250+ Imp Audit

Part 1 -- SA Introduction
No Questions in Part 1
Part 2 -- SA 200 Series
SA 200
QNO Reasonable Assurance New Course-(M22M)
0.300 Bhaskar CNO - SA200.020
Yupee (P) Ltd. got incorporated on 15th May 2021 and Mr. Harsh, the director of Yupee (P) Ltd. proposed
to Kamal & Co. on 24th May 2021, for being appointed as its statutory auditor. Mr. Kamal, the sole
proprietor of Kamal & Co., after checking the compliance with all the statutory requirements, accepted
the said offer and issued an audit engagement letter vide email to Yupee (P) Ltd. Mr. Harsh found all terms
of audit engagement to be proper but in the paragraph relating to auditor’s responsibly in the engagement
letter, as produced below:-
“We will conduct our audit in accordance with Standards on Auditing (SAs), issued by the Institute of
Chartered Accountants of India (ICAI). Those Standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatement.” Certain queries raised in his mind that what does reasonable
assurance meant? Which Standard on Auditing requires the auditor to obtain such reasonable assurance?
Is it possible to give absolute assurance on such financial statements?
Assuming that you are Mr. Kamal, the newly appointed statutory auditor of Yupee (P) Ltd. Please address
to the queries of Mr. Harsh as stated above.
Answer As per SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, the auditor is required:-
“To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the financial statements are prepared, in all material respects, in accordance with
an applicable financial reporting framework.”
Reasonable assurance is a high level of assurance and is less than absolute assurance. It is obtained
when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk (i.e., the risk
that the auditor expresses an inappropriate opinion when the financial statements are materially
misstated) to an acceptably low level.
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain
absolute assurance that the financial statements are free from material misstatement due to fraud or
error. This is because there are inherent limitations of an audit, which result in most of the audit
evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive
rather than conclusive. The inherent limitations of an audit arise from:
(i) The nature of financial reporting;
(ii) The nature of audit procedures; and
(iii) The need for the audit to be conducted within a reasonable period of time and at a reasonable
cost.
www.auditguru.in PARAM 1.1 | P a g e

SA 210
QNO Mandatory matters in engagement letter Old Course - (M19R, M19M,N20R)

2.010 Bhaskar CNO - SA210.060 New Course-(M19M,N20R,N21M,S21M,N22M)
MEA Limited is a listed company having its operation across India. MEA Limited appointed Mr. X, Mr. Y and
Mr. Z, as its joint auditors for the year 2019-20. After making sure that all of them are qualified to be
appointed as statutory auditor, MEA Limited issued engagement letter to all of them. But Mr. X was not
clear on some points, so he requested MEA Limited to slightly change the terms of his engagement.
This change will not impact the ultimate opinion on the financial statement. The engagement letter
contains the details on objective and scope of audit, responsibilities of auditor and identification of
framework applicable. It also contains the reference to expected form and content of report from all three
joint auditors. In your opinion what was the discrepancy in the Audit engagement letter issued by MEA
Limited?
OR
AKJ Ltd. is a small-sized 30 years old company having business of manufacturing of pipes. Company has a
plant based out of Dehradun and have their corporate office in Delhi. Recently the company appointed new
firm of Chartered Accountants as their statutory auditors.
The statutory auditors want to enter into an engagement letter with the company in respect of their
services, but the management has contended that since the statutory audit is mandated by law,
engagement letter may not be required. Auditors did not agree to this and have shared a format of
engagement letter with the management for their reference before getting that signed. In this respect
management would like to understand that as per SA 210 (auditing standard referred to by the auditors),
if the agreed terms of the engagement shall be recorded in an engagement letter or other suitable form of
written agreement, what should be included in terms of agreed audit engagement letter?
Answer Part I -- Relevant Standards & Laws
▪ SA 210, Agreeing the Terms of Audit Engagements
Part II -- Requirements of Relevant Standards & Laws
➢ As per SA 210 Agreeing the Terms of Audit Engagement
The auditor shall agree the terms of the audit engagement with management or those charged with
governance, as appropriate. The agreed terms of the audit engagement shall be recorded in an audit
engagement letter or other suitable form of written agreement and shall include:
• The objective and scope of the audit of the financial statements.
• The responsibilities of management.
• Identification of the applicable financial reporting framework for the preparation of the
financial statements; and
• The responsibilities of the auditor.
• Reference to the expected form and content of any reports to be issued by the auditor and
a statement that there may be circumstances in which a report may differ from its expected
form and content.
Part III -- Facts
➢ In the given scenario, MEA Limited appointed Mr. X, Mr. Y and Mr. Z, as its joint auditors for the year
2019-20 and issued engagement letter to all of them. The engagement letter contains the details on
objective and scope of audit, responsibilities of auditor, identification of framework applicable and
reference to expected form and content of report from all three joint auditors.
Part IV -- Conclusion
➢ However, engagement letter issued by MEA Ltd. Does not specify the responsibilities of management,
whereas as per SA 210, it should also specify responsibilities of management.

QNO Preconditions for an audit- Old Course - (N19R)
3.050 Bhaskar CNO - SA210.020 / SA210.040 New Course-(N19R)
"Mr. Ram Kapoor, Chartered Accountant, has been appointed as the statutory auditor by XYZ Private Limited
for the audit of their financial statements for the year 2018-19. The company has mentioned in the audit
terms that they will not be able to provide internal audit reports to Mr. Ram during the course of audit.
Further, company also imposed some limitation on scope of Mr. Ram.
What are the preconditions Mr. Ram should ensure before accepting/ refusing the proposal? Also
advise, whether Mr. Ram should accept the proposed audit engagement?"
Answer (Before asking any information & thinking about acceptance & continuance as per SQC 1 & SA 200,
these conditions should be satisfied)
➢ Preconditions of an audit
• Acceptable FRF: - The use by management of an acceptable financial reporting framework (Exp:-
Reliable / Relevant etc) in the preparation of the financial statements and
• Agreement: - the agreement of management and, where appropriate, those charged with
governance to the premise on which an audit is conducted.
(Exp:- Management should agree and take responsibility of financial reporting)
➢ Auditor’s Responsibility to Check 2 Conditions
In order to establish whether the preconditions for an audit are present, the auditor shall:
• Acceptable FRF: -
Determine whether the financial reporting framework to be applied in the preparation of the
financial statements is acceptable; and
• Agreement: -
Obtain the agreement of management that it acknowledges and understands its responsibility:
• Preparation of Financial Statements
For the preparation of the financial statements in accordance with the applicable financial
reporting framework, including where relevant their fair presentation.
• Internal Control System
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; and
• Information to Auditor
To provide the auditor with:
o Access to all information of which management is aware that is relevant to the
preparation of the financial statements such as records, documentation and other
matters.
o Additional information that the auditor may request from management for the
purpose of the audit; and
o Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
➢ Don’t Accept Assignment
If the preconditions for an audit are not present, the auditor shall discuss the matter with
management.
Unless required by law or regulation to do so, the auditor shall not accept the proposed audit
engagement:
• If the auditor has determined that the financial reporting framework to be applied in the
preparation of the financial statements is unacceptable; or
• If the agreement as discussed above has not been obtained.

➢ Limitation On Scope Prior To Audit Engagement Acceptance
If management or those charged with governance impose a limitation on the scope of the auditor’s
work in the terms of a proposed audit engagement such that the auditor believes the limitation will
result in the auditor “disclaiming an opinion” on the financial statements, the auditor shall not
accept such a limited engagement as an audit engagement, unless required by law or regulation to
do so.
➢ Conclusion:-
In the instant case, Mr. Ram should not accept the appointment as statutory auditor of XYZ Private
Limited due to limitation imposed on his scope of work.
SA 220
Change in Engagement Partner to Review Work (Death, Bad Old Course - (N15R,P17M,M18M,M21M)
QNO
Health Etc) New Course-M18M, M21M)
5.000
Bhaskar CNO - SA220.100
M/s Suresh Chandra & Co. has been appointed as an auditor of SC Ltd. for the financial year 2014-15. CA
Suresh, one of the partners of M/s Suresh Chandra & Co., completed entire routine audit work by 29th
May 2015. Unfortunately, on the very next morning, while roving towards office of SC Ltd. to sign final
audit report, he met with a road accident and died. CA Chandra, another partner of M/s Suresh Chandra
& Co., therefore, signed the accounts of SC Ltd., without reviewing the work performed by CA Suresh.
State with reasons whether CA Chandra is right in expressing an opinion on financial statements the audit
of which is performed by another auditor.
▪ SA 220“Quality Control for an Audit of Financial Statements”
▪ Basic Principle of Auditing on Delegation of Work
➢ Takeover, New Partner Should Review Work Done
Whenever there is takeover of assignment by new engagement partner, new partner should
carefully review work of old engagement partner.
➢ Review Procedures: -
• 1.Compliance of Law, Regulations, Prof Standards 2.Significant Matters Raised &
Considered 3.Appropriate Consultations 4.Conclusions Documented 5.Evidence is
Sufficient & Appropriate 6.Objectives Achieved 7.Need to Revise NTE
• The work has been performed in accordance with professional standards and
regulatory and legal requirements;(E.g., Sec 143 / IRDA Regulations / SAs)
• Significant matters have been raised for further consideration;(E.g., Accounting for
demerger)
• Appropriate consultations have taken place and the resulting conclusions have
been documented and implemented;(Consult Mr A in firm who has audited many
such cases)
• The work performed supports the conclusions reached and is appropriately
documented; (E.g., Check whether documents and explanation provide basis for
accounting done)
• The evidence obtained is sufficient and appropriate to support the auditor’s
report; and (E.g., Check that all areas are appropriately covered)
• The objectives of the engagement procedures have been achieved. (We are able
to form opinion with reasonable assurance)
• There is a need to revise the nature, timing and extent of work performed; (E.g.,
High Court should be obtained, also written representation of CFO on accounting)

➢ Basic Principle of Auditing on Delegation of Work
• Basic Principle of Delegation of Work Governing Audit ---Auditor can delegate work
but not responsibility.
Further, one of the basic principles, which govern the auditor’s professional responsibilities,
and which should be complied with wherever an audit is carried, is that when the auditor
delegates work to assistants or uses work performed by other auditor and experts, he will
continue to be responsible for forming and expressing his opinion on the financial
information.
• Reliance of Work with Adequate Skill & Care.
However, he will be titled 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. This is the fundamental principle which is ethically required as per Code of Ethics.
• Direct / Supervise / Review Work.
However, the auditor should carefully direct, supervise and review work delegated. He
should obtain reasonable assurance that work performed by other auditors/experts and
assistants is adequate for his purpose.
Part III – Case Discussion
➢ Report not signed because of death, other ca signed without review just relying on work
done by his partner.
In the given case, all the auditing procedures before the moment of signing of final report have been
performed by CA. Suresh. However, the report couldn’t be signed by him due to his unfortunate
death. Later on, CA. Chandra signed the report relying on the work performed by CA. Suresh.
Part IV – Conclusion
➢ Non-compliance of SA 220 & no adequate skill and due care exercised.
Here, CA. Chandra is allowed to sign the audit report, though, will be responsible for expressing the
opinion. He may rely on the work performed by CA. Suresh provided he further exercises adequate
skill and due care and review the work performed by him.
Author’s Note
Second point in part-I which deals with “Basic Principle of Auditing on Delegation of Work” is not given in SA
220, this is taken from Traditional Theory of Audit. It is easy to understand and retain and underlying
principles is also same as SA 220. As ICAI has covered this in their recent answer students should also cover
Independence--Responsibility of Partner and EQCR in listed Old Course - (M19R,N19M)

QNO
company New Course-
5.020
Bhaskar CNO - SA220.060/SA220.120 (M19R,N19M,S20M,M22R)
During the audit of FMP Ltd, a listed company, Engagement Partner (EP) completed his reviews and also
ensured compliance with independence requirements that apply to the audit engagement. The
engagement files were also reviewed by the Engagement Quality Control Reviewer (EQCR) except the
independence assessment documentation. Engagement Partner was of the view that matters related to
independence assessment are the responsibility of the Engagement Partner and not Engagement Quality
Control Reviewer. Engagement Quality Control Reviewer objected to this and refused to sign off the
documentation. Please advise as per SA 220.
Answer ➢ As per SA 220, Engagement Partner shall form a conclusion on compliance with independence
requirements that apply to the audit engagement. In doing so, Engagement Partner shall:
• Obtain relevant information from the firm and, where applicable, network firms, to
identify and evaluate circumstances and relationships that create threats to independence;
• Evaluate information on identified breaches, if any, of the firm’s independence policies
and procedures to determine whether they create a threat to independence for the audit
engagement; and
• Take appropriate action to eliminate such threats or reduce them to an acceptable
level by applying safeguards, or, if considered appropriate, to withdraw from the audit
engagement, where withdrawal is permitted by law or regulation.

• The engagement partner shall promptly report to the firm any inability to resolve the
matter for appropriate action.
Engagement Partner shall take responsibility for reviews being performed in accordance with the
firm’s review policies and procedures.
As per SA 220, “Quality Control for Audit of Financial Statements”, for audits of financial statements
of listed entities, Engagement Quality Control Reviewer (EQCR), on performing an engagement
quality control review, shall also consider the engagement team’s evaluation of the firm’s
independence in relation to the audit engagement.
In the given case, Engagement Partner is not right. The independence assessment
documentation should also be given to Engagement Quality Control Reviewer for his review.
SA 230
Factors affecting Form Content & Extent Old Course - (N15E, M17M, M20R)
QNO
Bhaskar CNO - SA230.040 New Course- (M20R)
6.000
Mr. A, a practising Chartered Accountant, has been appointed as an auditor of True Pvt. Ltd. What factors
would influence the amount of working papers required to be maintained for the purpose of his
audit?

▪ SA 230, Audit Documentation
➢ Factors affecting Form Content & Extent
• It is in flow of audit process: - .As auditor reaches premises of client he will know
size & complexity→ Risk Assessment→ Audit Procedures→ Audit Methodology→
Significance of Audit Evidence→ Exceptions→ Basis of Conclusion
The form, content and extent of audit documentation depend on factors such as:
• The size and complexity of the entity. (↑Size ↑Extent, ↑Complexity ↑ Extent)
• The identified risks of material misstatement. (↑Risk ↑Extent)
• The nature of the audit procedures to be performed. (Test of controls→Flow Charts
Content / Analytical Procedures→ Graphs & Ratios)
• The audit methodology and tools used. (Manual Inspection of Records→Physical
Form / CAAT→Electronic Form)
• The significance of the audit evidence obtained. (High Court Order of
Amalgamation→Photocopy Document Form / Regular Purchase Order→Inspection
+ recorded PO number)
• The nature and extent of exceptions identified. (fraud + material→Extent ↑ / error
+ material→Extent ↓)
The need to document a conclusion or the basis for a conclusion not readily determinable from the
documentation of the work performed or audit evidence obtained. (Complex working→Detailed
Calculation will be covered in content / Simple→ Only references will be given in content)
SA 240
QNO Fraud Risk in Revenue Recognition New Course-(M22R)
Arihant Limited was engaged in the business of owning and managing hotels and resorts, selling tourism
packages and performing airline bookings for corporate and individuals. It appointed Upadhyay & Co. as
its statutory auditor for the financial year 2021-22. While planning the audit, the audit team decided that
the risk of improper revenue recognition from hotel business should not be treated as a fraud risk. This
conclusion was based on the assessment of earlier years, wherein no fraud was identified in revenue
recorded from such business. While testing the internal financial controls over the process of revenue
recognition, it was identified that the controls are not properly designed to mitigate the risk of fraud and
risk of improper revenue recognition. As a result, the audit team decided to perform additional substantive
testing. However, the audit team still were to the conclusion that there is no risk of fraud in revenue
recognition. During the course of substantive testing, it was identified that the management did not
account for revenue received from corporate hotel bookings amounting to ` 35 crore. These amounts were
partially received in the company’s bank accounts and partially received in the CFO’s personal account.
The amounts received in the bank account of the company were disclosed as advances received against
the future bookings. In the light of above scenario, kindly guide the statutory auditors with respect to their
responsibility relating to fraud in an audit of a financial statement.
Answer As per SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”
and SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the
Entity and Its Environment”, the auditor shall identify and assess the risks of material misstatement
due to fraud at the financial statement level, and at the assertion level for classes of transactions,
account balances and disclosures. When identifying and assessing the risks of material misstatement
due to fraud, the auditor shall, based on a presumption that there are risks of fraud in revenue
recognition, evaluate which types of revenue, revenue transactions or assertions give rise to such risks.
In accordance with SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements” and 330,” The Auditor’s Responses to Assessed Risks” the auditor shall determine overall
responses to address the assessed risks of material misstatement due to fraud at the financial
statement level and assertion level.
The presumption that there are risks of fraud in revenue recognition may be rebutted. For example,
the auditor may conclude that there is no risk of material misstatement due to fraud relating to
revenue recognition in the case where there is a single type of simple revenue transaction, for example,
leasehold revenue from a single unit rental property. However, when there is a complex revenue
structure or when there is lack of controls on revenue recognition, then there is a high probability of
fraud risk in revenue recognition.
Obtaining an understanding of the entity and its environment, including the entity’s internal control
(referred to hereafter as an “understanding of the entity”), is a continuous, dynamic process of
gathering, updating and analysing information throughout the audit.
In the current scenario, the company was earning revenue from multiple streams. Also, it was
identified that the controls are not properly designed to mitigate the risk of fraud and risk of improper
revenue recognition. During the year it was identified that the management did not account for
revenue from corporate hotel bookings amounting to ` 35 crore. These amounts were partially received
in the company’s bank accounts and partially received in the CFO’s personal account. The amounts
received in the bank account of the company were disclosed as advances received against future
bookings.
Therefore, the auditor while performing the risk assessment procedures should consider the
complexity and nature of the revenue for determining the fraud risks in revenue recognition. Also,
there were no adequate controls addressing the risk of improper revenue recognition or fraud risk, the
audit team rebutted the fraud risk. Moreover, the audit team should have recognised fraud risk by
identifying the deficiencies of internal control over the revenue recognition process and should have
treated the risk of improper revenue recognition as a significant risk. Also, as per Section 143(12), the
auditor is required to report all the frauds identified during the course of the audit involving amounts
above ` 1 crore within the prescribed time frame to the Central Government
Responsibility in Management Old Course - (N09E, N12R, N15R, S17M, P17M, M17R, M17E, N18M)
QNO
Fraud New Course- (S17M, S21M)
13.000
UNIQUE
Fraud can be committed by management overriding controls using such techniques as engaging in complex
transactions that are structured to misrepresent the financial position or financial performance of the
entity.
In view of the above-mentioned circumstances of management fraud, explain briefly duties and
responsibilities of an auditor in case of material misstatement resulting from such Management Fraud.
OR

Explain briefly duties and responsibilities of an auditor in case of material misstatement resulting
from Management Fraud.
▪ SA 240, The Auditor’s Responsibilities Relating to Fraud in audit of Financial Statement.
▪ Sec 143 (12) of Companies Act
▪ Clause (XI) of CARO 2020
➢ As per SA 240
• Nature of Management Fraud – Overriding Controls / Complex Transactions to
Misrepresent Financial Performance
Fraud can be committed by management overriding controls using such techniques as
engaging in complex transactions that are structured to misrepresent the financial position
or financial performance of the entity.
• Employee Fraud Vs Management Fraud
The risk of the auditor not detecting a material misstatement resulting from management
fraud is greater than for employee fraud, because management is frequently in a position
to directly or indirectly manipulate accounting records, present fraudulent financial
information or override control procedures designed to prevent similar frauds by other
employees.
• TCWG & Management Responsibility to Prevent , Detect Fraud & Obtain Reasonable
Assurance that FST are free from MMST.
The primary responsibility for the prevention and detection of fraud rests with those
charged with the governance and the management of the entity. Further, an auditor
conducting an audit in accordance with SAs is responsible for obtaining reasonable
assurance that the financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error.
• Auditor Objective – Reasonable Assurance regarding MMST.
Auditor’s opinion on the financial statements is based on the concept of obtaining
reasonable assurance, hence in an audit, the auditor does not guarantee that material
misstatements will be detected.
• Because of Inherent limitation in Audit some MMST may not be detected
Owing to the inherent limitations of an audit, there is an unavoidable risk that some
material misstatements of the financial statements may not be detected, even though the
audit is properly planned and performed in accordance with the SAs.
➢ As per Sec 143 (12) - Reason to Believe – Fraud by of Officer or Employee on the
company—report to CG (if fraud >=1 crore) or to Audit Committee , BOD (if fraud is less
than 1 crore)
Further, as per section 143(12) of the Companies Act, 2013, if an auditor of a company, in the course
of the performance of his duties as auditor, has reason to believe that an offence involving fraud
is being or has been committed against the company by officers or employees of the company, he
shall immediately report the matter to the Central Government (in case amount of fraud is Rs 1
crore or above) or Audit Committee or Board in other cases (in case the amount of fraud involved
is less than Rs 1 crore) within such time and in such manner as may be prescribed.
➢ Clause (xi) of CARO 2020 - Report on fraud by/on the company noticed or reported.
whether any fraud by the company or any fraud on the company has been noticed or reported
during the year, if yes, the nature and the amount involved is to be indicated.
➢ Ability to Continue as Auditor- Resulting from fraud or expected fraud – encounters
exceptional circumstances – not able to continue.
If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor encounters
exceptional circumstances that bring into question the auditor’s ability to continue performing the
audit, the auditor shall:

➢ Consider is it appropriate to withdraw.
• If it is appropriate to with draw – inform, discuss with management & TCWG with
reasons / Report decision to persons, authorities as per legal & regulatory
requirement.
If the auditor withdraws:

• Discuss with the appropriate level of management and those charged with
governance, the auditor’s withdrawal from the engagement and the reasons for
the withdrawal; and
• Determine whether there is a professional or legal requirement to report to the
person or persons who made the audit appointment or, in some cases, to
regulatory authorities, the auditor’s withdrawal from the engagement and the
reasons for the withdrawal.
QNO Error in Valuation of Inventory Old Course - (N11R, N13R, P17M)

14.000 UNIQUE
As an auditor of public limited company for year ended 31.03.2013, you discovered an error in valuation
of inventory, which has material effect on financial statements. Comment with reference to standards on
auditing.
▪ SA 240, The Auditor’s Responsibilities Relating to Fraud in audit of Financial Statements.
▪ SA 450, Evaluation of Misstatement Identified during the Audit
COMMON POINTS -- SA 240 & 450
➢ As per SA 240
• Circumstances Indicates Possible Misstatement – Consider Potential Effect – If
Effect could be Material – Perform Modified & Additional Procedures
SA 240, “The Auditor’s Responsibilities Relating Fraud in an Audit of Financial Statements”,
requires that if circumstances indicate the possible existence of fraud or error, the auditor
should consider the potential effect of the suspected fraud or error on the financial
information. If the auditor believes the suspected fraud or error could have a material effect
on the financial information, he should perform such modified or additional procedures as
he determines to be appropriate.
• If actual Misstatement – Evaluate whether Indicative of Fraud – if such Indication
– Implication on other aspects of audit, E.g., Cannot be isolated occurrence,
Reliability of WR.
SA 240 also requires that when the auditor identifies a misstatement, the auditor shall
evaluate whether such a misstatement is indicative of fraud. If there is such an indication,
the auditor shall evaluate the implications of the misstatement in relation to other aspects
of the audit, particularly the reliability of management representations, recognizing that an
instance of fraud is unlikely to be an isolated occurrence. When the auditor confirms that,
or is unable to conclude whether, the financial statements are materially misstated as a
result of fraud the auditor shall evaluate the implications for the audit.
➢ As per SA 450 & 320
After Misstatement Identified – Extend Audit Procedures to know materiality and Ask for
Adjustment for Misstatements and Must for Material Items –Even after extension unable
to conclude about materiality given or If rectification not done – give qualified or adverse
opinion as the case may be
Further, SA 450, also requires that in such circumstances, the auditor should consider requesting
the management to adjust the financial information or consider extending his audit procedures. If
the management refuses to adjust the financial information and the results of extended audit

procedures do not enable the auditor to conclude that the aggregate of uncorrected misstatements
is not material, the auditor should express a qualified or adverse opinion, as appropriate.
COMMON POINTS -- ABILITY / SEC 143 / CARO
➢ Ability to Continue as Auditor- Resulting from fraud or expected fraud – encounters

exceptional circumstances – not able to continue.
If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor encounters
exceptional circumstances that bring into question the auditor’s ability to continue performing the
audit, the auditor shall:
➢ Consider is it appropriate to withdraw.
• If it is appropriate to with draw – inform, discuss with management & TCWG with
reasons / Report decision to persons, authorities as per legal & regulatory
requirement.
If the auditor withdraws:
• Discuss with the appropriate level of management and those charged with
governance, the auditor’s withdrawal from the engagement and the reasons for
the withdrawal; and
• Determine whether there is a professional or legal requirement to report to the
person or persons who made the audit appointment or, in some cases, to
regulatory authorities, the auditor’s withdrawal from the engagement and the
reasons for the withdrawal.
➢ As per Sec 143 (12) -Reason to Believe – Fraud by of Officer or Employee on the company—
report to CG (if fraud >=1 crore) or to Audit Committee , BOD (if fraud is less than 1
crore)
Further, as per section 143(12) of the Companies Act, 2013, if an auditor of a company, in the course
of the performance of his duties as auditor, has reason to believe that an offence involving fraud
is being or has been committed against the company by officers or employees of the company, he
shall immediately report the matter to the Central Government (in case amount of fraud is Rs 1
crore or above) or Audit Committee or Board in other cases (in case the amount of fraud involved
is less than Rs 1 crore) within such time and in such manner as may be prescribed.
➢ Clause (xi) of CARO 2020 - Report on fraud by/on the company noticed or reported.
whether any fraud by the company or any fraud on the company has been noticed or reported
during the year, if yes, the nature and the amount involved is to be indicated.
➢ Error is valuation of Inventory can be intentional or Intentional, so it can be suspected fraud or can
be genuine error. Further it has material impact also.
➢ So, auditor should perform additional procedures, find out whether it is fraud or error. If it’s a fraud
consider impact on other aspects of audit and further ask management to rectify it.
Author’s Note
In this question as per PM, reference of SA 320 is given along with SA 240 , but in Param SA 450 reference
is given along with SA 240 because it SA 450 is more appropriate and relevant, other questions also refer
SA 450 in such situation.
No Documentary or Other Evidence Old Course - (N13E, N16R, P17M,M20M)

QNO
UNIQUE New Course- (N18R ,M20M)
17.000
Intelligent Ltd entered into an agreement with Mr Intellectual on 15th March, 2016, whereby it agreed to
pay him Rs 2 lakhs per month as retainership fee for consultation in IT department However, no amount
was actually paid and Rs 24 lakhs was provided in the Statement of Profit and Loss for the year ending on
March 31st, 2016 Management of the company uttered that need-based consultation was obtained
throughout the year However, on investigation, no documentary or other evidence of receipt of such
service was found As the auditor of Innocent Ltd, what would be your approach?

OR
On 15thMarch, 2020, the directors of Phony Ltd. instructed their accountant to enter purchases amounting
Rs. 1.02 crores from a company incorporated dated 11th March 2020. However, no amount was actually
paid and Rs. 1.02 crore was provided in the books of account as purchases for the year ending on 31st
March 2020.
On inspection, no documentary or other evidence of such purchases was found. As the auditor of Phony
Ltd., what would be your approach regarding reporting of such bogus purchases?

▪ SA 240, The Auditor’s Responsibilities Relating to Fraud in audit of Financial Statements.
NEW POINT
➢ Fictitious Journal Entries at the end of the year are generally used to manipulate financial
statements
As per SA 240 on “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements”, fraud can be committed by management overriding controls using such techniques as
recording fictitious journal entries, particularly close to the end of an accounting period, to
manipulate operating results or achieve other objectives.
COMMON POINTS -- SA 240 & 450 - Refer QNO 14.0
COMMON POINTS -- ABILITY / SEC 143 / CARO - Refer QNO 14.0
➢ Entered into agreement with Consultant – Charged Fees of Rs 24 lakhs to P&L – No Evidence
for receipt of services
In the given case, Intelligent Ltd. has entered into an agreement with Mr. Intellectual, at year-end,
for consultation in IT department. It also charged yearly fee of Rs 24 lakhs in the Statement of Profit
and Loss, however, no documentary or other evidence of receipt of such service was found, on
investigation.
➢ Indicates Fictitious Journal Entry – Auditor should Perform Additional Detailed Examination
It is clear that company has passed fictitious journal entries, near year-end, to manipulate the
operating results.
QNO Special Audit Report Not Provided Old Course - (M14E, P17M)
18.000 UNIQUE New Course-( S17M , M18R, N18M, S21M)
In the course of audit of K Ltd, its auditor Mr 'N' observed that there was a special audit conducted at
the instance of the management on a possible suspicion of a fraud and requested for a copy of the
report to enable him to report on the fraud aspects Despite many reminders it was not provided In
absence of the special audit report, Mr 'N' insisted that he be provided with at least a written
representation in respect of fraud on/by the company For this request also, the management
remained silent Please guide Mr 'N'.
▪ SA 240, The Auditor’s Responsibilities Relating to Fraud in audit of Financial Statements
▪ SA 580, Written Representation
➢ As per SA 580

No WR or Modification of WR as against expected – Indicates Significant Issues – Discuss
Issue with management – at the same time Re-evaluate integrity and effect on reliability
of WR, other audit evidence in general—take appropriate action – consider effect on opinion
As per SA 580 “Written Representations”, if management modifies or does not provide the
requested written representations, it may alert the auditor to the possibility that one or more
significant issues may exist.
The auditor shall discuss the matter with management; re-evaluate the integrity of management
and evaluate the effect that this may have on the reliability of representations (oral or written) and
audit evidence in general; and take appropriate actions, including determining the possible effect
on the opinion in the auditor’s report.
COMMON POINTS -- SA 240 & 450 - Refer QNO 14.0
COMMON POINTS -- ABILITY / SEC 143 / CARO - Refer QNO 14.0
➢ Special Audit by Client – Report not shared despite many reminders – No WR also given
In the instant case, the auditor observed that there was a special audit conducted at the instance of
the management on a possible suspicion of fraud. Therefore, the auditor requested for special audit
report which was not provided by the management despite of many reminders. The auditor also
insisted for written representation in respect of fraud on/by the company. For this request also
management remained silent.
➢ Auditor should perform detailed examination as explained above to find out is it a material
misstatement and then further whether fraud or error and ask for rectification.
SA 250
QNO Non-Compliance Old Course -(N12E, M16R, N16M, P17M, M20M, M21M)
23.000 Bhaskar CNO - SA250.060 New Course- (M18R, M20M, M21M,M22R)
While verifying the employee records in a company, it was found that a major portion of the labour
employed was child labour. On questioning the management, the auditor was told that it was outside
his scope of the financial audit to look into the compliance with other laws.
OR
CA. Young has been appointed as an auditor of Rama Ltd., a textile entity. While going through the
employee records of the company, CA. Young identified that most of the labourers employed are of the
age between 11-12 years. On enquiring the same, the management argues that there is no such
boundation with regard to employment of such lower age children and contends that it is out of the scope
of audit as well to check such compliance. Comment in the context of relevant standard on auditing
whether the contention of management is tenable.
▪ SA 250 “Consideration of Laws and Regulations in an Audit of Financial Statements”,
➢ Auditor should obtain S&A evidence regarding law having direct effect including tax & labour
laws
Compliance with Other Laws: As per SA 250, “Consideration of Laws and Regulations in an Audit of
Financial Statements”, the auditor shall obtain sufficient appropriate audit evidence regarding
compliance with the provisions of those laws and regulations generally recognised to have a direct
effect on the determination of material amounts and disclosures in the financial statements
including tax and labour laws.
➢ Non-Compliance may result in fines, litigations or other consequences
Further, non-compliance with other laws and regulations may result in fines, litigation or other
consequences for the entity, the costs of which may need to be provided for in the financial
statements but are not considered to have a direct effect on the financial statements.

➢ Auditor should understand Nature of act & circumstances→Possible effect on financial
statement→Discuss with management→if not satisfied obtain legal advice→if still not able
obtain sufficient & appropriate evidence→Modify as per SA 705→Impact on other areas
If the auditor becomes aware of information concerning an instance of noncompliance or suspected
non-compliance with laws and regulations, the auditor shall obtain: (Children working in factory
premises, could be contravention of child labour act)
• An understanding of the nature of the act and the circumstances in which it has occurred
(25 children were working in packing department under supervision of contractor without
identity card & age proof); and
• Further information to evaluate the possible effect on the financial statements. (Go
through law, amendments, rule to determine penalty, impact on production license etc.)
If the auditor suspects there may be non-compliance, the auditor shall discuss the matter with
management and, where appropriate, those charged with governance. If management or, as
appropriate, those charged with governance do not provide sufficient information that supports
that the entity is in compliance with laws and regulations and, in the auditor’s judgment, the effect
of the Suspected non-compliance may be material to the financial statements, the auditor shall
consider the need to obtain legal advice. (Discuss with management if required obtain legal advice
E.g., VODAFONE case).
If sufficient information about suspected non-compliance cannot be obtained, the auditor shall
evaluate the effect of the lack of sufficient appropriate audit evidence on the auditor’s opinion.
(Modify Opinion)
The auditor shall evaluate the implications of non-compliance in relation to other aspects of the
audit, including the auditor’s risk assessment and the reliability of written representations, and
take appropriate action. (MD / CFO both were aware & they also gave in writing there are no child
labour in fire cracker factory, affects reliability of WR)
➢ Major Portion of Labour Employed was Child Labour / Contention of Management that it
was outside scope of financial audit is not acceptable.
In the instant case, major portion of the labour employed in the company was child labour. While
questioning by auditor, reply of the management that it was outside his scope of financial audit to
look into the compliance with other laws is not acceptable as it may have a material effect on
financial statements.
➢ After performing audit procedures as given in SA 250, ensure that cost of fines l litigation
etc. are properly accounted and disclosed / if not express qualified or adverse opinion as
appropriate.
Thus, auditor should ensure the disclosure of above fact and provision for the cost of fines, litigation
or other consequences for the entity. In case if the auditor concludes that non-compliance has a
material effect on the financial statements and has not been adequately reflected in the financial
statements, the auditor shall express a qualified or adverse opinion on the financial statement.
SA 260
QNO Significant Difficulties During Audit New Course - (M22R)
M/s Manidhari & Associates have been appointed as an auditor of JIN Limited, a multinational company
dealing in spare parts. During the course of audit, CA Manidhari is facing many problems including the
problem of not getting the desired information from the management. Accordingly, he decided to
communicate with those charged with the governance about significant difficulties encountered
during the audit. CA Manidhari seeks your guidance on matters which can be considered as significant
difficulties as per SA 260.

Answer As per SA 260, “Communication with Those Charged with Governance”, significant difficulties encountered
during the audit may include such matters as:
(i) Significant delays by management, the unavailability of entity personnel, or an unwillingness by

management to provide information necessary for the auditor to perform the auditor’s procedures.
(ii) An unreasonably brief time within which to complete the audit.
(iii) Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
(iv) The unavailability of expected information.
(v) Restrictions imposed on the auditor by management.
(vi) Management’s unwillingness to make or extend its assessment of the entity’s ability to continue as a
going concern when requested.
In some circumstances, such difficulties may constitute a scope limitation that leads to a modification of the
auditor’s opinion.as per SA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report.
QNO Communication to Shareholders Vs TCWG Old Course - (N14E, P17M, M17R)

25.000 UNIQUE New Course (M18R, S20M)
Reporting to Shareholders vs Reporting to those Charged with Governance.
Answer Shareholder Vs TCWG Reporting
Report
Reporting to Shareholders Reporting to those Charged with Governance
(Applicability)
➢ Sec 143 makes it mandatory ➢ SA 260 makes it mandatory
Section 143 of the Companies Act, 2013 Standard on Auditing 260 deals with the
deals with the provisions relating to provisions relating to reporting to those
reporting to Shareholders. Thus, it is a Charged with Governance.
Statutory Audit Report which is addressed
to the members.
(Objective)
➢ True & Fair View ➢ Responsibilities, Planning, Significant
Statutory Audit Report is on true and fair Difficulties, Significant Matters,
view and as per prescribed Format. Content of AR
It is a reporting on matters those charged
with governance like scope of audit, audit
procedures, audit modifications, etc.
(Confidentiality)
➢ Public Document ➢ Private Document
Statutory Audit Reports are in public Reporting to those Charged with
domain. Governance is an internal document i.e.
private report.
SA 299
Responsibility of Joint Auditors & Old Course – (N04E, M15R, N15E, P17M, N17M, N18E, N18M, N19E)
QNO Difference of opinion amongst New Course (S17M, M18M,
28.100 Joint Auditor S21M)
KRP Ltd., at its annual general meeting, appointed Mr. X, Mr. Y and Mr. Z as joint auditors to conduct
auditing for the financial year 2015-16. For the valuation of gratuity scheme of the company, Mr. X, Mr. Y
and Mr. Z wanted to refer their own known Actuaries.
Due to difference of opinion, all the joint auditors consulted their respective Actuaries. Subsequently,
major difference was found in the actuary reports. However, Mr. X agreed to Mr. Y’s actuary report,

though, Mr. Z did not. Mr. X contends that Mr. Y’s actuary report shall be considered in audit report due to
majority of votes. Now, Mr. Z is in dilemma.
You are required to briefly explain the responsibilities of auditors when they are jointly and severally
responsible in respect of audit conducted by them and also guide Mr. Z in such situation.
OR
Excellent Bank Ltd. is a Public Limited Company.. The Bank appoints 3 Joint Auditors for the financial year
ending 31/03/2019. All the 3 Joint Auditors divide the work with mutual consent. Verification of
Consolidation, however, remained undivided.
All branches and zones were divided amongst the 3 Joint Auditors" During audit of zones, CA. Z, one of the
joint auditors expressed a concern about internal control in one of the large corporate branches situated in
his zone.
The irregularity was net reported, in the final accounts as the other 2 Joint Auditors were not in favour of
reporting and decision of not reporting the same was taken on the basis of majority. Subsequently, fraud
has been detected in the said branch which was audited by CA. Z.
Bank seeks your advice about the responsibility of the 3 Joint Auditors in the above situation.
▪ SA 299 on, “Responsibility of Joint Auditors”
Responsibility
A B
Specific/Separate Responsibility Joint Responsiblity For:
For:
1 Work divided. 1 Work not divided.
2a Assessment of risk relating to the areas of work Decisions taken by all the J.A together w.r.t ,NTE of the
2
allocated . audit procedures for common audit areas .
Evaluation of internal control relating to the areas of Matters brought to the notice of the J.A by other J.A
2b work allocated . 3
and on which there is an agreement among the J.A.
N.T.E of the audit procedures for work allocated to said Examining whether the F.S of the entity comply with
2c 4
joint auditor. relevant statute.
5 Presentation and disclosure Req of the F.S .
Ensuring that audit report complies with statutes, the app.

