the state of affairs of the company as at 31.03.2022
and the P&L for the year ending on that date.

9
 CA INTER
AUDITING ETHICS

Question 4
M/s Kite Rite & Associates are the statutory auditors of Prime Deluxe Limited, for the FY 2021-
22. At the time of finalising the audit report, one of the engagement team members, Mr. Robin,
asked the engagement partner, CA Kite as to what all should be included in the Basis of Opinion
Paragraph. The engagement partner CA Kite, explained the team in detail and asked Mr. Robin to
draft such section for the auditor’s report of Prime Deluxe Limited. Help Mr. Robin to draft the
Basis for opinion section.

Answer:
We conducted our audit in accordance with the Standards on Auditing (SAs) specified
under section 143(10) of the Companies Act, 2013. Our responsibilities under those
Standards are further described in the Auditor’s Responsibilities for the Audit of the FS
section of our report. We are independent of the Company in accordance with the Code of
Ethics issued by the ICAI together with the ethical requirements that are relevant to our
audit of the financial statements under the provisions of the Companies Act, 2013 and
the Rules thereunder, and we have fulfilled our other ethical responsibilities in accordance
with these requirements and the Code of Ethics. We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a basis for our opinion.

Question 5
Diamond Shine Ltd. is a company engaged in the manufacture of detergent. M/s Bright &
Associates are the statutory auditors of the company. Explain how the paragraph related to the
management’s responsibility will come in the auditor’s report.

Answer:
Management responsibility

Question 6
M/s Ajay Vijay & Associates are the statutory auditors of Sarovar Ltd. for the FY 2021-22. The
company is engaged in the business of manufacture of water bottles. At the time of finalising the
auditor’s report, one of the audit team members asked CA Ajay, the engagement partner to advise
as to how the auditor’s responsibilities can be shown in an appendix to the auditor’s report. Draft
the auditor’s responsibility paragraph so as to advise the audit team member.

Answer:
• Auditors responsibility
• Para 1

10
 CA INTER
AUDITING ETHICS

Question 7

M/s TUV & Associates are the statutory auditors of Venus Ltd. for the FY 2021-22.At the time of
finalising the auditor’s report, one of the audit team members asked the engagement partner, CA
Tarun, to explain as to how the auditor’s report will be signed. Help CA Tarun in explaining the same

Answer:
The following is the correct way of signing an audit report.

M/s TUV & Associates

Chartered Accountants
(Firm’s Registration No.)
Signature
(Name of the Member Signing the Audit Report)
(Designation)
(Membership No. XXXXX)
Place of Signature: UDIN: 20037320AAAAAH1111
Date:

Question 8
Maithili Thakur, a CA student, was perusing audit report of a company. Her eyes fell on an
18-digit alpha numeric number stated at end of audit report below the signatures of auditor
and membership number. Make her understand objective and significance of such a randomly
generated number. Is it required to be stated in case of audit reports only?

Answer:
The 18-digit alpha numeric number noticed by her at end of audit report is (UDIN). It is a system
generated unique number. Its basic objective is to curb the malpractices of non-CAs impersonating
themselves as CAs. It helps in securing reports and documents issued by practicing CAs.

11
 CA INTER
AUDITING ETHICS

Question 9
CA. Maya Memani has conducted audit of a company. She has asked Sana, a CA student
undergoing training in her office, to prepare draft audit report. Sana was part of engagement
team conducting the audit. She has been further told to prepare draft report expressing unmodified
opinion. After drafting para comprising unmodified opinion, Sana feels no need to provide basis for
opinion. Discuss why her thinking is not proper.

Answer:
Basis for Opinion” is one of basic elements of an audit report in accordance with SA-700. Even
in cases where unmodified opinion is expressed by auditor, “Basis for opinion” has to be provided
by auditor. Basis for opinion section provides context about auditor’s opinion.Therefore, Sana’s
thinking is not proper.

Question 10
"The auditor shall evaluate whether the financial statements are prepared, in all material
respects, in accordance with the requirements of the applicable financial reporting framework.
This evaluation shall include consideration of the qualitative aspects of the entity's accounting
practices, including indicators of possible bias in management's judgements." Discuss stating
clearly qualitative aspects of the entity's accounting practices.

Answer:
Qualitative aspects

Question 11
The auditor shall evaluate whether the financial statements are prepared in accordance with
the requirements of the applicable FRF. Explain stating clearly specific evaluations made by the
auditor.

Answer:
Specific evaluations

12
 CA INTER
AUDITING ETHICS

Question 12
The requirements of SA 700 are aimed at addressing an appropriate balance between the need for
consistency and comparability in auditor reporting globally. Explain.

Answer:
• Requirements of SA 700 are aimed at addressing an appropriate balance between the need
for consistency and comparability in auditor reporting globally and the need to increase the
value of auditor reporting by making the information provided in the auditor's report more
relevant to users.

• This SA promotes consistency in the auditor's report but recognizes the need for flexibility to
accommodate particular circumstances of individual jurisdictions.

• Consistency in the auditor's report, when the audit has been conducted in accordance with
SAs, promotes credibility in the global market place by making more readily identifiable those
audits that have been conducted in accordance with globally recognized standards.

• It also helps to promote the user's understanding and to identify unusual circumstances
when they occur.

Question 13
In considering the qualitative aspects of the entity's accounting practices, the auditor may
become aware of possible bias in management's judgements. The auditor may conclude that lack
of neutrality together with uncorrected misstatements causes the financial statements to be
materially misstated. Explain and analyse the indicators of lack of neutrality with examples,
wherever required.

Answer:
possible bias in management’s judgments

13
 CA INTER
AUDITING ETHICS

COMMUNICATING KEY
SA 701 AUDIT MATTERS

QUESTION 1

MEANING :
• Those matters that, in the auditor’s professional judgment, were of most significance
in the audit of the financial statements of the current period.
• Key audit matters are selected from matters communicated with those charged
with governance

QUESTION 2

APPLICABILITY :
• Listed entities
• Circumstances where auditor otherwise decides to communicate key Audit matters
in the auditors report
• Required by law or regulation
However, Auditor cannot communicate key audit matters when the auditor disclaims/
adverse an opinion on the financial statements, unless such reporting is required by law
or regulation.

QUESTION 3

COMMUNICATING KEY AUDIT MATTERS IN THE AUDITOR’S REPORT IS NOT:

• A substitute for disclosures in the financial statements that the AFRF
requires management to make, or that are otherwise necessary to achieve fair
presentation
• A substitute for the auditor expressing a modified opinion when required by
the circumstances of a specific audit engagement in accordance with SA 705
(Revised)
14
 CA INTER
AUDITING ETHICS

• A substitute for reporting in accordance with SA 570 (Revised) 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
• A separate opinion on individual matters

QUESTION 4

PURPOSE OF COMMUNICATING KEY MATTER PARA:

• To enhance the communicative value of the Auditors report by providing greater
transparency about the audit that was performed.
• To assist intended users in understanding the entity and areas of significant
management judgement in the audited FS
• to assist intended users in understanding those matters that, in the auditor’s
professional judgement, were of most significance in the audit of the FS of the
current period

QUESTION 5

DETERMINING KEY AUDIT MATTERS:

• Areas of higher assessed risk of material misstatement, or significant risks
identified in accordance with SA 315 (For examples Refer SA 315)
• Significant auditor judgments relating to areas in the financial statements that
involved significant management judgment, including accounting estimates that
have been identified
• The effect on the audit of significant events or transactions that occurred
during the period.

QUESTION 6

DETERMINING KEY AUDIT MATTERS:

• The auditor shall describe each key audit matter, using an appropriate
subheading, in a separate section of the auditor’s report under the heading “Key
Audit Matters”.
• The introductory language in this section of the auditor’s report shall state that:
(a) KAM are those matters that, in the auditor’s professional judgment, were
of most significance in the audit of the FS [of the current period]; and

15
 CA INTER
AUDITING ETHICS

(b) These matters were addressed in the context of the audit of the FS as a
whole, and in forming the auditor’s opinion thereon, and the auditor does
not provide a separate opinion on these matters.

QUESTIONS ASKED IN PAST/RTP/MOCK TEST

Question 1
Write a short note on: Purpose of communicating key audit matters

Answer:
Purpose

Question 2
CA. Amar has come across certain key matters while auditing the accounts of PR Ltd. for the
financial year 2017-18. He, being the associate of your firm, seeks your advice on "Communicating
Key Audit Matters" in the Auditor's Report. Guide him.

Answer:
Communicating KAM

Question 3
Communicating KAM is not substitute for disc in FS rather communicating KAM ins te

Answer:
Communicating KAM is not a substitute for

Question 4
How would an auditor determine KAM?

Answer:
Determining KAM

16
 CA INTER
AUDITING ETHICS

MODIFICATIONS TO THE OPINION IN

SA 705 THE INDEPENDENT AUDITORS REPORT

QUESTION 1
TYPE OF REPORT

Unmodified Modified

Modified without Modified by

modifying opinion modifying opinion

Emphasis on Others matter

matters Para (EOM) Para (OM)

Modified by modifying opinion

Auditor has SAAE Auditor is unable to obtain SAAE

that misstatement exist in FS that FS are free from misstatement

Matter is material Matter is material matter is material

and pervasive and pervasive and pervasive

ADVERSE QUALIFIED DISCLAIMER

OPINION OPINION OPINION

17
 CA INTER
AUDITING ETHICS

Note 1- Pervasive :
Pervasive effects on the FS are those that, in the auditor’s judgment:
(i) Are not confined to specific elements, accounts or items of the FS;
(ii) If so confined, represent or could represent a substantial proportion of the FS; or
(iii) In relation to disclosures, are fundamental to users’ understanding of the FS.

