ANSWER SHEET

CODE:NI-6182
DATE:29-5-22 BATCH:5077 +5083 +4089 +4082+4088 +4084 +4086 [ NOV, 20221
CA INTERMEDIATE
MARKS:95
AUDITING AND ASSURANCE
SYLLABUS: CHP. 2,5

A-1 MCQS:
2-B 3-D 4-C 5-C
1-A 6-A
8-D 9-A 10-D 11-B
7-C 12-B
14-A 15-D 16-A 17-C
13-A 18-C
19-A 20-C
A-2
Incorrect:As per section 143(12) of the Companles Act, 2013, if an auditor afa couu
() the performance of his dutles as auditor, nas reason to belleve that an offence Inu n the course of
or has been committed against the company by officers or employees of hVng fraud Is beln
immediately report the matter to tne Cenrar aovernment (in case amount of pany, he shal
In other cases (in case the amount af fOf fraud Is ed
above) or Audit Committee or Board
within such time and in such manner as may be prescribed.
crore)
Thus, fraud involving amount of 20 lakh rupees should be reported to Audit mmitte

(ii) Incorrect: Excessive interest by management inmaintaining or Increasing the antl

or earnings trend is an example of Fraud Risk Factor related to Rationalizatlanuy s inventory price

Correct: As per SA 240 "The Auditor's ResponsiblIties Relating to Fraud In an

(iii) Statements'. It is important that management, with the oversight of those chara Audlt of Financlal
place a strong emphasis on fraud prevention, wnhich may reduce opportunitles fo gOvernance
and fraud deterrence, which could persuade inaivIauais not to commlt fraud becausa af the place,
of detention and punishment. This Involves a commitment to create a culture of honesty anro
behavior which can be reinforced by an active oversight by those charged with eovarand ethlcal
Incorrect: In comparing management fraud with employee fraud, the auditor's risk of falllna
iv) the fraud is greater for management fraud because of management's abilty to overrlde exlstinginteral
controls
Incorrect. The auditor shall establish an overall audit strategBy that sets the scope, timing and directlon
(v)
of the audit, and that guides the development of the audit plan.
Incorrect. Planning is not a discrete phase of an audit, but rather a continual and Iterative process that
(vi often begin shortly after (or in connection with) the completion of the prevlous audlit and continues
until the completion of the current audit engagement. Planning, however, Includes consideratlon of
the timing of certain activities and audit procedures that need to be completed prior to the performance
of further audit procedures
(vii) Incorrect. Businesses vary In nature, size and compositlon; work which ls sultable to one businessmay
not be suitable to others; efficiency and operation of internal controls and the exact nature of the
service to be rendered by the auditor are the other factors that vary from asslgnment to assignment.
On account of such variations, evolving one audit programme applicable to all business under all
circumstances is not practicable.
(viii) Correct. 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 engagementdevelops
(ix) Correct: Once the overall audit strategy has been established, an audit plan can be developed to
achieve the audit objectlves through the efficlent use of the auditor's resources. The establishment or
the overall audit strategy and the detalled audit plan are not necessarlly discrete or sequentral
processes, but are closely inter-related since changes In one may result In consequential Cnatngee
the other.,
e
 or
for the financial statements as a whole (and, if applicable,
the materiality level
(x)Incorrect: Materiality need to be revised as
classes of transactions, account balances or disclosures) may
levels for particular a decislon to dispose
a result of a change in circumstances
that occurred during the audit (for example,
understanding of
information, or a change in the auditor's
of a major part of the entity's business), new
of performing further audit procedures
the entity and its operations as a result SA 240 The Auditor's Responsiblltles
Auditor's Responsibilities for Detection of Fraud and Error: As per audit in accordance with
A-3(a) an auditor conducting an
to fraud in an audit of Financial Statements", taken as a whole
relating reasonable assurance that the financlal
statements
SAs is responsible for obtaining
whether caused by fraud or error.
are free from material misstatement, unavoidable risk that some materlal
the inherent limitations of an audit, there is an Is properly
Owing to even though the audit
statements will not be detected,
misstatements of the financial
accordance with the SAs.
planned and performed in responsible for maintaining an
attltude of
assurance, the auditor is
When obtaining reasonable for management overrlde of
throughout the audit, considering the potential
professional skepticism for detecting error may not be
and recognizing the fact that audit procedures that are effective
controls
effective in detecting fraud. reasonable a s s u r a n c e
audit in accordance with SAs is responsible for obtaining caused
from materlal misstatement, whether
An auditor conducting an
statements taken as a whole are free
that the financial
by fraud or error. misstatement to the appropriate level of
has the responsibility to communicate the
The auditor also to it to those charged with governance.
on a timely basis and consider the need to report ancial information or before withdrawing
management
also obtain legal advice before reporting on the reflected
He may
auditor should satisfy himself
that the effect of fraud is properly
from the engagement. The in case the modifled procedures performed by
the
or the error is corrected
in the financial information
the fraud.
auditor confirms the existence of and errors, and frame his report
consider the implications of the frauds
The auditor should also the financlal statement. If adequate
appropriately. In case of a fraud, should be disclosed inhis audit
the samesuitable
should be a disclosure in report.
disclosure is not made, there
of Statutory Audit: As per SA 240, the primary responsibility for
Detection of Fraud after Completion of the entity and
detection of fraud rests with both those charged with
governance
the prevention and the of those charged with governance,
management. It is important that management, with
oversight
reduce opportunities for fraud to take place,
on fraud prevention, which may
place a strong emphasis because of the likelihood
and fraud deterrence, which could persuade individuals not to commit fraud
Such a system reduces but does not eliminate the possibility of fraud