6
SA s and the relevant pronouncements issued by ICAI.
➢ Difference of Opinion Among Joint Auditors:

SA 299 on, “Responsibility of Joint Auditors” deals with the professional responsibilities, which the
auditors undertake in accepting such appointments as joint auditors. In respect of the work divided
amongst the joint auditors, each joint auditor is responsible only for the work allocated to him,
whether or not he has made a separate report on the work performed by him. On the other hand, the
joint auditors are jointly and severally responsible in respect of the audit conducted by them as under:
• in respect of the audit work which is not divided among the joint auditors and is carried out
by all of them;
• in respect of decisions taken by all the joint auditors concerning the nature, timing or extent
of the audit procedures to be performed by any of the joint auditors;
• in respect of matters which are brought to the notice of the joint auditors by any one of them
and on which there is an agreement among the joint auditors;
• for examining that the financial statements of the entity comply with the disclosure
requirements of the relevant statute.
• for ensuring that the audit report complies with the requirements of the relevant statute.
• it is the separate and specific responsibility of each joint auditor to study and evaluate the
prevailing system of internal control relating to the work allocated to him, the extent of
enquiries to be made in the course of his audit;
• the responsibility of obtaining and evaluating information and explanation from the
management is generally a joint responsibility of all the auditors;
• each joint auditor is entitled to assure that the other joint auditors have carried out their part
of work in accordance with the generally accepted audit procedures and therefore it would
not be necessary for joint auditor to review the work performed by other joint auditors.
1
Before finalizing their Audit Report:
1a
J.A shall Discuss and

Communicate with other
J.A s their respective
conclusions
2
Audit Report
3 4
Agreement with regard to the opinion: Disagreement with regard to the opinion:
4a JA is not bound by views of the majority regarding opinion or

matters to be covered in the audit report
Common audit report In case of disagreement in opinion or any matters to be covered

4b
by the audit report, they shall express their opinion in a
separate audit report.
Audit report by other J.As (Combined) shall make a reference to

4c the separate audit report,
Separate audit report shall also make reference to Audit report
by other J.As (Combined)
4d Such reference shall be made under the heading Other Matter

Paragraph as per Revised SA
SA Normally, the joint auditors are able to arrive at an agreed report. However, where the joint
auditors are in disagreement with regard to any matters to be covered by the report, each one of
them should express their own opinion through a separate report. A joint auditor is not bound by the
views of majority of joint auditors regarding matters to be covered in the report and should express
his opinion in a separate report in case of a disagreement.
Case I
Part III -- Facts
➢ In the instant case, there are three auditors, namely, Mr. X, Mr. Y and Mr. Z, jointly appointed as an
auditor of KRP Ltd. For the valuation of gratuity scheme of the Company they referred their own
known Actuaries. Mr. Z (one of the joint auditors) is not satisfied with the report submitted by Mr. Y’s
referred actuary. He is not agreed with the matters to be covered by the report whereas Mr. X agreed
with the same.
➢ Hence, as per SA 299, Mr. Z is suggested to express his own opinion through a separate report whereas
Mr. X and Mr. Y may provide their joint report for the same.
Case II (Excellent Bank Ltd)
Part III -- Facts
➢ In the instant case, Excellent Bank Ltd. Appoints 3 joint auditor for the financial year ending
31.03.2019. All the joint auditors divided the work with mutual consent. The only work which
remained undivided was verification of Consolidation. In accordance with SA 299, all the joint auditors
are responsible for the same.
Further, during audit of zone, CA Z, one of the joint auditors expressed a concern about internal
control in one of the large corporate branches situated in his zone, however, this irregularity was not

reported as 2 of the joint auditors (i.e. majority of the joint auditors ) were not in favour of the same.
Later on, fraud has been detected in the same branch which was audited by CA. Z
➢ In the present scenario, CA. Z brought this matter in the notice of the other 2 joint auditors and the
decision for not reporting was taken on majority basis and no separate opinion was expressed through
separate audit report pointing out irregularity. Thus, all the 3 joint auditors will be held responsible
for the fraud detected in the branch audited by CA. Z as per SA 299

Part 3 - SA 300 Series
SA 320
Revision of Materiality Old Course – (N09R, M15E,N16M,S17M,P17M,N17R,
QNO
BHASKAR CNO—SA320.080/ SA320.0400 M19M)
43.000
New Course – (S17M, M18E,S20M,S21M)
As an auditor of BRK Ltd Mr Preet applied the concept of materiality for the financial statements as a
whole on the basis of obtaining additional information of significant contractual arrangements that draw
attention to a particular aspect of a company's business, he wants to re-evaluate the materiality
concept Please guide him.
OR
“Auditor’s assessment of materiality may be different at the time of planning the engagement than
at the time of evaluating the results of his audit procedures” Discuss.
▪ SA 320, Materiality in Planning and Performing an Audit
➢ Types of Materiality: -
Determine Overall Strategy / While Determining Overall Strategy Determine FST Level
Materiality / Determine lower amount for TBD level if it’s affecting economic users / Also
determine performance materiality at FST level and TBD Level.
As per SA 320 while establishing the overall audit strategy, the auditor shall determine materiality
for the financial statement as a whole. He should set the benchmark on the basis of which he
performs his audit procedure. If, in the specific circumstances of the entity, there is one or more
particular classes of transactions, account balances or disclosures for which misstatements of lesser
amounts than the materiality for the financial statements as a whole could reasonably be
expected to influence the economic decisions of users taken on the basis of the financial
statements, the auditor shall also determine the materiality level or levels to be applied to those
particular classes of transactions, account balances or disclosures.
➢ Uses of Materiality: -
Planning / Performing / Evaluating Misstatements / Uncorrected Misstatements / Opinion
on Audit Report
SA 320 recommends that the concept of materiality is applied by the auditor both in planning and
performing the audit, and in evaluating the effect of identified misstatements on the audit and of
uncorrected misstatements, if any, on the financial statements and in forming the opinion in the
auditor’s report.
➢ Revision of Materiality: -
Auditor shall revise financial statement materiality / TBD level materiality if auditor gets
information which was not available initially
The auditor shall revise materiality for the financial statements as a whole (and, if applicable, the
materiality level or levels for particular classes of transactions, account balances or disclosures) in
the event of becoming aware of information during the audit that would have caused the auditor
to have determined a different amount (or amounts) initially.
➢ What if materiality level is Lowered? –
If lower materiality is determined than initial, then think whether it is necessary to revise
performance materiality and NTE of further audit procedures
If the auditor concludes that a lower materiality for the financial statements as a whole (and, if
applicable, materiality level or levels for particular classes of transactions, account balances or
disclosures) than that initially determined is appropriate, the auditor shall determine whether it is
necessary to revise performance materiality, and whether the nature, timing and extent of the
further audit procedures remain appropriate

➢ Reasons for change: -
Change in Circumstances / New Information / Change in Understanding of The Entity & its
Operation after performing further audit procedures
Materiality for the financial statements as a whole (and, if applicable, the materiality level or levels
for particular classes of transactions, account balances or disclosures) may need to be revised as a
result of a change in circumstances that occurred during the audit (for example, a decision to
dispose of a major part of the entity’s business), new information (Ongoing Fraud by MD in
Purchases), or a change in the auditor’s understanding of the entity and its operations (Bonus is
much complicated than thought) as a result of performing further audit procedures.
➢ Example: -
• Actual Financial Results are substantially different from anticipated period end
financial results.
For example, if during the audit, it appears as though actual financial results are likely to
be substantially different from the anticipated period end financial results that were used
initially to determine materiality for the financial statements as a whole, the auditor
revises that materiality.
➢ Mr Preet determined FST level materiality / Got additional information on contractual
arrangements on Particular Aspect of Business
In the instant case, Mr. Preet, as an auditor of BRK Ltd. has applied the concept of materiality for
the financial statements as a whole. But he wants to re-evaluate the materiality concept on the basis
of additional information of significant contractual arrangements which draws attention to a
particular aspect of the company’s business.
➢ If auditor concludes revision is necessary, then revise materiality and also NTE of further
audit procedures.
If the auditor concludes a lower materiality for the same, then he should consider the fact that
whether it is necessary to revise performance materiality and whether the nature, timing and
extent of the further audit procedures remain appropriate.
Thus, Mr. Preet can re-evaluate the materiality concepts after considering the necessity of such
revision.
SA 330
Test of Control Interim Period -- Identifying & Disclosing Old Course – (N21R)
QNO
Related Party New Course – (N21R)
47.500
UNIQUE
While formulating the audit plan and responding to the risks of material misstatement identified and
assessed in related party transaction and relationships, Ms. K the engagement manager of the audit team
of ABC Limited, decided to rely upon the internal controls placed for identification and disclosure of
related party relationships and transactions in accordance with the applicable financial reporting
framework.
You are requested to guide Ms. K regarding the necessity to test the controls to obtain sufficient and
appropriate audit evidence. Also guide, whether Ms. K can use the audit evidence obtained,
regarding operative effectiveness of control on identification and disclosure of related party
relationships and transactions, in the interim period.
Answer ➢ SA 550 FAP
As per SA 550, “Related Parties”, according to para on “Responses to the risks of material
misstatement associated with related party relationships and transactions”, the auditor

should design and performs further audit procedures to obtain sufficient appropriate audit
evidence about the assessed risks of material misstatement associated with related party
relationships and transactions.
➢ SA 330--which Controls/NTE
Further, as per SA 330, “The Auditor’s Responses to Assessed Risks”, the auditor shall design
and perform tests of controls to obtain sufficient appropriate audit evidence as to the
operating effectiveness of relevant controls when:
(a) the auditor’s assessment of risks of material misstatement at the assertion level includes an
expectation that the controls are operating effectively (i.e., the auditor intends to rely on the
operating effectiveness of controls in determining the nature, timing and extent of substantive
procedures); or
(b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at the
assertion level.
In designing and performing tests of controls, the auditor shall obtain more persuasive audit
evidence the greater the reliance the auditor places on the effective ness of a control.
Moreover, the auditor shall test controls for the particular time, or throughout the period, for
which the auditor intends to rely on those controls.
➢ Interim Period
When the auditor obtains audit evidence about the operating effectiveness of controls during
an interim period, the auditor shall:
(a) Obtain audit evidence about significant changes to those controls subsequent to the
interim period; and
(b) Determine the additional audit evidence to be obtained for the remaining period.
In the current case, Ms. K shall design and perform tests of controls to obtain sufficient appropriate
audit evidence as to the operating effectiveness of relevant controls as she intends to rely on the
operating effectiveness of controls in determining the nature, timing and extent of substantive
procedures.
Further, she is also required to obtain the audit evidence about significant changes to those controls
subsequent to the interim period along with the additional audit evidence to be obtained for the
remaining period in accordance with the requirements of Standards on Auditing as discussed above.
Relying on previous year test of controls. Old Course – (M13E, N16R, P17M, N19M)
QNO
BHASKAR CNO—SA330.060 New Course – (N18R ,
49.000
N19M,M22R)
In the course of audit of Z Ltd, its auditor wants to rely on audit evidence obtained in previous audit in
respect of effectiveness of internal controls instead of retesting the same during the current audit. As an
advisor to the auditor kindly caution him about the factors that may warrant a re-test of controls.
▪ SA 330, ‘The Auditor’s Responses to Assessed Risks
➢ Retesting Controls: - Its matter of professional judgement to decide whether to retest controls
and what should be length of time between retesting / Even if there are no changes auditor should
test controls once in every third audit. Shall test some controls each audit to avoid possibility of
testing all controls in one audit.
As per SA 330 changes may affect the relevance of the audit evidence obtained in previous audits
such that there may no longer be a basis for continued reliance. The auditor’s decision on whether
to rely on audit evidence obtained in previous audits for control is a matter of professional

judgment. In addition, the length of time between retesting such controls is also a matter of
professional judgment.
If there have not been such changes, the auditor shall test the controls at least once in every third
audit and shall test some controls each audit to avoid the possibility of testing all the controls on
which the auditor intends to rely in a single audit period with no testing of controls in the
subsequent two audit periods.
➢ Factors affecting retesting on controls: -

Factors that may warrant a re-test of controls are-
Retesting should be done if there are three Deficiencies in PM’s Computer Deficient Control
Environment / Deficient General IT Controls / Deficient Monitoring on Controls / Personnel
Changes / Manual Controls are Significant / Changing Circumstances.
• D- Deficient Monitoring of controls. (Purchases not covered in scope of Internal Audit)
• D- A Deficient Control environment. (Poor attitude of management towards internal
control system is encouragement to wrong doers)
• D- Deficient General IT-controls. (Purchase entries are ID restricted, but people use each
other’s computer, and they know username passwords)
• P- Personnel changes that significantly affect the application of the control. (Purchase &
Store Manager Retired at the beginning of the year, they were replaced my new comers)
• M- A significant Manual element to the relevant controls. (Quotation Selection & Issuing
PO is subjective matter and depends on approving authority, behaviour can change over
period of time)
• C- Changing circumstances that indicate the need for changes in the control. (GST)

Understanding Services Given by SO Old Course – (M06E, M11E, M12M, N12R, N13E, N14R, M16R,
QNO
BHASKAR CNO--SA402.020/SA402.040 P17M, M17R,N19M)
52.000
New Course – (N18R, N18M,N19M)
In the course of audit of Raja and Rank Ltd, the audit manager of Sharma & Co observed that Raja and
Rank Ltd has outsourced certain activities to an outsourcing agency.
(a) As the engagement partner, guide the audit manager in the assessment of services provided by the
outsourcing agency in relation to the audit
(b)What are sources of information for understanding SO services.
(c) Discuss the procedure to be applied in case the user auditor is unable to obtain a sufficient
understanding from the user entity?
▪ SA 402, Audit Considerations relating to an Entity Using a Service Organisation
SA 402 / SAE 3402
SA 402 SAE 3402

Applicable Applicable
USER AUDITOR
SO
AUDITOR
SALARY PROCESSING IS
OUTSOURCED
USER ENTITY
SERVICE
ORGANISATION
SALARY PROCESSING IS
OUTSOURCED
USER ENTITY
SERVICE ORGANISATION
25th of Every Month, One Copy of all
letters is sent to SO with other Info
CFO Finalise & puts

signature Naresh Receives and
Management I/C/S Confirms it from Clerk
1. Compares with Master File
2. Select 10 Employees in random
selection and check detailed
HR heads approves calculation Mahesh types it and
it with signature 3. 5 Month graphical analysis coverts it in electronic form
Clerk prepares Jignesh uploads it and

documents in orders processing
Triplicate
Ganesh evaluates it ,
Email
finalises & send email

a)
➢ Obtaining Understanding: - Obtaining understanding of entity & its environment is covered
under SA 315 / SA 402 further explains which information should be obtained if services
of SO is used.
As per SA 402 for obtaining understanding of the user entity in accordance with SA 315, the user
auditor shall obtain an understanding of how a user entity uses the services of a service organization
in the user entity’s operation including:
➢ Four Information points are Related to Services.
Nature of Services / Significance of Services / Effect of Services on ICS / Nature
& Materiality of TBD affected by Service.
• The nature of services provided by the service organisation and the significance of
such services to the user entity, including its effect on the internal control of user
entity.
• The nature and materiality of the transactions processed, or accounts or financial
reporting processes affected by the service organisation.
➢ Three Information Points are Related to SO
Nature of Relationships with SO / Degree of Interaction with SO / Relevant Controls
applied on transactions processed by SO
• The nature of the relationship between the user entity and the service
organization including the relevant contractual terms for the activities undertaken
by the service organisation.
• The degree of interaction between the activities of the service organization and
those of user entity and
When obtaining an understanding of internal control relevant to the audit in accordance
with SA 315 “Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment”, the user auditor shall evaluate the design
and implementation of relevant controls at the user entity that relate to the services
provided by the service organisation, including those that are applied to the transactions
processed by the service organisation.
(b)
➢ Sufficient Understanding should be obtained Services Received & SO, so that auditor can
go for Identification & Assessment of RMM.
The user auditor shall determine whether a sufficient understanding of the nature and significance
of the services provided by the service organisation and their effect on the user entity’s internal
control relevant to the audit has been obtained to provide a basis for the identification and
assessment of risks of material misstatement.
Sources of Information –
Information on the nature of the services provided by a service organisation may be available from
a wide variety of sources, such as 1. the contract or service level agreement between the user
entity and the service organisation; 2. system overviews; 3. technical manuals; 4. user
manuals; 5. reports by service organizations; 6. reports by the service auditor; 7. internal
auditors or regulatory authorities on controls at the service organisation; 8. including
management letters, if available.
Knowledge obtained through the user auditor’s experience with the service organisation, for
example through experience with other audit engagements, may also be helpful in obtaining an
understanding of the nature of the services provided by the service organisation. This may be
particularly helpful if the services and controls at the service organisation over those services are
highly standardized.
(c)
➢ If Sufficient understanding is not obtained from User Entity, then following procedures can
give auditor better understanding. (In sequence of ease of doing procedures)
Type 1 or Type 2 Report / Contact SO through UE / Using Another Auditor /
Visiting SO

If the user auditor is unable to obtain a sufficient understanding from the user entity, the
user auditor shall obtain that understanding from one or more of the following procedures:
• Contacting the service organisation, through the user entity, to obtain specific
information;
• Obtaining a Type 1 or Type 2 report, if available;
• Using another auditor to perform procedures that will provide the necessary
information about the relevant controls at the service organisation.
• Visiting the service organisation and performing procedures that will provide the
necessary information about the relevant controls at the service organisation;
• -
Author’s Note:
It is a Kind of Master answer for SA 402 covering more than a single topic. Please consider the question
asked and don’t just write the entire answer.
Choose the relevant part of answer on the basis of question asked.
QNO Sub Service Organisation Old Course – (M15E, P17M)

53.000 BHASKAR CNO--SA402.100 New Course –(S17M, S21M)
When a sub-service organization performs services for a service organization, there are two alternative
methods of presenting the description of controls The service organization determines which method
will be used As a user auditor what information would you obtain about controls at a sub-service
organization?
➢ Use of Subservice Organisation: - It may happen that UE is taking services from, SO which
are in turn given by SSO. SSO can be related to SO or sperate entity all together.
In accordance with SA 402 a user entity may use a service organisation that in turn uses a sub-
service organisation to provide some of the services provided to a user entity that are part of the
user entity’s information system relevant to financial reporting. The sub-service organisation may
be a separate entity from the service organisation or may be related to the service organisation.
➢ Controls at SSO: - Auditor needs to consider controls at SSO. Two important factors
Interactions / Nature & Materiality of Transactions in determining significance of SO &
SSO controls. Interaction will include interaction between UE / SO / SSO
A user auditor may need to consider controls at the sub-service organisation. In situations where
one or more sub-service organisations are used, the interaction between the activities of the user
entity and those of the service organisation is expanded to include the interaction between the
user entity, the service organisation and the sub-service organisations. The degree of this
interaction, as well as the nature and materiality of the transactions processed by the service
organisation and the sub-service organisations are the most important factors for the user auditor
to consider in determining the significance of the service organisation’s and sub-service
organisation’s controls to the user entity’s controls.
➢ Sufficient Understanding: - Nature of Services / Significance of Services / Effect of
Services on ICS
Further, the user auditor shall determine whether a sufficient understanding of the nature and
significance of the services provided by the service organisation and their effect on the user entity's
internal control relevant to the audit has been obtained to provide a basis for the identification and
assessment of risks of material misstatement.
➢ If Sufficient understanding is not obtained from User Entity, then Type 1 / Type 2 can
give auditor better understanding.
Two Methods of Reporting: - SO Auditor may either include or exclude control objectives
& controls of SSO. These 2 methods of reporting are called inclusive & carve out method
respectively.

It is mandatory for SO to include description of controls at SSO in its description of
controls. If carve out method of reporting is used and controls at SSO are relevant then
auditor needs to apply requirements of SA 402 in respect of SSO
If the user auditor is unable to obtain a sufficient understanding from the user entity, the user
auditor shall obtain that understanding by application of the following two methods of presenting
description of internal controls i.e. (i) Type 1 report; or (ii) Type 2 report.
If a service organisation uses a subservice organisation, the service auditor's report may either
include or exclude the subservice organisation's relevant control objectives and related controls
in the service organisation's description of its system and in the scope of the service auditor's
engagement.
These two methods of reporting are known as the inclusive method and the carve-out method
respectively.
In either method, the service organisation includes in its description of controls a description of the
functions and nature of the processing performed by the subservice organisation. If the Type 1 or
Type 2 report excludes the control at a subservice organization and the services provided by the
subservice organization are relevant to the audit of the user entity’s financial statements, the user
auditor is required to apply the requirements of the SA 402 in respect of the subservice organization.
The nature and extent of work to be performed by the user auditor regarding the services provided
by a subservice organization depend on the nature and significance of those services to the user
entity and relevance of those services to the audit.
QNO Giving Reference of Type 1 & Type 2 report Old Course – (N20R,M21M)
53.050 BHASKAR CNO--SA402.120 New Course–(N20R,N21M,M21M,N22M)
ENN Limited is availing the services of APP Private Limited for its payroll operations. Payroll cost accounts
for 65% of total cost for ENN Limited. APP Limited has provided the type 2 report as specified under SA
402 for its description, design and operating effectiveness of control.
APP Private Limited has also outsourced a material part of payroll operation M/s SMP & Associates in such
a way that M/s SMP & Associates is sub-service organization to ENN Limited. The Type 2 report which
was provided by APP Private Limited was based on carve-out method as specified under SA 402.
CA Raman while reviewing the unmodified audit report drafted by his assistant found that, a reference
has been made to the work done by the service auditor. CA Raman hence asked his assistant to remove
such reference and modify report accordingly.
Comment whether CA Raman is correct in removing the reference of the work done by service
auditor?
Part I -- Relevant Standards & Laws
➢ Reporting by the User Auditor:
As per SA 402, “Audit Considerations Relating to an Entity Using a Service Organization”, the user
auditor shall modify the opinion in the user auditor’s report in accordance with SA 705, “Modifications
to the Opinion in the Independent Auditor’s Report”, if the user auditor is unable to obtain sufficient
appropriate audit evidence regarding the services provided by the service organization relevant to the
audit of the user entity’s financial statements.
The user auditor shall not refer to the work of a service auditor in the user auditor’s report containing
an unmodified opinion unless required by law or regulation to do so. If such reference is required by
law or regulation, the user auditor’s report shall indicate that the reference does not diminish the user
auditor’s responsibility for the audit opinion.
➢ CA Raman while reviewing the unmodified audit report drafted by his assistant found that, a reference
has been made to the work done by the service auditor.
➢ Thus, in view of above, contention of CA. Raman in removing reference of the work done by service
auditor is in order as in case of unmodified audit report, user auditor cannot refer to the work done
by service auditor.

SA 450
QNO Sources of Misstatement Old Course – (M12M, N12R, M13E, P17M, M18M)
54.000 BHASKAR CNO--SA450.020 New Course – (N18R,M22R)
In audit plan for T Ltd, as the audit partner you want to highlight the sources of misstatements, arising
from other than fraud, to your audit team and caution them Identify the sources of misstatements.
▪ SA 450, Evaluation of Misstatements identified during the Audit
➢ According to SA 450, the following are the sources of misstatements arising from other than fraud
omission / Inaccurate Gathering of Data / Inappropriate selection & application of
AP / Inaccurate Processing / Unreasonable Estimates by Mgt / Incorrect Estimate
because of Overlooking or Misinterpretation
• An omission of an amount or disclosure;
• An inaccuracy in gathering or processing data from which the financial statements
are prepared;
• Judgments of management concerning accounting estimates that the auditor
considers unreasonable or the selection and application of accounting policies
that the auditor considers inappropriate.
• An incorrect accounting estimate arising from overlooking, or clear
misinterpretation of facts; and

Expert report inconsistent with other audit Old Course – (N11R, N16R, P17M, M19R)
QNO
evidence New Course – (S17M, M19R, S21M)
58.500
BHASKAR CNO--SA500.100
Based upon the legal opinion of a leading advocate, X Ltd made a provision of Rs 5 crores towards Income
Tax liability The assessing authority has worked out the liability at Rs 50 crores It is observed that the
opinion of the advocate was inconsistent with legal position with regard to certain revenue items
OR
Based upon the legal opinion of a leading advocate, X Ltd. made a provision of ` 3 crores towards Income
Tax liability. The assessing authority has worked out the liability at ` 5 crores. It is observed that the opinion
of the advocate was inconsistent with legal position with regard to certain revenue items.
▪ SA 500 “Audit Evidence”
➢ SA 500
SA 500 on "Audit Evidence" discusses the auditor's responsibility in relation to and the procedures
the auditor should consider in, using the work of an expert as audit evidence.
➢ Use of Expert
During the audit, the auditor may seek to obtain, in conjunction with the client or independently,
audit evidence in the form of reports, opinions, valuations and statements of an expert, e.g., legal
opinions concerning interpretations of agreements, statutes, regulations, notifications, circulars,
etc.
➢ Responsibility
Before relying on advocate's opinion, the auditor should have seen that opinion given by the expert
is prima facie dependable. The question states very clearly that the opinion of the advocate was
inconsistent with legal position with regard to certain items. It is, perhaps, quite possible that auditor
did not seek reasonable assurance as to the appropriateness of the source data, assumptions and
methods used by the expert properly.
➢ Case Discussion
In fact, SA 500 makes it incumbent upon the part of the auditor to resolve the inconsistency by
discussion with the management and the expert. In case, the experts' work does not support the
related representation in the financial information the inconsistency in legal opinions could have
been detected by the auditor if he had gone through the same.
➢ Conclusion
This seems apparent having regard to wide difference in the liability worked out by the assessing
authority. Under the circumstance, the auditor should have rejected the opinion and insisted upon
making proper provision.
SA 501
Physical Verification & Cases it is Impractical Old Course – ( M13M, M15R, N15E, M16M, P17M,
QNO
BHASKAR CNO--SA501.040/SA501.080 M17M, M18M, M18E, M20R)
60.000
New Course – (M18R, M20R, S21M, N22M)
XYZ Ltd supplies navy uniforms across the country The company has 4 warehouses at different locations
throughout the India and 5 warehouses at the borders The major stocks are generally supplied from the
borders XYZ Ltd appointed M/s MNO & Co to conduct its audit for the financial year 2016-17 Mr O, partner
of M/s MNO & Co, attended all the physical inventory counting conducted throughout the India but could
not attend the same at borders due to some unavoidable reason.

You are required to advise M/s MNO & Co,
(a) How sufficient appropriate audit evidence regarding the existence and condition of inventory may
be obtained?
(b) How is an auditor supposed to deal when attendance at physical inventory counting is
impracticable?
OR
"RIM Private Ltd is engaged in the business of manufacturing of water bottles and is experiencing
significant increase in turnover year on year. During the financial year ended 31 March 2019, the company
carried out a detailed physical verification of its inventory and property, plant and equipment.
You are the auditor of RIM Private Ltd. The inventory as at the end of the year was ` 2.25 crores. Due to
unavoidable circumstances, you could not be present at the time of annual physical verification.
Under the above circumstances how would you ensure that the physical verification conducted by
the management was in order?"
OR
The Engagement Partner of the audit team of High Inventory Limited assessed that the inventory is
material with respect to the audit of the financial statement for the current period. Upon inquiring with
the management, the Engagement Partner identified that the management will be performing an annual
physical inventory count at all the warehouses where the entity stores and maintains its inventory.
Moreover, management confirmed in its written representation that they will be performing a 100%
physical count of inventory for the current period. As a result, the engagement Partner decided not to
perform any physical count of inventory as it will be a duplication of the work. Moreover, he decided that
the written representation from management stating “the inventory exists and is in appropriate physical
condition” will be sufficient and appropriate with respect to audit evidence to conclude that the inventory
balance in the financial statement is free from any material misstatement. In the light of SA 501, evaluate
whether the decision taken by the Engagement Partner is appropriate or not.
▪ SA 501, Audit Evidence- Specific Considerations for Selected Items
a)
➢ Sufficient & Appropriate Evidence: - When inventory is material obtain S&A evidence for
Existence & Condition
As per SA 501 When inventory is material to the financial statements, the auditor shall obtain
sufficient appropriate audit evidence regarding the existence and condition of inventory by:
➢ Two steps to obtain evidence
• Step 1: - Attend physical verification and perform following Evaluate Mgt
instructions & procedures, obtain evidence foe reliability of procedures / Observe
counting / Inspect inventory / Perform test counts
Attendance at physical inventory counting, unless impracticable
• Evaluate management’s instructions and procedures for recording and controlling
the results of the entity’s physical inventory counting; Obtaining audit evidence as
to the reliability of management’s count procedure
• Observe the performance of management’s count procedures
• Inspect the inventory; and
• Perform test counts; and
• Step 2: - Performing audit procedures on final inventory records and comparing
them with actual inventory count results
Performing audit procedures over the entity’s final inventory records to determine
whether they accurately reflect actual inventory count results.
• Suitable for both as Test of Controls or Substantive Procedures
These procedures may serve as test of controls or substantive procedures depending on the
auditor’s risk assessment, planned approach and the specific procedures carried out.
(b)
➢ Reasons for Impractical Inventory Counting: - Nature & Location of Inventory
In some cases, attendance at physical inventory counting may be impracticable.

This may be due to factors such as the nature and location of the inventory, for example, where
inventory is held in a location that may pose threats to the safety of the auditor. The matter of
general inconvenience to the auditor, however, is not sufficient to support a decision by the auditor
that attendance is impracticable.
➢ Example of Alternative Procedures: - Verify Subsequent Sale
In some cases where attendance is impracticable, alternative audit procedures, for example
inspection of documentation of the subsequent sale of specific inventory items acquired or
purchased prior to the physical inventory counting, may provide sufficient appropriate audit
evidence about the existence and condition of inventory.
➢ Alternative Procedures Doesn’t Give S&A Evidence – Modify Opinion as per SA 705
In other cases, however, it may not be possible to obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory by performing alternative audit procedures. In
such cases, SA 705 requires the auditor to modify the opinion in the auditor’s report as a result of
the scope limitation.
➢ SA 501 Specific Principle: - If impractical Perform Alternative Procedures / If not possible
then modify as per SA 705
If attendance at physical inventory counting is impracticable, the auditor shall perform alternative
audit procedures to obtain sufficient appropriate audit evidence regarding the existence and
condition of inventory. If it is not possible to do so, the auditor shall modify the opinion in the
auditor’s report in accordance with SA 705.
➢ SA 200 General Principle: - Difficulty / Time / Cost is no itself valid basis to omit audit
procedure for which there is no alternative or evidence available is less than persuasive
In SA 200, the matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor
to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence
that is less than persuasive.
SA 505
External Confirmation (Use of Negative Confirmation Old Course – (M14E, P17M)

QNO
Request Inappropriate) New Course – (S17M, M18R, S21M)
63.000
During the course of audit of Moon Limited the auditor received some of the confirmation of the balances
of trade payables outstanding in the balance sheet through external confirmation by negative
confirmation request. In the list of trade payables, there are number of trade payables of small
balances except one old outstanding of Rs 25 Lacs, of whom, no confirmation on the credit balance
received. Comment with respect to Standard of Auditing.
▪ SA 505 “External Confirmation”
➢ Negative Confirmation Definition: - Confirming party should response only if they disagree
with info given in EC request.
As per SA 505, Negative Confirmation is a request that the confirming party respond directly to the
auditor only if the confirming party disagrees with the information provided in the request.
➢ Less Persuasive: - In NCR there is no response if TP agrees to Info. In PCR there is
response with confirmation if info agrees. NCR provides less persuasive evidence because
if there is no response, it may be because request is not received, Or they may not have
replied because information disagreement may be favourable for them. Or they were just
careless to reply. Hence no response is not explicitly indicating accuracy of information.
NCR should be used for large number of small homogenous balances. It should not be used
for big balances.