Note 2- Communication with Those Charged with Governance:

When the auditor expects to modify the opinion in the auditor’s report, the auditor shall
communicate with TCWG the circumstances that led to the expected modification and the
wording of the modification.

Note 3 - Description of Auditor’s Responsibilities for the Audit of the Financial Statements
When the Auditor Disclaims an Opinion on the Financial Statement:
When the auditor disclaims an opinion on the financial statements due to an inability to
obtain sufficient appropriate audit evidence, the auditor shall amend the description of the
auditor’s responsibilities required by SA 700 (Revised) to include only the following:
(a) A statement that the auditor’s responsibility is to conduct and audit of the entity’s
financial statements in accordance with Standards on Auditing and to issue an auditor’s
reports;
(b) A statement that, however, because of the matter(s) described in the Basis for
Disclaimer of Opinion section the auditor was not able to obtain sufficient appropriate
audit evidence to provide a basis for an audit opinion on the financial statements; and
(c) The statement about auditor independence and other ethical responsibilities required by
SA 700 (Revised)

Note 4 - Consideration when the Auditor Disclaims an Opinion on the Financial Statements:
Unless required by law or regulation, when the auditor disclaims an opinion on the financial
statements, the auditor’s report shall not include a Key Audit Matters section in accordance
with SA 701.

18
 CA INTER
AUDITING ETHICS

QUESTION 2

Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to a

Management-Imposed Limitation after the Auditor Has accepted the Engagement

Inability to Obtain Sufficient Appropriate Audit Evidence Due to a

Management-Imposed Limitation after the Auditor Has Accepted the

Request the management to remove the limitation

Management removes Management refuses to

the limitation remove the limitation

Proceed with audit 1. Communicate with TCWG and perform

procedures 2. alternative procedures

Still unable to obtain sufficient

and appropriate audit evidence

Possible Effects Material Possible effects

but not pervasive material and pervasive

Qualified Opinion Where permitted by law withdraw from

audit engagement
Or disclaimer of opinion if withdrawal
is not permitted

19
 CA INTER
AUDITING ETHICS

QUESTIONS ASKED IN PAST/RTP/MOCK TEST

Question 1
Super Duper Ltd. is a company engaged in the manufacture of office furniture. M/s Young Old &
Associates are the statutory auditors of the company for the FY 2020-21. During the year under
audit, the engagement partner CA Young noticed that the company has not bifurcated its loans
into long term and short term. CA Young understands that such misstatement is not pervasive
though the same is material. Explain the type of opinion that should be given by M/s Young Old &
Associates in this case.

Answer:
QUALIFIED OPINION

Question 2
M/s Taj Raj & Associates are the statutory auditors of Polex Ltd. engaged in the manufacture of
premium watches, for the FY 2020-21. During the course of audit, CA Taj, the engagement partner
found that the stocks and debtors of the company constituting about 80% of the total assets of
the company are not realisable. Further, the cashier of the company has committed a fraud during
the year under audit. Both the facts are not reflected in the financial statements for the year
ending 31.03.2021. Accordingly, CA Taj is of the view that the impact of both the situations on
the financial statements is material and pervasive and thus, the financial statements represent a
distorted view of the state of affairs of the company. Explain the reporting requirements of CA Taj.

Answer:
ADVERSE OPINION

Question 3
Delightful Ltd. is a company engaged in the production of smiley balls. During the FY 2020-21 the
company transferred its accounts to computerised system (SAP) from manual system of accounts.
Since the employees of the company were not well versed with the SAP system, there were many
errors in the accounting during the transition period. As such the statutory auditors of the
company were not able to extract correct data and reports from the system. Such data was not
available manually also. Further, the employees and the management of the company were not
supportive in providing the requisite information to the audit team. Explain the kind of audit report
that the statutory auditor of the company should issue in this case.

Answer:
DISCLAIMER OF OPINION

20
 CA INTER
AUDITING ETHICS

Question 4
CA. Sarasbhai Patel, while conducting audit of an entity, feels that there is an atmosphere of non-
cooperation all around. He has not been provided with necessary support for attending inventory
count process of entity as at year end. Besides, CFO is not providing him present addresses of
customers as well as suppliers for sending external confirmations. Even mail ids have not been
provided on the pretext of business confidentiality.
He was not able to verify revenues of entity due to lack of complete details. For verifying expenses,
he has been asking for bills on a sample basis, but staff has been making lame excuses. The matter
was brought to knowledge of higher echelons of management, but of no avail. The auditor feels
that there could be misstatements and their possible effects would be material and affecting many
aspects of financial statements.
Assuming it is not possible to withdraw from engagement, what type of opinion should be expressed
by auditor?

Answer:
DISCLAIMER OF OPINION

Question 5
XYZ Ltd. is a company engaged in the manufacture of cranes. CA Sudhir is the statutory auditor
of the company for the FY 2022-23. The company has taken long term funding for fixed capital
requirements and short-term funding for its working capital requirements. During the course of
audit, CA Sudhir found that the company's financing arrangements are about to expire and the
company is unable to renegotiate or obtain the replacement financing, As such the company may
be unable to realize its assets and discharge its liabilities in the normal course of business Notes
to accounts annexed to the FS discuss the magnitude of financing arrangements, the expiration
and the total financing arrangements; however, the FS do not include discussion on the impact
or the availability of refinancing. Thus, the FS (and notes thereto) do not fully disclose this fact.
What kind of opinion should CA Sudhir issue in case of XYZ Ltd.?

Answer:
CA Sudhir shall express a qualified opinion as the effects are material but not pervasive

21
 CA INTER
AUDITING ETHICS

Question 6
MNO Ltd. is a power generating company having its plants in the north eastern states of the
country. For the FY 2022-23, M/s PRT & Associates are the statutory auditors of the company.
During the course of audit, the audit team was unable to obtain sufficient appropriate audit
evidence about a single element of the consolidated financial statements. That is, the auditor was
also unable to obtain audit evidence about the financial information of a joint venture investment
(in XYZ. Ltd.) that represents over 90% of the entity's net assets. What kind of opinion should
the statutory auditor's issue in such case?

Answer:
Disclaimer of opinion

Question 7
ADKS & Co LLP are the newly appointed statutory auditors of PKK Ltd. During the course of
audit, the statutory auditors have come across certain significant observations which they believe
could lead to material misstatement of FS. Management has a different view and does not concur
with the view of the statutory auditors. Considering this the statutory auditors are determining
as to how to address these observations in terms of their reporting requirement. Please advise.

Answer:
SA 705 chart

Question 8
Under the applicable Standards on Auditing, in what circumstances does the report of the
statutory auditor require modifications? What are the types of modifications possible to the said
report?

Answer:
ROSA chart

22
 CA INTER
AUDITING ETHICS

Question 9

M/s Daisy & Associates are the statutory auditors of Zebra Ltd. for the FY 2021-22. CA
Daisy, the engagement partner wants to verify the cash in hand as on 31.03.2022. The
cash balance of the company as on 31.03.2022 is ` 1,00,000/- and the turnover of the
company for the year is ` 6 crores. The management of the company informs CA Daisy
that such cash verification is not possible as the cashier is on leave for his marriage and
no other employee of the company is available as all are busy in year ending activities.
Explain the relevant provisions to deal with such a situation

Answer:
Refer ROSA chart

Question 10

After accepting the statutory audit of M/s All in One Ltd., a departmental store, you became
aware of the fact that management of the company have imposed certain limitations
on the scope of your assurance function which may adversely affect and result in your
inability to obtain sufficient appropriate audit evidence to discharge your responsibility
required by the statute. Indicate the consequences and your response to the limitations
imposed by the management on your scope.

Answer:
ROSA chart

Question 11
XYZ Ltd. which is in the business of trading of automobile components is following Cash
Basis of Accounting for sale of spare parts. As Statutory Auditor of XYZ Ltd. explain the
reporting requirements, manner of qualification and disclosure, if any, to be made in the
auditor's report in line with AS-1 Disclosure of Accounting Policies

23
 CA INTER
AUDITING ETHICS

Question 12

Answer:
Reporting requirements, Manner of qualification and disclosure to be made in the auditor's
report in line with AS 1, "Disclosure of Accounting Policies":
In the case of a company, members should qualify their audit reports in case:
(a) accounting policies required to be disclosed under Schedule III or any other provisions
of the Companies Act, 2013 have not been disclosed, or
(b) accounts have not been prepared on accrual basis, or
(c) the fundamental accounting assumption of going concern has not been followed and
this fact has not been disclosed in the FS, or
(d) proper disclosures regarding changes in the accounting policies have not been made.
• Where a company has been given a specific exemption regarding any of the
matters stated above but the fact of such exemption has not been adequately
disclosed in the accounts, the member should mention the fact of exemption
in his audit report without necessarily making it a subject matter of audit
qualification.
• In view of the above, the auditor will have to consider different circumstances
whether the audit report has to be qualified or only disclosures have to be given.
• In making a qualification/disclosure in the audit report, the auditor should
consider the materiality of the relevant item. Thus, the auditor need not make
qualification/disclosure in respect of items which, in his judgment, are not
material.
• A disclosure, which is not a subject matter of audit qualification, should be
made in the auditor's report in a manner that it is clear to the reader that the
disclosure does not constitute an audit qualification. The paragraph containing
the auditor's opinion on true and fair view should not include a reference to the
paragraph containing the aforesaid disclosure.