of detection and punishment.
and error.
reasonable assurance
An auditor conducting audit in accordance with SAs is responsible for obtaining
an
taken as a whole are free from material misstatement, whether caused
that the financial statements is unavoidable risk that some
by fraud or error. Owing to the inherent limitations of an audit, there an
the audit is
be detected, even though
material misstatements of the financial statements will SAs.
not
in accordance with the
properly planned and performed
The risk of not detecting a material misstatement resulting
from fraud is higher than the risk of not
detecting one resulting from error. This is because fraud may invglve sophisticated and carefully
deliberate failure to record transactions, or
organized schemes designed to conceal it, such as forgery,
intentional misrepresentations being made to the auditor. Such attempts at concealment may be even
more difficult to detect when accompanied by
collusion.
The subsequent discovery of material misstatement of the financial information resulting from fraud
or error existing during the period covered by the auditor's report does not, in itself, indicate that
whether the auditor has adhered to the basic principles governing an audit. The question of whether
the auditor has adhered to the basic principles governing an audit (such as performance of the audit
work with requisite skills and competence, documentation of important matters, details of the audit
plan and reliance placed on internal controls, nature and extent of compllance and substantive tests
carried out, etc.) is determined by the adequacy of the procedures undertaken in the circumstances
and the suitability of the auditor's report based on the results of these procedures.
The liability of the auditor for failure to detect fraud exists only when such failure is clearly due to not
exercising reasonable care and skil., Thus, in the instant case, after the completion of the statutoiy
audit, if a fraud has been detected, the same by itself can not mean that the auditor cdid not peitorm his
- 6
 duty properly. If the auditor can
adequate prove with the help of his
the same. procedures necessary
If however, the for the proper conduct ofpapers (documentation) that he has followed
an audit, he cannot
A-3(6) same cannot be be held
Fraud, whether fraudulent proved, he would be held
responsible. responsible for
financial
pressure commit fraud, a perceivedreporting misappropriation
to or
of assets, involves
example opportunity to do so and some rationalization incentive or
of the act.
Incentive or
pressure to
For
commit fraudulent financial
under pressure, from sources outside reporting may exist when
management is
unrealistic) earnings or inside the
target entity, to achieve an
financial outcome.
A or
perceived opportunity to commit fraud may exist expected (and perhaps
Overridden, for example, because the individual is when an individual
believes internal
deficlencies in internal control. in a position of trust or control
has knowledge
can
be
of specific
Individuals may be able to rationalize
characteror set of
ethical values thatcommitting
allow them
a
fraudulent act. Some individuais
act. However, even otherwise possess an attitude,
knowingly and intentionally to commit
sufficient pressure on them. honest individuals can commit fraud in an
a dishonest
A-4a) Defalcation of Cash environment that imposes
Defalcation of cash has been found
(a) to
By inflating cash perpetrate generally in the
payments: following ways:
Examples of inflation of
(1) Making payments payments:
against fictitious vouchers.
(2 Making payments against vouchers, the amounts whereof
(3) Manipulating totals of rolls
have been inflated.
them in any other manner. wage either by including therein names of
(4) Casting a larger
dummy workers or by inflating
totals for petty
detailed columns so that cross totals cash expenditure and adjusting the excess
(b) show agreement in the totals of the
By suppressing cash receipts:
Few techniques of how
receipts are suppressed are
(1) Teeming and Lading:
Amount received from a customer being
detection the money received
from misappropriated; also to prevent its
paid earlier.another
the customer who has customer
Similarly, subsequenty being credited to the account of
thereafter being credited to the moneys received from the customer
that no one account is account of the second
customer and such a who has paid
to either send out a
outstanding for payment for any length of practice is continued so
statement of account to him or time, which may lead the
(2) Adjusting unauthorised communicate with him. management
misappropriating amount paidfictitious
or
by them.rebates, allowances, discounts, etc. to customer' accounts and
(3) Writing off as debts in of such balances
has been misappropriated.respect against which cash has already been received but
(4) Not accounting for cash sales
fully.
(5) Not accounting for miscellaneous
receipts, e.g., sale of scrap,
etc. quarters allotted
to the
(6) Writing down asset values in
employees,
(c) By casting wrong totals in the cashbook.
entirety,
sellingg them subsequently and
misappropriating the proceeds.
A-4(b) These are such errors the
existence
of which
becomes apparent in the process of compilation of
account. A few illustrations of such errors are given
hereunder, showing how they become
apparent.
 Omission to post a part of
journal entry to the ledger.
a
Trial balance is thrown out of
agreement
Wrong totaling of the Control Account
Purchase Register [e.g. the Sundry Trade
payables Account) balances and the
aggregate of the balance in the
personal ledger will disagree.
in) A failure to
record in the cas |Bank reconciliation statement will show
book amounts paid into or
up error.
withdrawn from the bank.
(v)|A mistake in recording Statements of account of parties will
amount received from X in
reveal mistake.
the account of Y.
From the above, it is clear that certain apparent errors balance almost automatically by double
accounting procedure and by following established practices that lie within the accounting systementrybut
not being generally considered to be a part of it, like bank reconciliation or sending monthly statements
of account for
confirmation.
A-5(a) Fraudulent financial reporting often involves management override of controls
may
appear to be operating effectively. Fraud can be committed by management overriding controls using that otherwise
such techniques as:

Techniques by which
Management Override
Controls

Recording Inappropriately Omitting/ Concealing/ Engaging

Fictitious Adjusting Advancing/ in
Not Aftering
Journal Assumptions/ Delaying
Changing Recognition Disclosing Complex Records
Entries Facts Transactions
Judaments
Recording fictitious journal entries, particularly close to the end of an accounting period, to
operating results or achieve other objectives. manipulate
Inappropriately adjusting assumptions and
changing judgments used to estimate account balances.
Omitting, advancing or delaying recognition in the financial statements of events and
have occurred during the reporting period. transactions that
Concealing, or not disclosing, facts that could affect the
amounts recorded in the financial statements.
Engaging in complex transactions that are structured to misrepresent the financial position or
performance of the entity. financial
Altering records and terms related to
significant and unusual transactions.
A-5(b) Inadequate internal control over assets may increase the
assets. For example, misappropriation of assets susceptibility of
may occur because there ismisappropriation of those
the following:
Inadequate segregation of duties or independent checks.
Inadequate oversight of senior management expenditures, such as travel and other
Inadequate record keeping with respect to assets. reimbursements.
Inadequate system of authorization and approval transactions (for example, in
of
inventory, or fixed assets. purchasing).
Inadequate physical safeguards over cash, investments,
Lack of complete and timely reconciliations of assets.
 Lack of timely and
returns. approprlate documentation of transactions, for example, credits for merchandise
of
Lack mandatory vacations for employees performing key control functions.
Inadequate management understanding of information technology, which enables
technology employees to perpetrate a information
misapproprlation.
Inadequate access controls over automated records, including controls over and review of
systems event logs. computer
A-6(a) Without adequate
knowledge of client's
important princlples in developing an overallbusiness,
a proper audit is not
possible. It is one of the
audit plan. As per SA-315,
Risk of Materlal Misstatement "Identifying and Assessing the
shall obtain through Understanding the Entity and Its Environment", the auditor
(a) Relevant
an
understanding of the following:
industry, regulatory and other external factors
including the
framework. applicablefinancial reporting8
(b) The nature of the entty,
including:
(1) Its operations;
(11) Its ownership and
governance structures;
(11) the types of Investments that the
entity is making and plans to
make,including investments in
speclal-purpose entities; and
(lv) the way that the entity is structured and
how it is financed; to enable the auditor to
the classes of transactions, account understand
(c) The entity's selection and
balances, and disclosures to be expected in the
financial statements.
application of
The auditor shall evaluate whether the accounting policies, including the reasons for changes thereto.
entity's accounting policies are appropriate for lits business and
consistent with the applicable financial
reporting framework and accounting policles used in the relevant
industry.
(d) The entlty's objectives and strategles, and those related business risks that
misstatement. mayresult in risks of material
(e) The measurement and revlew of the
entity's financlal performance.
In addition to the
importance of knowledge of the client's business in
plan, such knowledge helps the auditor to identify areas of establishing the overall audit
reasonableness both of speclal audit
consideration, to evaluate the
accounting estimates and management representations and to make
Judgements regarding the appropriateness of accounting policles and disclosures.
A-6(b) The auditor shall plan the nature, timing and extent of directlon and
members and the review of their work. supervision of engagement team
The nature, timing and extent of the direction and
review of their work vary depending on many supervision of engagement team members and
factors, including:
1. The slze and complexity of the entity.
2. The area of the audit.
3. The assessed risks of materlal misstatement
4. The capablities and competence of the individual team
members performing the audit work.
A-7(a) In the context of recurring audits, as
per SA-300, "Planning an Audit of Financial
is not a discrete phase of an audit, but rather a continual Statements", Planning
and iterative process that often
after (or in connection with) the completion of the begins shortly
previous audit and continues until the completion
of the current audit engagement. Planning,
however, includes consideration of the timing of certain
activitles and audit procedures that need to be
completed prior to the
procedures. For example, planning includes the need to consider, prior toperformance
of further audit
the auditor's identification
and assessment of the risks of material
misstatement, such matters as:
The analytical procedures to be
applied as risk assessment procedures.
2. Obtaining a general understanding of the legal and regulatory framework applicable to the
how the entity Is complying with that framework. entity and
3 The
The
determination of materiality.
involvement of experts.
The
performance of other risk assessment
A-7(6) The advantages of an audit procedures.
(a) t
provides the assistant programme are:
generally to be done. carrying out the audit with total and clear set of instructions of the work
(b)
(c) is essential, particularly for major audits, to provide a total perspective of the work to be
Selection of assistants for the jobs on the basis of capability becomes easier when performed.
planned, defined andsegregated. the work is
rationally
d) Without a written and
Some 'menta> pre-determined programme, work is necessarily to be carried out on the
plan. In such a situation there is basis of
books and records. always a danger of ignoring or overlooking certain
Under properly framed programme, such danger is
a