Negative confirmations provide less persuasive audit evidence than positive confirmations. The
failure to receive a response to a negative confirmation request does not explicitly indicate receipt
by the intended confirming party of the confirmation request or verification of the accuracy of the
information contained in the request. Accordingly, a failure of a confirming party to respond to a
negative confirmation request provides significantly less persuasive audit evidence than does a
response to a positive confirmation request. Confirming parties also may be more likely to respond
indicating their disagreement with a confirmation request when the information in the request is
not in their favour, and less likely to respond otherwise.
➢ No Response: - No response in NCR does not means misstatement / As NCR requires to
respond only if there is disagreement / if Auditor has doubt he can examine subsequent
cash disbursements / correspondence with TP / Examine other documents such as GRN
etc
Further non-response for negative confirmation request does not means that there is some
misstatement as negative confirmation request itself is to respond to the auditor only if the
confirming party disagrees with the information provided in the request. In case of non-response,
the auditor may examine subsequent cash disbursements or correspondence from third parties,
and other records, such as goods received notes.
➢ Use of NCR: - Auditor has used NCR. There are many small credit balances, but one
balance is of 25 lakhs and it is old outstanding.
In the instant case, the auditor sent the negative confirmation requesting the trade payables having
outstanding balances in the balance sheet while doing audit of Star Limited. One of the old
outstanding of Rs 25 lacs has not sent the confirmation on the credit balance.
➢ Doubts: - After using NCR, if auditor still has doubts and need more evidence. He should
perform further audit procedures. Specially for old outstanding 25 lakh balance. He can go
for PCR such balance.
But, if the auditor identifies factors that give rise to doubts about the reliability of the response to
the confirmation request, he shall obtain further audit evidence to resolve those doubts.
External Confirmation (Refusal) Old Course – (M05E, M11E, M12M, N12R, M13M, M13E, P17M,
QNO
BHASKAR CNO--SA505.100 M17M, M20R)
65.000
New Course – (M18E, M20R,S21M)
The accountant of V Ltd has requested you, not to send balance confirmations to a particular group of
trade receivables since the said balances are under dispute and the matter is pending in the Court as
a Statutory Auditor, how would you deal?
▪ SA 505 “External Confirmation”
➢ Refusal to send a Confirmation Request: - Inquire as to management’s reasons & Seek audit
evidence as to their validity / Evaluate the implications (RMM / ROF) / Perform alternative
audit procedures.
If management refuses to allow the auditor to send a confirmation request, the auditor shall:
• Inquire as to management’s reasons for the refusal, and seek audit evidence as to their
validity and reasonableness;
• Evaluate the implications of management’s refusal on the auditor’s assessment of the
relevant risks of material misstatement, including the risk of fraud, and on the nature,
timing and extent of other audit procedures; and
• Perform alternative audit procedures designed to obtain relevant and reliable audit
evidence.
➢ Refusal is unreasonable & unable to obtain relevant and reliable audit evidence:- Modify
opinion as per SA 705

If the auditor concludes that management’s refusal to allow the auditor to send a confirmation
request is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence from
alternative audit procedures, the auditor shall communicate with those charged with governance in
accordance with SA 260. The auditor also shall determine the implications for the audit and the
auditor’s opinion in accordance with SA 705.
SA 510
Audit Procedures for Opening Old Course – (N04E, N09E, N13R, N14R, M15E, M16M, N16M P17M,
QNO Balance N17R, M18M, N18R, N19M, N19E)
66.000 BHASKAR CNO-- New Course – (S17M, N18R, N18M, M18M, N19M,
SA510.020/SA510.040 N19E, S21M)
a) What are ‘Initial Audit Engagements’?
(b) In an initial audit engagement, the auditor will have to satisfy about the sufficiency and
appropriateness of ‘Opening Balances’ to ensure that they are free from misstatements, which may
materially affect the current financial statements. Lay down the audit procedure, you will follow in
cases: -
(i) when the financial statements are audited for the preceding period by another auditor; and
(ii) when financial statements are audited for the first time.
(c) If, after performing the procedure, you are not satisfied about the correctness of ‘Opening Balances’;
what approach you will adopt in drafting your audit report in two situations mentioned in (b) above?
OR
You have been appointed as the auditor of Top Health Ltd. for 2017-18 which was audited by CA
Trustworthy in 2016-17. As the Auditor of the company state the steps you would take to ensure that
the Closing Balances of 2016-17 have been brought to account in 2017-18 as Opening Balances and
the Opening Balances do not contain misstatements.
▪ SA 510 “Initial Audit Engagements – Opening Balances
➢ Initial Audit Engagement: - Prior period FST Not Audited or Audited by Predecessor
Auditor
As per SA 510 “Initial Audit Engagements - Opening Balances”, initial audit engagement is an
engagement in which either:
• The financial statements for the prior period were not audited; or
• The financial statements for the prior period were audited by a predecessor auditor.
➢ Audit Procedures: -
• Check whether closing balances have been correctly brought forward from last year
ledger. / Agree opening balance with the most recent financial statements / Read
predecessor audit report if any. (If any modification it should be marked as RMM)
/ If any adjustment is shown as prior period item, trace to previous period
documents. / Whether audit procedures performed in the current period provide
evidence relevant to the opening balances
The auditor shall obtain sufficient appropriate audit evidence about whether the opening
balances contain misstatements that materially affect the current period’s financial
statements by:
• Determining whether the prior period’s closing balances have been correctly
brought forward to the current period or, when appropriate, any adjustments have
been disclosed as prior period items in the current year’s Statement of Profit and
Loss;
• The auditor shall read the most recent financial statements, if any, and the
predecessor auditor’s report thereon, if any, for information relevant to opening
balances, including disclosures.
• Performing one or more of the following:

o Where the prior year financial statements were audited, perusing the
copies of the audited financial statements including the other relevant
documents relating to the prior period financial statements;
o Evaluating whether audit procedures performed in the current period
provide evidence relevant to the opening balances; or
o Performing specific audit procedures to obtain evidence regarding the
opening balances.
• Determining whether the opening balances reflect the application of appropriate
accounting policies; and
➢ Current Audit Procedures to give evidence about opening balance: -
• For CA & CL: - Collection or Payment of Op balances will give evidence about
existence, completeness, valuation, rights & obligation.
For current assets and liabilities, some audit evidence about opening balances may be
obtained as part of the current period’s audit procedures. For example, the collection/
payment of opening accounts receivable/ accounts payable during the current period will
provide some audit evidence of their existence, rights and obligations, completeness and
valuation at the beginning of the period.
• For other Assets & Liabilities: - Documentary evidence regarding opening balance /
Confirmation from third parties
In respect of other assets and liabilities such as property plant and equipment, investments,
long term debts, the auditor will examine the records relating to opening balances. The
auditor may also be able to get the confirmation from third parties (e.g., balances of long-
term loan obtained from banks can be confirmed from the Bank Loan statement).
➢ If the auditor obtains audit evidence that the opening balances contain misstatements that could
materially affect the current period’s financial statements, the auditor shall perform such additional
audit procedures as are appropriate in the circumstances to determine the effect on the current
period’s financial statements. If the auditor concludes that such misstatements exist in the current
period’s financial statements, the auditor shall communicate the misstatements with the
appropriate level of management and those charged with governance.
➢ Drafting Audit Report: If the auditor is unable to obtain sufficient appropriate audit evidence
regarding the opening balances, the auditor shall express a qualified opinion or a disclaimer of
opinion, as appropriate. Further, If the auditor concludes that the opening balances contain a
misstatement that materially affects the current period’s financial statements, and the effect of the
misstatement is not properly accounted for or not adequately presented or disclosed, the auditor
shall express a qualified opinion or an adverse opinion.
QNO No Change, Opening Balance Case Old Course – (N15R, N17M, P17M, N18M, M20M)
66.100 BHASKAR CNO--SA510.020 New Course – (N18M, M20M)
CA. Jack, a recently qualified practicing Chartered Accountant got his first audit assignment of Futura (P)
Ltd. for the financial year 2017-18. He obtained all the relevant appropriate audit evidence for the items
related to Statement of Profit and Loss. However, while auditing the Balance Sheet items, CA. Jack left out
obtaining appropriate audit evidence, say, confirmations, from the outstanding Accounts Receivable
amounting Rs. 150 lakhs continued as it is from the last year, on the affirmation of the management
that there is no receipts and further credits during the year. CA. Jack, therefore, excluded from the
audit programme, the audit of accounts receivable on the understanding that it pertains to the
preceding year which was already audited by predecessor auditor. Comment.
OR
CA. Mack, a recently qualified practicing Chartered Accountant got his first audit assignment of Captura
(P) Ltd. for the financial year 2017-18. He obtained all the relevant appropriate audit evidence for the
items related to Statement of Profit and Loss. However, while auditing the Balance Sheet items, CA. Mack
left out obtaining appropriate audit evidence, say, confirmations, from the outstanding Accounts
Receivable amounting Rs. 145 lakhs continued as it is from the last year, on the affirmation of the
management that there is no receipts and further credits during the year. CA. Mack, therefore, excluded

from the audit programme, the audit of accounts receivable on the understanding that it pertains to the
preceding year which was already audited by predecessor auditor. Comment

▪ SA 510 “Initial Audit Engagements – Opening Balances
➢ Opening Balance Procedures
As per SA 510 “Initial Audit Engagements – Opening Balances”, while conducting an initial audit
engagement, the objective of the auditor with respect to opening balances is to obtain sufficient
appropriate audit evidence about whether –
• Opening balances contain misstatements that materially affect the current period’s
financial statements; and
• Appropriate accounting policies reflected in the opening balances have been consistently
applied in the current period’s financial statements or changes thereto are properly
accounted for and adequately presented and disclosed in accordance with the applicable
financial reporting framework.
When the financial statements for the preceding period were audited by another auditor, the
current auditor may be able to obtain sufficient appropriate audit evidence regarding opening
balances by perusing the copies of the audited financial statements.
Ordinarily, the current auditor can place reliance on the closing balances contained in the financial
statements for the preceding period, except when during the performance of audit procedures for
the current period the possibility of misstatements in opening balances is indicated.
For current assets and liabilities, some audit evidence about opening balances may be obtained as
part of the current period’s audit procedures, say, the collection of opening accounts receivable
during the current period will provide some audit evidence of their existence, rights and obligations,
completeness and valuation at the beginning of the period.
➢ Written representation
In addition, according to SA 580 “Written Representations”, the auditor may consider it necessary
to request management to provide written representations about specific assertions in the financial
statements; in particular, to support an understanding that the auditor has obtained from other
audit evidence of management’s judgment or intent in relation to, or the completeness of, a specific
assertion. Although such written representations provide necessary audit evidence, they do not
provide sufficient appropriate audit evidence on their own for that assertion.
➢ In the given case, the management of Futura (P) Ltd. has restrained CA. Jack, its auditor, from
obtaining appropriate audit evidence for balances of Accounts Receivable outstanding as it is from
the preceding year. CA. Jack, on believing that the preceding year balances have already been
audited and on the statement of the management that there are no receipts and credits during the
current year, therefore excluded the verification of Accounts Receivable from his audit programme.
➢ Thus, CA. Jack should have requested the management to provide written representation for their
views and expressions; and he should also not exclude the audit procedure of closing balances of
Accounts Receivable from his audit programme. Consequently, CA. Jack shall also be held guilty for
professional misconduct for not exercising due diligence, or grossly negligence in the conduct of his
professional duties as per the Code of Ethics.
SA 520
QNO Analytical Procedures (Considerations) Old Course – (M09E, N13R, P17M)
71.000 BHASKAR CNO--SA520.080
What are the considerations to be kept in mind while performing substantive analytical procedures
on data prepared by the client?

▪ SA 520, “Analytical Procedures”
➢ Factors to be kept in mind while performing analytical procedures
• Suitability of particular substantive analytical procedures for given assertions /
Reliability of data to be used to develop expectations / Develop expectations
sufficiently precise /Determine differences from recorded values and evaluate
whether investigations are required. Inquiry & Other Audit procedures can be used
for investigations
As per “SA 520 (Revised) Analytical Procedure”, when the auditor intends to perform
analytical procedures on data prepared by the client, he should consider the following:
• Determine the suitability of particular substantive analytical procedures for given
assertions, taking account of the assessed risks of material misstatement and tests
of details, if any, for these assertions;
• Evaluate the reliability of data from which the auditor’s expectation of recorded
amounts or ratios is developed, taking account of source, comparability, and nature
and relevance of information available, and controls over preparation;
• Develop an expectation of recorded amounts or ratios and evaluate whether
the expectation is sufficiently precise to identify a misstatement that, individually
or when aggregated with other misstatements, may cause the financial statements
to be materially misstated; and
• Determine the amount of any difference of recorded amounts from expected
values that is acceptable without further investigation and if analytical procedures
performed in accordance with this SA identify fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by
a significant amount, the auditor shall investigate such differences by:
o Inquiring of management and obtaining appropriate audit evidence
relevant to management’s responses; and
o Performing other audit procedures as necessary in the circumstances.
QNO Analytical Procedures (Investigating Inconsistencies) New Course – (N18E)

In audit of DEF Limited, the Auditor had made use of certain analytical procedures with regard to certain
key data in the Statement of Profit and Loss. The results obtained showed inconsistencies with other
relevant information. State the course of action that the Auditor should take to ensure that the risk
of material misstatement would be contained to a low level fixed as per materiality level.
▪ SA 520, “Analytical Procedures”
➢ Investigating Results of Analytical Procedures:
• Analytical Procedures will help identify fluctuations.
As per SA 520, “Analytical Procedures”, if analytical procedures performed in accordance
with this SA identify fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount, the auditor shall
investigate such differences by:
• 2 Ways of investigating.
• Inquiring of management and obtaining appropriate audit evidence relevant to
management’s responses; and
• Performing other audit procedures as necessary in the circumstances.
• Evaluate responses of inquiry.
Audit evidence relevant to management’s responses may be obtained by evaluating those
responses taking into account the auditor’s understanding of the entity and its
environment, and with other audit evidence obtained during the course of the audit.

• Situations where other audit procedures may be required.
The need to perform other audit procedures may arise when, for example, management is
unable to provide an explanation, or the explanation, together with the audit evidence
obtained relevant to management’s response, is not considered adequate.
SA 530
QNO Sampling Risk Old Course – (M06E, M10E, M12R, M12M, N13R, P17M)
Sampling Risk
OR
While planning the audit of S Ltd you want to apply sampling techniques What are the risk factors you
should keep in mind?
▪ SA 530, Audit Sampling
➢ Sampling Risk:
As per SA 530 “Audit Sampling”, the risk that the auditor’s conclusion based on a sample may be
different from the conclusion if the entire population were subjected to the same audit procedure.
Sampling risk can lead to two types of erroneous conclusions:
• In the case of a test of controls, that controls are more effective than they actually are, or
in the case of a test of details, that a material misstatement does not exist when in fact it
does. The auditor is primarily concerned with this type of erroneous conclusion because it
affects audit effectiveness and is more likely to lead to an inappropriate audit opinion.
• In the case of a test of controls, that controls are less effective than they actually are, or in
the case of a test of details, that a material misstatement exists when in fact it does not. This
type of erroneous conclusion affects audit efficiency as it would usually lead to additional
work to establish that initial conclusions were incorrect.

Sampling Risk
The risk that the auditor’s conclusion based on a sample may be different
from the conclusion if the entire population were subjected to the same audit
procedure.
Sampling risk can lead to two types of erroneous conclusions
Type I – Error Type II – Error

In the case of a test of controls, that In the case of a test of controls, that
controls are more effective than they controls are less effective than they
actually are actually are
(Over Reliance on Controls) , (Under Reliance on Controls)
or in the case of a test of details, that ,or in the case of a test of details,
a material misstatement does not that a material misstatement exists
exist when in fact it does when in fact it does not.
(Incorrect Acceptance) . (Incorrect Rejection)
The auditor is primarily concerned This type of erroneous conclusion
with this type of erroneous conclusion affects audit efficiency as it would
because it affects audit effectiveness usually lead to additional work to
and is more likely to lead to an establish that initial conclusions were
inappropriate audit opinion. incorrect .
(Reduces Effectiveness of Audit) (Reduces Effeciency of Audit)
QNO Sampling Methods Old Course – (N14E, M16M, N16R, N16M, P17M , N17M,M18E,N18M)
In the course of your audit assignment of Indraprastha Ltd., you want to guide your audit assistants in
selecting sample items in such a way that sample can be expected to be representative of the population
and all items have an opportunity of being selected. Guide your assistants with principal methods of
collecting samples.
OR
Principal Methods of Selection of Samples
➢ Random Sampling: - All items in population or within each stratum as known chance of
selection i.e. probability is carefully designed to achieve objectives.
Random selection ensures that all items in the population or within each stratum have a known
chance of selection. It may involve use of random number tables.
Random sampling includes two very popular methods which are discussed below:
• Simple Random Sampling: - Each unit in population has equal chances of selection /
use of random number table, computer or number chits in drum / ensures no bias /
population should be homogeneous.
Under this method each unit of the whole population e.g. purchase, or sales invoice has an
equal chance of being selected. The mechanics of selection of items may be by choosing
numbers from table of random numbers by computers or picking up numbers randomly
from a drum. It is considered that random number tables are simple and easy to use and
also provide assurance that the bias does not affect the selection. This method is
considered appropriate provided the population to be sampled consists of reasonably
similar units and fall within a reasonable range. For example, the population can be
considered homogeneous, if say, trade receivables balances fall within the range of Rs 5,000
to Rs 25,000 and not in the range between Rs 25 to Rs 2,50,000.
• Stratified Random Sampling: - Dividing, partitioning whole population in few sperate
groups called strata / taking sample from each strata / each stratum is treated as
separate population and proportionate items are selected / number of strata
depends on auditor judgement / example of receivables all items above 1,00,000,
25% between 75,000 to 1,00,000, 10% between 25,000 to 75,000, 2% below
25,000 / good for diversified strata / weights should be allocated to different
strata
This method involves dividing the whole population to be tested in a few separate groups
called strata and taking a sample from each of them. Each stratum is treated as if it was a
separate population and if proportionate of items are selected from each of these
stratums. The number of groups into which the whole population has to be divided is
determined on the basis of auditor judgment. For example, in the above case, trade
receivables balances may be divided into four groups as follows: -
• Balances in excess of Rs 1,00,000;
• Balances in the range of Rs 75,000 to Rs 1,00,000;
• Balances in the range of Rs 25,000 to Rs 75,000; and
• Balances below Rs 25,000.
From these above groups the auditor may pick up different percentage of items from each
of the group. From the top group i.e. balances in excess of Rs 1,00,000, the auditor may
examine all the items; from the second group 25 per cent of the items; from the third group
10 per cent of the items; and from the lowest group 2 per cent of the items may be selected.
The reasoning behind the stratified sampling is that for a highly-diversified population,
weights should be allocated to reflect these differences. This is achieved by selecting
different proportions from each strata. It can be seen that the stratified sampling is simply
an extension of simple random sampling.
➢ Interval / Systematic Sampling: - Constant intervals between selections / interval can be
number of items or monetary total / first item is randomly selected from first interval /
ensure that interval doesn’t corresponds to pattern of population example for the same /
multiple random starting points
It involves selecting items using a constant interval between selections, the first interval having a
random start. The interval might be based on a certain number of items (for example every 20th
voucher) or a monetary total (for example every Rs 1,000 in the cumulative value of the
population). When using systematic selection, the auditor should determine that the population is
not structured in such a manner that the sampling interval corresponds with a particular pattern
in the population.
For example, if in a population of branch sales, particular branch sales occur only as every 100th
item and the sampling interval selected is 100. The result would be that either the auditor would
have selected all or none of the sales of that particular branch. To minimise the effect of the
possible known buyers through a pattern in the population, more than one starting point may be
taken. The multiple random starting points are taken because it minimises the risk of interval
sampling pattern with that of the population being sampled.
➢ Monetary Unit Sampling: - It is a version of interval-based sampling with only difference
that interval in monetary amount and probability of item getting selected depends on its
monetary amount.
It is a type of value-weighted selection in which sample size, selection and evaluation results in a
conclusion in monetary amounts.
• Example (Just for understanding no need to write in exams)
Total Sales 20,00,000 / Sample Size 5 / Monetary Interval between 2 bills should be
20,00,000 ÷ 5 = 4,00,000 / Select Starting Point Randomly Between (1 – 2,00,000) is say 620
Selection will be 620 / 4,00,620 / 8,00,620 / 12,00,620 / 16,00,620

Bill No Bill Amount Cumulative Amount Selection Base
1 50,000 50,000 620

2 3,00,000 3,50,000
3 1,00,000 4,50,000 4,00,620
4 2,50,000 7,00,000
5 1,00,000 8,00,000
6 75,000 8,75,000 8,00,620
7 25000 9,00,000
8 40,000 9,40,000
9 60,000 10,00,000
10 1,50,000 11,50,000
11 85,000 12,35,000 12,00,620
12 60,000 12,95,000
13 90,000 13,85,000
14 15,000 14,00,000
15 45,000 14,45,000
16 95,000 15,40,000
17 98,000 16,38,000 16,00,620
18 84,000 17,22,000
19 1,29,000 18,51,000
20 1,49,000 20,00,000
➢ Cluster sampling: - Dividing population into groups / number of clusters are randomly
selected from all clusters / selection can be done in the form of simple random sampling or
stratified random sampling / if any item of cluster is selected that particular cluster will
be selected / there can be complete or proportionate checking / it is less effective than
random sampling as at the time of selection of item, whole population is not under
consideration but only cluster is in consideration
This method involves dividing the population into groups of items known as clusters. A number of
clusters are randomly selected from all the clusters rather than individual items of the population.
Cluster sampling can be used together with both unrestricted random and stratified sampling, for
example 500 to 540, 2015 to 2055 etc. The first item i.e. 500, 2015 is randomly selected from
random number tables. The items of selected cluster can either be checked completely or a
randomly selected proportion of them can be examined.
The cluster is less effective for a given sample size than unrestricted random and stratified samples
as items are not individually selected. However, the time saved can be utilised to have a larger
sample to make the sample results more reliable.
As per SA 530, the auditor shall determine a sample size sufficient to reduce sampling risk to an
acceptably low level.
➢ Block Sampling: - Selection of fixed number of consecutive items / first item of block is
selected rest of the items automatically get selected as per block size / Simple, Economical
/ Risk of being biased / Establishing selection pattern which may be noted by auditees
This method involves the selection of a defined block of consecutive items. For example, take the
first 200 sales invoices from the sales day book in the month of September; alternatively take any

four blocks of 50 sales invoices. Therefore, once the first item in the block is selected, the rest of the
block follows items to the completion.
Consequently, it has similar characteristics, namely, simplicity and economy. On the other hand,
there is a risk of bias and of establishing a pattern of selection which may be noted by the auditees.
➢ Haphazard Sampling: - Selection without structure technique / avoid any conscious bias /
don’t be predictable e.g. always choosing first and last entries, not choosing difficult to
locate items / it is not statistical
Haphazard selection, in which the auditor selects the sample without following a structured
technique. Although no structured technique is used, the auditor would nonetheless avoid any
conscious bias or predictability (for example, avoiding difficult to locate items, or always choosing
or avoiding the first or last entries on a page) and thus attempt to ensure that all items in the
population have a chance of selection. Haphazard selection is not appropriate when using
statistical sampling.
QNO Haphazard Sampling Old Course – (M08E, N12M, M13M, M16R, P17M, M17R)
Haphazard Sampling
➢ Haphazard Sampling: - Selection without structure technique / avoid any conscious bias /
don’t be predictable e.g. always choosing first and last entries, not choosing difficult to
locate items / it is not statistical / it can be good alternative to random sampling provided
sampling is representative
In haphazard selection, the auditor selects the sample without following a structured technique.
Although no structured technique is used, the auditor would nonetheless avoid any conscious bias
or predictability for example, avoiding difficult to locate items, or always choosing or avoiding the
first or last entries on a page and thus attempt to ensure that all items in the population have a
chance of selection. Haphazard selection is not appropriate when using statistical sampling.
Haphazard selection of sample, may be an acceptable alternative to random selection of sample,
provided the auditor attempts to draw a representative sample from the entire population with
no intention to either include or exclude specific units.
When the auditor uses this method, care needs to be taken to guard against making a selection that
is biased, for example, towards items which are easily located, as they may not be representative.
Sampling Not Providing Reasonable Basis to Support New Course – (N22R)

QNO
Conclusion
78.500
Chintamani Ltd appoints Chintan & Mani as statutory auditors for the financial year 2021 - 2022. Chintan
& Mani seem to have different opinions on Audit approach to be adopted for audit of Chintamani Ltd.
Mani is of the opinion that 100% checking is not required and they can rely on Audit Sampling techniques
in order to provide them a reasonable basis on which they can draw conclusions about the entire
population. Chintan is concerned that whether the use of audit sampling has provided a reasonable
basis for conclusions about the population that has been tested.
You are required to guide Chintan about his role if audit sampling has not provided a reasonable basis for
conclusions about the population that has been tested in accordance with SA 530.
Answer As per SA 530, “Audit Sampling”, the auditor shall evaluate:
(a) The results of the sample; and

(b) Whether the use of audit sampling has provided a reasonable basis for conclusions about the population
that has been tested.

If the auditor concludes that audit sampling has not provided a reasonable basis for conclusions about the
population that has been tested, the auditor may:
(I) Request management to investigate misstatements that have been identified and the potential for further
misstatements and to make any necessary adjustments; or
(II) Tailor the nature, timing and extent of those further audit procedures to best achieve the required
assurance. For example, in the case of tests of controls, the auditor might extend the sample size, test an
alternative control or modify related substantive procedures.
SA 550
Related Party (Sources) Old Course – (M06E, N08R, M11R, M12E, N12E, M14R, N15E,
QNO
BHASKAR CNO--SA550.060 P17M,M19M, N19E)
82.000
New Course – (N18M,M19M)
The training partner in your office is aware that you have covered SA 550 Related Parties in your
professional studies. He has asked you to help him prepare for a training session he is about to give.
Requirements
Prepare notes for a training session for junior staff on how to verify the existence of related party
transactions.
OR
In the course of audit of Q Ltd, its statutory auditor wants to be sure of the adequacy of related party
disclosures? Kindly guide the auditor in identifying the possible source of related party information.
OR
JY & Co is appointed as auditor of Breeze Ltd JY & Co seeks your guidance for reviewing the records and
documentation of the company regarding ‘related party transactions in the normal course of business’
Describe the steps to be followed
▪ SA 550, Related Parties
➢ Inspecting Records or Documents may indicate existence of related party relationships or
transactions which were not identified or Mgt didn’t disclose it to auditor.
During the audit, the auditor shall remain alert, when inspecting records or documents, for
arrangements or other information that may indicate the existence of related party relationships
or transactions that management has not previously identified or disclosed to the auditor.
➢ Compulsory to see following documents: -
• Legal, Bank, TP Confirmations / Minutes of Shareholders, TCWG / Such other
documents
In particular, the auditor shall inspect the following for indications of the existence of
related party relationships or transactions that management has not previously identified
or disclosed to the auditor:
• Bank (For guarantees / securities given or taken, arrangements such as minimum
balance setoff arrangement / joint holders / nominee) legal (Contracts / MOUs etc)
and third-party confirmations (From Directors / Subsidiaries) obtained as part of
the auditor’s procedures;
• Minutes of meetings of shareholders and of those charged with governance; and
(Approvals under Sec 177 & Sec 188)
• Such other records or documents as the auditor considers necessary in the
circumstances of the entity. (E.g. Company Restructuring Documents)
➢ Documents which can give information about related parties: -

• AS 18 / Schedule III disclosures of Previous Years (Old Records)
• Shareholders register (Control / SI)
• Director’s register (SI)
• Contracts with TCWG / Directors / KMP (SI)
• Life insurance policies (SI)
• Records of Entity’s pension plans (SI)
• Statements of Conflict of Interest (SI)
• Investment Register (Control / SI)
(Legal Documents)
• BOD / Shareholder Meeting Minutes
• Sec 189 Register
• Information supplied to Regulatory Authorities
• Filing with SEBI / SEC
• Tax Returns
(Other Documents)
• Internal Auditor’s Report
• Invoices & Correspondence with professional advisor
• Contracts not in ordinary course of business
• Contracts re-negotiated
Related Party Case Study – Approach of Auditor Old Course – (N20M, N21M)
QNO
UNIQUE New Course –(N20M,
84.000
N21M)
Whilst the Audit team has identified few matters, they need your advice to conclude on the same.
Engagement Partner have asked them to review the Board minutes and other secretarial / regulatory
records based on which the following additional matters were brought to the attention of the Partner:-
(i) The long-term borrowings from the parent company has no written terms and neither the interest
nor the principal has been repaid so far.
(ii) Certain computers were received from the parent company free of cost, the value of which is ` 0.23
lac and no accounting or disclosure of the same has been made in the notes to accounts.
(iii) An amount of ` 3.25 Lakhs per month is paid to M/s. WE CARE Associates, a partnership firm, which
is a 'related party' in accordance with the provisions of the Companies Act, 2013 for the marketing services
rendered by them. Based on an independent assessment, the consideration paid is higher than the
arm's length pricing by `0.25 Lakhs per month. Whilst the transaction was accounted in the financial
statements based on the amounts' paid, no separate disclosure of this related party transaction has
been made in the notes to accounts forming part of the financial statements highlighting the same as a
'related party' transaction.
Audit Manager has reported that she had asked certain information relating to another 'related party'
transaction (amounting to approx. ` 47 lac) but the CFO refused to provide the same since the same is
perceived to be confidential and cannot be shared with the Auditors.
You are required to advise about items to be reported to those charged with governance, where
applicable, based on your audit findings in the given situation.
▪ SA 550, Related Parties
▪ Ind AS 24 / AS 18
▪ Clauses (xiii) of Paragraph 3 of CARO 2020
▪ Sections 177 and 188 of Companies Act, 2013
➢ As per SA 550, Related Parties,
• Communicating significant matters arising during the audit in connection with the entity’s related
parties helps the auditor to establish a common understanding with those charged with
governance of the nature and resolution of these matters.
• Examples of significant related party matters include, non-disclosure (whether intentional or
not) by management to the auditor of related parties or significant related party

transactions, which may alert those charged with governance to significant related party
relationships and transactions of which they may not have been previously aware; The
identification of significant related party transactions that have not been appropriately
authorised and approved, which may give rise to suspected fraud; etc.
• It may be noted that unless all of those charged with governance are involved in managing the
entity, the auditor shall communicate with those charged with governance significant matters
arising during the audit in connection with the entity’s related parties.
• The auditor is also required to ensure the compliance of Ind AS 24 / AS 18 Related Party
Disclosures.
Part III—Case Study & Conclusion
• In view of above in the given scenario, the auditor is required to prepare a brief summary of
following items to be reported to those charged with governance in accordance with SA 260
Communication with Those Charged with Governance:
• Receipt of free of cost Computers and long-term borrowing (on no agreed terms and
repayment of interest and principal) from the Parent Company need separate
disclosure in financial statements as per Ind AS 24 / AS 18 Related Party
Disclosures.
• One of related party transaction amounting 3.25 lac per month i.e., in lieu of marketing
services has been noticed of which amount ` 0.25 lac per month is exceeds the arm's
length price has not been disclosed highlighting the same as related party
transactions as per Ind- AS 24 / AS 18 Related Party Disclosures.
• Refusal by CFO of the company to provide the details of related party transaction
amounting to rupees 47 lac on the ground that same is perceived to be confidential and
cannot be shared with auditors, is not in order, as denying for the related part details of `
47 lac is imposing limitation of scope of auditor in view of SA 705.
• Further, in case of all the above cases, the auditor would also need to assess his reporting
requirements under the clauses (xiii) of Paragraph 3 of CARO 2020 with respect to related
party transactions that whether all transactions with the related parties are in compliance with
sections 177 and 188 of Companies Act, 2013 where applicable and the details have been
disclosed in the Financial Statements etc., as required by the applicable Accounting Standards.
SA 560
Specific enquiry may be conducted to evaluate Old Course – (M19E)
QNO
subsequent events.
85.050
M/s LMP Associates, Chartered Accountants while conducting the audit of PQR Ltd want to conduct an
inquiry of management and those charged with governance as to whether any subsequent events have
occurred which might affect the financial statements. Guide M/s LMP Associates with the matters
where specific enquiry may be conducted to evaluate subsequent events.
Answer ➢ Specific Enquiries
• May make specific inquiries about the following matters
• (Assets - 3)
o Whether sales or acquisitions of assets have occurred or are planned.
o Whether any assets have been appropriated by government or destroyed, for
example, by fire or flood.
o Whether any events have occurred that is relevant to the recoverability of
assets.
(E.g. Product Banned Etc)

• (Capital & Liability -4)
o Whether there have been increases in capital or issuance of debt instruments,
such as the issue of new shares or debentures, or an agreement to merge or
liquidate has been made or is planned.
o Whether new commitments, borrowings or guarantees have been entered
into.
o Whether there have been any developments regarding contingencies.
o Whether any events have occurred that is relevant to the measurement of
estimates or provisions made in the financial statements.
(E.g. Draft royalty rates)
• (All items -2)
o Whether any unusual accounting adjustments have been made or are
contemplated.
(E.g. Heavy sales return)
o Whether any events have occurred or are likely to occur that will bring into
question the appropriateness of accounting policies used in the financial
statements, as would be the case, for example, if such events call into question
the validity of the going concern assumption.
(E.g. Sale of Long-term Investments)
QNO Subsequent Event-- After Audit Report-- Financial Statements Amended Old Course – (N21R)
87.500 BHASKAR CNO--SA560.100 New Course – (N21R)
The audit report of Kolsi (P) Ltd. for F.Y. 2020-21 was issued by Bishnoi & Co. on 25th July, 2021. However,
a case was filed against Kolsi (P) Ltd. on 4th August, 2021, with the Civil Court, with respect to an incident
caused in its factory on 17th January,2021, the outcome of which may result in paying heavy penalty by
Kolsi (P) Ltd.
Mr. Raj Bishnoi, the partner of Bishnoi & Co., discussed the said matter with the management and it was
determined to amend the financial statements for F.Y. 2020 -21.
Further, Mr. Raj inquired how the management intended to address the said matter in the financial
statements to which he was told that the said matter was going to be disclosed as a “Contingent Liability
for a Court case” to the foot note in the balance sheet with no additional disclosures.
The management told Mr. Raj that such disclosure was enough as he would further going a description of
the said court case and its outcome in the ‘Emphasis of Matter’ paragraph in his amended audit report.
In the context of aforesaid case scenario, please answer the following questions:-
(a) Whether Mr. Raj on behalf of Bishnoi & Co., has properly adhered to his responsibilities in accordance
with SA 560, on becoming aware of the court case filed against Kolsi (P) Ltd.?
(b) Whether the contention of management of Kolsi (P) Ltd. is valid with respect to the disclosure of the
court case in the financial statements?
Answer As per SA 560, ‘Subsequent Events’, the auditor has no obligation to perform any Audit procedures
regarding the financial statements after the date of the auditor’s report. However, when, after the
date of the auditor’s report but before the date the financial statements are issued, a fact becomes
known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may
have caused the auditor to amend the auditor’s report, the auditor shall:
(1) Discuss the matter with management and, where appropriate, those charged with governance.
(2) Determine whether the financial statements need amendment and, if so,
(3) Inquire how management intends to address the matter in the financial statements.
In the given case, on becoming aware of the court case filed against Kolsi (P) Ltd., Mr. Raj discussed
the said matter with the management and it was determined to amend the financial statements. Also,
he inquired how the management intended to address the said matter in the financial statements.
However, If management does not take the necessary steps to ensure that anyone in receipt of the
previously issued financial statements is informed of the situation and does not amend the financial
statements in circumstances where Mr. Raj (hereinafter referred as ‘the auditor’) believes they need

to be amended, the auditor shall notify management and, those charged with governance (unless all
of those charged with
governance are involved in managing the entity), that the auditor will seek to prevent future reliance
on the auditor’s report. If despite such notification the management or those charged with
governance do not take these necessary steps, the auditor shall take appropriate action to seek to
prevent reliance on the auditor’s report in accordance with SA 560.
SA 570
QNO Going Concern (Case - Inappropriate) Old Course – (M15R, N15E,P17M,N17R,N17M)

94.000 BHASKAR CNO--SA570.060 New Course – (S21M)
Sun Moon Ltd. is a power generating company which uses coal as raw material for its power generating
plant. The company has been allotted coal blocks in the state of Jharkhand and Odisha. During the FY
2020-21, a scam regarding allotment of coal blocks was unveiled leading to a ban on the allotment of
coal blocks to various companies including Sun Moon Ltd. This happened in the month of December
2020 and as such entire power generation process of Sun Moon Ltd, came to a halt in that month.
As a result of such ban, and the resultant stoppage of the production process, many key managerial
personnel of the company left the company. There were delays in the of payment of wages and
salaries and the banks from whom the company had taken funds for project financing also decided
not to extend further finance or to fund further working capital requirements of the company.
Further, when discussed with the management, the statutory auditor understood that the company had
no action plan to mitigate such circumstances. Further, all such circumstances were not reflected the
financial statements of Sun Moon Ltd. What course of action should the statutory auditor of the
company consider in such situation?
OR
S N Projects Limited, a manufacturing company in the Steel industry was allegedly involved in some
irregularity relating to allotment of coal blocks for which a complaint was lodged against the company by
the government The financial institutions stopped additional working capital finance which caused a
financial crisis resulting in stoppage of production The company incurred a massive loss during the year
2015-16 There were delays in salary and other payments Certain key managerial personnel including
GM Finance and certain other employees left the company The company has no sound action plan
to mitigate these situations Guide the statutory auditor on how he should deal with this situation.
▪ SA 570 on “Going Concern,”
➢ SA 570- “Going Concern” deals with the auditor’s responsibilities in the audit of financial statements
relating to going concern and the implications for the auditor’s report.
➢ The auditor’s responsibilities are
• To obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness
of management’s use of the going concern basis of accounting in the preparation of the financial
statements, and to conclude, based on the audit evidence obtained, whether a material
uncertainty exists about the entity’s ability to continue as a going concern.
• When the use of Going Concern Basis of Accounting Is Inappropriate i.e., if the financial statements
have been prepared using the going concern basis of accounting but, in the auditor’s judgment,
management’s use of the going concern basis of accounting in the preparation of the financial
statements is inappropriate, the auditor shall express an adverse opinion.
• When adequate Disclosure of a Material Uncertainty Is Not Made in the Financial Statements the
auditor shall:
• Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705
(Revised); and
• In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a
material uncertainty exists that may cast significant doubt on the entity’s ability to continue
as a going concern and that the financial statements do not adequately disclose this matter.
➢ In the present case, the following circumstances indicate the inability of Sun Moon Ltd. to continue as a
going concern:
• Ban on the allotment of coal blocks.
• Halt in power generation
• Key Managerial Personnel leaving the company.
• Banks decided not to extend further finance and not to fund the working capital requirements of
the company.
• Non availability of sound action plan to mitigate such circumstances.
➢ Therefore, considering the above factors it is clear that the going concern basis is inappropriate for
the company.
➢ Further, such circumstances are not reflected in the financial statements of the company. As such, the
statutory auditor of Sun Moon Ltd. should:
• Express an adverse opinion in accordance with SA 705 (Revised) and
In the Basis of Opinion paragraph of the auditor’s report, the statutory auditor should state that a material
uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going
concern and that the financial statements do not adequately disclose this matter.
Author’s Note
In SA 570 there are questions which are not specific part of SA 570 they are case studies with “bad business
position”
ICAI gave following answers which is a mixed bag where explain below points in short
TRADITIONAL APPROACH BY ICAI
1. Going concern meaning and disclosure in notes to accounts
2. Responsibility of management
3. Auditor Responsibility
i. look for events & condition which create significant doubt
ii. perform additional procedure
iii. conclusion about material uncertainty & disclosure
iv. conclusion about going concern & reporting
v. finally discuss case give conclusion about reporting
NEW APPROACH BY ICAI
In QNO 90.050 again we have a bad business story it was given in M19M & N19R where they explained about
1. Events or condition creating significant doubt
2. Additional procedures
3. MU and its disclosure
4. Case discussion
5. Conclusion
CONCLUSION
So we have traditional approach and new approach of answering bad business questions students can
follow any approach both will give marks traditional approach is popular as of now and students can use
it
QNO Dealing with Material Uncertainty New Course – (N18E, S21M, N21M)
M/s Airlift Ltd., carrying on the business of Passenger Transportation by air is running into continuous
financial losses as well as reduction in Sales due to stiff competition and frequent break down of its
own aircrafts. The Financial Statements for the Year ended on 31/03/2018 are to be now finalized. The
Management is quite uncertain as to its ability to continue in near future and has informed the Auditors
that having seized of this matter, it had constituted a committee to study this aspect and to give
suggestions for recovery, if any, from this bad, situation. Till the study is completed, according to the