Question 13
When should an auditor make a disclaimer opinion in his Audit Report?

Answer:
Refer chart

24
 CA INTER
AUDITING ETHICS

Question 14
CA Guru is in the process of preparing the final audit report of JPA Private Limited and would
like to disclaim his opinion on the financial statements due to an inability to obtain sufficient
appropriate audit evidence. How CA Guru shall amend the description of the auditor's responsibilities
as required by SA 700?

Answer:
Report Writing in note book

Question 15
M/s Sun Moon & Associates are the statutory auditors of Venus Ltd. for the FY 2021-22. Owing
to the pervasive nature of material misstatements in the financial statements of the company, CA
Moon, the engagement partner decided to give an adverse opinion. Explain the responsibility of CA
Moon with respect to communication with those charged with governance.

Answer:
Communicate with TCWG

25
 CA INTER
AUDITING ETHICS

EOM PARA & OM PARA IN

SA 706 INDEPENDENT AR

QUESTION 1

I. EMPHASIS OF MATTER PARA

1. MEANING:
• A matter, although appropriately presented or disclosed in FS, is that is of
such importance that it is fundamental to users understanding of the FS.

2. EMPHASIS OF MATTER PARA IN THE AUDITOR'S REPORT

• Use the heading ‘Emphasis of Matter' or other appropriate heading
• Include in the Para a clear reference to matter being emphasized
• Indicate that the auditor's opinion is not modified in respect of the
emphasized matter

3. EXAMPLES:

(LACS)
L An uncertainty relating to the future outcomes of an exceptional litigation or
regulatory action.

A Early application of new accounting standard that has a pervasive effect

on FS in advance of is effective date.

C A major catastrophe that have a significant effect on the entity’s financial

position

S A significant event that occurs after the date of FS and the date of
auditors report
26
 CA INTER
AUDITING ETHICS

4. EOM NOT A SUBSTIUTE FOR

(a) A modified opinion in accordance with SA 705 when required by the
circumstances of a specific audit engagement;

(b) Disclosures in the FS that the AFRF management to make, or that are
otherwise necessary to achieve fair presentation; or

(c) Reporting in accordance with SA 570 when a material uncertainty exists

relating to events or conditions that may cast significant doubt on an entity’s
ability to continue as a going concern.

5. THE AUDITOR SHALL INCLUDE EOM PROVIDED

(a) Not required to modify opinion in accordance with SA 705 as a result of the
matter

(b) When SA 701 applies, the matter has not been determined to be a key audit
matter to be communicated

QUESTIONS ASKED IN PAST/RTP/MOCK TEST

Question 1
Enumerate certain important matters which can be included in “Emphasis of Matter Paragraph”
in an Auditor’s Report.

Answer:
Question 1,2,3

Question 2
Give examples of Emphasis of Matters which may have an adverse effect on the functioning of the
company as well as those which may not affect the functioning of the company.

Answer:
LACS

27
 CA INTER
AUDITING ETHICS

Question 3
Lomaxe Ltd. is a company engaged in the business of manufacture of candles. CA Kamalnath is
the statutory auditor of the company for the FY 2020-21. During the year under audit, there was
a fire in the company’s factory as a result of which, some of the company’s plant and machinery
was destroyed. The same was disclosed by the company in the notes to accounts annexed to the
financial statements for the year ending 31.03.2021. CA Kamalnath decided to communicate this
matter in the auditor’s report as he is of the view that the matter is of such importance that it is
fundamental to the user’s understanding of the financial statements. Help CA Kamalnath to deal
with this situation in the auditor’s report

Answer:
In the present case there is a need to add Emphasis on Matter Paragraph in the Auditor’s
Report. The draft of the same is as under:

Emphasis of Matter:
• We draw attention to Note Y of the financial statements, which describes the effects of a
fire in the Company’s factory. Our opinion is not modified in respect of this matter.

Question 4
Compare and Explain the following: Audit Qualification and Emphasis of Matter.

Answer:
• SA 705 "Modifications to the Opinion in the Independent Auditor's Report", deals with the
provisions relating to Audit Qualification. Audit Qualifications are given when auditor is
having reservations on some of the items out of the financial statements.

• It is issued under following circumstances:

1. Financial statements are materially misstated which in the auditor's judgments are
not pervasive.
2. Auditor is unable to obtain SAAE which in the auditor judgment are not pervasive

• As per 706 "Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor's Report" EOM is a paragraph which is included in auditor's report
to draw users’ attention to important matter(s) which are already disclosed in FS and are
fundamental to users' for understanding of FS.
• EOM is used when there is an uncertainty relating to future outcome of exceptional litigation,
regulatory action, etc; or there is early application (where permitted) of a new accounting
standard that has a pervasive effect on the FS in advance of its effective date.

28
 CA INTER
AUDITING ETHICS

QUESTION 2

OTHER MATTER PARA IN AUDITORS REPORT:

1. MEANING:
• If the auditor considers it necessary to communicate a matter other than
those that are presented or disclosed in FS that,
• in auditors judgement, is relevant to users understanding of the audit, the
auditors responsibilities or auditor’s report
• The auditor shall do so in a Para in the auditor’s report , with the heading
‘others matter’ or other appropriate heading.

2. The auditor shall include an Other Matter paragraph in the auditor’s report,
provided:
• This is not prohibited by law or regulation; and
• When SA 701 applies, the matter has not been determined to be a key
audit matter to be communicated in the auditor’s report.

3. If auditor expects to include EOM or OM, the auditor shall communicate with
TCWG regarding:
• this explanation and the
• wordings of this para

4. EXAMPLES(OFU)
(RALI)
R Reasons why auditor is unable to resign from the engagement even though
there is limitation of scope.

A Another set of FS has been prepared by the same entity in accordance with
another general purpose framework & that the auditor had issued a report
on those FS.

L Law, regulation or generally accepted practise that may require or permit the
auditor to elaborate on matters that provide further explanation

I Auditors report is intended solely for intended users.

29
 CA INTER
AUDITING ETHICS

QUESTIONS ASKED IN PAST/RTP/MOCK TEST

Question 5

In respect of the audit of BDS Ltd., the statutory auditor of the company noticed
some matters. The statutory auditor wants to draw the user's attention towards such
matters, though his opinion is not modified in respect of such matters. Draft the relevant
paragraphs of the audit report for the following matters
(1) The company has a plan to resume its construction activities with respect to one
of its thermal power projects, The activity of such power plant was suspended in
the FY 2018-19. The thermal power project comprises of the plant and equipment
amounting to $ 5.95 crores and capital work in progress of t 147.50 crores.
(2) The FS of 5 branches are included in the Standalone FS of BDS Ltd. whose FS reflect
total assets of $ 90 crores as on 31.03.2023 and total revenue from operations of
$ 40 crores for the year ended on that date. The FS of these branches have been
audited by the branch auditors.

Answer:
• Emphasis of Matter Para and Other Matter Para in Audit Report:

Emphasis of Matter
 We draw attention to the following note of the standalone financial statements:
Note 27 regarding the plans of the Company to resume construction/
developmental activities of a thermal power project.
 The carrying amounts related to the project as on 31st March, 2023 comprise
of plant and equipment of R 5.95 crores and capital work in progress of
$ 147.50 crores.
 Our opinion is not modified in respect of this matter.

Other Matter
 We did not audit the FS of 5 branches included in the Standalone FS of the
company whose FS reflect total assets of 7 90 crores as on 31.03.2023 and
total revenue from operations of R 40 crores for the year ended on that date.
 The FS of these branches have been audited by the branch auditors whose
reports have been furnished to us, and our opinion insofar as it relates to the
amounts and disclosures included in respect of these branches, is based solely
on the report of the branch auditors.
 Our opinion is not modified in respect of this matter.

30
 CA INTER
AUDITING ETHICS

Question 2
AKB Associates, a renowned audit firm in the field of CA practice for past two decades. The firm
was appointed to conduct statutory audit of Rica Ltd. an unlisted company, which is engaged in
the business of paper manufacturing. It decided to commence the audit for the recently concluded
financial year. Once after making significant progress in the audit, the auditors made the following
observations:

Observation 1: The management had disclosed in the financials that, during the year, one of
the warehouses of the Company was affected due to a major flood. As a result of the same, the
Company had incurred some losses. But the management was of the view that it was not material.

Observation 2: Due to flood, few records maintained by the Company with respect to a particular
transaction was completely destroyed and there was no duplicate record maintained by the
Company. However, those details were not pervasive, but material.

You are required to advise, whether AKB Associates should report Observations 1 and 2 in its
audit report? If so, under which heading should it be reported?

Answer:
Observation 1:
• Facts of the case:
• Relevant provisions: As per SA 706, "Emphasis of Matter Paragraph & Other Matter
Paragraph in the Independent Auditor's Report", an Emphasis of Matter Paragraph refers
to matter appropriately disclosed in the financials, that in the auditor's judgment is of such
importance that it is fundamental to users' understanding of the financials.
• Reporting requirements: The auditor shall report about the consequences of the flood which
affected the Company's warehouse under EOM.

