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CA FINAL NEW COURSE (Nov 2021)

GROUP I – PAPER 3
ADVANCED AUDITING AND PROFESSIONAL ETHICS
(Series 2)
Time Allowed: - 3 Hours Maximum Marks: 100

This question paper comprises two parts, Part I and Part II.
Part I comprises MCQ & Part II comprises questions which require descriptive answers.

PART – I (MCQs)
All MCQs are compulsory

Questions no. 1-10 carry 2 Marks each and Questions no. 11-20 carry 1 Mark each.
The following scenario relates to questions 1–5
You are an audit manager at Tryambakeshwar & Co and you are considering a number of ethical
issues which have arisen on some of the firm’s long-standing audit clients.
Radhe Ltd.
Tryambakeshwar & Co is planning its external audit of Radhe Ltd.. Yesterday, the audit engagement
partner, Shiva, discovered that a significant fee for information security services, which were
provided to Radhe Ltd. by Tryambakeshwar & Co, is overdue. Shiva hopes to be able to resolve the
dispute amicably and has confirmed that he will discuss the matter with the finance director, Vishnu,
at the weekend, as they are both attending a party to celebrate the engagement of Shiva’s daughter
and Vishnu’s son.
Shyam Ltd.
Tryambakeshwar & Co is the external auditor of Shyam Ltd. and also provides other non-audit
services to the company. While performing the audit for the year ended 31 October 2020, the audit
engagement partner was taken ill and took an indefinite leave of absence from the firm. The ethics
partner has identified the following potential replacements and is keen that independence is
maintained to the highest level:
Mahadev who is also the partner in charge of the tax services provided to Shyam Ltd.
Shambhu who was the audit engagement partner for the ten years ended 31 October 2019
Neelkanth who introduced Shyam Ltd. as a client when she joined the firm as an audit
partner five years ago
Mahesh who is also the partner in charge of the payroll services provided to Shyam Ltd.
Mohan Ltd.
Mohan Ltd. is a large private company, with a financial year to 30 June, and has been an audit client of
Tryambakeshwar & Co for several years. Shankar, a partner of Tryambakeshwar & Co, has acted as
the engagement quality control reviewer (EQCR) on the last two audits to the year ended 30 June
2020. At a recent meeting, he advised that he can no longer be EQCR on the engagement as he is
considering accepting appointment as a non-executive director and will sit on the audit committee
of Mohan Ltd..
The board of directors has also asked Tryambakeshwar & Co if they would be able to provide internal
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audit services to the company.
Murari Ltd.
Murari Ltd., a listed company, is one of Tryambakeshwar & Co’s largest clients. Last year the fee for
audit and other services was ₹1·2m and this year it is expected to be ₹1·3m which represents
16·6% and 18·1% of Tryambakeshwar & Co’s total income respectively.

1. Which of the following statements correctly explains the possible threats to

Tryambakeshwar & Co’s independence and recommends an appropriate safeguard in
relation to their audit of Radhe Ltd.?
(1) An intimidation threat exists due to the overdue fee and Radhe Ltd. should be advised that
all fees must be paid prior to the auditor’s report being signed
(2) A self-review threat exists due to the nature of the non-audit work which has been
performed and an engagement quality control review should be carried out
(3) A self-interest threat exists due to the relationship between Shiva and Vishnu and Shiva
should be removed as audit partner
(a) 1, 2 and 3
(b) 1 and 2 only
(c) 2 only
(d) 3 only

2. Taking into account the concern of the ethics partner, which of the partners identified as
potential replacements should take over the audit of Shyam Ltd. for the year ended 31
October 2020?
(a) Mahadev
(b) Shambhu
(c) Neelkanth
(d) Mahesh

3. Which of the following correctly identifies the threats to Tryambakeshwar & Co’s
independence and proposes an appropriate course of action for the firm if Shankar
accepts appointment as a non-executive director of Mohan Ltd.?
Threats Course of action
(a) Self-interest and familiarity Can continue with appropriate safeguards
(b) Self-interest and self-review Must resign as auditor
(c) Self-review and familiarity Must resign as auditor
(d) Familiarity only Can continue with appropriate safeguards