Management, the issue involves uncertainty as to its ability to continue its business and it informs
the Auditor that the fact of uncertainty clamping on the “Going Concern” would suitably be disclosed
in notes to accounts. State the reporting requirement if any, in the Independent Auditor’s Report in
respect of this matter.
OR
TUV Ltd. is a company engaged in the business of manufacture of spare parts. Saroj & Associates are the
statutory auditors of the company for the FY 2020-21. During the course of audit, CA Saroj noticed that
the company had a major customer, namely, Korean Mart from South Korea. Owing to an outbreak of war
and subsequent destruction leading to government ban on import and export in South Korea, the demand
from Korean Mart for the products of TUV Ltd. ended for an unforeseeable time period. When discussed
with the management, CA Saroj was told that the company is in the process of identifying new customers
for their products. CA Saroj understands that though the use of going concern assumption is appropriate
but a material uncertainty exists with respect to the identification of new customers. This fact is duly
reflected in the financial statements of TUV Ltd. for the FY 2020-21. How should CA Saroj deal with this
matter in the auditor’s report for the FY 2020-21?
➢ SA 570 “Going Concern”
➢ Reporting requirements in case of Uncertainty clamping on the Going Concern:
• Situation when going concern is appropriate but MU exits
As per SA 570 “Going Concern”, if the auditor concludes that management’s use of the
going concern basis of accounting is appropriate in the circumstances but a material
uncertainty exists, the auditor shall determine whether the financial statements:
• Disclosure of Principal Events & Conditions in financial statements
Adequately disclose the principal events or conditions that may cast significant
doubt on the entity’s ability to continue as a going concern and management’s
plans to deal with these events or conditions; and
• Warn may be unable to realise assets & pay liabilities in notes to accounts
Disclose clearly that there is a material uncertainty related to events or conditions
that may cast significant doubt on the entity’s ability to continue as a going
concern and, therefore, that it may be unable to realize its assets and discharge
its liabilities in the normal course of business.
• If adequate disclosure as given above – unmodified opinion & Separate section with
heading “MU related to Going Concern” in Audit Report
If adequate disclosure about the material uncertainty is made in the financial
statements, the auditor shall express an unmodified opinion and the auditor’s
report shall include a separate section under the heading “Material Uncertainty
Related to Going Concern” to:
o Draw attention to the note in the financial statements that discloses the
matters set out above; and
o State that these events or conditions indicate that a material uncertainty
exists that may cast significant doubt on the entity’s ability to continue
as a going concern and that the auditor’s opinion is not modified in
respect of the matter.
➢ In the instant case, M/s Aircraft Ltd. is running into continuous financial losses as well as reduction
in sales due to stiff competition and frequent break down of its own aircrafts and management of
Aircraft Ltd. is uncertain as of its ability to continue in near future. Therefore, a committee has
been constituted to study this aspect and till the time study is completed management
accordingly decided to suitable disclose this aspect in notes to accounts.
➢ Therefore, the auditor should
• Express an unmodified opinion and

• Include in his audit report, a separate section under the heading “Material
Uncertainty Related to Going Concern” to:
• Draw attention to the note in the financial statements that discloses the matters and
• State that these events or conditions indicate that a material uncertainty exists that
may cast significant doubt on the entity’s ability to continue as a going concern and that
the auditor’s opinion is not modified in respect of the matter
Author’s Note
• In this question nowhere it is mentioned that mitigating factor exists. It is only written that
committee has been constituted to give suggestion for recovery, but answer has been given on the
basis that going concern is appropriate and material uncertainty exists. Why Isn’t going concern
inappropriate?
o Material uncertainty means uncertain future events affecting going concern having such
likelihood and magnitude that disclosure should be made.
o Mitigating factors are one which reduces material uncertainty, so sometimes mitigating factors
may nullify material uncertainty.
o There can be circumstances where material uncertainty exists but still chances / probability of
going concern in next 12 months are more and going concern is valid.
Drafting Opinion (Material Uncertainty & No New Course -- (M22M)

QNO
Disclosure in FST)
94.500
UNIQUE
In the financial year 2020-21, Shreyansh Ltd. faced an extraordinary event (earthquake), which destroyed a
lot of business activity of the company. These circumstances indicate material uncertainty on the company’s
ability to continue as going concern. Due to such event, it may not be possible for the company to realize
its assets or pay off the liabilities during the regular course of its business. The financial statement
and notes to the financial statements of the company do not disclose this fact. What kind of opinion should
the statutory auditor of Shreyansh Ltd. issue in such circumstances and why? Also, draft the
opinion and basis for opinion para for the same.
Answer In the present case, there exists a material uncertainty that cast a significant doubt on the company’s ability
to continue as going concern and the same is not disclosed in the financial statements of Shreyansh Ltd.
As such, the financial statements of Shreyansh Ltd. for the FY 2020-21 are materially misstated and the effect
of the misstatement is so material and pervasive on the financial statements that giving only a qualified
opinion will be insufficient and therefore the statutory auditor of Shreyansh Ltd . should issue an adverse
opinion.
The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph is as under:
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse Opinion
section of our report, the accompanying financial statements do not present fairly, the financial position of
Shreyansh Ltd. as at March 31, 2021, and of its financial performance and its cash flows for the year then
ended in accordance with the Accounting Standards issued by the Institute of Chartered Accountants of
India.
Basis for Adverse Opinion
Shreyansh Ltd. has faced an extraordinary event (earthquake), which destroyed a lot of business activity of
the company. Due to such event, it may not be possible for the company to realize its assets or pay off the
liabilities during the regular course of its business. This situation indicates that a material uncertainty
exists that may cast significant doubt on the Company’s ability to continue as a going concern. The
financial statement and notes to the financial statements of the company do not disclose this fact.

QNO Material uncertainty Not Disclosed New Course- (N22M)
CA.K is appointed statutory auditor of SEEK INDIA LTD under Companies Act, 2013 for the first time. The
company is preparing its accounts keeping in view applicable requirements of Division II of Schedule III of
Companies Act, 2013. On scrutiny of financial statements of company put up for audit, it was noticed that
notes to accounts show ageing of trade payables as per amended requirements of Schedule III of the
Companies Act, 2013.
The ageing schedule forming part of notes is as under: -
Outstanding for following periods from due date of payment (` In crore)
Particulars Less than 1 1-2 years 2-3 years More than Total
year 3 years
MSME NIL NIL NIL NIL NIL

Others 2 4 3 1 10
Disputed dues- NIL NIL NIL NIL NIL
MSME
Disputed dues- NIL NIL NIL NIL NIL
others
Besides above, current ratio, debt-equity ratio, trade payables turnover ratio and net profit ratio disclosed
in notes to accounts have slipped drastically as compared to last year and from standard norms. Most of
the key financial ratios are in red. There is no other relevant information concerning above in notes to
accounts.
Further, on reviewing bank statement of cash credit limit (against hypothecation of paid stocks), it was
noticed that there is no debit transaction in the month of March,2022. On inquiry, he came to know that
stock audit of company was conducted in the month of January,2022 and stock auditors have commented
vide their report dated 25.2.2022 that company had negative drawing power due to high creditors.
Accordingly, the bankers have refused further debits in cash credit account from start of March,2022.
There is no information in this respect in financial statements and notes to accounts.
Discuss how CA K should deal with above for reporting in his audit report under the Companies Act, 2013
Answer In the given situation, it is clear from the ageing schedule that company is not able to pay its creditors on
time. Outstanding to creditors for a period of 1 year or more account for 80% of total dues to the creditors
of the company from due date of payment. Most of key financial ratios are adverse.
Further, bankers have refused further debits in cash credit account due to negative drawing power from
March 2022. Cash credit loans are repayable on demand. There is no other information or disclosure
available how the company plans to run its business without bank finance.
All the above factors are indicators that a material uncertainty exists that may cast a significant doubt on the
company’s ability to continue as going concern. There is no express disclosure of this fact in financial
statements.
Therefore, it is a situation where material uncertainty exists which has cast a significant doubt on company’s
ability to continue as going concern in accordance with SA 570, “Going Concern”.
Keeping in view above the fact that although a material uncertainty exists casting a significant doubt on the
ability of company to continue as going concern, adequate disclosure of material uncertainty is not made in
financial statements, CA K shall give qualified or adverse opinion in accordance with SA-705, “Modifications
to the Opinion in the Independent Auditor’s Report”.

SA 580
QNO Date of and period covered by written representation Old Course – (M21M)
97.100 BHASKAR CNO--SA580.040 New Course – (M19R, M21M)
PRSH & Co is the statutory auditor of Make My Journey Ltd. The company is in the business of tours and
travels. Annual turnover of the company is INR 2000 crores and profits are INR 190 crores. During the
planning meeting of the management and the auditors, it was discussed that the management needs to
provide written representation letter to the auditors for the preparation of the financial statements and
for the completeness of the information provided to the auditor. At the time of closure of the audit, there
has been some confusion about the requirements of the written representation letter. Management
argued that representation need not be written, it can also be verbal which has been provided to the
audit team during the course of their audit. Auditors have completed their documentation and hence in a
way, representation based on verbal discussions with the auditors has also got documented. Auditors
explained that this is mandatory to obtain written representation in accordance with the requirements of
SA 580. However, still some confusion remains regarding the date and period covered by the written
representation. You are required to advise about the date of and period covered by written
representation in view of SA 580.
Answer ➢ Before Audit Report & Near to Signing:
As per SA 580, “Written Representations”, as written representations are necessary audit evidence,
the auditor’s opinion cannot be expressed, and the auditor’s report cannot be dated, before the
date of the written representations. Furthermore, because the auditor is concerned with events
occurring up to the date of the auditor’s report that may require adjustment to or disclosure in the
financial statements, the written representations are dated as near as practicable to, but not after,
the date of the auditor’s report on the financial statements.
➢ Updation of Written Representation
In some circumstances it may be appropriate for the auditor to obtain a written representation
about a specific assertion in the financial statements during the course of the audit. Where this is
the case, it may be necessary to request an updated written representation.
➢ All Periods
The written representations are for all periods referred to in the auditor’s report because
management needs to reaffirm that the written representations it previously made with respect to
the prior periods remain appropriate. The auditor and management may agree to a form of written
representation that updates written representations relating to the prior periods by addressing
whether there are any changes to such written representations and, if so, what they are.
➢ Change of Management
Situations may arise where current management were not present during all periods referred to in
the auditor’s report. Such persons may assert that they are not in a position to provide some or all
of the written representations because they were not in place during the period. This fact, however,
does not diminish such persons’ responsibilities for the financial statements as a whole. Accordingly,
the requirement for the auditor to request from them written representations that cover the whole
of the relevant period(s) still applies.
Author’s Note
A short summary of the above answer is provided below.
First Para Explains — WR should be taken before signing (dating) audit report and as it cover subsequent
events till date of signing audit report it should be close to date of signing
Second Para Explains — WR are generally taken at the end of the year but if any WR is taken during the
year, auditor can ask for updated WR at the end of year if any information has changed
Third Para Explains — If you giving audit report for multiple years, like in prospectus we give report for 5
years then WR should be taken for multiple years

Fourth Para Explains — When we take WR for past years, even if management has changed take it again
from current management because they are overall responsible for financial statements
So it focuses on 4 points
1. Year end WR
2. During the year WR
3. WR for multiple years
4. WR even when management has changed

Part 6 - SQC 1
Examples of the matters to be considered With regard to the Old Course – (M19R)
QNO
integrity of a client by the firm as per the requirements of SQC 1 New Course – (M19R,N19E)
127.500
UNIQUE
BSS & Associates is a partnership firm of Chartered Accountants which was established five years back.
The firm was offering only advisory services at the beginning, however, after audit rotation and advent of
GST, firm sees lot of potential in these areas also and started looking for opportunities in these areas also.
These services being assurance in nature, the firm required some internal restructuring and set up some
policies and procedures for compliance year on year.
The firm started getting new clients for these new services and is now looking to obtain such information
as it considers necessary in the circumstances before accepting an engagement with a new client, when
deciding whether to continue an existing engagement, and when considering acceptance of a new
engagement with an existing client. Where issues have been identified, and the firm decides to accept
or continue the client relationship or a specific engagement, it has been setting up a process to
document how the issues were resolved.
The firm is now looking to work with only select clients which are in line with the policies of the firm.
The firm understands that the extent of knowledge it will have regarding the integrity of a client will grow
within the context of an ongoing relationship with that client. With regard to the integrity of a client,
you are required to give some examples of the matters to be considered by the firm as per the
requirements of SQC 1.
▪ SQC 1
➢ As per SQC 1, the firm should obtain such information as it considers necessary in the circumstances
before accepting an engagement with a new client, when deciding whether to continue an existing
engagement, and when considering acceptance of a new engagement with an existing client. Where
issues have been identified, and the firm decides to accept or continue the client relationship or a
specific engagement, it should document how the issues were resolved.
With regard to the integrity of a client, matters that the firm considers include, for example:
The identity and business reputation of the client’s principal owners, key management,
related parties and those charged with its governance
The nature of the client’s operations, including its business practices.
Information concerning the attitude of the client’s principal owners, key management and
those charged with its governance towards such matters as aggressive interpretation of
accounting standards and the internal control environment.
Whether the client is aggressively concerned with maintaining the firm’s fees as low as
possible
Indications of an inappropriate limitation in the scope of work.
Indications that the client might be involved in money laundering or other criminal activities
The reasons for the proposed appointment of the firm and non-reappointment of the
previous firm.
The extent of knowledge a firm will have regarding the integrity of a client will generally grow within
the context of an ongoing relationship with that client.

QNO Review (Procedures) & Rotation of Partner as per SQC-1 New Course – (M21E,N22M)
127.600 UNIQUE
HK & Co. Chartered Accountants have been auditors of SAT Ltd (a listed entity) for the Last 8 financial
years. CA. H, partner of the firm, has been handling the audit assignment very well since the appointment.
The audit work of CA. H and her team is reviewed by a senior partner CA. K to assure that audit is
performed in accordance with professional standards and regulatory and legal requirements. CA. K was
out of India for some personal reasons, so this year CA. G has been asked to review the audit work. In
your opinion, what areas CA. G should consider at the time of review. List any four areas and also
comment whether firm is complying with Standard on Quality Control or not.
Answer As per SQC 1, an engagement quality control review for audits of financial statements of
listed entities includes considering the following:
(i) The work has been performed in accordance with professional standards and
regulatory and legal requirements;
(ii) Significant matters have been raised for further consideration;
(iii) Appropriate consultations have taken place and the resulting conclusions have been
documented and implemented;
(iv) There is a need to revise the nature, timing and extent of work performed;
(v) The work performed supports the conclusions reached and is appropriately
documented;
(vi) The evidence obtained is sufficient and appropriate to support the report; and
(vii) The objectives of the engagement procedures have been achieved.
The firm should establish policies and procedures:

(i) Setting out criteria for determining the need for safeguards to reduce the familiarity
threat to an acceptable level when using the same senior personnel on an assurance
engagement over a long period of time; and
(ii) For all audits of financial statements of listed entities, requiring the rotation of the
engagement partner after a specified period in compliance with the Code.
The familiarity threat is particularly relevant in the context of financial statement audits of listed
entities. For these audits, the engagement partner should be rotated after a predefined period,
normally not more than seven years.
From the facts given in the question and from the above stated paras of SQC 1, it can be concluded
that firm is not complying with SQC 1 as Engagement Partner H is continuing for more than 7 years.

Part 1 -- SA 300
QNO- Audit Planning Old Course – (M11E, M12R, M16R, P17M, N20R)
30.200 BHASKAR CNO—SA300.060 New Course- (S17M, N20R, S21M)
A & Co was appointed as auditor of Great Airways Ltd As the audit partner what factors shall be considered
in the development of overall audit plan?
OR
Contents of an audit plan.
Answer The auditor shall develop an audit plan that shall include a description of
➢ The nature, timing and extent of planned risk assessment procedures, as determined under SA
315 “Identifying and Assessing the Risks of Material Misstatement through Understanding the
Entity and Its Environment”.
➢ The nature, timing and extent of planned further audit procedures at the assertion level, as
determined under SA 330 “The Auditor’s Responses to Assessed Risks”.
➢ Other planned audit procedures that are required to be carried out so that the engagement
complies with SAs.
The audit plan is more detailed than the overall audit strategy that includes the nature, timing and
extent of audit procedures to be performed by engagement team members. Planning for these audit
procedures takes place over the course of the audit as the audit plan for the engagement develops.
For example, planning of the auditor's risk assessment procedures occurs early in the audit process.
However, planning the nature, timing and extent of specific further audit procedures depends on
the outcome of those risk assessment procedures. In addition, the auditor may begin the execution
of further audit procedures for some classes of transactions, account balances and disclosures
before planning all remaining further audit procedures.
Alternative Answer
➢ Development of an overall plan –
The auditor should consider the following matters in developing his overall plan for the expected
scope and conduct of the audit:
D-Degree of reliance to be placed on the accounting system and internal control.
I -Work of the internal auditors and the extent of reliance on their work, if any in the audit.
A-Nature and extent of audit evidence to be obtained.
M-Setting of materiality levels for the audit purpose.
E-Involvement of other auditors in the audit of subsidiaries or branches of the client and
involvement of experts.
T - Terms of his engagement and any statutory responsibilities.
R-Nature and timing of reports or other communications.
A-Accounting policies adopted by the clients and changes, if any, in those policies.
L-Applicable Legal or Statutory requirements.
J-Allocation of works to be undertaken between joint auditors and the procedures for its
control and review.
S-Identification of significant audit areas.
Author’s Note
#controversy
#Controversies In Audit

Note: - Planning is covered by SA 300 as well as separate chapter on planning. So we have 2 sources talking
on planning. Content from these both sources is not exactly same. But ICAI in their new module is moving
more towards SA 300 content and reduce differences.
Now earlier ICAI use to treat overall audit plan equal to overall audit strategy but in new module overall audit
plan means audit plan as per SA 300.
On the basis of that we are providing both the answers as alternatives, but first alternative is preferred over
other
Authors Note
Note: Since it’s a list of things which the student is required to memorize and write, a mnemonic has
been created. Student is just required to memorize it and speak it up in the exam like:
Overall audit plan should be “DIAMETRAL, J-abardast & S-calable”
M-Materiality Setting/S-Significant Area Identification/J-Joint auditor/A.P-Accounting Policies/I.N-
Internal Auditor/N- Nature and extent of audit evidence/D- Degree of reliance/T-Terms of eng./E-
Expert/S- Statutory requirements. /T-Time of Reporting.
QNO Audit Strategy & Audit Plan Old Course – (N16E)

30.300 BHASKAR CNO—SA300.070 New Course – (M22R)
Discuss the relationship between overall audit strategy and audit plan.
Answer
Audit Strategy Audit Plan
Provides guidelines for developing the audit plan Prepared on basis of Audit Strategy.
Establishes scope & conduct of the audit Contains Details on nature, timing and extent of
procedures. the audit procedures. (konsa/ kab tak/kitna)
(kya kya cover hoga)
The audit strategy is prepared before the audit The audit plan is prepared after the audit strategy
plan.
Less Detailed More Detailed
Change in audit strategy would result into change Change in audit plan would result into change in
in Plan Strategy.
Author’s Note
-Above is a table on relationship between overall audit strategy and audit plan. The answer has been
presented by us in a chart form only for ease of understanding.
-Answer issued by institute is presented in a (paragraph) manner. Students may write the answer in Para
points form in order to maintain consistency.

Part 2- SA 540
Content of WR, in case of estimates and Old Course – (M19M)

QNO
consequences of refusal New Course – (M19M,N19E, S21M)
81.100
BHASKAR CNO—SA540.160
Statutory auditor of O Ltd requested the management for a written representation in respect of
obsolescence of inventory and warranty obligations recognized by the company in its financial statements.
The management denied the representation on the ground that during the course of audit, all the required
procedures were performed by the auditor and after obtaining sufficient appropriate audit evidence,
auditor has issued a clean report. Please comment.
OR
Mr. L while conducting the observed that inventory and warranty obligation in the financial statements,
Mr. L wants to obtain written representation from the management to determine whether the
assumptions and estimates used are reasonable.
Guide Mr. L with reference to the relevant Standard on Auditing,
Answer ➢ As per SA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates
and Related Disclosures:
The auditor shall obtain written representations from the management and, where appropriate,
those charged with governance whether they believe significant assumptions used in making
accounting estimates are reasonable.
Depending on the nature, materiality and extent of estimation uncertainty, written representations
about accounting estimates recognised or disclosed in the financial statements may include
representations:
About the appropriateness of the measurement processes, including related assumptions
and models, used by management in determining accounting estimates in the context of
the applicable financial reporting framework, and the consistency in application of the
processes.
That the assumptions appropriately reflect management’s intent and ability to carry out
specific courses of action on behalf of the entity, where relevant to the accounting
estimates and disclosures.
That disclosure related to accounting estimates are complete and appropriate under the
applicable financial reporting framework.
That no subsequent event requires adjustment to the accounting estimates and disclosures
included in the financial statements.
➢ For those accounting estimates not recognised or disclosed in the financial statements, written
representations may also include representations about:
The appropriateness of the basis used by management for determining that the recognition
or disclosure criteria of the applicable financial reporting framework have not been met.
The appropriateness of the basis used by management to overcome the presumption
relating to the use of fair value set forth under the entity’s applicable financial reporting
framework, for those accounting estimates not measured or disclosed at fair value.
➢ Thus, management’s contention on the ground that during the course of audit, all the required
procedures were performed by the auditor and after obtaining sufficient appropriate audit
evidence, auditor has issued a clean report, for not providing written representation is not correct.
The management should provide written representations to the auditor.
Further as per SA 580 Written Representation, if management does not provide one or more of the
requested written representations, the auditor shall:-
Discuss the matter with management.
Re-evaluate the integrity of management and evaluate the effect that this may have on the
reliability of representations (oral or written) and audit evidence in general; and
Take appropriate actions, including determining the possible effect on the opinion in the
auditor’s report in accordance with SA 705.

QNO Review of Prior period estimates Old Course – (M19R)
81.200 BHASKAR CNO—SA540.170 New Course – (M19R,S21M,N21M)
A Pvt Ltd is engaged in the business of real estate. The auditor of the company requested the information
from the management to review the outcome of accounting estimates (like estimated costs considered
for percentage completion etc) included in the prior period financial statements and their subsequent re-
estimation for the purpose of the current period.
The management has refused the information to the auditor saying that the review of prior period
information should not be done by the auditor. Please advise.
Answer ➢ Mandatory to review outcome of prior period estimates
As per SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures”, the auditor shall review the outcome of accounting estimates included in the
prior period financial statements, or, where applicable, their subsequent re-estimation for the
purpose of the current period. The nature and extent of the auditor’s review takes account of the
nature of the accounting estimates, and whether the information obtained from the review would
be relevant to identifying and assessing risks of material misstatement of accounting estimates
made in the current period financial statements.
➢ Benefits of Reviewing outcome of Prior Period Estimates
The outcome of an accounting estimate will often differ from the accounting estimate recognised in
the prior period financial statements. By performing risk assessment procedures to identify and
understand the reasons for such differences, the auditor may obtain:
Information regarding the effectiveness of management’s prior period estimation process,
from which the auditor can judge the likely effectiveness of management’s current process.
Audit evidence that is pertinent to the re-estimation, in the current period, of prior period
accounting estimates.
Audit evidence of matters, such as estimation uncertainty, that may be required to be
disclosed in the financial statements.
The review of prior period accounting estimates may also assist the auditor, in the current
period, in identifying circumstances or conditions that increase the susceptibility of
accounting estimates to, or indicate the presence of, possible management bias. The
auditor’s professional scepticism assists in identifying such circumstances or conditions and
in determining the nature, timing and extent of further audit procedures.
➢ Not Intended to question or doubt prior period estimates
However, the review is not intended to call into question the judgments made in the prior periods
that were based on information available at that time.
➢ Conclusion
In the given case, the management is not correct in refusing the relevant information to the auditor.

Part 3 - SA 600
QNO Branch Audit (Co-Ordination) Old Course – (M08R, N16E, P17M, N20M)
101.000 BHASKAR CNO—SA600.080/SA600.100 New Course –(N20M)
“There should be sufficient liaison between a principal auditor and other auditors” Discuss the above
statement and state in this context the reporting considerations, when the auditor uses the work
performed by other auditor.
B Ltd is the Subsidiary company of A Ltd ABC & Associates has been appointed as auditor of A Ltd for the
Financial Year 2014-15 and XYZ & Associates has been appointed as auditor of B Ltd for the year 2014-15
Explain the role of ABC & Associates and XYZ & Associates as auditors of the parent company and
subsidiary respectively
➢ SA 600 – “Using the Work of Another Auditor”
➢ Co-ordination – Between PA & OA / To Achieve this there should be Sufficient Liaison / If
necessary Written Communication by P.A to O.A
SA 600 contemplates coordination between auditors and requires that there should be sufficient
liaison between the principal auditor and the other auditor. For this purpose, the principal auditor
may find it necessary to issue written communication(s) to the other auditor.
OA to PA
➢ Understand how his work is to be used & Co-ordinate with the PA / Ensure Compliance with
Statutory Requirement / Inform Significant Findings material at entity level/ adhering to
Timetable/ Responding to Questionnaire
The other auditor, knowing the context in which his work is to be used by the principal auditor,
should co-ordinate with the principal auditor. For example, by bringing to the principal auditor’s
immediate attention any significant findings requiring to be dealt with at entity level, adhering to
the timetable for audit of the component, etc. He should ensure compliance with the relevant
statutory requirements. The other auditor should respond to such questionnaire on a timely basis.
PA to OA
➢ Advice on imp. Matter/ Require OA to answer detailed Questionnaire if req.
Similarly, the principal auditor should advise the other auditor of any matters that come to his
attention that he thinks may have an important bearing on the other auditor’s work.
When considered necessary by him, the principal auditor may require the other auditor to answer
a detailed questionnaire regarding matters on which the principal auditor requires information for
discharging his duties.
Reporting Requirements
➢ Modifying Opinion
PA shall Evaluate Nature & Significance of Subject Matter with respect to financial
information of Entity
In all circumstances, if the other auditor issues, or intends to issue, a modified auditor's report, the
principal auditor should consider whether the subject of the modification is of such nature and
significance, in relation to the financial information of the entity on which the principal auditor is
reporting that it requires a modification of the principal auditor's report.
➢ Qualified / Disclaimer
If OA work cannot be used / PA Cannot perform Suff. Audit procedures/P.A should express
Q/DOM
When the principal auditor concludes, based on his procedures, that the work of the other auditor
cannot be used and the principal auditor has not been able to perform sufficient additional
procedures regarding the financial information of the component audited by the other auditor, the
principal auditor should express a qualified opinion or disclaimer of opinion because there is a
limitation on the scope of audit.

Part 4 - SA 610
QNO How to use/rely on work/report of internal auditor- Old Course (M12E,N15R,N15E,N16M,P17M)

103.250 BHASKAR CNO—SA610.060 New Course – (N18M)
CA Amboj, a practicing-chartered accountant has been appointed as an internal auditor of Textile Ltd He
conducted the physical verification of the inventory at the year-end and handed over the report of such
verification to CA Kishor, the statutory auditor of the Company, for his view and reporting Can CA Kishor
rely on such report?
OR
In the course of the statutory audit of Z Ltd, its statutory auditors, having determined that the work of
internal auditor is likely to be adequate for the purpose of statutory audit, wanted to use the work of
internal auditor in respect of physical verification of fixed assets How an evaluation of this specific work
done by the internal auditor can be done
▪ SA 610 – “ Using Work Of the Internal Auditor”
➢ How to use the work?
Discuss planned use & Co-ordinate Activities (Auditor will not check salary till 30th May, he
will check on 1st June)
Read report to understand NTE and related findings (1st Week Test of Controls, 2nd Week
Substantive Testing 3rd Week rectifications & reporting)
Perform Audit Procedures on body of work of Internal Auditor to evaluate whether work is
planned / performed / supervised / reviewed / documented / S&A Evidence to draw
conclusions / conclusions drawn are consistent with evidence obtained. (Read detailed plan,
check sign of performer & reviewer, analyse misstatements and conclusion)
His own audit procedures should be responsive depending on factors discussed earlier
Judgment / RMM / (Competence / Objectivity / Work Performed by IA) and should always
include reperformance of some work.
Evaluate whether his own conclusions regarding internal audit function and its uses remain
appropriate as per SA’s
Part III–In this case Kishor should determine:
➢ Whether reliance can be placed on the work of the internal auditor /Shall determine Internal
Auditors Scope of: Verification , Area Of Coverage and Method of Verification.
In the instant case, CA. Kishor should ascertain the internal auditor’s scope of verification, area of
coverage and method of verification. He should review the report on physical verification taking into
consideration these factors. If possible, he should also test check few items and he can also observe
the procedures performed by the internal auditors.
➢ After Considering the above If the external auditor is satisfied – rely/if not satisfied decide
otherwise./Final Responsibility to express opinion remains with the external auditor
If the statutory auditor is satisfied about the appropriateness of the verification, he can rely on the
report but if he finds that the verification is not in order, he has to decide otherwise. The final
responsibility to express opinion on the financial statement remains with the statutory auditor.
QNO Nature of Work to be Assigned to Internal Auditor New Course – (M18E, S21M)
103.400 BHASKAR CNO—SA610.080
Moon Ltd. of which you are the Statutory Auditor, have an internal audit being conducted by an outside
agency. State the factors that weigh considerations in opting to make use of direct assistance of the
internal auditors for the purpose of statutory audit.
Answer ➢ Determining the Nature and Extent of Work that Can Be Assigned to Internal Auditors
Providing Direct Assistance:

SA 610 ‘Using the work of Internal Auditor’ Deals about the concept of direct assistance of internal
auditor. In determining the nature and extent of work that may be assigned to internal auditors and
the nature, timing and extent of direction, supervision and review that is appropriate in the
circumstances, the external auditor shall consider:
The amount of judgment involved in:
• Planning and performing relevant audit procedures; and
• Evaluating the audit evidence gathered.
The assessed risk of material misstatement; and
The external auditor’s evaluation of the existence and significance of threats to the
objectivity and level of competence of the internal auditors who will be providing such
assistance.
If using internal auditors to provide direct assistance is not prohibited by law or regulation, and the
external auditor plans to use internal auditors to provide direct assistance on the audit, the external
auditor shall evaluate the existence and significance of threats to objectivity and the level of
competence of the internal auditors who will be providing such assistance.
The external auditor’s evaluation of the existence and significance of threats to the internal auditors’
objectivity shall include inquiry of the internal auditors regarding interests and relationships that
may create a threat to their objectivity.

Part 5 - SA 620
QNO Agreement (Need for Detailed agreement) Old Course – (N16E,M21M)

105.000 BHASKAR CNO—SA620.120 New Course –(M21M)
Mr Mohan, an auditor of KTEN Limited wants to use the work of an expert With reference to the Standard
on Auditing state the factors, which suggest the need for detailed and written agreement between the
auditor and the auditor’s expert.
▪ SA 620 – “Using Work Of an auditors Expert”
➢ Factors which suggest the need for detailed and written agreement:
As per SA 620, “Using the work of an Auditor’s Expert”, some of the matters may affect the
level of detail and formality of the agreement between the auditor and the auditor’s
expert, including whether it is appropriate that the agreement be in writing. For example,
the following factors may suggest the need for a more detailed agreement than would
otherwise be the case, or for the agreement to be set out in writing:
Nuclear-DEAL should have detailed agreement as they are C-omplex
• N- The auditor has Not previously used work performed by that expert.
• D- The respective roles or responsibilities of the auditor and the auditor’s
expert are Different from those normally expected.
• E- The greater the Extent of the auditor’s expert’s work, and its
significance in the context of the audit.
• A - The auditor’s expert will have Access to sensitive or confidential entity
information.
• L -Multi-jurisdictional Legal or regulatory requirements apply.
• C-The matter to which the auditor’s expert’s work relates is highly
Complex.
Author’s Note
Nuclear-DEAL should have detailed agreement as they are C-omplex
QNO Agreement With Expert (Matters Covered) Old Course – (M19R,M19M)

105.100 BHASKAR CNO—SA620.120 New Course – (N18M,M19R,M19M,S21M)
X Ltd had a net worth of INR 1300 crores because of which Ind AS became applicable to them. The
company had various derivative contracts – options, forward contracts, interest rate swaps etc. which
were required to be fair valued for which company got the fair valuation done through an external third
party. The statutory auditors of the company involved an auditor’s expert to audit valuation of derivatives.
Auditor and auditor’s expert were new to each other i.e. they were working for the first time together but
developed a good bonding during the course of the audit . The auditor did not enter into any formal
agreement with the auditor’s expert. Please advise.
Answer ➢ Matters to be considered in Agreement
The auditor shall agree, in writing when appropriate, on the following matters with the auditor’s
expert:
The nature, scope and objectives of that expert’s work.
The respective roles and responsibilities of the auditor and that expert.
The nature, timing and extent of communication between the auditor and that expert,
including the form of any report to be provided by that expert; and
When the work of the auditor’s expert relates to the auditor’s conclusions regarding a significant
risk, both a formal written report at the conclusion of that expert’s work, and oral reports as the
work progresses, may be appropriate. Identification of specific partners or staff who will liaise with

the auditor’s expert, and procedures for communication between that expert and the entity, assists
timely and effective communication, particularly on larger engagements.
➢ The need for the auditor’s expert to observe confidentiality requirements.
It is necessary for the confidentiality provisions of relevant ethical requirements that apply to
the auditor also to apply to the auditor’s expert. Additional requirements may be imposed by law
or regulation. The entity may also have requested that specific confidentiality provisions be agreed
with auditor’s external experts.
Facts and Conclusion

➢ In the instant case X Ltd. had various derivative contracts – options, forward contracts, interest rate
swaps etc. which were required to be fair valued for which company got the fair valuation done
through an external third party. The statutory auditors of the company involved an auditor’s expert
to audit valuation of derivatives. Considering the complexity involved in the valuation and volume
of derivatives and also due to the fact that the auditor and auditor’s expert were new to each other,
auditor should have signed a formal agreement/ engagement letter with the auditor’s expert in
respect of the work assigned to him in accordance with SA 220.

Part 6 – OTHER CONCEPTS
Nature and extent of Planning & Changes to Planning Old Course – (M21E)
QNO
decisions
149.030
UNIQUE
Mr. S & Mr. J are a senior and junior articled assistant respectively, in a renowned audit firm. Both were
assigned statutory audit of a manufacturing company. Mr. S instructed his junior to draft an audit plan by
taking reference from a similar client (a partnership firm) who was engaged in the same business. Mr. J was
confused as to how that reference could suit in this case, since the nature and extent of planning would vary
for both clients. After few days, the audit work commenced. During the course of the audit, certain events
took place, which made Mr. J to rethink about the audit plan initially designed. He approached Mr. S and
enquired about when would an audit plan require a change. Comment about both the situations face by Mr.
J in the above situation.
Answer SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance with
Standards on Auditing” states that in order to achieve the overall objectives of the audit, the auditor shall
use the objectives stated in relevant SAs in planning and performing the audit. Without a careful plan, the
overall objective of an audit may not be achieved. The audit planning is necessary to conduct an effective
audit, in an efficient and timely manner. So far as the nature of planning is concerned, it would vary
according to-
(i) Size and Complexity of the Auditee - If the size and complexity of organization of which audit is to be
conducted is large, then much more planning activities would be required as compared to an entity whose
size and complexity is small.
(ii) Past Experience & Expertise - The key engagement team members’ previous experience & expertise also
contributes towards variation in planning activities.
(iii) Change in Circumstances - Another factor contributing towards variation in planning activities is change
in circumstances.
Changes to Audit Planning: The auditor should update and change the overall audit strategy and audit plan
as necessary during the course of the audit. The auditor may need to modify the overall audit strategy and
audit plan due to the factors such as
(i) result of unexpected events,
(ii) changes in conditions, or
(iii) the audit evidence obtained from the results of audit procedures.
Further, the auditor would also have to modify the nature, timing & extent of further audit procedures,
based on the revised considerations of assessed risks. This may be the case when information coming to the
auditor differs significantly from the information when he planned the audit process.
In addition to the above, there may be possibilities of change in law, notifications, government policies,
which warrants updation of overall audit strategy and audit plan.
Audit Programme for Multiplex, Sale of Old Course – (N09E, M12R, N15R, P17M,M21M)
NO
tickets New Course – (M18R, N19E, S21M , M21M, M22M)
153.000
UNIQUE
You have been appointed as the auditor of a Multiplex Cinema House Draw an audit programme in
respect of its Revenue and Expenditure.
OR
XLoud, a movie theatre complex, is the foremost theatre located in Delhi Along with the sale of tickets
over the counter and online booking, the major proportion of income is from the cafe shops, pubs etc
located in the complex Its ‘other income’ includes advertisements exhibited within/outside the premises
such as hoarding, banners, slides, short films etc The facility for parking of vehicles is also provided in the
basement of the premises.
XLoud appointed your firm as the auditor of the entity Being the head of the audit team, you are
therefore required to draw an audit programme initially in respect of its revenue and expenditure
considering the above-mentioned facts along with other relevant points related to a complex.