Observation 2:
• Facts of the case:
• Relevant provisions: As per SA 705, "Modification to Opinion in the Independent Auditor's
Report", where the auditor is unable to obtain sufficient and appropriate audit evidence and
where such mater is material but not pervasive, the auditor shall issue a qualified opinion.
• Reporting requirements: In accordance with SA 705, the auditor is required to issue qualified
opinion.

31
 CA INTER
AUDITING ETHICS

COMPARATIVE INFO-
SA 710 CORRESPONDING FIGURES

QUESTION 5

MEANING :
A) COMPARATIVE INFORMATION
• The amounts and disclosures included in the FS
• in respect of one or more prior periods in accordance with the AFRF.

B) CORRESPONDING FIGURE
• Comparative information
• Where amounts & other disclosures for the preceding period
• Are included
• As part of current period FS
• And are intended to be read in relation to the amounts & other disclosures
relating to the current period.
• These corresponding figures are not presented as complete financial
statements capable of standing alone, but are integral part of the current
period financial statement intended to be read only in relationship to
current period figures.

C) COMPARATIVE FINANCIAL STATEMENT

• Comparative information where amounts and other disclosures for the prior
period are included for comparison with the financial statements of the
current period but,
• if audited, are referred to in the auditor ’s opinion.
• The level of information included in those comparative financial statements
is comparable with that of the financial statements of the current period.

32
 CA INTER
AUDITING ETHICS

The essential audit reporting differences between the approaches are:

(a) For corresponding figures, the auditor’s opinion on the financial statements
refers to the current period only; whereas
(b) For comparative financial statements, the auditor’s opinion refers to each
period for which financial statements are presented.

QUESTION 2

AUDIT PROCEDURES FOR COMPARATIVE INFO :

(i) The auditor shall determine whether FS include the comparative info required by
the AFRF & whether such info is appropriately classified. For this purpose the
auditor shall evaluate whether:
(a) The comparative info agrees with the amounts & other disclosures presented
in the prior period; and
(b) The accounting policies reflected in the comparative info are consistent
with those applied in the current period or if there have been changes in
accounting policies, whether those changes have been properly accounted for
& adequately presented & disclosed.
↓
(ii) If the auditor becomes aware of a possible material misstatement in the comparative
info while performing the current period Audit
• The auditor shall perform such additional audit procedures as are necessary
in the circumstances to obtain SAAE to determine whether a material
misstatement exists.
↓
(iii) If the auditor had audited the prior periods FS, the auditor shall also follow the
relevant requirements of SA 560.
↓
(iv) As required by SA 580, the auditor shall request WR for all periods referred to in
the auditor’s opinion.

The auditor shall also obtain a specific WR regarding any prior period item that is
separately disclosed in cy statement of P/L.

33
 CA INTER
AUDITING ETHICS

QUESTION 3

THE AUDITOR’S OPINION SHALL NOT REFER TO THE CORRESPONDING

FIGURES EXCEPT IN THE FOLLOWING CIRCUMSTANCES:

CASE 1: PREVIOUS REPORT CONTAINS A QUALIFICATION:

• When the auditors report on • When the auditor report

prior period as previously issued. on prior period as previously
-included a modified opinion issued.
-and the matter giving rise -included a modified
to modification is resolved opinion.
& properly accounted for & -and matter giving rise to
disclosed in FS according to modification is unresolved.
AFRF. • The auditor shall modify
• The auditors opinion of the the auditor’s opinion on
current period need not refer to current period FS.
modifications.

CASE 2: If the auditor obtains AE that a MMS exists in the prior period financial
statements on which an unmodified opinion has been previously issued:
• the auditor shall verify whether the misstatement has been dealt with
as required under the AFRF and,
• if that is not the case, the auditor shall express a qualified opinion or an
adverse opinion in the auditor’s report on the current period FS

CASE 3 : If the FS of the prior period were audited by a predecessor auditor and
• the auditor is permitted by law or regulation to refer to the predecessor
auditor’s report on the corresponding figures and decides to do so, the
auditor shall state in an Other Matter paragraph in the auditor’s
report:

34
 CA INTER
AUDITING ETHICS

(a) That the financial statements of the prior period were audited by
the predecessor auditor;
(b) The type of opinion expressed by the predecessor auditor and, if the
opinion was modified, the reasons therefore; and
(c) The date of that report. (slide no 11)

CASE 4: If the prior period financial statements were not audited:

• the auditor shall state in an Other Matter paragraph in the
auditor’s report that the corresponding figures are unaudited.
• Such a statement does not, however, relieve the auditor of the
requirement to obtain SAAE that the opening balances do not
contain misstatements that materially affect the current period’s
financial statements

QUESTION 4

COMPARATIVE FINANCIAL STATEMENT

(A) Auditor’s Opinion- To Refer Each Period :
When comparative fs are presented, the auditor’s opinion shall refer to each period
for which fs are presented and on which an audit opinion is expressed.

(B) When Reporting On Prior Period Fs In Connection With The Current Period’s Audit
If the auditor’s opinion on such prior period FS differs from the opinion the auditor
previously expressed, the auditor shall disclose the substantive reasons for the
different opinion in an other matter paragraph in accordance with sa 706

If the prior period financial statements were not audited:

• The auditor shall state in an other matter paragraph in the auditor’s report
that the corresponding figures are unaudited.
• Such a statement does not, however, relieve the auditor of the requirement to
obtain SAAE that the opening balances do not contain misstatements that
materially affect the current period’s financial statements.

35
 CA INTER
AUDITING ETHICS

(C) If the FS of the prior period were audited by a predecessor auditor the auditor
shall state in an Other Matter paragraph in the auditor’s report:
(a) That the financial statements of the prior period were audited by the
predecessor auditor;
(b) The type of opinion expressed by the predecessor auditor and, if the opinion
was modified, the reasons therefore; and
(c) The date of that report.
• If the auditor concludes that a material misstatement exists that affects
the prior period FS on which the predecessor auditor had previously
reported without modification,
• the auditor shall communicate the misstatement with the appropriate
level of management and TCWG and request that the predecessor auditor
be informed.
• If the prior period FS are amended, and the predecessor auditor agrees
to issue a new auditor’s report on the amended FS of the prior period,
the auditor shall report only on the current period.

(D) If the prior period financial statements were not audited:

• the auditor shall state in an Other Matter paragraph in the auditor’s report
that the corresponding figures are unaudited.
• Such a statement does not, however, relieve the auditor of the requirement to
obtain SAAE that the opening balances do not contain misstatements that
materially affect the current period’s financial statements

QUESTIONS ASKED IN PAST/RTP/MOCK TEST

Question 1:

When corresponding figures are presented, the auditor shall not refer to the corresponding
figures except in some circumstances. the auditor’s opinion shall not refer to the corresponding
figures

Answer:
Q.3

36
 CA INTER
AUDITING ETHICS

Question 2:

NG Ltd. appointed CA N as the statutory auditor for the F.V. 2023-24. Previous year's
auditor gave a qualified opinion on the comparative Financial Statements for the Year ended
31.03.2023. What will reporting responsibility casted on CA N when he forms an opinion
and prepares audit report on the Comparative Financial Statements for the F.V. 2023-247

Answer:
Matters to be stated in OM

Question 3:

The nature of the comparative information that is presented in an entity’s FS depends on

the requirements of the AFRF. There are two different broad approaches to the auditor's
reporting responsibilities in respect of such comparative information: corresponding figures
and comparative financial statements. Explain clearly stating the essential audit reporting
differences between the approaches. Also define comparative information and audit
procedures regarding comparative information.

Answer:
Difference between

37
 CA INTER
AUDITING ETHICS

RESPONSIBILITY OF
SA 299 JOINT AUDITOR

QUESTION 1

I. DEFINITION:
• A Joint audit is an audit of FS
• of an entity by two or more auditors
• appointed with the objective of issuing the AR.
• Such auditors are described as joint auditors

QUESTION 2

ADVANTAGES AND DISADVANTEGS:

Advantages Disadvantages
Sharing of expertise. The fees being shared.
Advantage of mutual consultation. Psychological problem where firms of
Lower workload. different standing are associated in the
Better quality of performance. joint audit.
Improved service to the client. General superiority complex of some auditors.
In respect of multi-national companies, the Problems of co-ordination of the work.
work can be spread using the expertise of Areas of work of common concern being
the local firms which are in a better position neglected.
to deal with detailed work and the local laws Uncertainty about the liability for the work
and regulations. done
Lower staff development costs.
Lower costs to carry out the work.
A sense of healthy competition towards a
better performance.

38
 CA INTER
AUDITING ETHICS

QUESTION 3

SPECIAL CONSIDERATIONS IN CARRYING OUT AUDIT BY JOINT AUDITORS :

(PREND2S)
P the engagement partner and other key members of the engagement team
from each of the joint auditors should be involved in planning the audit.

R each of the joint auditors should consider and assess the ROMMS and
communicate to other joint auditors.

E the joint auditors should obtain common engagement letter and common
management representation letter.

N the joint auditors should discuss and document the NTE of the AP for
 Common and
 specific allotted areas of audit to be performed.

D before the commencement of the audit, the joint auditors should discuss
and develop a joint audit plan. In developing the joint audit plan, the joint
auditors should:
 Identify division of audit areas and common audit areas
 Ascertain the reporting objectives of the engagement
 Consider the results of preliminary engagement activities
 Consider and communicate among all joint auditors the factors that are
significant in directing the engagement team’s efforts;
 Ascertain the NTE of resources necessary to perform the engagement.