4. You are separately considering Mohan Ltd.’s request to provide internal audit services and the
remit of these services if they are accepted.
Which of the following would result in Tryambakeshwar & Co assuming a management
responsibility in relation to the internal audit services?
(1) Taking responsibility for designing and maintaining internal control systems
(2) Determining which recommendations should take priority and be implemented
(3) Determining the reliance which can be placed on the work of internal audit for the
external audit
(4) Setting the scope of the internal audit work to be carried out

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 (a) 1 and 3
(b) 2, 3 and 4
(c) 1, 2 and 4
(d) 3 and 4 only

5. Which of the following actions should Tryambakeshwar & Co take to maintain their
objectivity in relation to the level of fee income from Murari Ltd.?
(1) The level of fee income should be communicated to those charged with governance
(2) Separate teams should be used for the audit and non-audit work
(3) Request payment of the current year’s audit fee in advance of any work being performed
(4) Request a pre-issuance review be conducted by an external accountant
(a) 1 and 4 only
(b) 3 and 4 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4

The following scenario relates to questions 6–10

Maya Ltd. is a manufacturer of shoes. You are an audit manager with Brahma & Associates and you are
performing an overall review of the financial statements for the year ended 30 September 2020 prior
to the issue of the auditor’s report. Profit before tax for the year was ₹131·4m (20X7: ₹120·9m).
Analytical procedures
As part of your overall review, you have performed analytical procedures over the draft financial
statements and have noted that the trade receivables collection period is lower than it was during the
interim audit performed in July 2020. You are aware that the credit controller of Maya Ltd. left the
company in August 2020 and that the directors have said that, as a result, the company is
experiencing difficulties in debt collection.
Disclosures
During the year, Maya Ltd. revalued its head office and as part of your review, you are considering the
detail which is disclosed in the property, plant and equipment note in the draft financial statements.
Uncorrected misstatements
Your review also includes an assessment of uncorrected misstatements. These have been recorded by
the audit team as follows:
₹’000
(1) Interest payable omitted in error 1,942
(2) Additional allowance for receivables required 9,198
(3) Error in sales invoice processing resulting in understatement of sales 8,541
(4) Write off in respect of faulty goods 2,900
Faulty goods
The adjustment for faulty goods listed as an uncorrected misstatement above relates to an entire
batch of shoes, which was produced on 12 September 2020. The audit work concluded that the cost of
this inventory exceeded its net realisable value by ₹2·9m. The directors dispute the audit team’s
figures and believe that the realisable value of the inventory still exceeds its cost.

6. Which of the following would form part of the auditor’s overall review of the financial
statements?
(1) Establishing whether the pre-conditions for an audit are present
(2) Assessing whether the information and explanations obtained during the audit are
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 adequately reflected
(3) Performing a detailed review of the audit working papers to ensure the work has been
properly performed
(4) Reviewing the adequacy of the disclosure of accounting policies
(a) 1 and 2
(b) 3 and 4
(c) 1 and 3
(d) 2 and 4

7. Which of the following is a valid explanation for the INCONSISTENCY between the results
of the analytical procedures on trade receivables and the directors’ statement
regarding debt collection problems?
(a) A change in sales mix towards high value products
(b) An increase in the proportion of cash sales since August 2020
(c) An increase in the rate of sales tax in September 2020
(d) Sales growth of 1% per month over the year

8. Which of the following details should be disclosed in respect of the revaluation of the
head office if the auditor is to conclude that the disclosures are adequate?
(1) Effective date of the revaluation
(2) Name of the valuer
(3) The amount of the revaluation increase
(4) Carrying amount of the head office under the cost model
(a) 1, 2 and 3 only
(b) 1, 3 and 4 only
(c) 2, 3 and 4 only
(d) 1, 2, 3 and 4

9. Which of the uncorrected misstatements numbered (1), (2) and (3) by the audit team
MUST be adjusted for if the auditor is to issue an unmodified audit opinion?
(a) Misstatements 2 and 3 only
(b) Misstatements 1 and 3 only
(c) Misstatements 1, 2 and 3
(d) Misstatement 2 only

10. All adjustments required by the auditors have been made to the financial statements with the
exception of adjustment (4) relating to the faulty goods.
Which of the following correctly describes the effect of this matter on the auditor’s
report?
(a) Unmodified opinion with no further disclosure
(b) Unmodified opinion with disclosure in an emphasis of matter paragraph
(c) Qualified opinion due to material misstatement
(d) Qualified opinion due to inability to obtain sufficient appropriate audit evidence

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11. Which of the following statements is not true?
a. Management fraud is more difficult to detect than employee fraud
b. Internal control system reduces the possibility of occurrence of employee fraud and
management fraud
c. The auditor’s responsibility for detection and prevention of errors and frauds is
similar.
d. All statements are correct.