Answer ➢ Audit Programme of Multiplex
Just Think About Going For A Movie - Imagine the Events that take place .
➢ General points
Peruse the Memorandum of Association and MOA
General
Articles of Association of the entity. Points
Ensure the object clause permits the entity to AOA
engage in this type of business.
➢ Incomes
In the case of income from sale of tickets: Income
Verify the system of collection from the parking areas in
respect of the vehicles parked by the customers.
Parking
Verify the system of control exercised relating to the
income receivable from advertisements exhibited within Advertisment
`
the premises and inside the hall such as hoarding,
banners, slides, short films etc. Sale of Tickets
Verify the control system as to how it is ensured that the -Online/Offline
collections on sale of tickets of various shows are properly Café/Pubs
accounted.
Verify the system of relating to online booking of various
shows and the system of realization of money.
Check that there is overall system of reconciliation of Check Internal Control
System & Its Effectiveness
collections with the number of seats available for different with respect to Incomes
shows on a day.
Verify the internal control system and its effectiveness relating to the income from cafe
shops, pubs etc., located within the multiplex.
Expenses
➢ Expenses
Verify the payments effected in respect of the Building
maintenance of the building and ensure the same is in Maintainance
order.
`
Distributors
In the case of payment to the distributors verify the
system of payment which may be either through out right
Salaries
payment or percentage of collection or a combination of
both. Ensure at the time of settlement any payment of
advance made to the distributor is also adjusted against
the amount due. Verify the system of payment of salaries Check Internal Control System &
and other benefits to the employees and ensure that Its Effectiveness with respect to
statutory requirements are complied with. payment of expenses
QNO Audit Programme for Wastage New Course – (M22M)

159.000 UNIQUE
Darshan Ltd. is a manufacturing company, provided following details of wastages of raw materials in
percentage, for various months. You have been asked to enquire into causes of abnormal wastage of raw
materials. Draw out an audit plan.
Wastage percentage are
July 2021 1.3%

Aug 2021 1.6%
Sep 2021 1.5%
Oct 2021 3.9%
Answer Audit Plan to locate the Abnormal Wastage of Raw Material: To locate the reasons for the abnormal
wastage, the auditor of Darshan Ltd. should first assess the general requirements as under:

(i) Procure a list of raw materials, showing the names and detailed characteristics of each raw
material.
(ii) Obtain the standard consumption figures, and ascertain the basis according to which normal
wastage figures have been worked out. Examine the break-up of a normal wastage into that in
process, storage and handling stages. Also obtain control reports, if any, in respect of
manufacturing costs with reference to predetermined standards.
(iii) Examine the various records maintained for recording separately the various lots purchased and
identification of each lot with actual material consumption and for ascertaining actual wastage
figures therein.
(iv) Obtain reports of Preventive Maintenance Programme of machinery to ensure that the quality of
goods manufacture is not of sub-standard nature or leads to high scrappage work.
(v) Assess whether personnel employed are properly trained and working efficiently.
(vi) See whether quality control techniques have been consistent or have undergone any change.
(vii) Examine inventory plans and procedures in report of transportation storage efficiency,
deterioration, pilferage and whether the same are audited regularly.
(viii) Examine whether the basis adopted for calculating wastage for September is the same as was
adopted for the other three months.
(ix) Obtain a statement showing break up of wastage figures in storage, handling and process for the
four months under reference and compare the results of the analysis for each of the four months.
In addition, some specific reasons for abnormal wastage in process may be considered by the auditor
are as under:
(i) Examine laboratory reports and inspection reports to find out if raw materials purchased were of a
poor quality or were of sub-standard quality. This will be most useful if it is possible to identify the
wastage out of each lot that has been purchased.
(ii) Machine breakdown, power failure, etc. may also result into loss of materials in process. Check the
machine utilisation statements.
(iii) A high rate of rejections in the finished lots may also be responsible for abnormal wastage;
therefore, examine the inspectors’ reports in respect of inspection carried out on the completion of
each stage of work or process.
(iv) It is possible that the wastage may have occurred because the particular lot out of which issues
were made was lying in the store for a long time, leading to deterioration in quality or because of a
change in the weather which may have led to the deterioration. Compare the wastage figures.
(v) Abnormal wastage in storage and handling may arise due to the following reasons:
(1) Write offs on account of reconciliation of physical and book inventories: In case of periodical
physical inventory taking, such write offs will be reflected only in the month such reconciliation
takes place.
(2) Accidental, theft or fire losses in storage: The auditor should examine the possibility of these
for the purpose.
(vi) Examine whether any new production line was taken up during the month in respect of which
standard input-output ratio is yet to be set-up.
QNO Audit Strategy For Online Business Old Course – (M15E, N16M, P17M, N17R, N17M)
160.000 UNIQUE New Course – (S17M, S21M)
As an auditor of garment manufacturing company for the last five years you have observed that new
venture of online shopping has been added by the company during current year As an auditor what
factors would be considered by you in formulating the audit strategy of the company?

Answer ➢ Formulation of Audit Strategy: While formulating the audit strategy for a company, following
factors may be considered.
General Factors:
Audit Strategy/
• The engagement objectives.
• Main points relating to planning and controlling
the audit or comments on the adequacy of the
existing arrangements.
• Preliminary judgements as to materiality
• The results of the business review, including major
developments in the client’s business and industry,
significant operating results and financial
arrangements.
• Identified inherent risks. The team should also consider the risk of fraud and, in
particular, any evidence of a high level of risk to the firm. They should take into
account the results of procedures for the acceptance and continuation of clients.
• The degree to which the team should carry out further assessment of controls
as a means of reducing substantive tests.
The broad nature, extent and timing of substantive tests, or changes to the previous year’s
strategy for substantive testing.
Specific Factors for Online Shopping
The auditor shall also obtain an understanding of the business ,it processes (Example: B-B
, Supplier-Business-Customer-Own or mediator) and of the information system including
the related business processes due to new venture of online shopping in the following
areas :
• Obtain an understanding of the Class of transactions : Significant.
The classes of transactions in the entity’s operations that are significant to the
financial statements;
Example: For Jabong -Clothes, shoes(S)/Amazon Clothes, Shoes, Electronics(S)
• Manual /Electronic Records Maintained
Records/Documents (manual or electronic) used
to initiate, process, record and report Significant
Understanding
transactions; includes the correction of incorrect
information how information is transferred to the
Records
general ledger. Maintained
• Process of Capturing events and conditions :
Flow
Process of
How the Info. System captures events and Capturing
conditions, insignificant to the financial (Insignificant)
statements.
Procedure
• Procedure :
The procedures by which transactions are Controls
initiated, processed, recorded, corrected as
necessary, transferred to the general ledger and
reported in the financial statements;
• Controls :
Controls surrounding Standard journal entries/ non-standard journal entries -non-
recurring, unusual transactions or adjustments
Author’s Note
The above points have been rearranged in the flow of audit ( core audit process).However instead of
above you can use points of overall audit strategy as given in QNO 147.000

Part 1 - SA 315
NO Audit Risk (Calculation) Old Course – (M19R, M19M, N20M)

36.500 BHASKAR CNO—SA315.RISK.020 New Course– (M19M,N20M,S21M)
Compute the overall Audit Risk if looking to the nature of business there are chances that 40% bills of
services provided would be defalcated, inquiring on the same matter management has assured that
internal control can prevent such defalcation to 75%. At his part the Auditor assesses that the procedure
he could apply in the remaining time to complete Audit gives him satisfaction level of detection of frauds
& error to an extent of 60%. Analyse the Risk of Material Misstatement and find out the overall Audit Risk.
Answer According to SA-200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, the Audit Risk is a risk that Auditor will issue an inappropriate
opinion while Financial Statements are materially misstated.
➢ Audit Risk, has two components:
Risk of material Misstatement and
Detection Risk.
The relationship can be defined as follows.
• Audit Risk = Risk of material Misstatement X Detection Risk
• Risk of material Misstatement: - Risk of Material Misstatement is anticipated risk
that a material.
➢ Misstatement may exist in Financial Statement before start of the Audit. It has two components
Inherent risk and Control risk. The relationship can be defined as
Risk of material Misstatement = Inherent risk X control risk
• Inherent risk: it is a susceptibility of an assertion about account balance; class of
transaction, disclosure towards misstatements which may be either individually or
collectively with other Misstatement becomes material before considering any
related internal control which is 40% in the given case.
• Control risk: it is a risk that there may be chances of material Misstatement even
if there is a control applied by the management and it has prevented defalcation
to 75%. Hence, control risk is 25% (100%-75%)
Risk of material Misstatement: Inherent risk X control risk i.e. 40% X 25 % = 10% . Chances
of material Misstatement are reduced to 10% by the internal control applied by
management.
• Detection risk: It is a risk that a material Misstatement remained undetected even
if all Audit procedures applied, Detection Risk is 100-60=40%
➢ In the given case, overall Audit Risk can be reduced up to 4% as follows:
Audit Risk: Risk of Material Misstatement x Detection Risk = 10 X 40% = 4%
QNO ICS (Components) New Course –(S17M,S20M)

40.000 BHASKAR CNO—SA315.ICS.040
What are the components of an internal control framework?
▪ SA 315, Identifying And Assessing The Risk Of Material Misstatement Through Understanding The
Entity And Its Environment

There are five components of an internal
control framework. They are as follows:
1. Control Environment;
2. Risk Assessment;
3. Information & Communication;
4. Monitoring;
5. Control Activities
Identify & Assess RMM & Response to Risk Old Course – (N14E, M17R, P17M, N18E)
40.100
BHASKAR CNO—SA315.RISK.080 New Course – (M18R)
While commencing the statutory audit of Alex Co Ltd, what would you consider as an auditor to assess risk
of material misstatement and responses to such risks?
▪ SA 315, Identifying And Assessing The Risk Of Material Misstatement Through Understanding The
Entity And Its Environment.
➢ RMM at 2 Levels: - Financial Statement Level & Assertion Level
The auditor shall identify and assess the risks of material misstatement at:
The financial statement level; an
The assertion level for classes of transactions, account balances, and disclosures; to provide
a basis for designing and performing further audit procedures.
➢ 4 Steps in Identifying & Assessing Risk
Identify risks while obtaining understanding /Identify which assertions will get
affected / Identify whether risks are affecting financial statement as a whole and
affecting many assertions / Consider likelihood and Magnitude of Misstatement and
whether there could be Material Misstatement
For this purpose, the auditor shall:
• Identify risks throughout the process of obtaining an understanding of the entity
and its environment, including relevant controls that relate to the risks, and by
considering the classes of transactions, account balances, and disclosures in the
financial statements; (Har information collect karne ke baad risk ke baarein
mein sochtein raho)
• Relate the identified risks to what can go wrong at the assertion level, taking
account of relevant controls that the auditor intends to test; and (Kahi assertion
level pet oh nahi)
• Assess the identified risks, and evaluate whether they relate more pervasively to
the financial statements as a whole and potentially affect many assertions; (Ya
financial statement level pet oh nahi)
• Consider the likelihood of misstatement, including the possibility of multiple
misstatements, and whether the potential misstatement is of a magnitude that
could result in a material misstatement. (Badi risk toh nahi hai , with big amount
and more probability)
SA 330 The Auditor’s Responses to Assessed Risks
➢ Response for Risk at Financial Statement Level: - Overall Responses (E.g. More Seniors,
Experts / Professional Scepticism / Surprise Element / Supervision etc)
The auditor shall design and implement overall responses to address the assessed risks of material
misstatement at the financial statement level.

➢ Response for Risk at Assertion Level: - Further Audit Procedures / NTE should be
Responsive to RMM
The auditor shall design and perform further audit procedures whose nature, timing and extent are
based on and are responsive to the assessed risks of material misstatement at the assertion level.
➢ More Explanation: - Consider Reasons for RMM :- 1i. It is due to high likelihood because
of nature of item (i.e. inherent risk) 1ii. Which are relevant controls compensating this
risk, what’s control risk, if we are relying on this control then we need to check operating
effectiveness
In designing the further audit procedures to be performed, the auditor shall
• Consider the reasons for the assessment given to the risk of material misstatement
at the assertion level for each class of transactions, account balance, and disclosure,
including:
o The likelihood of material misstatement due to the particular
characteristics of the relevant class of transactions, account balance, or
disclosure (i.e., the inherent risk); and
o Whether the risk assessment takes into account the relevant controls
(i.e., the control risk), thereby requiring the auditor to obtain audit
evidence to determine whether the controls are operating effectively(i.e.,
the auditor intends to rely on the operating effectiveness of controls in
determining the nature, timing and ext000ent of substantive procedures);
and
➢ Higher RMM: - Higher RMM More Persuasive Evidence
• Obtain more persuasive audit evidence the higher the auditor’s assessment of risk.

PART 2 - SA 265
QNO Letter of Weakness Old Course - (M15R, N15E, M20R,M20M)

26.000 BHASKAR CNO—SA265.060 New Course- (S17M,N18M,N18R,M20R,M20M,S21M)
During the course of his audit, the auditor noticed material weaknesses in the internal control system, and
he wishes to communicate the same to the management You are required to elucidate the important
points the auditor should keep in the mind while drafting the letter of weaknesses in internal control
system.
▪ SA 265, Communicating Deficiencies in Internal Control to Those who Charged with Governance and
Management
➢ Shall be in Writing.
Description of Deficiencies / Sufficient Information to understand nature & context
of communication
The auditor shall include in the written communication of significant deficiencies in internal
control:
• A description of the deficiencies and an explanation of their potential effects; and
• Sufficient information to enable those charged with governance and management
to understand the context of the communication.
➢ Explain purpose of the Audit.
→Test of controls is part of audit not purpose of expressing opinion on IFCR →There
can be other deficiency also we are certifying your system.
In particular, the auditor shall explain that:
• The purpose of the audit was for the auditor to express an opinion on the financial
statements;
• The audit included consideration of internal control relevant to the preparation of
the financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of internal control; and
• The matters being reported are limited to those deficiencies that the auditor has
identified during the audit and that the auditor has concluded are of sufficient
importance to merit being reported to those charged with governance.
➢ Usefulness for Management & Auditor: -
Valuable refence document for Mgt revising the system and insisting strict
compliance / Minimises auditor’s legal liability in event of major defalcation or other
loss resulting from weakness.
• This letter serves as a valuable reference document for management for the purpose
of revising the system and insisting on its strict implementation.
• The letter may also serve to minimize legal liability in the event of a major defalcation
or other loss resulting from a weakness in internal control.
QNO Significant Deficiencies Old Course - (M15R)

27.000 BHASKAR CNO—SA265.080 New Course- (N20E,N22M)
Give some examples of matters which auditor may consider while determining the significant deficiencies
in internal control.
OR
CA. N has been appointed as an auditor of TRP Ltd. While conducting the audit he has identified some
deficiencies in the Internal control. He needs to determine whether a deficiency or combination of
deficiencies in internal control constitutes a "significant deficiency" and has to communicate them in
writing to those charged with Governance and management on a timely basis. Guide CA. N with some

examples of matters to be considered while determining `significant deficiency' in internal control with
reference to relevant SA.
OR
During the course of the audit of Tirthankara Limited, CA. Shreyansh Manager in the audit team identified
that there is significant risk in lease transactions due to complex cross-border sale and lease back
arrangements. This significant risk or risk of material misstatement was not identified in management's
risk assessment process. Upon various inquiries with Management regarding their risk assessment
process, it was identified and concluded by the audit team that the management's risk assessment process
is not effective to identify all the significant risks. CA. Shreyansh decided that this in combination with
other potential deficiencies in internal control constitutes significant deficiencies in internal control and
hence, is required to be communicated to those charged with governance. However, the engagement
partner had a different view regarding the audit of Tirthankara Limited. According to him, the only matter
that is identified and poses significant deficiencies due to their magnitude is only required to be
communicated. Matters of potential misstatements that are not actual misstatements cannot be termed
as significant deficiencies. You are required to guide CA. Shreyansh with respect to examples of matters
that the auditor may consider in determining whether a deficiency or combination of deficiencies in
internal control constitutes a significant deficiency.
▪ SA 265, Communicating Deficiencies in Internal Control to Those who Charged with Governance and
Management
➢ Definition: - Significant Deficiency: - Deficiency or combination of deficiency, as per
auditor’s judgement is important enough to be brought to attention of TCWG
Significant deficiency in internal control means a deficiency or combination of deficiencies in internal
control that, in the auditor’s professional judgment, is of sufficient importance to merit the attention
of those charged with governance.
➢ Only occurrence of material misstatement is not must to decide whether deficiency is
significant deficiency, even if there is likelihood of MMST it will be significant deficiency
The significance of a deficiency or a combination of deficiencies in internal control depends not only
on whether a misstatement has actually occurred, but also on the likelihood that a misstatement
could occur and the potential magnitude of the misstatement. Significant deficiencies may
therefore exist even though the auditor has not identified misstatements during the audit.
Examples of matters which should be considered while deciding significant
deficiency.
(Very Amazing FLOSS)
Volume of activity / Amounts exposed / Frequency of the exceptions Detected &
its Causes / Likelihood of the deficiencies / Other deficiencies interacting /
Susceptibility to loss or fraud of the related asset or liability / Subjectivity and
complexity of determining estimated amounts
Examples of matters that the auditor may consider in determining whether deficiency or
combination of deficiencies in internal control constitutes a significant deficiency include:
• The Volume of activity that has occurred or could occur in the account balance or
class of transactions exposed to the deficiency or deficiencies. (Coal is purchased 5
times in a week, wooden blocks are purchased once a week)
• The financial statement Amounts exposed to the deficiencies. (Coal accounts for
80% of fuel while wooden blocks account for 5% of fuel)
• The cause and Frequency of the exceptions detected as a result of the deficiencies
in the controls. (Already 5 instances of fraud detected in coal)
• The Likelihood of the deficiencies (Probability) leading to material misstatements
in the financial statements in the future. (Chances of misstatement is higher in
purchase of coal as compared to wooden blocks)
• The interaction of the deficiency with Other deficiencies in internal control. (There
is fixed policy of coal quality assessment & there is no experienced, knowledgeable
supervisor also)

• The Susceptibility to loss or fraud of the related asset or liability. (Moisture level
in coal has huge impact on coal weight as compared to wooden blocks)
• The Subjectivity and complexity of determining estimated amounts, such as fair
value accounting estimates. (Quality determination is difficult in coal as compared
to wooden blocks)
➢ Important Controls: - POMPS
Controls over Prevention & Detection of Frauds / Outside Normal Course of Business
/ Monitoring Controls / Period End Financial Reporting Process / Significant
Accounting Policies
• The importance of the controls to the financial reporting process; for example:
• General monitoring controls (such as oversight of management).
• Controls over the prevention and detection of fraud.
• Controls over significant transactions with related parties.
• Controls over significant transactions outside the entity’s normal course of
business.
• Controls over the period-end financial reporting process (such as controls over
non-recurring journal entries)
• Controls over the selection and application of significant accounting policies.

PART 3 - OTHER CONCEPTS
Control Objectives (Accounting Control Old Course – (M09E, M12M, N13R, M15E, M16M,
QNO System) P17M,M21M)
165.100 BHASKAR CNO—CH30C.100 New Course – (S21M, M21M)
As auditor of Z Ltd, you would like to limit your examination of account balance tests What are the
control objectives you would like the accounting control system to achieve to suit your purpose?
Answer ➢ Basic Accounting Control Objectives: The basic accounting control objectives which are sought
to be achieved by any accounting control system are –
Whether recorded transactions are real
Whether all transactions are recorded
Whether all transactions are recorded timely
Whether all transactions are properly classified
Whether all recorded transactions are properly valued
Whether all transactions are properly posted
Whether all transactions are properly summarized
Whether all transactions are properly disclosed
Author’s Note
The above answer has been arranged as per the flow so that it becomes easy to visualize.
This question and the above question are different to each other as above one asks about control
objectives and this one asks about accounting control objective.
Internal Check Old Course – (M08R, N13E, M14E, N15E, N16M, N16E, P17M, N17R,
QNO
BHASKAR CNO—CH30C.160 N17M, M18M, N18M, N19R, N19M,M20R)
171.000
New Course – (M18M, N19R, N19M, M20R,S21M, S20M,M22M)
New Life Hospital is a multi-speciality hospital which has been facing a lot of pilferage and troubles
regarding their inventory maintenance and control. On investigation into the matter it was found that
the person in charge of inventory inflow and outflow from the store house is also responsible for
purchases and maintaining inventory records.
According to you, which basis system of control has been violated? Also advise the other general
conditions pertaining to such system which needs to be maintained and checked by the management.
OR
State the considerations on which effectiveness of an efficient system of internal check depends.
OR
Write a short note on Objectives of Internal Check System
OR
BSF Limited is engaged in the business of trading leather goods. You are the internal auditor of the
company for the year 2018-19. In order to review internal controls of the sales department of the
company, you visited the department and noticed the work division as follows:
(1) An officer was handling the sales ledger and cash receipts.
(2) Another official was handling dispatch of goods and issuance of Delivery challans.
(3) One more officer was there to handle customer/ debtor accounts and issue of receipts.
a) As an internal auditor you are required to briefly discuss the general condition pertaining to the
internal check system.
b) Do you think that there was proper division of work? If not, why?
Answer ➢ Basic system of Control:
Internal Checks and Internal Audit are important constituents of Controls. Internal Check means
check on day to day transactions operating continuously as a part of routine system in which work
done by one person can be checked by others.

➢ Objectives of the Internal Check System:
To detect error and frauds with ease.
To avoid and minimize the possibility of commission of errors and fraud by any staff.
To increase the efficiency of the staff working within the organization
To locate the responsibility area or the stages where actual fraud and error occurs.
To protect the integrity of the business by ensuring that accounts are always subject to
proper scrutiny and check
To prevent and avoid the misappropriation or embezzlement of cash and falsification of
accounts.
➢ General Condition:
The general condition pertaining to the internal check system may be summarized as under-
(Start)
No Single Control- No single person should have complete control over any important
aspect of the business operation. Every employee’s action should come under the review
of another person
Distribution of Power- The financial and administrative powers should be distributed
very judiciously among different officers and the manner in which those are actually
exercised should be reviewed periodically.
Budgetary Control- Budgetary control should be exercised and wide deviations observed
should be reconciled.
(During)
Job Rotation- Staff duties should be rotated from time to time so that members do not
perform the same function for a considerable length of time.
Leave-Every member of the staff should be encouraged to go on leave at least once a
year.
Segregation of Duties- Persons having physical custody of assets must not be permitted
to have access to the books of accounts.
Accounting Control-There should exist an accounting control in respect of each class of
assets, in addition, there should be periodical inspection so as to establish their physical
condition.
Cash Control- Mechanical devices should be used, where ever practicable to prevent loss
or misappropriation of cash.
(End)
Inventory Control- For inventory taking, at the close of the year, trading activities should,
if possible be suspended, and it should be done by staff belonging to several sections of
the organization.
Record Control-Procedures should be laid down for periodical verification and testing of
different sections of accounting records to ensure that they are accurate
➢ Division of work
Company has not done proper division of work as:
the receipts of cash should not be handled by the official handling sales ledger.
delivery challans should be verified by an authorised official other than the officer
handling despatch of goods.
Case Discussion & Conclusion

➢ In the given case of Modest Hospital, the person-in-charge of inventory inflow and outflow from
the store house is also responsible for purchases and maintaining inventory records. Thus, one of
the basic system of control i.e. internal check which includes segregation of duties or maker and
checker has been violated where transaction processing are allocated to different persons in such
a manner that no one person can carry through the completion of a transaction from start to finish
or the work of one person is made complimentary to the work of another person.
Author’s Note
The above answer can be considered as one of the master answer w.r.t internal control system. Student
are not always required to write the entire answer. They should see what specifically has been asked in

the question before writing the answer
Internal Controls (Multiple Location Old Course – (N11E, M16R, M16M, N16M, P17M, N17M,
QNO
Business) N18M)
174.000
UNIQUE New Course – (M18M, S21M)
Funtoosh Ltd has five entertainment centres to provide recreational facilities for public especially for
children and youngsters at five different locations in the peripheral of 250 kilometres Collections are
made in cash Specify the adequate internal control system towards collection of money.
OR
Y Ltd has five entertainment centres to provide frivolous facilities for public especially for children and
youngsters at 5 different locations in the peripheral of 200 kms Collections are made in cash Specify the
adequate control system towards collection of money.
Answer ➢ Internal Control System:

In order to achieve proper internal control over the sale of tickets and its collection by Funtoosh
Ltd., following system should be adopted-
5 Surprise Check
1 2 4
Advance Booking Enterance
Printing Tickets Ticket Sale Ticket
Discount/Free Pass
Cash Deposit in
Cash Reconcile
3 Bank
Printing of tickets: Serially numbered pre-printed tickets to avoid duplication to prevent

forgery. Non-repetition of serial no. for reasonable period.
• Advance booking: System shall ensure that all advance booked tickets are paid
for.
• Ticket sales: Sale of tickets should take place from the Central ticket office ,
preferably through machines
• Discounts and free pass: Discount policy should be properly authorized and
such authorization should be preserved
• Daily cash reconciliation: Cash collection should be reconciled with the number
of tickets sold. Serial number of tickets will facilitate the reconciliation.
• Daily banking: Each day’s collection should be deposited in the bank on next
working day. Cash should be in the custody of properly authorized person,
preferably in joint custody. Daily cash in hand report should be signed by the
authorized persons.
Entrance ticket: Entrance tickets should be cancelled at the entrance gate
Surprise check: Internal audit system should carry out periodic surprise checks for cash
counts, daily banking, reconciliation and stock of unsold tickets etc
Author’s Note
In the Institute’s answer each point was an individual point by itself .However in order to give a better
picture for the sake of understanding the points:
-A diagram has been created and

-Points have been rearranged in the order of the diagram
QNO Checklist for IFCR Over C&B New Course – (N22E)
175.600 BHASKAR CNO—CH30C.200
Mr. K has been appointed as statutory auditor of SK Limited for issuing an audit opinion on financial
statements and internal controls over financial reporting (ICFR) for the year ended March 31, 2022 under
the Companies Act, 2013. Guide Mr. K to prepare a checklist in the form of questions for testing internal
control over cash and bank balances. When forming an opinion on ICFR is it necessary for Mr. K to test
the transactions only at the balance sheet date?
Answer In the given case of SK Limited, the appointed auditor Mr. K would prepare checklist for testing
internal control over cash and bank balances. An illustrative set of questions to be answered by the
audit staff is as follows:
Have you checked that the cashier -
(i) is not responsible for opening the incoming mails;
(ii) does not authorise any of the ledgers;
(iii) does not authorise any expenditure or receipt;
(iv) does not sign cheques;
(v) takes his annual leave regularly;
(vi) inks and balances the cash book every day;
(vii) verifies physical cash balance with the book figure daily at the end of the day;
(viii) prepares monthly bank reconciliation statement;
(ix) holds no other funds or investment;
(x) holds no unnecessary balance in hand;
(xi) does not pay money without looking into compliance with proper procedure and due
authorisation; and
(xii) has tendered proper security or has executed a fidelity bond?
In the given situation, Mr. K is Statutory Auditor of SK Limited for issuing opinion on financial
statements and internal control over financial reporting. He should surely test transactions during
the financial year and not just as at the balance sheet date, though the extent of testing at or near
the balance sheet date may be higher. From the discussion given above, it can be concluded that it
would not be necessary for Mr. K to test the transactions only at the balance sheet date.

Approach to identify risks associated with the IT New Course – (S21M)
QNO
systems.
204.005
UNIQUE
A Company is using ERP for all its business processes including Procurement, Sales, Finance and
Reporting. You are required to explain the Statutory Auditor’s approach to identify the risks associated
with the IT systems.
➢ The Auditor should understand and document each of the business processes in form of narratives
and / or flowcharts.
➢ The next process will be to identify areas / events that can lead to risks, viz. manual Invoicing and
accounting once goods are dispatched could lead to incorrect Invoicing and accounting and hence
is a ‘risk’.
➢ The Auditor should also analyze the risks i.e., the impact it will have if materializes.
➢ Next will be prioritization in terms of probability of how often the risks will materialize.
QNO Types of Automated Environment New Course – (N18R, N18M, M20M, S21M,
204.020 BHASKAR CNO—AAE.040 M21M)
A real-time environment is a type of automated environment in which business operations and
transactions are initiated, processed and recorded immediately as they happen without delay. It has
several critical IT components that enable anytime, anywhere transactions to take place. You are
required to name the components and its example of real-time environment.
Answer ➢ Real Time Environment: IT Components:
To facilitate transactions in real-time, it is essential to have the systems, networks and applications
available during all times. A real -time environment has several critical IT components that enable
anytime, anywhere transactions to take place. Any failure even in one component could render
the real -time system unavailable and could result in a loss of revenue. IT Components include:
H- Hardware For example, Data centers, Backup and Storage devices, Power supply.
M-Middleware For example, Web servers like Apache, ATM switches.
For example, ERP applications SAP, Oracle R12, Core banking
A-Applications
applications.
N-Networks For example, Wide Area Networks, Internet hosting.
Author’s Note
H-it MAN ( Order of Points is rearranged to match with mnemonic)
QNO Types of IT Controls New Course –(N22R)

204.024 BHASKAR CNO—AAE.100
M/s RST & Associates have been appointed as auditors of ADI Ltd. for the financial year 2021-22. The
processes, operations, accounting and decisions are carried out by using computers in ADI Ltd. M/s RST
& Associates understand that there are several aspects that they should consider to determine the level
of automation and complexity in the business environment of ADI Ltd. While planning the audit work,
the engagement partners discussed with the audit staff about the various types of controls in the
automated environment that are put in place to mitigate the IT risks and to maintain the confidentiality,
integrity, availability and security of data such as General IT Controls; Application Controls; and IT-
Dependent Controls.
You are required to briefly explain:
(i) General IT Controls.
(ii) Application Controls.
(iii) IT-Dependent Controls.

Answer The controls that are put in place to mitigate the IT risks and to maintain the confidentiality, integrity,
availability and security of data are General IT Controls, Application Controls and IT-Dependent Controls.
General IT Controls: “General IT controls are policies and procedures that relate to many applications and
support the effective functioning of application controls. They apply to mainframe, miniframe, and end-
user environment. General IT controls that maintain the integrity of information and security of data
commonly include controls over the following:” (SA 315)
• Data center and network operations;
• System software acquisition, change and maintenance
• Program change;
• Access security;
• Application system acquisition, development, and maintenance (Business Applications).
These are IT controls generally implemented to mitigate the IT specific risks and applied commonly across
multiple IT systems, applications and business processes. Hence, General IT controls are known as
“pervasive” controls or “indirect” controls.
Application Controls: Application controls include both automated or manual controls that operate at a
business process level. Application controls can be preventive as well as detective in nature and are
designed to ensure the integrity of the accounting records. application controls relate to procedures used
to initiate, record, process and report transactions or other financial data. These controls help ensure that
transactions occurred, are authorised, and are completely and accurately recorded and processed.
Automated Application controls are embedded into IT applications viz., ERPs and help in ensuring the
completeness, accuracy and integrity of data in those systems. Examples of automated applications include
edit checks and validation of input data, sequence number check, limit check, format check, range check,
reasonableness check, mandatory data fields, existence check etc.
IT dependent controls: IT dependent controls are basically manual controls that make use of some form of
data or information or report produced from IT systems and applications. In this case, even though the
control is performed manually, the design and effectiveness of such controls depend on the reliability of
source data. Due to the inherent dependency on Information Technology, the effectiveness and reliability
of Automated application controls and IT dependent controls require the General IT Controls to be
effective.
QNO Application Controls New Course – (S17M, M18M,S21M)

204.050 BHASKAR CNO—AAE.100/AAE.200
Describe application controls and give three examples of automated application controls.
OR
Explain Application Controls and General IT Controls
Answer ➢ Application Controls are automated or manual controls that operate at a business process level.
Automated Application controls are embedded into IT applications viz., ERPs and help in ensuring
the completeness, accuracy and integrity of data in those systems. Examples of automated
applications include:
User limit checks
Edit checks and validation of input data
Sequence number checks
Mandatory data fields
Reasonableness checks
➢ General Control
“General IT controls is policies and procedures that relate to many applications and support the
effective functioning of application controls. They apply to mainframe, miniframe, and end-user
environment. General IT controls that maintain the integrity of information and security of data
commonly include controls over the following:” (SA 315)
Data centre and network operations.
System software acquisition, change and maintenance
Program change.
Access security.
Application system acquisition, development, and maintenance (Business Applications).
These are IT controls generally implemented to mitigate the IT specific risks and applied commonly
across multiple IT systems, applications and business processes. Hence, General IT controls are
known as “pervasive” controls or “indirect” controls.
QNO Data Analytics New Course – (M19R, S21M, M22R)

In an automated environment, the data stored and processed in systems can be used to get various
insights into the way business operates. This data can be useful for preparation of management
information system (MIS) reports and electronic dashboards that give a high-level snapshot of business
performance. In view of above you are required to briefly discuss the meaning of data analytics and
example of circumstances when auditing in an automated environment, auditors can apply the concepts
of data analytics.
Answer ➢ Data Analytics:
Generating and preparing meaningful information from raw system data using processes, tools,
and techniques is known as Data Analytics. The data analytics methods used in an audit are known
as Computer Assisted Auditing Techniques or CAATs. When auditing in an automated
environment, auditors can apply the concepts of data analytics for several aspects of an audit
including the following:
preliminary analytics;
risk assessment;
control testing;
non-standard journal analysis;
evaluation of deficiencies;
fraud risk assessment.
QNO Enterprise Risk types and managing those risk New Course –(M19E, M22M)
The volatility, unpredictability and pace of fast changes that exists in the automated environment today
is far greater than in the past and consequently it throws more risk to business which requires them to
have a need to continuously manage such risks. State various risks which an enterprise may have to face
and manage.
Answer ➢ Various Risk
Businesses today operate in a dynamic environment. The volatility, unpredictability and pace of
changes that exist in the business environment today are far greater than in the past. Some of the
reasons for this dynamic environment include globalization, use of technology, new regulatory
requirements, etc. Because of this dynamic environment the associated risks to business have also
increased and companies have a need to continuously manage risks.
Examples of risks include:
Market Risks
Regulatory & Compliance Risks;
Business Partner Risk
Technology & Security Risks
Product or Project Risk;
Operational Risks
Credit Risk;
Environmental Risks.
Financial Reporting Risks
➢ Definition of Risk Management
Risk Management is a combination of process, people, tools and techniques through which
companies
Identify,
Assess,

Respond,
Mitigate and
Monitor risks.
Enterprise Risk Management is a formal program or framework that is implemented across an
enterprise or company for enabling risk management.