D the work allocation document should be signed by all the joint auditors and
communicated to those charged with governance

S the joint auditors should jointly establish an overall audit strategy which sets
the scope, timing and direction of the audit, and also guides the development
of the audit plan

39
 CA INTER
AUDITING ETHICS

QUESTION 4

RESPONSIBILITY DIVISION

JOINT AND SEVERAL RESPONSIBILITY DISTINCT RESPONSIBILITY

Undivided scope of Audit (NA2MES) Divided scope Audit

N → Audit work which is not divided Each auditor is entitled to assume

that other joint Auditor has
A1 → Decisions taken by All auditors in discharged his responsibilities
respect to NTE regarding allotted work.

A2 → Presentation and disclosure of fin.

Statement as per applicable FRF

M → Matter which are brought to the notice

of JA by any one of them

E → Examining that the financial statement

comply with requirement of statutes
S→ Ensuring report complies with applicable
SA’s and pronouncements issued by ICAI.

QUESTION 5

REPORTING RESPONSIBILITIES :
• The joint auditors are required to issue common audit report
• However, where the joint auditors are in disagreement with regard to the opinion
or any matters to be covered by the audit report, they shall express their opinion
in a separate audit report.
• Each joint auditor with a differing opinion would be required to issue a separate
audit report and the reference to the other joint AR would be required to be
made by each such joint auditor in their respective audit report.
40
 CA INTER
AUDITING ETHICS

• Such reference shall be made under the heading “Other Matter Paragraph” as per
SA 706
• A joint auditor is not bound by the views of the majority of the joint auditors
regarding the opinion or matters to be covered in the AR and shall express opinion
formed by the said joint auditor in separate audit report in case of disagreement.

QUESTIONS ASKED IN PAST/RTP/MOCK TEST

Question 1:
Before the commencement of audit, the joint auditors should discuss and develop a joint
audit plan.
Discuss the points to be considered in developing the joint audit plan by joint auditors.

Answer:
Discussion among joint Auditors

Question 2:

The practice of appointing CA as joint auditor is quite widespread in big companies and
corporations. Explain stating the advantages of the audit

Answer:
Advantages

Question 3:

A joint auditor is not bound by the views of majority. Comment

Answer:
Reporting

Question 4:

For which work joint auditors are jointly and severally responsible

Answer:
Responsibility of JA

41
 CA INTER
AUDITING ETHICS

USING THE WORK OF

SA 600 ANOTHER AUDITOR

QUESTION 1

INTRODUCTION (OFU)
• When the auditor delegates work to assistants or uses work performed by other auditors
and experts,
• he will continue to be responsible for forming and expressing his opinion on the financial
information.
• However, he will be entitled to rely on work performed by others, provided he exercises
adequate skill and care and is not aware of any reason to believe that he should not
have so relied.

QUESTION 2

MEANING:

Principal Auditor Other Auditor

The auditor with responsibility for reporting on other than the principal auditor, with
the financial information of an entity when that responsibility for reporting on the financial
financial information includes the financial information of a component which is included
information of one or more components audited in the financial information audited by the
by another auditor principal auditor.
42
 CA INTER
AUDITING ETHICS

QUESTION 3

RIGHTS OF THE PRINCIPAL AUDITOR

Visit component Normally rely on the Evaluate if he is competent

work, unless there are (provided he is not a member
special circumstances of the institute)

QUESTION 4

DUTIES OF THE PRINCIPAL AUDITOR

7. Should document in 1. Advise the other

his working papers auditor of the
the components use that is to be
whose financial made of the other
information was auditor's work
audited by other
auditors;

6. Discuss with the

other auditor and 2. Areas requiring
the management of special consideration
the component, the
audit findings .

5. Significant findings 3. Significant

of the other accounting,
auditor. auditing and
4. Audit procedures applied in reporting
form to questionnaire requirements

43
 CA INTER
AUDITING ETHICS

QUESTIONS ASKED IN PAST/RTP/MOCK TEST

Question 1:

CA. Dicky Yadav is auditor of a company having four branches. The four branches are
audited by another auditor CA. Yamini Jain. The reports in respect of accounts of branches
examined by her have already been sent to company auditor. During the course of audit,
CA Dicky Yadav asks the branch auditor to share with her summary of audit procedures
and findings in respect of accounts of branches examined. CA. Yamini Jain feels it as
encroachment of her domain. Discuss the Issue.

Answer:
It is not an encroachment of another auditor’s domain

Question 2:

When the accounts of the branch are audited by a person other than the company
s auditor, there is need for a clear understanding of the role of such auditor and the
company's auditor in relation to the audit of the accounts of the branch and the audit of
the company as a whole. Explain.

Answer:
Whole SA 600

TOPIC 8 : BRANCH AUDITOR - REFER LAW

TOPIC 9: REPORTING UNDER LAW - REFER LAW

44
 CA INTER
AUDITING ETHICS

CARO 2020

CARO 2020

FS AR CARO

1. Applicability : All companies including foreign companies

2. Excluded: (BIPS)
B- Banking Co
I- Insurance Co
PUSC + Res ≤ 1crore AND
P- Pvt Ltd C0 Loan ≤ 1crore AND
Revenue ≤ 10crore
S – Sec 8 co, small co, one person co

3. Status of the co shall be checked on the balance sheet date.

4. If applicable to holding co, it shall also apply to subsidiary.

5. The order shall not apply for Consolidated FS except in clause (xxi)
The auditor’s report of holding company shall also be an indicative of the companies
included in the consolidated FS whose CARO reports contain qualifications/adverse
remarks
45
 CA INTER
AUDITING ETHICS

QUESTIONS ASKED IN PAST/RTP/MOCK TEST

Question 1
As an auditor, how would you deal with the following: L pvt. Ltd. Which has an outstanding
loss of more than Rs. 100 lakhs from financial institution defaulted in repaymentthereof to
the extent of 50%. The company holds that it being a private limited company, the Companies
Auditor Report Order (CARO) is not applicable.

Answer:
Contention of L Pvt. Ltd is not correct as borrowing from financial institutuion exceeds Rs.
1 Cr., and auditor is required to report the period and amount of default in repaymentof dues
under Para 3 (viii) of CARO 2020.

Question 2
A Pvt. Ltd. Company reports the following position as on 31st March 2019:
l Paid up capital: 60 Lacs
l Revaluation reserves: 20 Lacs
l Capital Reserves: 22 Lacs
l P & LA /C(Dr. balance): 4 Lacs
l The management of the company contends that CARO, 2020 is not applicable to it.

Answer:
CARO is not applicable as paid up capital and reserves does not exceed Rs. 1 Cr.
(60 Lacs+ 20 Lacs + 22 Lacs – 4 Lacs).

Question 3
Under CARO 2020, how as a statutory auditor would you comment on the following: X Pvt.
Ltd. Is a subsidiary of a listed entity. The management of the company believes that since X
Pvt. Ltd. is a private company and satisfies all condition under CARO 2016, reporting under
CARO is not applicable.

Answer:
CARO is applicable as extension is not available to a private company which is a subsidiary or
holding of a public company.

46
 CA INTER
AUDITING ETHICS

Question 4
E-Tec󰇬 󰈑󰇾t. Lt󰈧., w󰇬i󰈝h 󰇬󰇧󰈤 󰈜n ag󰇫󰈦󰇪g󰈜󰇹e 󰈢󰇼󰇺s󰇹a󰈡d󰇮󰇳󰈪 l󰈣a󰇳 󰈢󰈆 20 la󰈫󰇭s f󰇶o󰈩 B󰇧n󰈫󰈤 󰈜n󰈧 30
la󰈫󰇭s 󰈇󰈦om F󰇮󰇳󰈜󰈡ci󰇧󰇰 In󰇷󰇺it󰇻󰇹󰇯o󰈡s, de󰈇󰇧󰇼󰇱te󰈧 󰇮󰈡 r󰈥󰇴a󰈠m󰇪󰇳󰇺 t󰇬e󰈦󰇪󰈣f 󰇹o 󰇺h󰇪 󰈥󰈀󰇺en󰇹 󰈢󰈆 50%. The
co󰇲󰇵󰇧n󰈂 󰇭󰈣l󰈧󰈤 t󰇬a󰇺 󰇮t 󰇨󰈥i󰈡g 󰇧 󰇴󰈦󰇯va󰇹󰇪 li󰇲󰇮󰇺󰈥d 󰈛o󰈩p󰇧󰇳󰈠, t󰇬e C󰈢󰈩p󰈜󰇳i󰇪󰈤 (Aud󰇮󰇹󰈣󰈦's Re󰇴󰈢󰈦t)
Or󰈧e󰈦, 2020 is 󰇳󰈢󰇺 ap󰇴󰇱󰇮c󰈜󰇨󰇱e.

Answer:
CARO, 2020 will not be applicable on it as outstanding loan from banks and financial
institution in aggregate does not exceeds 1 Cr.