systematically. significantly less and the audit can proceed

(e) The assistants,
by putting their signature on
out by them programme, accept the responsibility for the work
individually and, if necessary, the work done
The principal can control the may be traced back to the assistant.
carried
progress of the various audits in hand by
initiated by the assistants
It serves
deputed to the jobs for completed work. examination of audit programmes
as a guide
for audits to be carried out in
the succeeding
(h) A properdy drawn
up audit programme serves as year.
being brought against the auditor. It evidence in the event of
any charge of negligence
be of
reasonable skill and care that was may of considerable value in establishing that he exercised
A-8la) The auditors determination of expected professional auditor.
materiality
auditor's perception of the finanãal
is a matter of
professional judgment, and is affected by the
information needs of users of the financial
context, it is reasonable for the auditor to statements. In this
assume that users:
() Have a reasonable
knowledge of business and economic
study the information in the financial statements with activities and accounting and a willingness to
(ii) Understand that financial statements are reasonable diligence;
(ii) prepared, presented
Recognize the uncertainties inherent in the measurement of and audited tolevels of materiality;
judgment and the consideration of future events; and amounts based on the use of
estimates,
(iv) Make reasonable economic decisions on
the basis of the
A-8(b) The auditor shall document: information in the financial statements.
(a) the overalil audit strategy;
(b) the audit plan; and
(c) any significant changes made during the audit
plan, and the
reasons for such engagement to the overall audit
changes. strategy or the audit
The documentation of the overall
audit strategy is a record of the
properly plan communicate significant matters key decisions considered
to the audit and to
to the necessary
Example engagement team.
The auditor may summarize the overall audit
decisions regarding the overall scope, strategy in the form of a memorandum
timing and conduct of the that contains key
The documentation of the audit audit.
plan is a record of the
assessment procedures and further audit planned nature, timing and extent of
risks. It also serves as a procedures at the assertion level in risk
response to the assessed
record of the proper planning of the audit
performance. The auditor may use stañdardprocedures
audit
that can be reviewed and
approved prior to their
as needed to reflect the particular programs and/or audit completion
A record of the
engagement circumstances. checklists, tailored
significant changes to the overall audit
changes to the planned nature, timing and extent strategy and the audit
plan, and
of audit
procedures, explains why the resulting
10 significant
changes were made, and the overall strategy and audit plan finally adopted for the audit. It also
reflects the appropriate response to the significant changes occurring during the audit.
Example
The following things should form part of auditor's documentation:
A summary of discussions with the entity's key decision makers.
Documentation of audit committee pre-approval of services, where
Audit documentation access letters.
required.
Other communications or
agreements with management or those charged with governance regarding
the scope, or changes in
scope, of our services.
Auditor's report on the entity's financial statements.
Other reports as specified in the engagement agreement (e.g., debt covenant compliance letter).

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