Part 1 – Company Audit (Sec 139 to 148)
QNO Sec 139--Appointment Government Company (Prem)- Old Course – (N14R, S17M, P17M, N19M)
284.000 BHASKAR CNO—CA.120 New Course – (N19M, S20M)
As an auditor, how would you deal with the following situations:
Nick Ltd. is a subsidiary of Ajanta Ltd., whose 20% shares have been held by Central Government, 25% by
Uttar Pradesh Government and 10% by Madhya Pradesh Government. Nick Ltd. appointed Mr. Prem as
statutory auditor for the year.
Answer Part I -- Relevant Section & Laws
▪ Section 139(5) of the Companies Act, 2013
Part II -- Requirements of Relevant Section & Laws
➢ Section 139(5) of the Companies Act, 2013
As per section 139(5) of the companies act 2013, in the case of a Government company the
Comptroller and Auditor-General of India shall, in respect of a financial year, appoint an auditor
duly qualified to be appointed as an auditor of companies under this Act, within a period of one
hundred and eighty days from the commencement of the financial year, who shall hold office till
the conclusion of the annual general meeting.
As per section 2(45), a Government company is defined as any company in which not less than
51% of the paid-up share capital is held by the Central Government or by any State Government or
Governments or partly by the Central Government and partly by one or more State Governments
and includes a company which is a subsidiary of a Government Company as thus defined”.
➢ In the given case Ajanta Ltd is a government company as its 20% shares have been held by Central
Government, 25% by U.P. State Government and 10% by M.P. State Government. Total 55% shares
have been held by Central and State governments.
➢ Therefore, it is a Government company. Nick Ltd. is a subsidiary company of Ajanta Ltd. Hence Nick
Ltd. is covered in the definition of a government company. Therefore, the Auditor of Nick Ltd. can
be appointed only by C & AG.
Consequently, appointment of Mr. Prem is invalid and he should not give acceptance to the
Directors of Nick Ltd.
Author’s Note:
• Question does not clarify whether it is first auditor or subsequent auditor. Practically subsequent
auditor cases are much more than first auditor (as It is once in life time affair for company) so we
should assume it is subsequent auditor if question is silent and solve accordingly. ICAI did the same
they assumed it as subsequent auditor, you can write same assumption. No need to take different
assumption.
• So, if question is silent, we should always assume, case of subsequent auditor because, it is more
frequent, famous than first auditor.
QNO Sec 139--Rotation (Common Partner Undisclosed) Old Course – (N21R)

293.500 BHASKAR CNO—CA.200 New Course – (N21R)
AB & Co. were appointed auditors for NOME Limited, a listed company, for the term of two five
consecutive years from 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16, 2016-17, 2017-18, 2018-
19, 2019-20. As per the provision of the section 139(2)(b) “No listed company or a company belonging
to such class or classes of companies as may be prescribed, shall appoint or re-appoint an audit
firm as auditor for more than two terms of five consecutive years”.
Hence, Management of NOME Limited reached out (based on the recommendation of Audit Committee)
to BCD & Co. for their nomination as the appointment of Statutory Auditor for the financial year 2020-
21. However, BCD & Co. did not provide any written consent to such appointment neither they
provided a certificate that the appointment, if made, shall be in accordance with the conditions laid in
the Act and Rules therein.
Still the management went ahead and proposed an appointment in AGM and BCD & Co. were appointed
as an auditor for the financial year 2020-21. Post appointment, those charged with governance identified
that majority of the partners in the BCD & Co. are same which were there in AB & Co. Now, fearing
the contravention of the provision of Companies Act, 2013. Management, on guidance of those charged
with governance, decided to file a complaint with tribunal under section 140(5) of the Companies Act
against statutory auditors.
You are required to guide the BCD & Co. regarding the contravention of the provisions of the
Companies Act, 2013 with respect to appointment of Auditor.
Answer As per section 139(1) of the Companies Act, 2013, every company shall, at the first annual general
meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of
that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion
of every sixth meeting and the manner and procedure of selection of auditors by the members of the
company at such meeting shall be such as may be prescribed.
It may be noted further that before such appointment is made, the written consent of the auditor to
such appointment, and a certificate from him or it that the appointment, if made, shall be in
accordance with the conditions as may be prescribed, shall be obtained from the auditor.
It may also be noted that the certificate shall also indicate whether the auditor satisfies the criteria
provided in section 141 of the Companies Act, 2013.
Further, as per section 139(2), “(2) No listed company or a company belonging to such class or
classes of companies as may be prescribed, shall appoint or re-appoint (a) an individual as auditor for
more than one term of five consecutive years; and (b) an audit firm as auditor for more than two
terms of five consecutive years.
It may also be noted further that as on the date of appointment no audit firm having a common
partner or partners to the other audit firm, whose tenure has expired in a company immediately
preceding the financial year, shall be appointed as auditor of the same company for a period of five
years:”
In the current case, while appointing the auditors of the company a written consent of the auditor to
such appointment was not obtained. Moreover a certificate from him that the appointment if made
shall be in accordance with the conditions laid down in the Act and Rules was also not obtained.
Further, majority of the partners of AB & Co. were partners in BCD & Co. AB & Co. already served two
terms of five consecutive years i.e., from 2010- 11 to 2019-20 as a statutory auditor of the company.
Hence, BCD & Co. were not eligible to be appointed as an auditor of NOME Limited as all partners of
BCD & Co are partner of AB & Co. who have already served two terms of five consecutive years as an
auditor of NOME Limited. Since, before the appointment of Statutory Auditor, the management
should have obtained the required certification and written consent from BCD & Co., therefore, in
this case both, the management and the auditors have contravened the provision of the Companies
Act, 2013 as a result fine as per section 147 of Companies Act will be applicable i.e. if any of the
provisions of sections 139 to 146 (both inclusive) is contravened, the company shall be puni shable
with fine which shall not be less than twenty-five thousand rupees but which may extend to five
lakh rupees and every officer of the company who is in default shall be punishable with fine which
shall not be less than ten thousand rupees but which may extend to one lakh rupees. If an auditor

of a company contravenes any of the provisions of section 139, section 144 or section 145, the
auditor shall be punishable with fine which shall not be less than twenty - five thousand rupees, but
which may extend to five lakh rupees or four times the remuneration of the auditor, whichever is
less.
It may be noted that if an auditor has contravened such provisions knowingly or wilfully with the
intention to deceive the company or its shareholders or creditors or tax authorities, he shall be
punishable with imprisonment for a term which may extend to one year and with fine which shall
not be less than fifty thousand rupees, but which may extend to twenty-five lakh rupees or eight
times the remuneration of the auditor, whichever is less.
Sec 140--Removal by Tribunal Short Note Old Course – (N17R, M17R, M18E, N19E,
QNO
BHASKAR CNO—CA.220 N19M,N19R,N21R)
298.000
New Course – (M18M, M18E, N19R, N19M, S21M, N21R)
Direction by Tribunal in case auditor acted in a fraudulent manner
OR
Elucidate the power of tribunal to change the auditor of a company if found acted in a fraudulent
manner as provided under sub-section (5) of section 140 of the Companies Act, 2013
OR
The Auditor of M/s Quick Limited succumbed to the pressure of the Management in Certifying the
Financials with an over stated figure of turnover by not adhering to the cut-off principles of the time
scale for the transactions of the year. On taking cognizance of this act of the Auditor, the Tribunal under
the Companies Act, 2013 initiated the proceedings against him. Briefly list the powers of the Tribunal
in this respect including those relating to making orders against the Auditor found to be guilty.
OR
On the advice of Management of Quick Ltd., the auditor of the Company overlooked and did not report
on shifting of certain current year's sales transactions to the next year. The National Company Law
Tribunal (NCLT) wants to take action against the auditor. Describe the powers of the NCLT under
Section 140(5) of the Companies Act, 2013 for such action and consequences for the auditor.
As per section 140(5) of the Companies Act 2013.
➢ The Tribunal either Suo moto or on an application made to it by the Central Government or by any
person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly,
acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company
or its directors or officers, it may, by order, direct the company to change its auditors.
However, if the application is made by the Central Government and the Tribunal is satisfied that
any change of the auditor is required, it shall within fifteen days of receipt of such application,
make an order that he shall not function as an auditor and the Central Government may appoint
another auditor in his place.
➢ It may be noted that an auditor, whether individual or firm, against whom final order has been
passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any
company for a period of five years from the date of passing of the order and the auditor shall also
be liable for action under section 447.

➢ It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every
partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in
relation to, the company or its director or officers.
QNO Sec 140--Removal by Tribunal (Powers of Tribunal) (M22M)

298.200 BHASKAR CNO—CA.220
The Auditor of Rapid Limited succumbed to the pressure of the management in certifying the financials
with an overstated figure of turnover by not adhering to the cut-off principles of the time scale for
the transactions of the year. On taking cognizance of this act of the auditor, the Tribunal under the
Companies Act, 2013 initiated the proceedings against him. Briefly list the powers of the Tribunal in this
respect including those relating to making orders against the Auditor found to be guilty.
Answer Power of Tribunal in case Auditor acted in a Fraudulent Manner: As per sub-section (5) of the section 140
of the Companies Act, 2013, the Tribunal either Suo motu or on an application made to it by the Central
Government or by any person concerned, if it is satisfied that the auditor of a company has, whether
directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to,
the company or its directors or officers, it may, by order, direct the company to change its auditors.
However, if the application is made by the Central Government and the Tribunal is satisfied that any
change of the auditor is required, it shall within fifteen days of receipt of such application, make an order
that he shall not function as an auditor and the Central Government may appoint another auditor in his
place.
It may be noted that an auditor, whether individual or firm, against whom final order has been passed by
the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a
period of five years from the date of passing of the order and the auditor shall also be liable for action
under section 447 of the said Act.
It is hereby clarified that in the case of a firm, the liability shall be of the firm and that of every partner or
partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the
company or its director or officers.
Sec 141--Disqualification (Buying & Selling Shares New Course -- (M22M)

QNO
Before Appointment)
298.700
BHASKAR CNO—CA.080
Mr. Shripal, a practising Chartered Accountant, has been appointed as an auditor of Rani Ltd on 12th June
2021 for the year ended 31st March, 2022. The following persons have done following transactions in
securities of Rani Ltd.:
➢ Daughter of Mr. Shripal Purchase of Securities on 10th September, 2021 of face value of ` 45,000
(market value ` 90,000).
➢ Husband of daughter of Mr. Shripal: Purchase of Securities on 10th December, 2021 of face value of `

90,000 (market value ` 1,90,000).
All the above securities were sold on 18th February, 2022 for ` 3,00,000. Discuss the implications of the
above on the appointment of Mr. Shripal.
Answer Implications of relatives' securities holding on the Appointment of the Auditor: According to Section
141(3)(d)(i) of the Companies Act, 2013, read with Rule 10, an auditor is disqualified to be appointed as an
auditor if the auditor or his relative holds securities or interest in the company of face value exceeding `
100,000.
Further the definition of relative also includes daughter and a daughter's husband. Both are covered in the
definition of relative as defined by the Companies Act 2013.
Thus, the disqualifications will be applicable as the relative/s are holding securities of face value of more
than ` 100,000 and market value is not important.
It is also to note that in the event of acquiring any security or interest by a relative above the threshold
prescribed, the corrective action to maintain the limits as specified above can be taken by the auditor
within 60 days of such acquisition or interest. The same has however not been done.
In the instant case, Daughter of Mr. Shripal purchased the securities on 10th September 2021 of face value
of ` 45,000 and husband of daughter of Mr. Shripal purchased the securities on 10th of December, 2021 of
face value of ` 90,000. Aggregating the value of holding of securities exceeds the limits mentioned in
proviso to section 141(3)(d)(i) i.e., ` 1,00,000.
Further, corrective action taken by Husband of Daughter of Mr. Shripal on 18th February, is also not in
accordance with prescribed grace period of 60 days.
Therefore, CA. Shripal will be disqualified for appointment as an auditor of Raja Ltd. as per section
141(3)(d)(i) and he shall vacate his office.
Sec 141--Disqualification Prohibited Services Old Course – (N14R, M15R, M16M, N16R, P17M, N17M,
QNO
(Actuarial& Investment Advisory) N18M, N19M)
309.000
BHASKAR CNO—CA.080 New Course – (S17M, M18R, N19M, S21M)
C Ltd. appointed CA Innocent as a statutory auditor for the company for the current financial year.
Further the company offered him the services of actuarial, investment advisory and investment banking.

▪ Section 141(3)(i) of the Companies Act, 2013 and
▪ Section 144 of the Companies Act, 2013
➢ Section 144 of the Companies Act, 2013
It prescribes certain services not to be rendered by the auditor. An auditor appointed under this
Act shall provide to the company only such other services as are approved by the Board of
Directors or the audit committee, as the case may be, but which shall not include any of the
following services (whether such services are rendered directly or indirectly to the company or its
holding company or subsidiary company), namely: (BAD-MAFIA)
Investment Banking services;
Investment Advisory services;
Design and implementation of any financial information system;
Management services;
Actuarial services;
Rendering of outsourced Financial services;
Internal audit
Accounting and book keeping services; and
Any other kind of services as may be prescribed.

➢ Section 141(3)(i) of the Companies Act, 2013
A person is disqualified for appointment as an auditor of a company who is engaged as on the date
of appointment in consulting and specialized services as provided in section 144.
➢ In the given case, CA Innocent was appointed as an auditor of C Ltd. He was offered additional
services of actuarial, investment advisory and investment banking which was also approved by the
Board of Directors.
➢ The auditor is advised not to accept the services as these services are specifically notified in the
services not to be rendered by him as an auditor as per section 144 of the Act.
Author’s Note
B- Investment Banking services; / A- Investment Advisory services/ D- Design and implementation
of any financial information system/ M- Management services / A- Actuarial services/ F- Rendering
of outsourced Financial services/ I-Internal audit / A- Accounting and book keeping services; and
QNO Sec 143-- Inquiry Multiple Case Studies Old Course – (M21M)
327.500 BHASKAR CNO—CA.300 New Course – (M21M)
Mr. Raj, the engagement partner of R.O.K. & Co., in connection with statutory audit of Waria Ltd., had
assigned the responsibility of enquiring into propriety matters of the Company as required by section
143(1) of the Companies Act, 2013, to Mr. Samay, an engagement team member. Mr. Samay while
making such enquiries, was having following queries, as tabulated below, which he ought to get resolved
from Mr. Raj, as follows:- Sr. No. Query of Mr. Samay
1 What documents to be seen in case of loan given by the company in lieu of hypothecation of goods
from lender as a security for the purpose of reporting as per clause (a) of section 143(1) of the
Companies Act, 2013?
2 What shall be the cost of Debentures and Bonus Shares sold by the company for which the cost is not
ascertainable for the purpose of reporting as per clause (c) of section 143(1) of the Companies Act, 2013?
3 Whether the shares allotted by Waria Ltd. against a loan taken by it from a NBFC can be considered to
be allotted for cash for the purpose of reporting as per clause (f) of section 143(1) of the Companies Act,
2013?
Assuming that you are Mr. Raj the engagement partner, please provide answer to the queries of Mr.
Samay?
Answer Sr.No. Query of Mr. Samay Response to Query
1 What documents to be seen in case of loan Mr. Samay should see deed of
given by the company in lieu of Hypothecation or other document
hypothecation of goods from lender as a creating the charge, together with a
security for the purpose of reporting as per statement of stocks held at the balance
clause (a) of section 143(1) of the Companies sheet date in order.
Act, 2013?
2 What shall be the cost of Debentures and For Debentures sold: Where the cost of
Bonus Shares sold by the company for which debentures sold is not ascertainable, the
the cost is not ascertainable for the purpose book value thereof at the date of sale
of reporting as per clause (c) of section 143(1) may be treated as the cost for the
of the Companies Act, 2013? purposes of this clause.
For Bonus Shares sold: When bonus
shares are received, the number of
shares in the portfolio would be
increased by the bonus shares while the
cost of the total portfolio would remain
the same as before. The result would be
that the average cost per unit of the total

holding would come down
proportionately. The usual accounting
practice for apportioning the cost of a
part of the total holding on the sale
thereof is to take it at its average cost.
3 Whether the shares allotted by Waria Ltd. The law on the subject has hitherto been
against a loan taken by it from a NBFC can be that, where the consideration for the
considered to be allotted for cash for the issue of shares is an adjustment against a
purpose of reporting as per clause (f) of bona fide debt payable in money on
section 143(1) of the Companies Act, 2013? demand by the company, the shares are
deemed to have been subscribed in cash
(vide the decision in Spargo’s Case –
1873, 8, Ch. A. 407). According to the
legal opinion obtained by the ICAI, the
expression “shares allotted for cash” may
also include shares allotted against a
debt. Therefore, in cases which are
covered by the decision in Spargo’s case,
no comment is required by the auditor,
even though the company may have in
the Return of Allotment under Section 75,
shown such shares as allotted
against adjustment of a debt.
Thus, the shares allotted by Waria Ltd.
against a loan taken by it from a NBFC
can be considered to be allotted for cash.
QNO Sec 143-- Case Study on Role of CAG Old Course – (M21M)
335.200 BHASKAR CNO—CA.340 New Course – (M21M)
VM Ltd., a company wholly owned by Central Government was disinvested during the previous year,
resulting in 45% of the shares being held by public. The shares were also listed on the BSE. Since the
shares were listed, all the listing requirements were applicable, including publication of quarterly results,
submission of information to the BSE etc.
Gautam, the Finance Manager of the Company is of the opinion that now the company is subject to
stringent control by BSE and the markets, therefore the auditing requirements of a limited company
in private sector under the Companies Act 2013 would be applicable to the company and the
C&AG will not have any role to play. Comment.
Answer Section 2(45) of the Companies Act, 2013, defines a “Government Company” as a company in which
not less than 51% of the paid-up share capital is held by the Central Government or by any State
Government or Governments or partly by the Central Government and partly by one or more State
Governments, and includes a company which is a subsidiary company of such a Government
company. The auditors of these government companies are firms of Chartered Accountants,
appointed by the Comptroller & Auditor General, who gives the auditor directions on the manner in
which the audit should be conducted by them.
In the given scenario, VM Ltd., a company wholly owned by Central Government was disinvested
during the previous year, resulting in 45% of the shares being held by public. Since, shares were
listed on the BSE therefore all the listing requirements were applicable.
Opinion of Finance Manager of the Company Mr. Gautam that since company is subject to stringent
control by BSE and the markets, therefore the auditing requirements of a limited company in private
sector under the Companies Act 2013 would be applicable to the Company and the C&AG will not
have any role to play, is not correct as listing of company’s shares on a stock exchange is irrelevant
for this purpose.

QNO Sec 148--Applicability (Exports) Old Course – (M15R, N15R)
342.100 BHASKAR CNO—COST.020 New Course – (M19E, S21M, N21M)
Mithas Ltd is a top sugar manufacturer and exporter in India operating from Noida Specific Economic
Zone, Uttar Pradesh Its revenue from sale/export for the current year is given below:
Sale within India Rs 153 Lakhs
Sale outside India (Export) Rs 357 Lakhs
Total Revenue Rs 510 Lakhs
Mr X, the statutory auditor of Mithas Ltd, is of the view that the company is mandatorily required to
include cost records in their books of account and consequently conduct cost audit He also suggested the
name of his friend, who is a Cost Accountant in Practice, for the purpose of such cost audit However, the
management is of the view that the company neither required including cost records in their books of
account nor conduct cost audit Being an expert in cost records and audit rules, you are required to guide
the management in this regard
OR
Pearl Ltd. is an exporter of precious and semi -precious stones. The turnover of the company is 150 crore,
out of which? 105 crore is from export business and remaining? 45 crore from domestic sales. Amount
received from export business is all in foreign currency. Directors of Pearl Ltd. is of the opinion that cost
audit is not applicable to their company as maximum revenue has been generated from export business.
Give your opinion.

▪ Section 148 of the Companies Act, 2013 read with the Companies (Cost Records and Audit) Rules,
2014.
➢ Applicability of Provisions related to Cost Records and Audit: The provisions relating to cost
records and audit are governed by section 148 of the Companies Act, 2013 read with the
Companies (Cost Records and Audit) Rules, 2014.The audit conducted under this section shall be in
addition to the audit conducted under section 143.
➢ Rule 3 of the Companies (Cost Records and Audit) Rules, 2014
It provides the classes of companies, engaged in the production of goods or providing services,
required to include cost records in their books of account. The said rule has divided the list of
companies into regulated sectors and non-regulated sectors. Company belonging to sugar industry
is one of the types of companies prescribed under the regulated sectors.
➢ Exception
However, the requirement for cost audit under these rules shall not be applicable to a company
which is covered under Rule 3, and,
(i) whose revenue from exports, in foreign exchange, exceeds 75 per cent of its total
revenue; or
(ii) which is operating from a special economic zone.
(iii) which is engaged in generation of electricity for captive consumption through Captive
Generating Plant?
Case I
In the given case, Mithas Ltd., a sugar manufacturer and exporter in India, is operating from Noida Specific
Economic Zone, Uttar Pradesh.
Therefore, Mithas Ltd. is required to include cost records in their books of account in accordance with Rule
3 of the Companies (Cost Records and Audit) Rules, 2014.
However, the company is not required to conduct cost audit as it is operating from a special economic
zone. The facts given on revenue are not relevant here.
Case II
In the instant case, Pearl Ltd. is an exporter of precious and semi-precious stones and the turnover of the

company is rupees 150 crore out of which rupees 105 crore i.e. 70% is from export business and remaining
rupees 45 crore i.e. 30% from domestic sales. It is neither operating from SEZ nor involved in captive power
generation.
Thus, opinion of director is not tenable as revenue from exports in foreign exchanges is below prescribed
limit. Therefore, cost audit is applicable on Pearl Ltd. as per Rule 3 of the Companies (Cost Records and
Audit) Rules, 2014. Pearl Ltd. has to appoint cost auditor to get the cost accounts of the company audited.
Author’s Note:
• The 1st case is taken directly from RTP. There is printing mistake in RTP. In RTP figures are in
lakhs. If we take it in lakhs, then cost records won’t get applicable and whole case and its data
will become useless.
In PARAM we have assumed it as a mistake done by ICAI and have considered it as ‘Crores’
rather than ‘Lakhs’ on the basis of answer provided by ICAI. No change is made to original
question.
• In the 2nd case, Pearl Ltd. is an exporter only. The company is not engaged in the production of
goods or providing services. Then how the provisions of maintenance of cost records and cost
audit are applicable for the company?
o They have mentioned company is exporter but exporter can be producer also of goods they
are silent whether company is producer or not in such circumstances we generally assume
in such a manner that things get applicable to entity so it is reasonable to assume they must
be producing also
QNO Sec 148--Applicability of Cost Audit Old Course – (M17R, N20R)

342.200 BHASKAR CNO—COST.020 New Course – (N20R)
Electro Ltd. is engaged in generation of electricity for captive consumption through Captive Generating
Plant. The Company also maintain cost records in their books of account as required under Cost Records
and Audit Rules. Mr. X, friend of Managing Director of the company, suggested name of his brother, who
is a Cost Accountant in Practice, for the purpose of cost audit. However, the statutory auditor of the
company, is of the view that the company is not legally required to conduct cost audit. Now, the
Managing Director is in dilemma about the requirement of cost audit.
Being an expert in cost records and audit rules, you are required to guide in this regard.
▪ Section 148 of the Companies Act, 2013 read with the Companies (Cost Records and Audit) Rules,
2014.
➢ Section 148 of the Companies Act, 2013 read with the Companies (Cost Records and
Audit) Rules, 2014.
The provisions relating to cost records and audit are governed by section 148 of the
Companies Act, 2013 read with the Companies (Cost Records and Audit) Rules, 2014.
The audit conducted under this section shall be in addition to the audit conducted under
section 143.
Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 provides the classes of
companies, engaged in the production of goods or providing services, required to include
cost records in their books of account.
However, the requirement for cost audit under these rules shall not be applicable to a
company which is covered under Rule 3, and,
(i) whose revenue from exports, in foreign exchange, exceeds 75 per cent of its total
revenue; or
(ii) which is operating from a special economic zone.
(iii) which is engaged in generation of electricity for captive consumption through
Captive Generating Plant?

➢ In the Instant case, Electro Ltd. is engaged in generation of electricity for captive consumption
through Captive Generating Plant. The Company also maintain cost records in their books of
account as required under Cost Records and Audit Rules. Mr. X, friend of Managing Director of the
company, suggested name of his brother, who is a Cost Accountant in Practice, for the purpose of
cost audit. However, the statutory auditor of the company is of the view that the company is not
legally required to conduct cost audit. Now, the Managing Director is in dilemma about the
requirement of cost audit.
➢ In the given case, Electro Ltd. is engaged in generation of electricity for captive consumption
through Captive Generating Plant.
Therefore, Electro Ltd. is not required to conduct cost audit as it is falling under the exemption
criteria.
Hence, the opinion of statutory auditor of the company regarding non-applicability of cost audit is
correct and the management should follow the same.

PART - 2 COMPANIES AUDITOR REPORT ORDER (CARO) 2020
QNO Cl 1--Title Deed Not in Name of Company Old Course –(N17M, M17R, N19R, M19R, N21M)
391.000 BHASKAR CNO—CARO.080 New Course – (N19R, M19R, N21M)
Whilst the Audit team has identified various matters, they need your advice to include the same in your
audit report in view of CARO 2020: -
The Company is in the process of selling its office along with the freehold land available at Pune and is
actively on the lookout for potential buyers. Whilst the same was purchased at` 20 Lakh in 2006, the
current market value is ` 200 Lakh. This property is pending to be registered in the name of the
Company, due to certain procedural issues associated with the Registration though the Company is
having a valid possession and has paid its purchase cost in full. The Company has disclosed this amount
under Fixed Assets though no disclosure of non-registration is made in the notes forming part of the
accounts.
OR
NSP Limited has its factory building, appearing as fixed assets in its financial statements in the name of
one of its directors who was overlooking the manufacturing activities.
▪ Clause (i)(c) of Para 3 of CARO, 2020
➢ Clause (i)(c) of Paragraph 3 of the CARO, 2020,
• The auditor is required to report on whether the title deeds of all the immovable properties (other
than properties where the company is the lessee and the lease agreements are duly executed in
favour of the lessee) disclosed in the financial statements are held in the name of the company, if
not, provide the following details:

➢ In the present case, the Company has office along with freehold land in Pune. Though company
has paid its purchase cost in full however, this property is pending to be registered in the name of
the company i.e. title deed is not in the name of Company since 2006.
Therefore, the auditor is required to report the same in accordance with clause (i)(c) of para 3 of
CARO 2020.
➢ The reporting under this clause, where the title deeds of the immovable property are not held in
the name of the Company, may be made incorporating following details, in the form of a table or
otherwise in case of land:-
• total number of cases,
• whether leasehold / freehold,
• gross block and net block, (as at Balance Sheet date), and
• remarks, if any.
QNO Cl 1(a) & 1(b)—Physical verification of Fixed Assets Old Course – (N18M, M20M, M21M)
392.010 BHASKAR CNO—CARO.080 New Course – (M20M, M21M)
The Property, Plant and Equipment of Amir Ltd. included Rs.25.75 crores of earth removing machines of
outdated 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?

▪ Clause (i)(a) & (i)(b) of Para 3 of CARO, 2020
➢ Disclosure in Audit Report:
The auditor is required to specifically include certain matters as per CARO, 2020 under section 143
of the Companies Act, 2013.
• Whether the company is maintaining proper records showing full particulars
• including quantitative details and situation of Property, Plant and Equipment;
• intangible assets;
• Whether these Property, Plant and Equipment have been physically verified by the
management at reasonable intervals; whether any material discrepancies were noticed on
such verification and if so, whether the same have been properly dealt with in the books
of account;
➢ In the given case, Amir Ltd. has intention to sale its earth removing machines of outdated
technology which had been retired from active use and had been kept for disposal after knock
down and these assets are appearing at residual value. Further, inspection of such machines
(though it is a retired machine, however value is 25.75 crores which is material amount) was done
10 years back, is not in compliance with CARO, 2020.
➢ Hence, this fact needs to be disclosed in the Audit Report as per clause (i) (a) and (b) of Paragraph
3 of CARO 2020.
Author’s Note
Clause (i) (b) of Paragraph 3 of CARO 2020 requires to comment whether Property, Plant and Equipment
have been physically verified by the management at reasonable intervals.
What does reasonable interval mean?
In case of Property, Plant and Equipment reasonable interval means 3 years, which means it is
acceptable if management does physical verification once in every 3 years however reporting is required
to be done if physical verification interval is more than 1 year.
In case of inventory (clause ii) reasonable interval means 1 years, which means it is not acceptable if
management does not perform physical verification each year.
Cl 1 & Cl 2 -- Revaluation & Loan Taken Against (M22R)

QNO
Current Asset
392.200
BHASKAR CNO—CARO.080
Mr. Arjun was appointed as the engagement partner on behalf of Bhism & Co., a Chartered Accountant
Firm, for conducting statutory audit assignment of Sinwar Ltd., unlisted public company.
Mr. Brijesh, one of the senior engagement team members, was given the responsibility to audit the
matters as per the requirements of CARO, 2020 and in that connection, he made the following
observations, that may be relevant for reporting as per the said Order: -
Sr. Observations
No.
(a) One of the Plant and Equipment taken on a lease (‘right of use’ asset) by Sinwar Ltd. was
revalued based on the valuation by a registered valuer and the net carrying value of Plant and
Equipment in aggregate was changed from ` 4 crore to ` 4.45 crore.
(b) During the year under consideration, cash credit limit of ` 5.5 crore was sanctioned to Sinwar
Ltd. by DMC Bank based on the security of current assets which was reduced to ` 4.5 crore after
6 months. In this connection, quarterly returns have been filed by the company with the DMC
bank which are in agreement with Books of Accounts.

You are required to examine the contention of Mr. Brijesh regarding reporting of the above observations in
accordance with CARO 2020.
Answer Matters to be reported by Mr. Brijesh as per CARO, 2020 are as follows:-
(a) According to Clause (i) (d) of Para 3 of CARO 2020, the auditor is required to report whether the
company has revalued its Property, Plant and Equipment (including Right of Use assets) or intangible assets
or both during the year and, if so, whether the revaluation is based on the valuation by a Registered
Valuer; specify the amount of change, if the change is 10% or more in the aggregate of the net carrying
value of each class of Property, Plant and Equipment or intangible assets;
In the given situation, Sinwar Ltd. has revalued one of the Plant and Equipment taken on a lease (‘right of
use’ asset) based on the valuation by a registered valuer. The amount of change in the value of such Plant
and Equipment is ` 45 lakh. As the net carrying value of Plant and Equipment in aggregate was changed
from ` 4 crore to ` 4.45 crore i.e. change was 10% or more.
Thus, the auditor is required to report the amount of change of ` 45 lakh in accordance with Clause (i) (d) of
Para 3 of CARO 2020.
(b) As per Clause (ii) (b) of Para 3 of CARO 2020, the auditor is required to report whether during any point
of time of the year, the company has been sanctioned working capital limits in excess of five crore rupees,
in aggregate, from banks or financial institutions on the basis of security of current assets; whether the
quarterly returns or statements filed by the company with such banks or financial institutions are in
agreement with the books of account of the Company, if not, give details;
In the instant case, Sinwar Ltd. has been sanctioned a cash credit limit of ` 5.5 crore by DMC Bank during
the year under consideration, which is exceeding the prescribed limit of ` 5 crore based on the security of
current assets. Further, quarterly returns have also been filed by the company with the DMC bank in this
connection which is in agreement with Books of Accounts.
In view of the above, the auditor is required to report the same in accordance with Clause (ii) (b) of Para 3
of CARO 2020
Cl 2--Physical Verification (50%) Old Course – (M05E, M11R, M16R, N16M, P17M,
QNO
BHASKAR CNO—CARO.090 N19M)
393.000
New Course – (S17M, N19M, S21M)
Physical verification of only 50% 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.
Clause (ii) of Para 3 of CARO, 2020
Requirements of Clause (ii) of Para 3 of CARO, 2020
➢ Physical Verification of Inventory:
Clause (ii) of Para 3 of CARO, 2020 requires
whether physical verification of inventory has been conducted at reasonable intervals by the
management and whether, in the opinion of the auditor, the coverage and procedure of such
verification by the management is appropriate; whether any discrepancies of 10% or more in the
aggregate for each class of inventory were noticed and if so, whether they have been properly
dealt with in the books of account.
Physical verification of inventory is the responsibility of the management which should verify all
material items at least once in a year and more often in appropriate cases.
The auditor in order to satisfy himself about verification at reasonable intervals should examine
the adequacy of evidence and record of verification.
➢ Company conducted physical verification of only 50% of items of inventory and balance 50% will
be conducted in next year due to lack of time and resources.