(i) PROPERTY,PLANT, EQUIPMENT & INTANGIBLE ASSET

Quantitative Physical Deeds of immovable Revalued its P, Proceedings

details verification property in names of co if P, E & IA initiated or
maintained conducted not , report in prescribed pending for
at regular format Revaluation holding benami
Of property, intervals based on property
plant & ü Description of property valuation by
equipment and Discrepancy ü Gross carrying value registered Disclosed in FS
intangible Are dealt with ü Held in name of valuer
assets Promoter, director Amount if
or their relative or change ≥ 10%
employee
ü Period held-indicate
range, where
appropriate
ü Reasons for not being
held in name of co

47
 CA INTER
AUDITING ETHICS

QUESTIONS ASKED IN PAST/RTP/MOCK TEST

Question 5
XLtd. closed its manufacturing operations and sold all its property, plant and equipment relating
to manufacturing operations during the current financial year. However, it intends continue its
operations as a trading company. In respect of other fixed assets, the company carried out a
physical verification as at the end of current financial year and found a material discrepancy
to the tune of 1 lac, which was written off and is disclosed separately in the profit and loss
account. Kindly incorporate the above in your audit report.

Answer:
The property, plant and equipment have been physically verified by the management at
reasonable intervals; material discrepancies were noticed on such verification and the same
have been properly dealt with in the books of account.

Question 6
Under CARO, 2020, as a statutory auditor, how would you report: NSP Limited has its factory
building, appearing as property, plant and equipment in its financial statements in the name of
one of its director who was overlooking the manufacturing activities.

Answer:
Report under Clause (1)(c) of Para 3 of the CARO, 2020.

Question 7
ABC Ltd. owns a piece of Land and Building situated at IP road, Mumbai which was purchased
before 30 years. The title deeds for the same are deposited with State Bank of India for
obtaining credit facilities by the company.
As the statutory auditor of the company, what are the audit procedures to be followed and
what is the reporting under CARO, 2020

Answer:
Re󰇴󰈢󰈦t 󰇼󰇳󰈨er C󰇰󰇧󰇼󰈤e (1)(c) of P󰇧󰇶󰈜 3 of 󰇹󰇭󰇪 CA󰉊󰉇,

48
 CA INTER
AUDITING ETHICS

Question 8
The Property, Plant and Equipment of Amir Ltd. included ₹ 25.75 crores of earth removing
machines of out-dated technology which had been retired from active use and had been kept for
disposal after knock down. These assets appeared at residual value and had been last inspected
ten years back. As an Auditor, what may be your reporting concern in view of CARO, 2020 on
matters specified above?

Answer:
Report under Clause (1)(b) of Para 3 of the CARO, 2020

(ii) INVERNTORY

Physical verification Sanctioned working Capital limits

> 5 crores in aggregate, from banks or
Discrepancy ≥ 10% financial institutions

Discrepancy Whether quarterly returns or statements

Are dealt with are filed

Are in agreement with books of accounts

Question 9
As the statutory auditor of B Ltd. to whom CARO, 2020 is applicable, how would you report in
the following situations: Physical verification of only 50% (in value) of items of inventory has
been conducted by the company. The balance 50% will be conducted in next year due to lack
of time and resources.

Answer:
Pro󰈛󰇪󰈨󰇼re 󰈢󰈇 󰇵h󰈂󰈤ic󰇧󰇰 ve󰇶󰇮fi󰈝󰈜ti󰈢󰇳 󰈆󰈣l󰇰o󰈟󰇪d 󰇨󰈠 ma󰇳󰇧󰈪󰈥me󰇳󰇺 󰇮s 󰇳󰈣󰇺 re󰇧󰇷󰈣󰈡ab󰇰󰇪 󰈜󰈡d 󰇬e󰈡c󰇪 󰇹󰇭󰈥
a󰇻d󰇯󰇹o󰈦 s󰇬󰈢󰇼󰇱d 󰇴o󰇮󰈡t 󰈣u󰇹 󰇺h󰇪 in󰇧󰈧󰈥󰈚u󰇧c󰇯e󰇷 󰇮󰈡 p󰇬󰈠si󰈛󰇧󰇱 ve󰇶󰇮fi󰈝󰈜ti󰈢󰇳 󰇵r󰈣󰈛e󰈨󰇻r󰈥󰇷, un󰈧󰇪󰈦 P󰈜ra
3(i󰇮) of CA󰉊󰉇, 2020.

49
 CA INTER
AUDITING ETHICS

Question 10
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:
• 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.
• During the year under consideration, cash credit limit of 5.5 crore was sanctioned to Sinwar Ltd.
by DMC Bank based on the security of current assets which was reduced to 4.5 crore after 6
months. In this connection, quarterly returns have been filed by the company with the DMC bank
which are in agreement with Books of Account.
You are required to examine the contention of Mr. Brijesh regarding reporting of the above observations
in accordance with CARO, 2020

Answer:
Auditor is required to report the amount of change of 45 lakh in accordance with Clause (1)(d) of Para
3 of CARO, 2020. (ii) Reporting required under Clause (ii)(b) of Para 3.

Question 11
Jam Private Limited was engaged in business of manufacture of Cycles. CA Roy was appointed as a Statutory
Auditor of the Company for the financial year 2021-22. During the year under audit, Jam Private Limited
obtained working capital facilities from ABC Bank Limited for 10 crore hypothecating the Stock of goods
as primary security. On inquiry CA Roy was informed by management that stock statements are furnished
periodically to ABC Bank Limited and the details of submission of quarterly stock statement are as follows:
Per󰇮󰈣󰈧 o󰈆 Qt󰇶 Stock value as per Stock value as per statement
books submitted to ABC Bank
Q1 11.5 14
Q2 14.75 17
Q3 11.5 14
Q4 15.25 15.25
The management of Jam Private Limited did not disclose the above variations in Notes to accounts
forming part of financial Statements of the Company for the year 2021-22. The management replied
that there are no variations as on the Balance sheet date and further they are of the view that stock
statement furnished to bank is only a formality and computed arbitrarily only for the purpose of securing
higher drawing power and hence statutory auditors need not be bothered. Is the contention of the
management valid? As a Statutory Auditor how CA Roy should deal and discuss the disclosure/reporting
requirements if any, as per the Companies Act, 2013 and CARO,
Answer:
The variations need to be disclosed in the notes to accounts and also reported under CARO 2020.

50
 CA INTER
AUDITING ETHICS

(iii) Investments, Guarantee,Security & loans granted by co

a) Whether co has b) T&C are not prejudicial c) Repayment of

provided loans, guarantee To interest of the company Interest & principal is
or provided security to any regular
other entity. (NA to co.
whose principal business is
to give loans)

Aggregate amount Aggregate amount

given to subsidiaries, given to other
joint ventures & parties
associates

(iii) Investments, Guarantee,Security & loans granted by co

d) If overdue> 90 day any e) Loans & advances f) If loans or advances

steps for recovery taken has fallen due during the granted in nature of
year has been renewed or loans either repayable
extended or fresh loans on demand or without
granted to settle the specifying terms or period
overdues of existing loan of repayment

% of the aggregate to total Specify the aggregate

loans or advances amount
(NA to co. whose principal
business is to give loans) % of total loans to loans
to promoter &related
parties

51
 CA INTER
AUDITING ETHICS

Question 12
In the course of audit of Y Ltd., as the auditor of the company you observe the following: The
company has advanced a loan to a firm in which a director was interested at a rate lower
than the prevailing market rate as well as there was no agreement on terms of repayment.
How auditor will report in CARO, 2020?

Answer:
Reporting required under Para 3(iii) of CARO, 2020. Auditor should also ensure compliance of
disclosure requirements of AS 18 and perform procedures as prescribed under SA 550.

Question 13
H Ltd. granted unsecured loan of 1 crore @ 15% p.a. to two of its subsidiaries during the current
financial year. Before the year end both the companies repaid the loan. The management of
H Ltd. is of the opinion that since no balance is outstanding as at the end of financial year,
these loans are not required to be reported in CARO, 2020. Comment and draft a suitable
report.
Answer:
Draft Report: "The Company has granted loan of 1 Crore @ 15% p.a. to 2 of its subsidiaries
during the current Financial Year. The maximum amount involved during the year was 1 crore
and the year-end balance of such loans was Nil"

(iv) Compliance of sec 185 & 186

(v) PUBLIC DEPOSIT(Including Deemed deposits)

Directives of RBI Provisions of Co’s Act Order of CLB/Tribunal

(vi) Cost records maintained as per sec 148

(vii) STATUTORY DUES (including GST)

Undisputed Disputed

If O/S > 6m then report Always report amount & authority

52
 CA INTER
AUDITING ETHICS

(viii) Disclosure of transactions not recorded

Whether any transactions not recorded in books have been surrendered or

disclosed as income during tax assessments under income tax act, 1961

If so, whether the previously unrecorded income has been properly recorded
in the books of accounts during the year

Question 14
As a company auditor you noticed that there is an intercorporate loan granted by the company.
State the reporting requirements.

Answer:
Reporting required under Para 3 (iii) &(iv) of CARO, 2020.

Question 15
During the course of the audit of M/S CT Ltd, it has noticed that Rs. 2 lakh of employee
contribution and Rs. 9.5 Lakh of employer contribution towards ESIC have been accounted in
the books in the respective heads. Whereas it is found that only Rs. 4 lakh have been deposited
with the ESIC dept during the year. The Finance Manager informed that auditor that due to
financial crunch they have not deposited the amount due, but will deposit the amount overdue
along with interest as and when financial improves. Comment as a statutory auditor.

Answer:
Reporting required under Para 3(vii)(a) of CARO, 2020.