12. Professional skepticism requires that the auditor assume that management is
a. reasonably honest
b. Neither honest nor dishonest
c. Not necessarily honest
d. Dishonest unless proved otherwise

13. The audit engagement letter, generally, should include a reference to each of the following
except
a. limitations of auditing
b. responsibilities of management with respect to audit work
c. expectation of receiving a written management representation letter.
d. a description of the auditor’s method of sample selection.

14. The least important element in the evaluation of an audit firm’s system of quality control
would relate to
a. assignment of audit assistants
b. system of determining audit fees
c. consultation with experts
d. confidentiality of client’s info.

15. Knowledge of the entity’s business does not help the auditor to
a. reduce inherent risk
b. identify problem areas
c. evaluate reasonableness of estimates
d. evaluate appropriates of GAAP.

16. A state Government spent rupees fifty lakhs on renovation of Raj Bhavan’ for its Governor. In
the C & AG’s opinion, this expenditure was more than what occasion demanded? It is an
example of –
a. Propriety audit
b. Performance audit
c. Audit against provision of funds
d. None of the above

17. Which of the following is not an inherent limitation of internal control system?
a. Management override
b. Collusion among employees
c. Inefficiency of internal auditor
d. Abuse of authority

18. The auditor should state the reasons for his reservations in audit report and should try to
quantify the effect on them. This should be done in case he has expressed _
i) a qualified opinion ii) an unqualified opinion with emphasis of matter
iii) an adverse opinion iv) a disclaimer of opinion
a. i) only
b. i) and (iv) only
c. i), iii) and (iv) only
d. All of above

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19. To avoid invalid data input, a bank added an extra number at the end of each account number
and subjected the new number to an algoritham. This techniques is known as
a. Dual read correction
b. Test for reasonableness
c. Check digit
d. Occurrence

20. As per SEBI LODR regulations, The board shall lay down a code of conduct for
i) Employees ii) Senior Management
iii) Directors iv) Board Members
a. ii), iii) and iv)
b. i) and (iii)
c. (iv) only
d. ii) and iv)

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 PART – II (Descriptive Answers)
This part comprises 6 questions. Question No. 1 is compulsory. Attempt any
4 questions out of the remaining 5 questions.

Marks
1 (a) You are being appointed as the auditor of X Ltd. for the first time. You want to 5
determine the materiality level and for that you have applied percentage to
choose benchmark as a starting point in determining materiality for the financial
statements as a whole. What are the factors that may affect the identification of
materiality while auditing?

1 (b) William & Sons Limited is well-known in the hospitality and the entertainment 5
industry with their chain of hotels, travel agencies etc. They arrange packaged
tours for customers both in India and abroad.
A snapshot of their financials for the previous year ended 31 st March, 2020 is
given below:

Particulars Amount in Remarks

INR Mios
Share Capital 5000 Includes fully convertible preference
share capital (before 2021) of INR 2000
Mio
Reserves & surplus 200 Includes revaluation reserve of INR 100
Mio
External 8800 No cover through hedging
commercial
borrowing
Current Assets 2200 Primarily receivables from travel
companies who were enjoying credit
terms from the company
Current Liabilities 6550 Represents payments to creditors and
banks
Property Plant 11750 Goodwill has arisen based on the
Equipment (incl acquisition of hotels
Goodwill of INR
2200 Mio)
Their business has been severely impacted by COVID-19 pandemic during the
period April to June 2020 and the Company has to submit its audited financial
statements for the quarter ended 30 June 2020 to its investors. What are the key
considerations to be taken into account whilst auditing the financial statements of
the Company?

1 (c) M/s ABC & Co., a firm of Chartered Accountants responded to a tender from a 4
State Government for appointment of GST Auditor wherein no minimum fee was
prescribed. For this purpose, the firm also paid ` 50,000 as earnest deposit as part
of the terms of the tender. Comment on the above with reference to the Chartered

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 Accountants Act, 1949, Code of Ethics and Schedules to the Act.

2 (a) For financial reporting purposes, the entity's risk assessment process includes 5
how management identifies business risks relevant to the preparation of financial
statements in accordance with the entity's applicable financial reporting
framework, estimates their significance, assesses the likelihood of their
occurrence, and decides upon actions to respond to and manage them and the
results thereof. Explain the circumstances under which risk can arise or change.