➢ In the given case, the above requirement of CARO, 2020 has not been fulfilled as such and the
auditor should point out the specific areas where he believes the procedure of inventory
verification is not reasonable. He may consider the impact on financial statement and report
accordingly.
QNO Cl 7--Statutory Due (Pending Disputes) Old Course – (M11E, M13R, M14R, N16R, P17M, M18M)
400.000 BHASKAR CNO—CARO.140 New Course – (N18M, M19M)
Shahjahan Pvt. Ltd. has submitted the financial statements for the year ended 31-3-13 for audit. The
audit assistant observes and brings to your notice that the company's records show following dues:
Income Tax relating to Assessment Year 2007-08 ` 157 lacs - Appeal is pending before Hon'ble ITAT since
30-9-10.
Customs duty ` 65 lakhs - Demand notice received on 15-9-12 but no action has been taken to pay or
appeal.
As an auditor, how would you bring this fact to the members?
▪ SA 250 “Consideration of Laws and Regulations”
▪ Clause (vii)(b) of Para 3 of CARO, 2020
➢ Clause (vii)(b) of Para 3 of CARO, 2020
Where statutory dues referred to in sub clause (a) have not been deposited on account of any
dispute, then the amounts involved and the forum where dispute is pending shall be mentioned. (A
mere representation to the concerned Department shall not be treated as a dispute).
➢ Requirements of SA 250 “Consideration of Laws and Regulations”
• Responsibility of Management –
As per SA 250“Consideration of Laws and Regulations in an Audit of Financial Statement”,
the auditor shall obtain sufficient appropriate audit evidence regarding compliance with
the provisions of those laws and regulations generally recognised to have a direct effect
on the determination of material amounts and disclosures in the financial statements
including tax and labour laws.
• Responsibility of Auditor
During the audit, the auditor shall remain alert to the possibility that other audit
procedures applied may bring instances of non-compliance or suspected non-compliance
with laws and regulations to the auditor’s attention.
Then the auditor shall discuss the matter with management and, where appropriate,
those charged with governance. If management or, as appropriate, those charged with
governance do not provide sufficient information that supports that the entity is in
compliance with laws and regulations and, in the auditor’s judgment, the effect of the
suspected non-compliance may be material to the financial statements, the auditor shall
consider the need to obtain legal advice.
This show cause notice may be an alert or indication of non-compliance for the auditor. So
auditor need to discuss with management and apply additional procedure.
In case, if the auditor concludes that the non-compliance has a material effect on the
financial statements and has not been adequately reflected in the financial statements,
the auditor shall express a qualified or adverse opinion on the financial statements.
• Inherent limitations-
Owing to the inherent limitations of an audit, there is an unavoidable risk that some
material misstatements in the financial statements may not be detected, even though the
audit is properly planned and performed in accordance with the SAs.
Case Discussion
➢ In the present case, there is –
• Income Tax demand of 157 Lacs and the company has gone for an appeal,

• Demand notice received for Customs duty of 65 lakhs on 15-9-12 but no action has been
taken to pay or appeal
It needs to consider as to whether the entire demand is disputed, because it is difficult to
presume that the demand by Income Tax authority is without any basis.
Conclusion
➢ Therefore, As per AS 29 partly to the extent the company considered that the demand is based on
some logical basis, that amount may be provided for and the remaining may be disclosed as the
contingent liability.
Further, it should be brought to notice of members by reporting under Clause (vii)(b) of Para 3 of
CARO, 2020
Author’s Note
• In the question instead of Custom duty had there been GST then it would also have attracted
reporting under clause (vii) (a) since GST being a periodical payment.
• Clause (vii)(a) includes statutory dues related to Goods and Services Tax, provident fund,
employees' state insurance, income-tax, sales-tax, service tax, duty of customs, duty of excise,
value added tax, cess and any other statutory dues to the appropriate authorities
Cl 7--Statutory Due Old Course – (M04E, M08E, N11R, M12R, N15R, M16E, P17M, N17M,
QNO
(PF Not Deposited) N18M)
401.000
BHASKAR CNO—CARO.140 New Course – (M18M, N18M)
During the course of audit of CT Ltd. for the financial year 2016-17, it has been noticed that Rs. 2.00 lakhs
of employee contribution and Rs. 9.50 lakhs of employer contribution towards employee state insurance
contribution have been accounted in the books of accounts in respective heads. Whereas it was found
that Rs. 4.00 lakhs only have been deposited with ESIC department during the year ended 31st March
2017. The Finance Manager informed the 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 position
improves. Comment as a statutory auditor.
▪ SA 250 “Consideration of Laws and Regulations”
▪ Clause (vii)(a) of Para 3 of CARO, 2020
➢ Clause (vii)(a) of Para 3 of CARO, 2020
Whether the company is regular in depositing undisputed statutory dues including Goods and
Services Tax, provident fund, employees' state insurance, income-tax, sales-tax, service tax, duty of
customs, duty of excise, value added tax, cess and any other statutory dues to the appropriate
authorities and if not, the extent of the arrears of outstanding statutory dues as on 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
➢ Requirements of SA 250 “Consideration of Laws and Regulations”
Refer from QNO 399.000
Part III– Case Discussion
➢ Rs. 2.00 lakhs of employee contribution and Rs. 9.50 lakhs of employer contribution towards
employee state insurance contribution have been accounted in the books of accounts but only Rs.
4.00 lakhs only has been deposited with ESIC department during the year ended 31st March, 2017.
Conclusion
➢ In the instant case, even though accrual principles have been followed, disclosure of non-payment
is necessary. The auditor should disclose the fact of non-payment of rupees 7.50 lakhs in his report.
Cl 9--Default in Repayment Old Course – (M13E, N14E, M16M, P17M)

QNO
(Amount Repaid after Year End) New Course – (M18R)
403.000
C Limited has defaulted in repayment of dues to a financial institution during the financial year 2016-17
and the same remained outstanding as at March 31, 2017. However, the Company settled the total
outstanding dues including interest in April, 2017 subsequent to the year end and before completion of

the audit. Discuss how you would deal with this matter and draft a suitable Auditor's Report.
▪ Schedule III to the Companies Act, 2013
▪ Clause (ix) of Para 3 of CARO,2020
➢ Schedule III to the Companies Act, 2013
Reporting for Default in Repayment of Dues: As per the general instructions for preparation of
Balance Sheet, provided under Schedule III to the Companies Act, 2013, terms of repayment of
term loans and other loans is required to be disclosed in the notes to accounts. It also requires
specifying the period and amount of continuing default as on the balance sheet date in repayment
of loans and interest, separately in each case.
➢ Clause (ix) of Para 3 of CARO
Whether the company has defaulted in repayment of loans or other borrowings or in the payment
of interest thereon to any lender, if yes, the period and the amount of default to be reported as
below:
• Nature of borrowing, including debt securities
• Name of lender (Lender wise details to be provided in case of defaults to banks, financial
institutions and Government)
• Amount not paid on due date
• Whether principal or interest
• No. of days delay or unpaid
• Remarks, if any
➢ In the given case, C Ltd. has defaulted in repayments of dues to a financial institution during the
financial year 2016-17 which remain outstanding as at March 31, 2017.
However, the company has settled the total outstanding dues including interest in April 2017 but,
the dues were outstanding as at March 31, 2017.
➢ Therefore, it needs to be reported in the notes to accounts.
The draft report for above matter is as under:
“The company has taken a loan during the year, from a financial institution amounting to` XXXX @
X% p.a. which is repayable by monthly instalment of ` XXXX for XX months.
The company has defaulted in repayment of dues including interest to a financial institution during
the financial year 2015-16 amounting to` XXXX which remained outstanding as at March 31, 2017.
The period of default is XXX days. However, the outstanding sum was settled by the company in
April, 2017.”
Author’s Note
# Mistake point
Students may forget to write on the reporting aspect. Question specifically asks to draft a suitable
Auditor's Report.
N14
Cl 9--Default in Repayment (Re-schedulement Case New Course –(N22R)

QNO
Study)
404.500
Gautam Limited had borrowed ` 1000 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, 2021. On March 31, 2021, Gautam Limited approached XYZ 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.
During the statutory audit for the financial year 2021-22, KP & Co. identified this transaction and
obtained the relevant documents and understanding. Based on the underlying documents, it was
identified that the said restructuring agreement was approved and signed on April 8, 2022, by both of
the banks. As a result, on March 31, 2022, the restructuring was still not approved.
In the light of the above scenario, kindly guide the statutory auditors in the reporting of this transaction.
Answer As per Clause 3(ix) of CARO 2020, the auditor is required to report whether the company has defaulted in
repayment of loans or other borrowings or in the payment of interest thereon to any lender, if yes, the
period and the amount of default to be reported as per the format below.
Nature of Name of Amount not Whether No. of days Remarks, if any

borrowing, lender paid on due principal or delay or
including debt date interest unpaid
securities
lender wise
details to be
provided in
case of
defaults to
banks,
financial
institutions
and
Government.
In the given case, the company Gautam Limited defaulted in payment of the principal amount of the loan
due of ` 1000 crore on 30 June 2021 and the interest instalment of ` 100 crore. The said default continued
till the end of the year and on 8 April 2022, a restructuring agreement was signed by the banks and
company for re-structuring the outstanding loan. Moreover, no disclosure was provided by the company
with respect to the said matter.
Hence the auditor is required to report the same matter under Clause (ix) of Para 3 of CARO 2020, i.e.,
whether the company has defaulted in repayment of loans or other borrowings or in the payment of
interest thereon to any lender, if yes, then provide the details of the period and the amount of default.
Also, the auditor needs to consider the impact of such non-disclosure and the non-compliance with the
financial reporting framework and accordingly the auditor needs to either issue a qualified opinion or an
adverse opinion as per SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”.
QNO Cl 11--Fraud Reporting (Noticed or Reported) Old Course – (N18R, M19R, M19M)
407.010 BHASKAR CNO—CARO.180 New Course – (M19R, N21M)
Whilst the Audit team has identified various matters, they need your advice to include the same in
your audit report in view of CARO 2020: -
(ii) The Internal Auditor of the Company has identified a fraud in the recruitment of employees by
the HR department wherein certain sums were alleged to have been taken as kick -back from
the employees for taking them on board with the Company. After due investigation, the
concerned HR Manager was sacked. The amount of such kickbacks is expected to be in the
range of 13.50 Lakh.
OR
Paragraph 3(xi) of CARO, 2020 requires the auditor to report whether any fraud by the company or any
fraud on the company by its officers or employees has been noticed or reported during the year. The
clause does not require the auditor to discover such frauds. The scope of auditor’s inquiry under this
clause is restricted to frauds ‘noticed or reported’ during the year. Comment.
Answer ➢ Paragraph 3(xi) of CARO, 2020 states that :
Whether any fraud by the company or any fraud on the company has been noticed or reported
during the year, if yes,
• the nature and
• the amount involved is to be indicated;
The clause does not require the auditor to discover such frauds. The scope of auditor’s inquiry under
this clause is restricted to frauds ‘noticed or reported’ during the year.
The use of the words “noticed or reported” indicates that the management of the company should have
the knowledge about the frauds by the company or on the company that have occurred during the
period covered by the auditor’s report.
In the instant case, a fraud has been identified in recruitment of employees by the HR Department
wherein certain sums were alleged to have been taken as kickback from the company of amounting
rupees approx. 13.50 lakh. The auditor is required to report on the same in accordance with clause (xi)
of para 3 of CARO 2020.
QNO Cl 15--Non-Cash Transaction (Son of Director) Old Course – (M17R, M17M, N17M, M18M, N19R)
411.000 BHASKAR CNO—CARO.220 New Course – (N19R)
RPS Ltd. has entered into non-cash transactions with Mr. Rahul, son of director, which is an arrangement
by which RPS Ltd. is in process to acquire assets for consideration other than cash
▪ Clause (xv) of Para 3 of CARO, 2020
➢ Non-cash Transactions with Relative of Director:
As per Clause (xv) of paragraph 3 of CARO, 2020, the auditor is required to report
• “whether the company has entered into any non-cash transactions with directors or
persons connected with him and
• if so, whether the provisions of section 192 of Companies Act, 2013 have been complied
with”.
➢ Section 192 of the Companies Act, 2013
Section 192 of the said Act deals with restriction on non-cash transactions involving directors or
persons connected with them. The section prohibits the company from entering into such types of
arrangements unless it is an arrangement by which the company acquires or is to acquire assets
for consideration other than cash, from such director or person so connected.
➢ In the instant case, RPS Ltd. has entered into non-cash transactions with Mr. Rahul, son of director
which is an arrangement by which RPS Ltd. is in process to acquire assets for consideration other
than cash and falls within the meaning of section 192 of Companies Act, 2013.
➢ The reporting has to be two-fold.
• first part
It requires the auditor to report on whether the company has entered into any non-cash
transactions with the directors or any persons connected with such director/s.
• Second part
It requires the auditor to report whether the provisions of section 192 of the Act have
been complied with.
Therefore, the second part of the clause becomes reportable only if the answer to the first
part is in affirmative.
In the given situation, RPS Ltd. has entered into non-cash transactions with Mr. Rahul, son
of director which is affirmative answer to the first part of the Clause (xv) of Paragraph 3 of
CARO, 2020, thus, reporting is required for the same.
➢ Draft report is given below.
• According to the information and explanations given to us, the Company has entered into
non-cash transactions with Mr. Rahul, son of one of the directors during the year, for the
acquisition of assets, which in our opinion is covered under the provisions of Section 192

of the Companies Act, 2013.

PART - 3 DIVIDEND
QNO Full depreciation not charged Old Course – (N20M)

369.010 BHASKAR CNO—DIV.160 New Course -- (N18E, N20M, S21M)
ABC Limited is in the practice of maintaining consistent dividend payment over a minimum of 14%. The
Financial year 2017-18 was so very bad for the Company that it was not possible for the Company to
maintain the payment of consistent dividend as above. The Management, being hopeful of recovery of
its performance in next year, felt that the depreciation of the year to the extent of 75% alone be charged
to the Statement of Profit and Loss and the remaining 25% be kept in a separate account code in the
Balance Sheet- 'Debit Balances Adjustable against Revenue account'. The Management was of the view
that it would be in fair practice of accounting if the depreciation for asset is charged before the expiry of
the life’s of assets and the amount parked in asset code as above would unfailingly be adjusted to
Revenue before the close of next financial year anyway. Analyze the issues involved and state how the
Auditor should decide on this matter.
▪ Section 123 of the Companies Act, 2013.
➢ Sec 123
Section 123(1) of the Companies Act, 2013 provides that dividend cannot be declared or paid by a
company for any financial year except out of profits of the company for that year arrived at after
providing for depreciation in accordance with the provisions of Section 123(2), or out of the profits
or the company for any previous financial year or years arrived at after providing for depreciation
in the manner aforementioned and remaining undistributed, or out of both.
➢ AS 10 / Ind AS 16 / Schedule II
Further, it is the duty of auditor to check whether the depreciation was provided according to
provision of AS 10 / IND AS 16/Schedule II to the Act.
➢ In the instant case, ABC Limited is in the practice of maintaining consistent dividend payment over
a minimum of 14%. Due to bad financial condition, company has not provided for dividend for the
year 2017-18. In addition to this management has also taken decision to charge75% of the
depreciation in the statement of Profit and Loss whereas 25% of the depreciation amount kept in
a separate account code in the Balance Sheet – ‘Debit Balances Adjustable against Revenue
Account’.
Contention of management that it would be in fair practice of accounting where the depreciation
of asset is charged before the expiry of the life of assets and the amount parked in asset code
would unfailingly be adjusted to revenue before the close of next financial year is not tenable.
➢ The practice of the company in not charging the depreciation and accumulating 25% of it in a
debit balance for being written off in the next year is not an acceptable accounting treatment. If
dividend is declared in such situation, it would mean payment out of capital.
➢ Therefore, the auditor of the company should ensure the compliance of provisions of section 123
and Schedule II. In case the management does not comply with the provisions and does not
charge the 100% depreciation the auditor of the company shall suggest the management for the
same and if management refuses, the auditor should qualify his report accordingly.

Part 4 – COMPANY ACCOUNTS & MISC (LLP)
&
QNO Sec 130(3)--Revision of Accounts on Order of Court New Course – (M21E,N22M)
349.500 BHASKAR CNO—COACC.060
M/s ALM Ltd. is into the business of trading of toys since 2001. The company was performing well till
year 2015 and after that sales started showing downward trend. The Company had borrowed working
capital funds from LP Bank Ltd on 01.08.2020, account of the borrower was classified as NPA. Bank
appointed forensic auditor, to identify, if any diversion of funds is there or not. Forensic auditor
confirmed the diversion of funds. Matter went to the court of law and company was asked to
recast its financial statements for the last 5years. Management contended that Companies Act,
2013 does not allow recasting for more than three preceding financial years. Do you agree with the
views of the management?
Section 130 of the Companies Act, 2013

Re-opening of accounts on Court’s or Tribunal’s orders:
Section 130 of the Companies Act, 2013 states that a company shall not re-open its books of account
and not recast its financial statements, unless an application in this regard is made by the Central
Government, the Income-tax authorities, the Securities and Exchange Board of India (SEBI), any other
statutory regulatory body or authority or any person concerned and an order is made by a court of
competent jurisdiction or the Tribunal to the effect that—
(i) the relevant earlier accounts were prepared in a fraudulent manner; or
(ii) the affairs of the company were mismanaged during the relevant period, casting a doubt on the
reliability of financial statements.
The Order for reopening of accounts not to be made beyond eight financial years immediately
preceding the current financial year unless and until Government has, under Section 128(5) , issued a
direction for keeping books of account longer than 8 years, reopening of accounts can be made for
such longer period.
However, a notice shall be given by the Court or Tribunal in this regard and shall take into
consideration the representations, if any.
Bank appointed forensic auditor, to identify, if any diversion of funds is there or not. Forensic auditor
confirmed the diversion of funds. Matter went to the court of law and company was asked to recast
its financial statements for the last 5years.
Management contention that Companies Act,2013 does not allow recasting for more than three
preceding financial years is not valid.
QNO Section 134 -- Signing Financial Statement Case Study New Course -- (M22M)
Dharam & Karam Company Ltd. had prepared its financial statements for the financial year 2021-22 which
were approved by the Board of Directors of the company and thereafter they were signed by the
Chairperson of the company as authorized by the Board, as well as by its CEO, CFO and CS, respectively.
Also, its board report was signed by its Managing Director as well as by an Executive Director. You are
required to comment whether financial statements and the Board’s report of the company have been
signed by the persons mandatorily required to sign, as prescribed by the relevant Act.
Answer As per section 134 of the Companies Act, 2013, the financial statements, including consolidated financial
statements, if any, shall be approved by the Board of Directors before they are signed on behalf of the
Board by the Chairperson of the Company where he is authorized by the Board or by two directors out of
which one shall be Managing Director, if any, and the Chief Executive Officer, the Chief Financial Officer
and the Company Secretary of the Company, wherever they are appointed, or in the case of One Person
Company, only by one director, for submission to the auditor for his report thereon.
The Board’s report shall be signed by its chairperson of the company if he is authorised by the Board and
where he is not so authorised, shall be signed by at least two directors, one of whom shall be a Managing
Director.
Here, Dharam and Karam Company Ltd. had prepared its financial statements for the financial year 2021-
22 which were approved by the Board of Directors of the company and thereafter they were signed by the
Chairperson of the company as authorised by the Board, as well as by its CEO, CFO and CS, respectively.
Also, its board report was signed by its Managing Director as well as by an Executive Director.
Hence, it can be said that the financial statements and the Board’s report of the Dharam and Karam
Company Ltd. have been signed are in accordance with section 134 of the Companies Act, 2013.
Sec 138--Applicability (Average Turnover of Past Old Course – (N08R, M15R, P17M, N17E)
QNO
3 Years) New Course – (S17M, M18M, N22M)
352.000
BHASKAR CNO—COACC.180
JKH Pvt Ltd. who is into the business of imparting coaching to CA students did not appoint any internal
auditor for the year ended 31st March 2017. As on 31st March 2016, the company had paid up capital of
` 50 lakhs and reserves of ` 10 crores. Its turnover for the 3 years preceding the year ended 31st March
2017 was ` 75 crores, ` 145 crores and ` 260 crores respectively. As an auditor of the company for the
year ended 31st March 2017, how would you deal with the above?
OR
PQR Ltd., a listed company and having an average annual turnover of more than ` 5 crores has no
Internal Audit System. Give your views.
OR
ABC Pvt Ltd was involved in the business of manufacturing pipes and holdings. For financial year 2020-21
the company had the following turnover from its various segments and product: Segment Name
Turnover Profit Steel / Iron Pipe Manufacturing 140 Crore 10 Crore Holdings and Civil Structure
Accessories 25 Crore 50 Lakh PVC / Yellow Pipe Manufacturing 65 Crore 8 Crore During Financial Year
2021-22, the company’s performance was considerably lower compared to FY 2020-21 due to
competition and high prices. Turnover and Profit of the company for FY 2021-22 is given hereunder:
Segment Name Turnover Profit Steel / Iron Pipe Manufacturing 60 Crore 2 Crore Holdings and Civil
Structure Accessories 15 Crore 35 Lakh PVC / Yellow Pipe Manufacturing 35 Crore 3 Crore The company
was fully financed through its own capital during both years. Kindly assess whether the company was
required to appoint internal auditor as per section 138 read with Rule 13 of the Companies (Accounts)
Rules, 2014 for FY 2021-22.

▪ As per section 138 of the Companies Act, 2013, read with Rule 13 of Companies (Audit and
Auditors) Rules, 2014
➢ As per section 138 of the Companies Act, 2013, the following class of companies (prescribed in rule
13 of Companies (Accounts) Rules, 2014) shall be required to appoint an internal auditor or a firm
of internal auditors, namely-
a. every listed company;
b. every unlisted public company having

(i) paid up share capital of fifty crore rupees or more during the preceding financial
year; or
(ii) turnover of two hundred crore rupees or more during the preceding financial
year; or
(iii) outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year; or
(iv) outstanding deposits of twenty-five crore rupees or more at any point of time

during the preceding financial year; and
c. Every private company, having –
(i) turnover of two hundred crore rupees or more during the preceding financial
year; or
(ii) outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year:
Case 1
➢ In the instant case, JKH Pvt. Ltd. is having turnover of 260 crores during the preceding financial
year which is more than two hundred crore rupees.
➢ Hence, the company has the statutory liability to appoint an Internal Auditor and mandatorily
conduct internal audit
Case 2
➢ In the instant case, PQR Ltd is a listed company and having an average annual turnover of more
than ` 5 crores.
As the company is a listed company, the provisions related to internal audit shall be applicable to
the company. The turnover limit given has no relevance here.
➢ Therefore, the auditor will have to mention in his report the fact of not having such internal audit
system by the
Author’s Note
Only turnover of last year is important. Turnover of previous years other than that is of no use. Earlier
previous three turnover was important as average of last three year was calculated to for CARO
reporting on internal audit. Now there is no such requirement.
QNO Sec 138--Applicability (Multiple Companies) New Course -- (M22R)

One of the independent directors sought information regarding the appointment of internal auditors for
following Group Companies in accordance with the Companies Act, 2013 of which certain Financial
Information are given below:
Figures are in ` crore and correspond to the previous year.
Name Nature Equity Share Turnover Loan from Public

Capital Bank and PFI Deposits
AADI Ltd. Listed 100 190 50 24

AJIT Ltd. Unlisted Public 60 190 50 24
NEMI Ltd. Unlisted Private 60 190 50 -
You are required to evaluate the requirements of the Companies Act, 2013 regarding the appointment of
internal Auditors for the Group Companies. Discuss.
Answer Applicability of Provisions of Internal Audit: As per section 138 of the Companies Act, 2013, following class
of companies (prescribed in Rule 13 of Companies (Accounts) Rules, 2014) shall be required to appoint an
internal auditor or a firm of internal auditors, namely:-
(A) every listed company;

(B) every unlisted public company having-
(1) paid up share capital of fifty crore rupees or more during the preceding financial year; or
(2) turnover of two hundred crore rupees or more during the preceding financial year; or

(3) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred
crore rupees or more at any point of time during the preceding financial year; or
(4) outstanding deposits of twenty five crore rupees or more at any point of time during the preceding
financial year; and
(C) every private company having-
(1) turnover of two hundred crore rupees or more during the preceding financial year; or
(2) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred
crore rupees or more at any point of time during the preceding financial year.
In the given case, AADI Ltd. is a listed company. As per section 138 of the Companies Act, 2013, every
listed company is required to appoint an internal auditor or a firm of internal auditors. Thus, in view of the
above, AADI Ltd. is required to appoint an internal auditor.
Further, AJIT Ltd. is unlisted public company. The company is having ` 60 crore as equity share capital
which is exceeding the prescribed limit of rupees fifty crore as per section 138. Thus, AJIT Ltd. is required to
appoint an internal auditor as per section 138 of the Companies Act, 2013.
NEMI Ltd. is unlisted private company and having ` 60 crore as equity share capital, ` 190 crore as
turnover and ` 50 crore loan from Bank and PFI. In view of provisions of section 138 of the Companies Act,
2013 discussed above, all the limits are below the prescribed limit for a private company. Therefore, NEMI
Ltd. is not required to appoint an internal auditor.
It can be concluded that AADI Ltd. and AJIT Ltd. is required to appoint the internal auditor as per the
provisions of the Companies Act, 2013 whereas NEMI Ltd. is not required to do the same.
QNO Aspects (Audit and A/cs Maintenance of LLP)- New Course – (M19R, M22R)
507.250 BHASKAR CNO—LLP.040/LLP.060
MKc LLP is a newly set up LLP (Limited Liability Partnership). The operations of the LLP have been picking
up and management is currently in the process of setting up processes and procedures in place. As per
the understanding of the management of the LLP, its accounts would not be required to be audited
mandatory because of its operations but still the management has decided that they would get the
accounts audited voluntarily. In this regard, the management would like to understand some of the
aspects which they should consider not only limited to audit but also about the maintenance of books of
accounts as per the relevant laws. Please advise.
Answer ➢ An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its
state of affairs. The accounts of every LLP shall be audited in accordance with Rule 24 of LLP Rules
2009. Such rules, inter-alia, provides that any LLP, whose turnover does not exceed, in any
financial year, forty lakh rupees, or whose contribution does not exceed twenty-five lakh rupees, is
not required to get its accounts audited. However, if the partners of such limited liability
partnership decide to get the accounts of such LLP audited, the accounts shall be audited only in
accordance with such rule.
➢ Appointment of Auditor: The auditor may be appointed by the designated partners of the LLP
• At any time for the first financial year but before the end of first financial year,
• At least thirty days prior to the end of each financial year (other than the first financial
year),
• To fill the causal vacancy in the office of auditor,
• To fill the casual vacancy caused by removal of auditor.
The partners may appoint the auditors if the designated partners have failed to appoint
them.
➢ LLPs are required to maintain books of accounts which shall contain -
• Particulars of all sums of money received and expended by the LLP and the matters in
respect of which the receipt and expenditure takes place,
• A record of the assets and liabilities of the LLP,
• Statements of costs of goods purchased, inventories, work-in-progress, finished goods and
costs of goods sold,
• Any other particulars which the partners may decide.
➢ The auditor should read the LLP agreement & note the following provisions.
• Nature of the business of the LLP
• Amount of capital contributed by each partner.
• Interest – in respect of additional capital contributed.
• Duration of partnership
• Drawings allowed to the partners.
• Salaries, commission etc payable to partners
• Borrowing powers of the LLP
• Rights & duties of partners

Part 1 - [SA 700 Revised] FORMING AN OPINION AND REPORTING ON FINANCIAL
STATEMENTS
QNO Draft Opinion & Basis of Opinion Para (M22R)

108.500 UNIQUE
You have been appointed as an auditor of Dharmnath & Sons for FY 2020-21, as entity other than a
company incorporated under the Companies Act, 2013, using a fair presentation framework. Appointment
had been made in the month of April, 2021 The financial statements have been prepared by the
management in accordance with the Accounting Standards. The management had introduced the new
computerized accounts receivable system from November 2020 and still in the implementation
phase and thus management is in the process of rectifying system deficiencies and correcting the
errors. At the time of implementation of a new system, the earlier system of accounting of receivables
had been discarded. The auditor was unable to obtain sufficient appropriate audit evidence about the
entity’s accounts receivable and inventories. The possible effects of the inability to obtain sufficient
appropriate audit evidence are deemed to be both material and pervasive to the financial statements.
Write the opinion paragraph and basis of opinion paragraph to be included in the Independent Auditor’s
Report.
Answer (a) Opinion Paragraph
Disclaimer of Opinion
We were engaged to audit the financial statements of Dharmnath & Sons (“the entity”), which comprise
the balance sheet as at March 31, 2021, the statement of Profit and Loss, (the statement of changes in equity)
and the statement of cash flows for the year then ended, and notes to the financial statements, including a
summary of significant accounting policies.
We do not express an opinion on the accompanying financial statements of the entity. Because of the
significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have
not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these
Basis for Disclaimer of Opinion
We were not appointed as auditors of the Company until after March 31, 2021, and thus did not observe
the counting of physical inventories at the beginning and end of the year. We were unable to satisfy
ourselves by alternative means concerning the inventory quantities held at March 31, 2020, and 2021,
which are stated in the Balance Sheets at ` xxx and ` xxx, respectively. In addition, the introduction of a new
computerized accounts receivable system in November 2020 resulted in numerous errors in accounts
receivable. As of the date of our report, management was still in the process of rectifying the system
deficiencies and correcting the errors. We were unable to confirm or verify by alternative means
accounts receivable included in the Balance Sheet at a total amount of ` xxx as at March 31, 2021. As a result
of these matters, we were unable to determine whether any adjustments might have been found
necessary in respect of recorded or unrecorded inventories and account receivable, and the elements
making up the statement of Profit and Loss (and statement of cash flows)

Other Standards on Auditing in addition to Old Course – (N19R)
QNO
Standard on Auditing issued by the ICAI New Course – (N19R, S21M)
111.050
"KPI Ltd. is a company on which International Standards on Auditing are applicable along with
Standard on Auditing issued by the ICAI. The company appointed new auditors for the audit of the
financial statement’s year ended 31 March 2019 after doing all appointment formalities. Therefore, the
auditor’s report referred the International Standard on Auditing in addition to the Standard on Auditing
issued by the ICAI.
As an expert, you are required to advise the auditor regarding auditor’s report for audits conducted
in accordance with both the Standards."
Answer ➢ An auditor may be required to conduct an audit in accordance with, in addition to the Standards on
Auditing issued by ICAI, the International Standards on Auditing or auditing standards of any other
jurisdiction. If this is the case, the auditor’s report may refer to Standards on Auditing in addition to the
International Standards on Auditing or auditing standards of such other jurisdiction, but the auditor
shall do so only if:
• There is no conflict between the requirements in the ISAs or such auditing standards of other
jurisdiction and those in SAs that would lead the auditor.
• to form a different opinion, or
• not to include an Emphasis of Matter paragraph or Other Matter paragraph that, in
the particular circumstances, is required by SAs; and
• The auditor’s report includes, at a minimum, each of the elements set out for audit report as
per law.
➢ When the auditor’s report refers to both the ISAs or the auditing standards of a specific jurisdiction and
the Standards on Auditing issued by ICAI, the auditor’s report shall clearly identify the same including
the jurisdiction of origin of the other auditing standards.
Supplementary Information--Additional P&L is given in New Course – (M21E)

QNO
Financial Statements which is not required by FRF
111.060
CA. S has been appointed as Statutory Auditor of SRT Ltd. for the financial year 2020-2021. The Company
while preparing financial statements for the year under audit prepared one additional profit and loss
account that disclosed specific items of expenditure and included the same as an appendix to the
financial statements. CA. S has not been able to understand this as the additional profit and loss
account is not covered under applicable financial reporting framework. Guide him as to how he
should deal with this issue while reporting on the financial statements of SRT Ltd.
Answer If supplementary information that is not required by the applicable financial reporting framework is
presented with the audited financial statements, the auditor shall evaluate whether, in the auditor’s
professional judgment, supplementary information is nevertheless an integral part of the financial
statements due to its nature or how it is presented.
When it is an integral part of the financial statements, the supplementary information shall be
covered by the auditor’s opinion.
If supplementary information that is not required by the applicable financial reporting framework is
not considered an integral part of the audited financial statements, the auditor shall evaluate
whether such supplementary information is presented in a way that sufficiently and clearly
differentiates it from the audited financial statements. If this is not the case, then the auditor shall ask
management to change how the unaudited supplementary information is presented. If management
refuses to do so, the auditor shall identify the unaudited supplementary information and explain in the
auditor’s report that such supplementary information has not been audited.
When an additional profit and loss account that discloses specific items of expenditure is disclosed
as a separate schedule, included as an appendix to the financial statements, the auditor may

consider this to be supplementary information that can be clearly differentiated from the financial
statements.
Thus, additional profit and loss account is not considered an integral part of the audited financial
statements and the auditor shall evaluate that supplementary information is presented in a way
that sufficiently and clearly differentiates it from the audited financial statements.

Part 2 - [SA 701] COMMUNICATING KEY AUDIT MATTERS IN THE INDEPENDENT
AUDITOR’S REPORT
QNO Whether Key Audit Matter Required - Case Study Old Course – (N21R)
112.150 BHASKAR CNO—SA701.040 New Course – (N21R)
Mr. Hemant Ramsey was appointed as the engagement partner for conducting the audit of Kshetra Lap
Ltd. for F.Y. 2020-21, on behalf of Ramsey & Associates. Mr. Vishay Tyagi was appointed as the
engagement quality control reviewer by the firm for the said audit.
During F.Y. 2020-21, there was an implementation of ERP system in a phased manner, in Kshetra Lap
Ltd. due to which some of its business processes got automated. As a result of the implementation of
such a system, there was a significant effect on the auditor’s overall audit strategy. Mr. Hemant discussed
the implementation of such a system with Mr. Vishay and also told him that such a matter may be a key
audit matter to be reported in the audit report.
Mr. Vishay considered the significance of such matter but however he was of the opinion that such a
matter did not appear to link with the matters disclosed in the financial statements and so there
was no need to disclose such matter as a key audit matter.
Whether the contention of Mr. Vishay is proper with respect to the matters to be communicated as a key
audit matter?
Answer As per SA 701, ‘Communicating Key Audit Matters in the Independent Auditor’s Report’, the auditor
shall determine, from the matters communicated with those charged with governance, those matters
that required significant auditor attention in performing the audit. In making this determination, the
auditor shall take into account the following:
(i) Areas of higher assessed risk of material misstatement, or significant risks identified in
accordance with SA 315.
(ii) Significant auditor judgments relating to areas in the financial statements that
involved significant management judgment, including accounting estimates that have been identified
as having high estimation uncertainty.
(iii) The effect on the audit of significant events or transactions that occurred during the period.
The auditor shall determine which of the aforesaid matters considered were of most significance in
the audit of the financial statements of the current period and therefore are the key audit matters.
These aforesaid considerations focus on the nature of matters communicated with those charged with
governance. Such matters are often linked to matters disclosed in the financial statements and are
intended to reflect areas of the audit of the financial statements that may be of particular interest to
intended users.
The fact that these considerations are required is not intended to imply that matters related to them
are always key audit matters; rather, matters related to such specific considerations are key audit
matters only if they are determined to be of most significance in the audit.
In addition to matters that relate to the specific required considerations, there may be other matters
communicated with those charged with governance that required significant auditor attention and
that therefore may be determined to be key audit matters. Such matters may include, for example,
matters relevant to the audit that was performed that may not be required to be disclosed in the
financial statements. For example, the implementation of a new IT system (or significant changes to
an existing IT system) during the period may be an area of significant auditor attention, in particular
if such a change had a significant effect on the auditor’s overall audit strategy or related to a significant
risk
(e.g., changes to a system affecting revenue recognition).

In the given case, there was implementation of ERP system in the company due to which some of its
business processes got automated and which had a significant effect on the auditor’s overall audit
strategy during the period.
Accordingly, such a matter can be considered as a key audit matter if according t o Mr. Hemant, such a
matter required significant attention that had affected his overall audit strategy.
Thus, the contention of Mr. Vishay is not proper as matters that do not link with the matters disclosed
in the financial statements can also be considered as a key audit matter if it required significant
attention of the auditor which had an impact on its audit.
QNO Adverse Opinion & KAM New Course- (N22M)

112.350 BHASKAR CNO-SA701.080
While auditing the complete set of consolidated financial statements of Moksh Ltd., a listed company,
using a fair presentation framework, XYZ & Co., a Chartered Accountant firm, discovered that the
consolidated financial statements are materially misstated due to the non-consolidation of one of the
subsidiary. The material misstatement is deemed to be pervasive to the consolidated financial statements.
The effects of the misstatement on the consolidated financial statements could not be determined
because it was not practicable to do so. Thus, XYZ & Co. decided to provide an adverse opinion for the
same and further determined that, there are no key audit matters other than the matter to be described
in the Basis for Adverse Opinion section. Comment whether XYZ & Co. needs to report under SA 701
‘Communicating Key Audit Matters in the Independent Auditor’s Report’?"
Answer SA 700 establishes requirements and provides guidance on forming an opinion on the financial statements.
Communicating key audit matters is not a substitute for disclosures in the financial statements that the
applicable financial reporting framework requires management to make, or that are otherwise necessary
to achieve fair presentation. SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”,
addresses circumstances in which the auditor concludes that there is a material misstatement relating to
the appropriateness or adequacy of disclosures in the financial statements.
When the auditor expresses a qualified or adverse opinion in accordance with SA 705, presenting the
description of a matter giving rise to a modified opinion in the Basis for Qualified (Adverse) Opinion section
helps to promote intended users’ understanding and to identify such circumstances when they occur.
Separating the communication of this matter from other key audit matters described in the Key Audit
Matters section, therefore, gives it the appropriate prominence in the auditor’s report.
Further, when the auditor expresses a qualified or adverse opinion, communicating other key audit matters
would still be relevant to enhancing intended users’ understanding of the audit, and therefore the
requirements to determine key audit matters apply. However, as an adverse opinion is expressed in
circumstances when the auditor has concluded that misstatements, individually or in the aggregate, are
both material and pervasive to the financial statements depending on the significance of the matter(s)
giving rise to an adverse opinion, the auditor may determine that no other matters are key audit matters.
In the given situation Moksh Ltd., a listed company, has not consolidated one of its subsidiary. Further,
Consolidated Financial Statements of Moksh Ltd. Are materially misstated due to such non-consolidation.
The material misstatement is also deemed to be material and pervasive and effect of the failure to
consolidate have not been determined. In the given situation it is appropriate to give Adverse Opinion by
XYZ & Co., a Chartered Accountant Firm.
Since, in the given case, Adverse Opinion is being expressed thus XYZ & Co. can communicate Key Audit
Matter in given below manner:
Key Audit Matters: Except for the matter described in the Basis for Adverse Opinion section, we have
determined that there are no other key audit matters to communicate in our report.

QNO Key Audit Matter, But No Relevant Disclosure in FST New Course -- (M22R)
What is the auditor’s responsibility to report a key audit matter for which there are no relevant
disclosures in the financial statements?
Answer When communicating key audit matters, the fact that there are no disclosures in the financial statements
related to a matter determined to be a key audit matter does not relieve the auditor from the
requirement to communicate it. An auditor may determine a key audit matter related to the audit for
which relevant disclosure requirements do not exist in the applicable financial reporting framework. For
example, the implementation of a new IT system (or significant changes to an existing IT system) during the
period may be an area of significant auditor attention, in particular, if such a change had a significant effect
on the auditor’s overall audit strategy or related t significant risk (e.g., changes to a system affecting revenue
recognition
Also, if an auditor determines that it is necessary to include information about the entity in order
to effectively describe a key audit matter that has not been disclosed by management and
management does not agree to disclose that information, the auditor should reconsider the
adequacy of the disclosures in accordance with applicable financial reporting framework. The
auditor should communicate the matter as a key audit matter unless law or regulation precludes public
disclosure about the matter or in extremely rare circumstances, the auditor determines that the matter
should not be communicated in the auditor’s report because the adverse consequences of doing so
would reasonably be expected to outweigh the public interest benefits of such communication.
QNO Placement of KAM New Course -- (M22R)

Where should the placement of the key audit matters section be in the auditor’s report?
Answer Generally, the Key Audit Matters section is required to be placed after the Basis for Opinion paragraph
and before the Management’s Responsibility paragraph.
In case, ‘Material uncertainty relating to going concern’ section is required as per SA 570(Revised),
then KAM section is placed after that section.
Further, regarding placement of KAM section, SA 706 (Revised), “Emphasis of Matte Paragraphs and Other
Matter Paragraphs in the Independent Auditor’s Report” provides as under:
When a Key Audit Matters section is presented in the auditor’s report, an Emphasis of Matter (EOM)
paragraph may be presented either directly before or after the Key Audit Matters section, based on
the auditor’s judgment as to the relative significance of the information included in the Emphasis of
Matter paragraph. The auditor may also add further context to the heading “Emphasis of Matter”, such as
“Emphasis of Matter – Subsequent Event”, to differentiate the Emphasis of Matter paragraph from the
individual matters described in the Key Audit Matters section.