Question 16
Is the company regular in depositing undisputed statutory dues including Provident Fund,
Employees State Insurance, Income Tax, Sales Tax, Wealth Tax, Customs duty, Excise duty,
Value added Tax, Cess and any other statutory dues with the appropriate authorities and if
not, the extent of arrears of outstanding statutory dues as at the last day of the financial
year concerned for a period of more than six months from the date they became payable shall
be indicated by the auditor.

Answer:
Reporting required under Para 3(vii)(a) of CARO, 2020.

53
 CA INTER
AUDITING ETHICS

Question 17
Big and Small Ltd. received a show cause notice from GST department intending to levy a
demand of 25 lakhs in December 2022. The company replied to the above notice in January
2023 contending that it is not liable for the levy. No further action was initiated by the GST
department upto the finalization of the audit for the year ended on 31st March, 2023. As the
auditor of the company, what is your role in this?

Answer:
Reporting required under Para 3(vii) of CARO, 2020.

Question 18
As an auditor, how will you report under CARO in each of the following situation:
1. Since more than seven months, payment of electricity bills to company established under
statute is outstanding.
2. The company had imported goods 5 years back and were placed in bonded warehouse till
the end of financial year under Audit. The company has not paid import duty as goods
have not been removed from such warehouse. The company has also not paid rent and
interest expenditure payable on the amount of customs duty.
3. The company has received income tax assessment order along with demand notice from
Assessing Officer. The company has not paid dues payable as the same is not acceptable
to the company. The company has neither preferred appeal against the order nor an
application for rectification of mistake has been made. The company has just merely
represented to the Assessing Officer.
4. The company in view of voluminous pay-roll data consistently follows the method of making
lump sum deposit of estimated amount of ESI collections and adjust the excess or deficit
against next following months' deposit and the difference of the said amount always
remains insignificant.

Answer:
1. Reporting not required as dues has arisen on account of contract of supply of goods or
services between the parties
2. Reporting not required for customs duty as it is not yet due; Interest and rent that are
required to be incurred u/s 61 of the Customs Act, 1962 would come under other statutory
dues and the auditor would have to examine and comment upon the regularity of the company
in depositing such interest and rent.
3. Auditor is required to check whether time limit for filing the appeal or application for
rectification of mistake has expired or not and report accordingly.
4. Reporting not required

54
 CA INTER
AUDITING ETHICS

(ix) Default in repayment of loans or other borrowings

a. If default in repayment to any b. Whether the company c. Whether term loans

lender is declared willful defaulter were applied for which
by any bank or financial the loans were obtained
If yes, report the period and amount institute or other lender
of default as per prescribed format If not, the amount of
ü Nature of borrowing, including loan so diverted and the
debt securities purpose for which it is
ü Name of lender used.
ü Amount not paid on due date
ü Whether principal or interest
ü No. of days delay or unpaid
ü Remarks ,if any

(ix) Default in repayment of loans or other borrowings

d. Whether funds e. Whether the funds are f. Whether the company

raised on short term used to meet obligations of has raised loans on the
basis have been its subsidiaries, associates or pledge of securities held in its
utilized for long term joint ventures subsidiaries, joint ventures or
purpose associate companies
If so, details thereof with
If yes, the nature nature of such transactions If so, give details thereof and
and amount to be and the amount in each case. also report default if any
indicated
Question 19
R Ltd. as on 31st March 2023 defaulted in the repayment of interest and principal due to a
financial institution. The due date was 28th Feb. 2023. However, the defaulted amount was
paid on 5th April 2023. The company's management is of the opinion that since the default is
set right before the audit completion these need not be reported in CARO, 2020. Comment &
draft a suitable report.
Answer:
Draft Report: "The company has defaulted in repayment of principal and interest to the financial
institution amounted to ........., that become due on XX. Also the period of default is xx days".

55
 CA INTER
AUDITING ETHICS

Question 20
Under CARO how, as a statutory auditor how would you comment on the following: A Term
Loan was obtained from a bank for 75 lakhs for acquiring R&D equipment, out of which
12 lakhs were used to buy a car for use of the concerned director, who was overlooking the
R&D activities

Answer:
As per requirement of Para 3(ix) of CARO, 2020, auditor is required to report the fact that
out of the term loan obtained for R & D equipment, 12 Lacs was not utilized for the purpose
of acquiring the R &D equipment.

Question 21
As a Statutory Auditor, how would you deal with the following: LM Ltd. had obtained a Term
Loan of 300 lakhs from a bank for the construction of a factory. Since there was a delay in
the construction activities, the said funds were temporarily invested in shortterm deposits.

Answer:
Auditor is required to report the fact that the pending utilisation of term loan, the funds
are temporarily invested in short term deposits, in his audit report as per requirement of
Para 3(ix) of CARO

Question 22
During the financial year ended on 31.03.2023, LM Private Limited had borrowed from
a Nationalized Bank, a term loan of 120 lakhs consisting of 100 lakhs for purchase of a
machinery for the new plant and 20 lakhs for erection expenses. As on the date of 31st
March 2023, the total of capital and free reserves of the Company was 50 lakhs and
turnover for the year 2022-23 was 750 lakhs. The Bank paid * 100 lakhs to the vendor of
the Company for the supply of machinery on 31.12.2022. The machinery had reached the
yard of the Company. On 28.02.2023, the Company had drawn the balance of loan viz. * 20
lakhs to the credit of its current account maintained with the Bank and utilized the full
amount for renovating its administrative office building. The machinery had been kept as
capital stock under construction. Comment as to reporting issues, if any, that the Auditor
should be concerned with for the financial year ended on 31.03.2023, in this respect.
Answer:
As per requirement of Para 3(ix) of CARO, 2020, auditor is required to report the fact that
our the term loan obtained for achinery purchase and erection, 20 Lacs was not utilized for
the purpose of erection of machinery.

56
 CA INTER
AUDITING ETHICS

Question 23
Gautam Limited had borrowed 1,000 crore from XYZ Bank, the principal of which was
repayable after 5 years and interest was payable at the end of each year. For 4 years, Gautam
Limited paid the interest amount on time. Gautam Limited defaulted the 5th instalment
of interest payment and principal which was due on June 30, 2022. On Dec. 31, 2022,
Gautam Limited approached XY bank and MNO bank to restructure the existing liability.
As a result, the existing principal and outstanding and overdue interest was restructured
into a new loan amounting to 1,100 crore The management did not provide any disclosure
for the default on the loan on the belief that the old loan ceased to exist and the new loan
has maturity after 5 years.

Answer:
Report under ix of para 3

(x) Money raised by IPO, FPO & preferential allotment/private placement of

shares or convertible debentures

a. Whether money raised by IPO or FPO b. Whether the company has made any
are applied for the purpose for which they preferential allotment or private placement
are raised. of share or convertible debentures

If not, details together with delays or If so, whether sec 42 & 62 of companies
default and subsequent rectification, if any, Act,2013 have been complied with.
shall be reported
If not, provide details in respect of amount
involved and nature of non compliance

(xi) FRAUD

On company or by the 143(12) of companies Whether the auditor s

company is reported Act,2013 has been considered whistle blower
during the year complied with complaints, if any, received
during the year by the
If yes, Report Nature company
& Amount of fraud

57
 CA INTER
AUDITING ETHICS

Question 24
ABC Pvt. Ltd. is a manufacturer of jewellery. A senior employee of the Company informed you
that the Company does not properly disclose the purity of gold used on the jewellery.

Answer:
From the view point of reporting on frauds under CARO, 2020, there is no implication for
misstatement in the financial statements. Hence, no reporting is necessary for improper
disclosure of purity of gold on the jewellery.

Question 25
What are the reporting requirements in the audit report under the Companies Act,
2013/CARO,2020 for the following situations?
(a) A fraud has been committed against the company by an officer of the company.
(b) A fraud has been committed against the company by a vendor of the company.
(c) The company has committed a major fraud on its customer and the case is pending in
the court.
(d) A fraud has been reported in the cost audit report but not noticed by statutory
auditors in his audit

Answer:
Refer Sec. 143(12) read with Rule 13 of Companies (Audit & Auditor's) Rules, 2014 and
Para 3(xi) of CARO, 2020.

(xii) NIDHI COMPANY

a. Net owned funds: b.10% unencumbered term c. Whether there has been
Deposits deposit (liquid) any default in payment
1: 20 of interest on deposit or
principal

If yes, details thereof

58
 CA INTER
AUDITING ETHICS
(xiii) RELATED PARTY

Is as per sec 177, 188 and AS- 18

Sec 177: of Companies Act, 2013 amended to empower Audit Committee to give omnibus
approvals for related party transactions on annual basis

Sec 188: Prior approval of Board of Directors of the Company is required so as to enter
into any contract or arrangement with related party

AS 18: Related party disclosure

Question 26
In the course of audit of MM Ltd., your audit team has identified the following matter:
All amount of 4 Lakh per month for the marketing services rendered is paid to M/s. MG
Associates, a partnership firm in which Director of MM Ltd. is also a managing partner,
with a profit sharing ratio of 30%. Based on an independent assessment, the consideration
paid is higher than the arm's length pricing by 1.50 Lakh per month. Whilst the transaction
was accounted in the financial statements based on the amounts paid, no separate disclosure
has been made in the notes forming part of the accounts. Give your comments.