2 (b) What are the professional obligations of the statutory auditor who has resigned 5
before completion of his term due to non co-operation of the Management in
completing certain audit procedures?

2 (c) Please elaborate on the situations wherein the requirement related to 4

preparation of consolidated financial statements may not apply.

3 (a) A company has disclosed its old CNC machines as assets held for sales under 5
inventories in its annual financial statements and has also included the net
realizable value of the same as part of working capital statements to the banks.
Please comment on appropriateness of the above treatment from a statutory
auditor point of view.

3 (b) TBR Limited has plan of its business being closed due to huge loss incurred due to 5
the recent outbreak of global pandemic, within a short period from the close of
the accounting year ended on 31st March, 2020. The Financial Statements for the
said year have been prepared on the same basis as in earlier periods with an
additional note that the business of the Company shall cease in near future and
the assets shall be disposed off in accordance with a plan of disposal as decided
by the Management. The Statutory Auditors of the Company indicated this
aspect in Key Audit Matters only by a reference as to a possible cessation of
business and making of adjustments, if any, to be made at the time

3 (c) A firm of Chartered Accountants was appointed by a company to evaluate the 4

costs of the various products manufactured by it for its information system.
One of the partners of the firm was a Non-Executive Director of the company.
Comment with reference to the Chartered Accountants Act, 1949 and Schedules
thereto.

4 (a) Mr. BK, Partner in M/s. BK and Associates, as part of their audit presentation 5
to the Audit Committee of M/s. XYZ Limited, a listed company, highlighted the
following:
 Difficulties faced during the audit
 Disagreements with the management
 Management Letter Points
 Draft Management Representation letter to be provided by the Company
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 inconnection with the audit.
Some of the Audit Committee members were not happy with the above
presentation and asked Mr. BK to take it back and submit directly to the Board.
They believe that Audit Committee is not the forum for discussing such problems
and this has to be sorted out between auditors and the management. Please
comment on the above.

4 (b) Krishna Pvt Ltd is primarily into the business of selling computer parts. 5
However, the company is fulfilling the Principal Business Criteria as at the
balance sheet date i.e. Financial Assets are more than 50 % of total assets and
Financial Income is more than 50% of Gross Income. What shall be the obligation
of the Statutory Auditor in such a scenario?

4 (c) Mr. A was appointed as an auditor of M/s. XYZ Co. During the course of audit he 4
finds that the company has availed an excess ITC of ₹ 50 lakh. Accordingly, he
made recommendations in Part V of GSTR-9C, The management of the company
refused to pay the excess ITC and argued that auditors recommendations are not
binding. Comment.

5 (a) CA. M, appointed as a Peer Reviewer for M/s. K Associates, has asked for all the 5
compilation and the Due Diligence engagements carried out by M/s. K Associates
for her peer review during the period considered for peer review purposes by
the board. She has also sent out a mail to Peer Review Board regarding her
selection. Mr. K, the managing partner of the firm seeks your advise on this
matter.

5 (b) How will you verify the income & expenditure of earlier years credited/debited 5
in the current year for reporting under clause 27(b) of Form 3CD while carrying
out Tax Audit u/s 44AB of the Income Tax Act, 1961?

5 (c) You have been appointed as auditor of a AKY Ltd. After having determined the 4
audit objectives, now you have been requested to draft audit criteria. What are
the sources that you will use while doing the task?

6 (a) Tiger Ltd. has applied to a bank for loan facilities. The bank on studying the 5
financial statements of the company notices some discrepancies in the books of
the company. Upon discussion with the auditor of the company, the bank manager
requested for detailed information regarding a few items in the financial
statements. The information is available in the working paper file of the auditor.
What should be the response of the auditor in this regard?

6 (b) What are the reporting requirements in the audit report under the Companies Act, 5
2013 / CARO, 2016 for the following situations?

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 (i) A fraud has been committed against the company by an officer of the
company.
(ii) A fraud has been committed against the company by a vendor of the
company.
(iii) The company has committed a major fraud on its customer and the case is
pending in the court.
(iv) A fraud has been reported in the cost audit report but not noticed by
statutory auditor in his audit.

6 (c) What are the areas where the services of forensic accountants/ auditors are 4
generally required?

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