Answer:
Refer Para 3(xiii) of CARO, 2020

(xiv) Internal Audit System

a. Whether co has an ICS commensurate b. Whether reports of IA were considered

with the size and nature of its business by statutory auditor

Sec 138 of Companies Act, 2013 – Internal Audit

Listed Co Public co Pvt co

PUSC≥50cr or T/O≥200cr or
T/O≥200cr or Borr≥100cr
Borr≥100cr
59
 CA INTER
AUDITING ETHICS
(xv) NON CASH TRANSACTION

With directors or persons connected with him

If so, whether the provisions of sec 192 of Co. Act 2013 have been complied with

Sec 192: prior approval for such arrangement is accorded by a resolution of the
company in general meeting

(xvi) SEC 45 IA OF RBI, ACT 1934

a. Whether the b. Whether the co. c. Whether the co. is d. Whether the co.
co. is required to has conducted any a Core Investment Co Group has more than
be registered u/s Non-banking Financial (CIC) as defined by one CIC
45-IA of RBI Act, or housing Finance RBI
1934 (i.e NBFC) activities without if yes, indicate the
a valid certificate of if so, whether it number of CIC which
If so, whether the registration continues to fulfil are part of the group
registration has the criteria & if it is
been obtained exempted, it continues
to fulfil such criteria

CORE INVESTMENT CO
Core Investment Company (CIC) is a non-banking financial company carrying on the business
of acquisition of shares and securities and which

(a) holds not less than 90 per cent of its net assets in the form of investment in equity
shares, preference shares, bonds, debentures, debt or loans in group companies and

(b) its investments in the equity shares in group companies constitutes not less than 60 per
cent of its net assets as on the date of the last audited balance sheet.

60
 CA INTER
AUDITING ETHICS

(xvii) Cash losses

Whether the co has incurred cash losses in the FY & immediately preceding FY

If so, state the amount of cash losses

(xviii) Resignation of Statutory Auditor

Whether there has been any resignation of the statutory auditors during the year

If so, whether the auditor has taken into consideration the issues, the objections or
concerns raised by the outgoing auditor

Question 27
Yo󰇻 󰈜re 󰇧󰇴󰇵󰈣in󰇹󰇪󰈨 󰈜s 󰇹󰇭e A󰇻d󰇯󰇹o󰈦 󰈢f X󰉄󰉉 Pv󰇹. Lt󰈧. fo󰇶 fi󰈡󰇧n󰈛󰇯a󰇱 y󰇪󰈜󰇶 2022-23 a󰈭󰇪r 󰇹󰇭󰈥 re󰇷󰇮󰈪n󰈜󰇹i󰈢󰈡 󰈣f
R󰉍 & Co. Cha󰇶󰇺󰇪r󰈥󰈧 A󰈝co󰇻󰇳󰇺󰈜n󰇹󰈤, as 󰇷󰇺󰇧t󰇼󰇹o󰈦y 󰇧󰇼󰈧i󰇺󰈢r 󰈣󰈇 󰇺he 󰈛󰈢󰈩p󰈜󰇳󰈠. R󰉍 & Co., ha󰈧 󰈝󰇪r󰇹󰈜i󰈡 c󰈢󰇳󰈝󰈥r󰇳󰈤
on 󰇹󰇭󰇪 󰈜c󰈛o󰇻󰈡t󰇯󰇳󰈪 ma󰇹󰇺󰇪r󰇷 󰈣󰈆 t󰇬e 󰈝󰈢m󰇴󰈜󰈡y, le󰇧󰈧󰇯󰈡g 󰇹o c󰇬a󰈡g󰇪 󰈣󰈇 a󰇻󰈨󰇯to󰇶󰈤. Al󰇰 󰈝om󰇴󰇱󰇮󰈜n󰈛e󰈤 󰇻/s 139 & 140
ar󰇪 󰇲󰈜󰈨e b󰈂 󰇺he 󰈛󰈢󰈩p󰈜󰇳󰈠 wi󰇹󰇭 r󰇪󰇫󰈜󰈦d to 󰇶󰇪󰈤󰇯g󰇳a󰇺󰇮󰈣n a󰇴󰇵󰈢󰇯n󰇹󰈩en󰇹. Dur󰇮󰇳󰈪 t󰇬󰈥 󰈝o󰇻r󰇷󰈥 o󰈆 󰇧󰇼di󰇹, it 󰈛󰇧󰈩󰈥 to
󰈂󰈢󰇼󰈦 no󰇹󰇮󰈝󰈥 t󰇬a󰇺 󰇧 su󰇶󰇾󰇪y 󰇬󰈜󰈤 be󰇪󰇳 󰈝󰈣n󰈧u󰈝t󰇪󰈧 󰈣󰈡 Dec󰇪󰇲󰇩󰈥r 7, 2022 b󰈂 󰇺he I󰇳󰈝󰈢m󰈥 Ta󰈀 󰈊󰇪󰇵󰈜r󰇹󰈩en󰇹 󰇧󰈡d
de󰇴󰇧󰈦t󰇲󰈥󰈡t 󰇬a󰈤 󰇻n󰈥a󰇶󰇺h󰇪󰈧 󰇼󰈡re󰈛󰈢󰈦d󰈥󰈧 󰈤al󰇪󰇷 5 la󰈫󰇭s 󰇿󰇭ic󰇬 󰇭󰇧d 󰇨󰈥e󰈡 m󰇧󰈧󰈥 i󰈡 c󰇧󰇷󰇭 󰈣n diff󰇪󰇶󰈥󰈡t 󰈧a󰇺󰇪s
󰈧󰇼󰈦in󰇫 󰇺h󰇪 󰈂󰈥a󰈦 2021-22. X󰉄󰉉 Pv󰇹. Lt󰈧. pu󰇶󰈝h󰇧󰇷󰈥󰈨 go󰇰󰈨 f󰇶󰈢󰈩 s󰇼󰈛󰇭 co󰇰󰇱󰇪c󰇹󰇯o󰈡s 󰇧󰇳󰈨 t󰇬󰈥󰈤e t󰇶󰇧󰈄n󰇷a󰈝t󰇮󰈣󰇳󰈤
ar󰇪 󰇳󰈣󰇺 re󰈛󰈢󰈦d󰈥󰈧. Com󰇴󰇧󰈡y 󰇷󰇼󰈦re󰇳󰈨󰇪r󰈥󰈧 a󰈡d 󰈧󰇮󰈤c󰇰󰈣󰈤ed t󰇬e󰈤󰇪 t󰇶󰈜󰈡sa󰈛󰇺󰇮󰈣n󰇷 󰇩ef󰈢󰇶󰈥 󰇺he 󰇧󰇷󰈤󰈥s󰇷i󰈡g 󰈢ffi󰈛󰈥󰈦
an󰈧 󰇵󰇧󰇯d 󰇹a󰈁󰇪s 󰇹󰇭󰈥re󰈢󰇳. How󰇪󰇽󰈥󰈦, co󰇲󰇵󰇧n󰈂 ha󰇷 󰈡󰈢t 󰇶󰈥󰈝or󰈧󰇪󰈨 t󰇬󰈣󰈤e t󰇶󰇧󰈡s󰈜󰈛󰇺i󰈢n󰇷 󰇯󰈡 bo󰈢󰈫󰈤 󰈣f a󰈛󰈝󰈢󰇼n󰇹
e󰇾󰇪n 󰈜󰈭e󰇶 󰈤󰇻r󰇶󰈥󰈡de󰇶 󰇩󰇪f󰈣󰇶e In󰈛o󰈩󰇪 T󰈜x a󰇻󰇹󰇭󰈣ri󰇹󰇮󰈥󰈤. Com󰇲󰇪󰈡t.

Answer:
Report as per CARO clause (xviii) of para 3
(xix) Capability of Co meeting its liabilities existing at the BS date

On the basis of the Financial ratios, ageing and expected dates of realization of financial
assets and payments of financial liabilities

Or other info, the auditors knowledge of BOD and managements plan

Whether the auditor is of the opinion that no material uncertainty exists as on the date
of Audit report that co is capable of meeting its liabilities existing at the date of BS

And when they fall due within a period of one year from the date of BS

61
 CA INTER
AUDITING ETHICS

(xx) Transfer amount remaining unspent u/s 135(5) to fund specified in Sch VII

Sec 135(5):The Board of every company shall ensure that the company spends, in
every financial year, at least two per cent. of the average net profits of the company made
during the three immediately preceding financial years, in pursuance of its Corporate Social
Responsibility Policy

SCH VII: Activities which may be included by companies in their Corporate Social Responsibility
Policies Activities

(xx) Transfer amount remaining unspent u/s 135(5) to fund specified in Sch VII

a. whether, in respect of other than b. whether any amount

ongoing projects, the company has remaining unspent pursuant to
transferred unspent amount to a any ongoing project, has been
Fund specified in Schedule VII to the transferred to special account
Companies Act within a period of six
months of the expiry of the financial year

(xxi) Reporting on Consolidated Financial Statements

Whether there have been any qualifications or adverse remarks by the respective auditors
in the CARO reports of the companies included in the consolidated financial statements

if yes, indicate the details of the companies and the paragraph numbers of the CARO
report containing the qualifications or adverse remarks.
The change in reporting requirements clearly shows that regulator’s expectations from the
auditors are increasing significantly.
More emphasis is added on utilization of funds, financial stability of the company and
regulatory compliances.

Auditors need to be more conscious, skeptical and accurate while discharging his/her duties.

62