Part 3 - [SA 705] MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S
REPORT
QNO Types of Modification Old Course – (N12E, P17M, N17R, N17E, M19M)
113.000 BHASKAR CNO—SA705.020 New Course – (S17M, M19M, S21M)
If financial statements prepared in accordance with the requirements of a fair presentation framework do
not achieve fair presentation, the auditor shall discuss the matter with management and, depending on the
requirements of the applicable financial reporting framework and how the matter is resolved, shall
determine whether it is necessary to modify the opinion in the auditor’s report in accordance with SA 705
Under SA 705, in what circumstances does the report of the statutory auditor require modifications? What
are the types of modifications possible to the said report?
OR
Explain the circumstances which require a modification to the Auditor's Opinion
OR
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 financial statements. 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.
▪ SA 705 – Modifications To The Opinion In The Independent Auditor’s Report
As per SA 705 -
The auditor shall modify its opinion in the auditor s report if :
The auditor obtains S&A audit evidence that or The auditor is unable to obtain S&A audit
the FST as a whole are not free from material evidence that the FST as a whole are free
misstatement. from material misstatement.
➢ Modifications in Audit Report: As per SA 705, “Modifications to the Opinion in the Independent
Auditor’s Report”, the auditor may modify the opinion in the auditor’s report in the following
circumstances:
• If the auditor concludes that, based on the audit evidence obtained, the financial statements
as a whole are not free from material misstatement; or
• If the auditor is unable to obtain sufficient appropriate audit evidence to conclude that, the
financial statements as a whole are free from material misstatement.
If financial statements prepared in accordance with the requirements of a fair presentation framework
do not achieve fair presentation, the auditor shall discuss the matter with management and,
depending on the requirements of the applicable financial reporting framework and how the matter
is resolved, shall determine whether it is necessary to modify the opinion in the auditor’s report in
accordance with SA 705
➢ Types of Modification to the Auditor’s Opinion:
As per SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”, modified opinion
may be defined as a qualified opinion, an adverse opinion or a disclaimer of opinion.
Types of modifications possible to the said report are below mentioned:
• Qualified Opinion:
• The auditor shall express a qualified opinion when the auditor, having obtained
sufficient appropriate audit evidence, concludes that misstatements, individually or
in the aggregate, are material, but not pervasive, to the financial statements; or

Types of Modification :
The auditor shall express :
Qualified Opinion,If: Adverse Opinion Disclaimer of Opinion
or Unable to obtain S&A Unable to obtain S&A

Obtains S&A audit Obtained S&A audit
audit evidence but audit evidence but
evidence, that evidence, that
concludes that the concludes that the
material material
possible effects of possible effects of
Misstatements exist Misstatements exist
undetected undetected
individually or in the individually or in the
misstatement could misstatement could
aggregate. aggregate.
be material be material
But not pervasive to FST Pervasive to FST Pervasive to FST
Subject to Except For FST does not give Not able to express
True & Fair View opinion
• The auditor is unable to obtain sufficient appropriate audit evidence on which to base
the opinion, but the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material but not pervasive.
• Adverse Opinion:
The auditor shall express an adverse opinion when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the aggregate,
are both material and pervasive to the financial statements.
• Disclaimer of Opinion:
The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient
appropriate audit evidence on which to base the opinion, and the auditor concludes that the
possible effects on the financial statements of undetected misstatements, if any, could be
both material and pervasive.
Author’s Notes:
In Case 3:
Give Conditional Answer
If Pervasive — Adverse Opinion
If Not Pervasive — Qualified Opinion
QNO Special Consideration for Various Opinion Old Course – (M20R)

113.010 BHASKAR CNO—SA705.060 New Course – (N18R, S21M, M20R)
“When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified Opinion,”
“Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate, for the Opinion section.” As an expert you
are required to brief the special considerations required for expressing:
(a) Qualified Opinion.
(b) Adverse Opinion and
(c) Disclaimer of Opinion.
Answer (a) Special consideration required for expressing Qualified Opinion: When the auditor expresses a
qualified opinion due to a material misstatement in the financial statements, the auditor shall state
that, in the auditor’s opinion, except for the effects of the matter(s) described in the Basis for
Qualified Opinion section:
• When reporting in accordance with a fair presentation framework, the accompanying
financial statements present fairly, in all material respects (or give a true and fair view of) […]
in accordance with [the applicable financial reporting framework]; or

• When reporting in accordance with a compliance framework, the accompanying financial
statements have been prepared, in all material respects, in accordance with [the applicable
financial reporting framework].
• When the modification arises from an inability to obtain sufficient appropriate audit
evidence, the auditor shall use the corresponding phrase “except for the possible effects of
the matter(s) ...” for the modified opinion.
(b) Special consideration needed for expressing Adverse Opinion: When the auditor expresses an
adverse opinion, the auditor shall state that, in the auditor’s opinion, because of the significance of
the matter(s) described in the Basis for Adverse.
Opinion section:
• When reporting in accordance with a fair presentation framework, the accompanying
financial statements do not present fairly (or give a true and fair view of) […] in accordance
with [the applicable financial reporting framework]; or
• When reporting in accordance with a compliance framework, the accompanying financial
statements have not been prepared, in all material respects, in accordance with [the
applicable financial reporting framework].
(c) Special consideration is required for expressing Disclaimer of Opinion: When the auditor
disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence, the auditor
shall:
• State that the auditor does not express an opinion on the accompanying financial
statements.
• State that, because of the significance of the matter(s) described in the Basis for Disclaimer
of Opinion section, the auditor has not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion on the financial statements; and
• Amend the statement required in SA 700 (Revised), which indicates that the financial
statements have been audited, to state that the auditor was engaged to audit 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.
QNO Reasons for No S&A Evidence Old Course – (N18R, M20R)

113.020 BHASKAR CNO—SA705.050 New Course – (M20R)
The auditor’s inability to obtain sufficient appropriate audit evidence (also referred to as a limitation on the
scope of the audit) may arise from:
(i) Circumstances beyond the control of the entity.
(ii) Circumstances relating to the nature or timing of the auditor’s work; or
(iii) Limitations imposed by management.
Explain with the help of examples.
Answer ➢ Reasons (R )
The auditor’s inability to obtain sufficient appropriate audit evidence (also referred to as a limitation
on the scope of the audit) may arise from:
R 1 - Circumstances beyond the control of the entity;
R 2 - Circumstances relating to the nature or timing of the auditor’s work; or
R 3 - Limitations imposed by management.
• R1 – Fault of External Factors

Examples of circumstances beyond the control of the entity include when:
• The entity’s accounting records have been destroyed.
• The accounting records of a significant component have been seized indefinitely by
governmental authorities.
• R2 – Fault of Management
Examples of an inability to obtain sufficient appropriate audit evidence arising from a
limitation on the scope of the audit imposed by management include when:
• Management prevents the auditor from observing the counting of the physical
inventory.
• Management prevents the auditor from requesting external confirmation of
specific account balances.
• R3 – No one’s Fault
Examples of circumstances relating to the nature or timing of the auditor’s work include
when:
The entity is required to use the equity method of accounting for an associated entity, and
the auditor is unable to obtain sufficient appropriate audit evidence about the latter’s
financial information to evaluate whether the equity method has been appropriately applied.
• The timing of the auditor’s appointment is such that the auditor is unable to observe
the counting of the physical inventories.
• The auditor determines that performing substantive procedures alone is not
sufficient, but the entity’s controls are not effective.
➢ Solution
An inability to perform a specific procedure does not constitute a limitation on the scope of the audit
if the auditor is able to obtain sufficient appropriate audit evidence by performing alternative
procedures. Limitations imposed by management may have other implications for the audit, such as
for the auditor’s assessment of fraud risks and consideration of engagement continuance.
QNO Q Vs E Old Course – (N14E, M17R, P17M)

118.000 UNIQUE New Course – (S17M, M18R, S21M)
Audit Qualification vs Emphasis of Matter
Answer Audit Qualification Emphasis of Matter
➢ SA-705 “Modifications to the Opinion in the ➢ SA-706 “Emphasis of Matter Paragraphs and
Independent Auditor’s Report”, Deals with the Other Matter Paragraphs in the Independent
provisions relating to Audit Qualification. Auditor’s Report” Deals with the provisions
relating to Emphasis of Matter.
➢ Audit Qualifications are also known as “subject ➢ EOM para is included in auditor’s report to
to report” or “except that report”. draw attention of the users’ towards
important matter(s) which are already
disclosed in FST and are fundamental to users’
for understanding of Financial Statements.
➢ Audit Qualifications are given when auditor : ➢ EOM para is issued when there is uncertainty
• Obtains S&A audit evidence, that material relating to :
Misstatements exist individually or in the • future outcome of exceptional
aggregate. Or litigation, regulatory action, etc.; or
• Is Unable to obtain S&A audit evidence • there is early application of a new
but concludes that the possible effects of accounting standard that has a
undetected misstatement could be pervasive effect on FST in advance of
material and both the above are not its effective date.
pervasive to FST
QNO Drafting Disclaimer of Opinion New Course – (N22R)

CA Bahubali is the statutory auditor of Bharat Ltd. for the FY 2021-22. During the course of audit CA
Bahubali noticed the following:
(i) With respect to the debtors amounting to ` 240 crore, no balance confirmation was received by the
audit team. Further, there have been defaults on the payment obligations by debtors on the due dates
during the year under audit.The Company has created a provision for doubtful debts to the tune of `40
crore during the year under audit. The Company has stated that the provision is based on receivables
which are older than 39 months, which according to the audit team is inadequate and as such the audit
team is unable to ascertain the carrying value of trade receivables.

(ii) In respect of Inventories (which constitutes 38% of the total assets of the company), during the
reporting period, the management has not undertaken physical verification of inventories at periodic
intervals. Also, the Company has not maintained adequate inventory records at the factory. The audit
team was unable to undertake the physical inventory count as such the value of inventory could not be
verified.
Under the above circumstances what kind of opinion should CA Bahubali give? Write the opinion
paragraph and basis of opinion paragraph to be included in the Independent Auditor’s Report.
Answer In the present case, CA Bahubali is unable to obtain sufficient and appropriate audit evidence with respect
to the following:
(i) The balance confirmation with respect to debtors amounting to ` 240 crore is not available. Further
there has been default in payment by the debtors and the provision so made is not adequate. The
audit team is also unable ascertain the carrying value of trade receivables.
(ii) With respect to 38% of the company’s inventory, neither the physical verification has been done
by the management nor are adequate inventory records maintained. The audit team is also unable
to undertake the physical inventory count as such the value of inventory could not be verified.
In the above two circumstances the auditor is unable to obtain sufficient appropriate audit evidence on
which to base the opinion, and the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive.
Thus, CA Bahubali should give a Disclaimer of Opinion.

The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion
paragraph is as under:
Disclaimer of Opinion
We do not express an opinion on the accompanying financial statements of Bharat Ltd. Because of the
significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have
not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on
these financial statements.
Basis for Disclaimer of Opinion
We are unable to obtain balance confirmation with respect to the debtors amounting to ` 240 crore.
Further, there have been defaults on the payment obligations by debtors on the due dates during the year
under audit. The Company has created a provision for doubtful debts to the tune of ` 40 crore during the
year under audit which is inadequate in the circumstances of the company. The carrying value of trade
receivables could not be ascertained.
Further, in respect of Inventories (which constitutes 38% of the total assets of the company), during the
reporting period, the management has not undertaken physical verification of inventories at periodic
intervals. Also, the Company has not maintained adequate inventory records at the factory. We were
unable to undertake the physical inventory count and as such the value of inventory could not be verified.

Part 4 - [SA 706] EMPHASIS OF MATTER PARAGRAPHS & OTHER MATTER PARAGRAPHS
IN THE INDEPENDENT AUDITOR’S REPORT
Case Study (EMP & Modification) Old Course – (N20R)

122.050
BHASKAR CNO—SA706.020 New Course – (N20R)
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 Observation 1 and 2 in its audit report?
If so, under which heading should it be reported?
Observation 1 –
▪ SA 706, “Emphasis of Matter Paragraph & Other Matter Paragraph in the Independent Auditor’s
Report”
➢ 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 judgement is of such importance that it is fundamental to users’ understanding
of the financials.
➢ 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.
➢ Hence, in this case, the auditor shall report about the consequences of the flood which affected
the Company’s warehouse under Emphasis of Matter Paragraph.
Observation 2 –
▪ SA 705, “Modification to Opinion in the Independent Auditor’s Report”,
➢ 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.
➢ 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.
➢ Thus, in the given situation, on account of flood few records pertaining to particular transactions
was completely destroyed and in the absence of duplicate records, the auditor was unable to
obtain sufficient and appropriate audit evidence and those details were material but not
pervasive. Therefore, in accordance with SA 705, the auditor is required to issue qualified
opinion.

Part 5 - [SA 710] COMPARATIVE INFORMATION CORRESPONDING FIGURES &
COMPARATIVE FINANCIAL STATEMENTS
QNO Comparatives (Previous Year Misstatements) Old Course – (M09E, M11R, M12R, N12M, N14R,
126.000 BHASKAR CNO—SA710.080 N14E, P17M, M18E, N18E,N20M)
New Course – (M18M, N20M)
The audit report of P Ltd. for the year 2016-17 contained a qualification regarding non-provision of
doubtful debts. As the statutory auditor of the company for the year 2017-18, decide how would you
report, if :
(i) The company does not make provision for doubtful debts in 2017-18?
(ii) The company makes adequate provision for doubtful debts in 2017-18?
OR
For the year ended 31st March, 2016, the audit report of Avinash Ltd. contained a qualification regarding
non-provision for diminution in the value of investments to the extent of ? 50 lacs. As an Auditor of the
Company for the year 2016-17, how would you report, if :
(i) The Company does not makes provision for diminution in the value of investments in the year 2016-
2017.
(ii) The Company makes adequate provision for diminution in the year 2016-2017.
OR
It was observed from the modified audit report of the financial statements of AS Ltd. for the year ended
31st March 2017 that depreciation of Rs 2.50 crore for the year 2016-2017 had been charged off to the
Statement of Profit and Loss instead of including it in “carrying value of asset under construction". State
in relation to the audit for the year ended 31st March 2018, whether such modification in the previous
year's audit report would have any audit implication for the current year and if yes, how would you deal
with it in your audit report?
Answer Requirement of SA 710
Auditor’s responsibility in cases where audit If material misstatement exists in
the P.Y FST & a Q/Disclaimer/A opinion
report for an earlier year is qualified is given in
was given by auditor and the matter
SA 710 “Comparative Information – which gave rise to the modification is
Corresponding Figures and Comparative
Financial Statements”.
Unresolved Resolved
➢ Matter Resolved
in C.Y in C.Y
As per SA 710, when the auditor’s report
on the prior period, as previously issued,
Auditor shall No need to refer to
included a qualified opinion, a
also modify the P.Y modification
disclaimer of opinion, or an adverse audit report on
opinion and the matter which gave rise C.Y FST
to the modified opinion is resolved and
properly accounted for or disclosed in A
If such P.Y s If such P.Y s B
the financial statements in accordance Modification has Modification
with the applicable financial reporting material effects on C.Y does not
framework, the auditor’s opinion on the figures material affects
current period need not refer to the the C.Y
previous modification.
Refer current period s Explain in opinion para
➢ Matter Not Resolved figures and the that the audit opinion
SA 710 further states that if the auditor’s corresponding figures has been modified
report on the prior period, as previously in opinion Para because of the effects
issued, included a qualified opinion and of the unresolved
the matter which gave rise to the matter on
modification is unresolved, the auditor comparability
Of C.Y figures & P.Y
shall modify the auditor’s opinion on the
figures
current period’s financial statements. In
the Basis for Modification paragraph in the auditor’s report, the auditor shall either:

• Material effect on Current year
Refer to both the current period’s figures and the corresponding figures in the description
of the matter giving rise to the modification when the effects or possible effects of the
matter on the current period’s figures are material; or
• No-Material effect on Current year
In other cases, explain that the audit opinion has been modified because of the effects or
possible effects of the unresolved matter on the comparability of the current period’s
figures and the corresponding figures.
Case Discussion & Conclusion
In the instant Case, if P Ltd. does not make provision for doubtful debts the auditor will have to modify his
report for both current and previous year’s figures as mentioned above. If however, the provision is made,
the auditor need not refer to the earlier year’s modification.
Author’s note
• In current year, a previous year matter is unresolved however it does not affect current year
materially then why current year audit report is modified?
o In Comparative Financial Statement Approach we have to comment on both years, CY
& PY so here we should always comment about PY.
o In Corresponding figures approach we generally comment on CY only, but if there is
misstatement in PY then comparison on CY with PY goes wrong and gives in
appropriate interpretations, hence it is mandatory to modify with respect to PY and
explain it is done because CY comparison and interpretation is going wrong

Part 6 - [SA 720] THE AUDITOR’S RESPONSIBILITY IN RELATION TO OTHER
INFORMATION IN DOCUMENTS CONTAINING AUDITED FINANCIAL STATEMENTS
Examples of “Amounts” or “other items” included in the Old Course – (M21M)

QNO
“other information New Course – (N19E, S21M, M21M)
127.100
UNIQUE
LMP Associates, Chartered Accountants, conducting the audit of PQR Ltd., a listed Company for the year
ended 31st March 2019 is concerned with the auditor’s responsibilities relating to other information,
both financial and non-financial, included in the Company’s annual report While regarding other
information, Associates considers whether there is a material inconsistency between other information
and the financial statements. As a basis for the consideration the auditor shall evaluate their consistency,
compare selected amounts or other items in the other information with such amounts or other items in
the financial statements. Guide LMP Associates with examples of “Amounts” or “other items” that
may be included in the “other information” with reference to SA 720.
▪ SA 720 - The Auditor’s Responsibilities Relating to Other Information
➢ Definition of Other information –
• Financial or non-financial information (other than financial statements and the
auditor’s report thereon) included in an entity’s annual report.
• Appendix 1 of SA 720 contains examples of amounts or other items that may be
included in the other information.
• Examples of Amounts or Other Items that May Be Included in the Other
Information
The following are examples of amounts and other items that may be included in other
information. This list is not intended to be exhaustive.
• Amounts
o Items in a summary of key financial results, such as net income,
earnings per share, dividends, sales and other operating revenues, and
purchases and operating expenses.
o Selected operating data, such as income from continuing operations
by major operating area, or sales by geographical segment or product
line.
o Special items, such as asset dispositions, litigation provisions, asset
impairments, tax adjustments, environmental remediation provisions,
and restructuring and reorganization expenses.
o Liquidity and capital resource information, such as cash, cash
equivalents and marketable securities; dividends; and debt, capital
lease and minority interest obligations.
o Capital expenditures by segment or division.
o Amounts involved in, and related financial effects of, off-balance sheet
arrangements.
o Amounts involved in guarantees, contractual obligations, legal or
environmental claims, and other contingencies.
o Financial measures or ratios, such as gross margin, return on average
capital employed, return on average shareholders’ equity, current
ratio, interest coverage ratio and debt ratio. Some of these may be
directly reconcilable to the financial statements.
• Other Items
o Explanations of critical accounting estimates and related
assumptions.
o Identification of related parties and descriptions of transactions with
them.

o Articulation of the entity’s policies or approach to manage
commodity, foreign exchange or interest rate risks, such as through the
use of forward contracts, interest rate swaps, or other financial
instruments.
o Descriptions of the nature of off-balance sheet arrangements.
o Descriptions of guarantees, indemnifications, contractual obligations,
litigation or environmental liability cases, and other contingencies,
including management’s qualitative assessments of the entity’s related
exposures.
o Descriptions of changes in legal or regulatory requirements, such as
new tax or environmental regulations, that have materially impacted
the entity’s operations or fiscal position or will have a material impact
on the entity’s future financial prospects.
o Management’s qualitative assessments of the impacts of new
financial reporting standards that have come into effect during the
period, or will come into effect in the following period, on the entity’s
financial results, financial position and cash flows.
o General descriptions of the business environment and outlook.
o Overview of strategy.
o Descriptions of trends in market prices of key commodities or raw
materials.
o Contrasts of supply, demand and regulatory circumstances between
geographic regions.
o Explanations of specific factors influencing the entity’s profitability in
specific segments.
Author’s Note
• Above is the list of Examples of “Amounts” or “other items” included in the “other
information. Students are advised to write the number of points on the basis of marks for
which question is asked .
QNO Material Misstatement in other information Old Course – (N20M)

127.200 BHASKAR CNO—SA710.100 New Course – (N20M)
ING Associates, Chartered Accountants, conducting the audit of XYZ Ltd., a listed Company for the year
ended 31st March 2020 is concerned with the auditor's responsibilities relating to misstatements in other
information, both financial and non-financial, included in the Company’s annual report. While reading
other information, ING Associates considers whether there is any material misstatement of the other
information in the Company. After performing their procedures, the auditor concludes that a
material misstatement of the other information exists.
ING Associates discussed with the Management about the other information that appeared to be
materially misstated to the auditor and also requested management to provide evidence for the basis of
management’s statements in the other information along with supporting documents.
Guide ING Associates as to how to respond to that material misstatement of other information obtained
prior to the date of auditor’s report. Will your answer be different in case ING Associates conclude
the same after the date of auditor’s report?
➢ Responding When the Auditor Concludes That a Material Misstatement of the Other Information
Exists:
• As per SA 720, “The Auditor’s Responsibility in Relation to Other Information”, if the auditor
concludes that a material misstatement of the other information exists, the auditor shall request
management to correct the other information. If management:
• Agrees to make the correction, the auditor shall determine that the correction has been
made; or
• Refuses to make the correction, the auditor shall communicate the matter with those
charged with governance and request that the correction be made.

• If the auditor concludes that a material misstatement exists in other information obtained prior
to the date of the auditor’s report, and the other information is not corrected after
communicating with those charged with governance, the auditor shall take appropriate action,
including:
• Considering the implications for the auditor’s report and communicating with those
charged with governance about how the auditor plans to address the material
misstatement in the auditor’s report.
• Withdrawing from the engagement, where withdrawal is possible under applicable law or
regulation.
• If the auditor concludes that a material misstatement exists in other information obtained after
the date of the auditor’s report, the auditor shall:
• If the other information is corrected, perform the procedures necessary in the
circumstances; or
• If the other information is not corrected after communicating with those charged with
governance, take appropriate action considering the auditor’s legal rights and obligations,
to seek to have the uncorrected material misstatement appropriately brought to the
attention of users for whom the auditor’s report is prepared.

Audit Committee -Features Old Course – (N08E, M14R, N14R, N15R, M16M, M16R, N16R, N16M,
QNO
BHASKAR CNO— P17M, N17M, N17E, M18M, M19R)
422.000
ACCG.160/ACCG.180 New Course – (S17M, M18R, N18M, M18M, M19R, S21M)
State the main features of the Qualified and Independent Audit Committee set up under LODR,2015
OR
Key features of the Qualified and Independent Audit Committee set up under SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015.
OR
“Every listed entity shall constitute a qualified and independent audit committee in accordance with the
terms of reference.” State the main features of the Qualified and Independent Audit Committee set up
under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
OR
Classes of Companies Required to Constitute Audit Committee
OR
Explain the Constitution of Audit Committee under Section 177 of the Companies Act, 2013
OR
Audit Committee under LODR Vs Company Act 2013
Answer Main features of the Qualified and Independent Audit Committee Applicability of LODR –
Particulars LODR Companies Act
As per Section 177 all listed companies,
Public companies having paid up capital 10
crores or more, turnover 100 crores or
more,
Loan/Borrowing/ Debenture/ Deposit 50
crores or more are supposed to have AUDIT
COMMITTEE.
Same as applicability of LODR
Applicability
(below, after chart) The following classes of unlisted public
company shall not be covered under sub-
rule (1), namely :—
(a) a joint venture;
(b)a wholly owned subsidiary; and
(c)a dormant company as defined under
section 455 of the Act.
*Figures as on last audited balance sheet
rd
Minimum 3 Directors (2/3 IDs)
However, in case of a listed entity
Composition having outstanding SR (Superior Minimum 3 Directors (Majority IDs)
Rights) equity shares, the audit
committee shall only comprise of
independent directors
All members should be “Financially Majority including Chairman should be able
Qualifications
Literate” At least one Expert to “able to understand FST”
Chairman Should be ID Silent
Secretary Company Secretary of Company. Silent
Audit Committee shall meet at least 4
Number of times in a year, Gap between 2
Silent
meetings meetings should not be more than 4
months.
rd
Quorum 2 Members or 1/3 of members Silent

whichever is higher. (At least 2 IDs)
Invitees to Auditor / Key Managerial Person can attend
Finance Head / Head of Internal Audit /
committee and have right to be heard with respect to
Representative of Statutory Auditor /
Meetings audit report but cannot vote
Chairman of Audit Committee should
Presence at AGM Silent
be present at AGM
➢ Companies which are required to constitute Audit committee under LODR,2015:
Unless otherwise provided, these regulations shall apply to the listed entity who has listed any of the
following designated securities on recognized stock exchange(s):
(That means Approved by Central Government under SCRA)
Designated Securities
➢ Popular Securities
• Specified securities listed on
▪ Main board (Simply means having Nationwide Trading Terminal) or SME Exchange or
▪ Innovators Growth Platform (Also Known as Institutional Trading Platform)
(‘Specified securities’ means ‘equity shares’ and ‘convertible securities)
➢ Other Securities (NISSU)

• Non-convertible securities;
• Indian depository receipts;
• Security Receipts (Securities issued by Asset Reconstruction Company giving ownership of Bad
Loans as discussed under SARFESI Act)
• Securitised debt instruments; (Generally gives ownership of good quality Loan Assets)
• Units issued by mutual funds;
➢ Any other securities as may be specified by the Board.
➢ Explanations
• The term “financially literate” means the ability to read and understand basic financial
statements i.e. balance sheet, profit and loss account, and statement of cash flows.
• A member will be considered to have accounting or related financial management
expertise if he or she possesses experience in finance or accounting, or requisite
professional certification in accounting, or any other comparable experience or background
which results in the individual’s financial sophistication, including being or having been a
chief executive officer, chief financial officer or other senior officer with financial oversight
responsibility.
• The paid-up share capital or turnover or outstanding loans, or borrowings or debentures or
deposits, as the case may be, as existing on the date of last audited Financial Statements
shall be taken into account for the said purpose.
Author’s Note
# Mistake point
For the purpose of better understanding of students, comparison of features Audit Committee under
Companies Act and LODR is provided. Students are only required to write about different aspects of audit
committee as per LODR or Company Act depending on question.
QNO Risk Management Committee (Applicability) Old Course – (N18M)

422.100 BHASKAR CNO—ACCG.100 New Course – (M18E, S21M)
M/s All -in-One Limited is a large-sized listed Indian Company with focus on design and delivery of
custom-made Information Technology applications for various business entities in India and abroad. The
Management wants to know whether they are required to constitute Risk Management Committee as
per LODR, 2015 and if so, required, what should be its composition. Advice.
Regulation 21 of LODR, 2015
Part II Requirements of Relevant Standards & Laws

• Regulation 21 of LODR 2015,
Provision relating to constitution of risk management committee is applicable to top 1000 listed
entities, determined on the basis of market capitalisation, as at the end of the immediate previous
financial year. In the instant case, All-in-One Limited, is a large sized listed Indian Company with
focus on design and delivery of custom-made IT applications for various business entities in India
and abroad. As per fact of the case it is a large sized listed Indian company, assuming that it is
included in top 1000 listed entities, all – in – One Limited is required to constitute risk
management committee.
• Composition of Risk Management Committee:
• The Board of Directors shall constitute a Risk Management Committee.
• The Risk Management Committee shall have minimum three members with majority of
them being members of the board of directors, including at least one independent
director and in case of a listed entity having outstanding SR equity shares, at least two
third of the Risk Management Committee shall comprise independent directors.
• The Chairperson of the Risk Management Committee shall be a member of the Board of
Directors and senior executives of the listed entity may be members of the committee.
• The Board of Directors shall define the role and responsibility of the Risk
Management Committee and may delegate monitoring and reviewing of the risk
management plan to the committee and such other functions as it may deem fit and
such function shall specifically cover cyber security. It may be noted that the role and
responsibilities of the Risk Management Committee shall mandatorily include the
performance of functions specified in Part D of Schedule II. (Part D specifies roles of
various committees , which include roles of risk management committees)
These procedures shall be periodically reviewed to ensure that executive management controls
risk through means of a properly defined framework. A majority of this Committee will be the
members of the Board of Directors. Senior executives of the company may be also being members
of the Committee, but the Chairperson of the Committee shall be a member of the Board of
Directors.
QNO Audit Committee (Mandatory Review) – Old Course – (M12E, M16M, P17M, M18M)
425.000 BHASKAR CNO—ACCG.190 New Course – (N18E,M20R)
State the "Mandatory Review" areas of the audit committee.
OR
List few documents that require mandatory review by Audit Committee.
▪ LODR, 2015
(Start of the year)
➢ The appointment, removal and terms of remuneration of the chief internal auditor or shall be
subject to review by the audit committee.
(During the year)

➢ Statement of significant related party transactions (as defined by the audit committee),
submitted by management.
➢ Management letters/letters of internal control weaknesses issued by the statutory auditors.
➢ Internal audit reports relating to internal control weaknesses; and
(Quarter/Yearend)
➢ Statement of deviations: -
• Quarterly statement of deviation(s) including report of monitoring agency, inapplicable
submitted to stock exchange(s) in terms of regulation 32(1).
• Annual statement of funds utilised for purposes other than those stated in the offer
document /prospectus/notice in terms of regulation 32(7)
(Year-end)
➢ Management discussion and analysis of financial condition and results of operations.

QNO Audit Committee (Meeting) Old Course – (N13E, M15R, N16R, P17M, N17R)
426.000 BHASKAR CNO—ACCG.160 New Course – (S17M, N18R, N19E, S21M)
D Ltd., a company incorporated in India has six members in its Audit Committee. Due to recessionary
conditions in India, the revenue of the company is going down and there is slowdown in other activities
of the company. Therefore, it is expected that there would not be significant work for members of
the Audit Committee. Considering the overall recession in the company and the economy, the members
of the Committee decided unanimously to meet only once at the year end. They reviewed monthly
information system of the Company and found no errors As an auditor of D Limited, would you
consider the decision taken by the Audit Committee to hold the meeting once in a year, in complying
with Listing Obligation and Disclosure Requirements (LODR)? Also state the quorum requirements for
such meetings.
OR
PSU Limited, a company incorporated in India has six members in its Audit Committee. Due to
recessionary conditions in India the revenue of the company is going down and there is slow down in
other activities of the company. Therefore, it was expected that there would not be significant work for
members of the Audit Committee. Considering the overall recession in the company and the economy,
the members of the Committee decided unanimously to meet once in a year only on March 31, 2018.
They reviewed monthly information system of the Company and found no errors. As an auditor of PSU
Limited would you consider the decision taken by the Audit Committee is in line with the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015?
Answer
▪ LODR, 2015
➢ Audit Committee Meetings:
One of the following additional requirements as stipulated under SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015(“LODR Regulations”) on which Section 177 of the
Companies Act, 2013 (relating to audit committee) is silent is – The Audit Committee should meet
at least four times in a year and not more than one hundred and twenty days shall elapse
between two meetings. The quorum shall be either two members or one third of the
members of the audit committee whichever is greater, but there should be a minimum of two
independent directors present.
Besides, there is a mandatory review requirement and to review only monthly information
system is not sufficient. Here the audit committee members reviewed only monthly information
system of the company and the same is not sufficient as per LODR Regulations.
The Audit Committee shall mandatorily review the following information as per LODR
Regulations:
• Management discussion and analysis of financial condition and results of operations;
• Statement of significant related party transactions (as defined by the Audit Committee),
submitted by management;
• Management letters / letters of internal control weaknesses issued by the statutory
auditors;
• Internal audit reports relating to internal control weaknesses;
• The appointment, removal and terms of remuneration of the Chief internal auditor shall be
subject to review by the Audit Committee; and
• Statement of deviations:
• quarterly statement of deviations including report of monitoring agency if applicable
and
• Annual statement of funds utilized for purposes other than those stated in the offer
document/ prospectus/ notice.
Applying the above, the decision taken by the audit committee is not in line with the LODR
Regulations.
Explanation
➢ In the instant case, due to recessionary conditions, slowdown in activities of the company and not
expecting the significant work for the members of the audit committee, D Ltd. decided

unanimously to meet only once at the year end. They also reviewed monthly information system
of the company and found no errors.
➢ In view of above, decision taken by the audit committee to hold the meeting only once at the year
end is not correct as the Audit Committee should meet at least four times in a year and not more
than one hundred and twenty days shall elapse between two meetings
QNO Conducting Meeting New Course – (S21M)

426.500 BHASKAR CNO—ACCG.160
XYZ Limited has conducted 4 meetings in 2019-20. i.e., June 15, 2019, October 18, 2019, February 10,
2020 and June 10, 2020. Does it comply with provisions of conducting meeting?
▪ LODR, 2015
➢ As per Listing Obligation and Disclosure Requirements Regulations 2015,depending upon the facts
and circumstances,
• Some situations may require an adverse or qualified statement or a disclosure without
necessarily making it a subject matter of qualification in the Auditors’ Certificate, in respect of
compliance of requirements of corporate governance.
• The Audit Committee shall meet at least four times in a year and not more than one hundred and
twenty days shall lapse between two meetings.
➢ In the given case, XYZ Limited has conducted 4 meetings in 2019-20. i.e., June 15, 2019, October 18,
2019, February 10, 2020 and June 10, 2020.
➢ It does not comply with provisions because time gap between June 15 and October 18 is more
than 120 days i.e., 125 days.
QNO BOD Composition & Chairmanship Old Course – (N21R)

430.500 BHASKAR CNO—ACCG.200 New Course – (N21R)
Kayask Ltd. is a public company which got listed on BSE and NSE in the F.Y. 2015-16 and is amongst the
top 500 listed entities on the basis of market capitalization. JP Bhuj & Co., a CA firm, has been
appointed as its statutory auditor for the F.Y. 2020-21.
Mr. Pankaj Bhuj was assigned its audit as an engagement partner and he was verifying the composition
of the Board of Director because of some changes in the same. The present composition of the Board of
Kayask Ltd. is as follows: -
(1) There are 9 directors out of which there are 4 non-executive directors and 3 independent
directors. The board has only one woman director and she is an executive director.
(2) Mr. Madhusudan Mehra has been appointed as the non-executive chairperson of the Board. He is
brother in law of the Managing Director of Kayask Ltd.
Whether present composition of the board of Kayask Ltd. complies with the requirement of the
provisions of SEBI LODR Regulations?
Answer As per Regulation 17 and 17A of the SEBI LODR Regulations, -
✓ The auditor should ascertain whether, throughout the reporting period, the Board of Directors
comprises an optimum combination of executive and non-executive directors, with at least one
woman director and not less than 50% of the Board of Directors comprising non-executive directors.
It may be noted that the Board of directors of the top 1000 listed entities shall have at least one
independent woman director.
✓ The auditor should also verify that where the Chairperson of the Board is a nonexecutive direc tor,
at least one-third of the Board should comprise of independent directors.
✓ The auditor shall ensure that the Chairperson of the board of the top 500 listed entities is - (a) a
non-executive director; (b) not related to the Managing Director or the Chief Executive Officer as
per the definition of the term “relative” defined under the Companies Act, 2013.

As per the term “relative” defined under the Companies Act, 2013 – Brother-in-law i.e. sister’s
husband is not included.
In the given case, Kayask Ltd. is a public company which got listed on BSE and NSE in the F.Y. 2015-16
and is amongst the top 500 listed entities on the basis of market capitalization. The present
composition of the board of Kayask Ltd includes 9 directors out of which there are 4 non -executive
directors and 3 independent directors. The board has only one woman director and she is an
executive director. In addition, Chairperson of the Board Mr. Madhusudan Mehra is brother in law of
the Managing Director of Kayask Ltd. and has been appointed as the non-executive Chairperson.
In view of Regulation 17 and 17A of the SEBI LODR Regulations, there should at least 5 non-
executive directors and 3 Independent directors as its Chairperson is a non-executive director.
Further as the company is amongst the top 500 listed entities, at least one independent woman
director should be there in its board.
Thus, it can be concluded that the present composition of the board of Kayask Ltd. does not comply
with the requirement of the provisions of SEBI LODR Regulations as the woman director should
be an independent director and there should be 5 non-executive directors.
QNO Management Discussion and Analysis. Old Course – (N13E, P17M, N17R)
433.000 BHASKAR CNO—ACCG.320 New Course – (S17M, S21M)
Briefly explain the Content of Management Discussion and Analysis
▪ LODR, 2015
➢ Management Discussion and Analysis
• Addition to BOD Report
As part of the directors’ report or as an addition thereto, a Management Discussion and
Analysis report should form part of the Annual Report to the shareholders. This
Management Discussion &Analysis should include discussion on the following matters within
the limits set by the company’s competitive position:
• Matters to be Covered
SO2FT Discussion with RISHI2 in Management Discussion & Analysis
• Segment–wise or product-wise performance
• Outlook(Future of economy & industry)
• Discussion on Financial performance with respect to operational performance
• Opportunities and Threats(At Macro Level)
• Risks and concerns(At Micro Level)
• Industry structure and developments(Past Year)
• details of Significant changes (i.e. change of 25% or more as compared to the
immediately previous financial year) in key financial ratios, along with detailed
explanations therefore, including:
o Details of any change in Return on Net Worth as compared to the immediately
previous financial year along with a detailed explanation thereof
o Current Ratio
o Debtors Turnover
o Inventory Turnover
o Debt Equity Ratio
o Operating Profit Margin (%)
o Net Profit Margin (%) or sector-specific equivalent ratios, as applicable.
• Material developments in Human Resources / Industrial Relations front, including
number of people employed. (HR Function in company)
• Internal control systems and their adequacy(ICS in Company)
• Interest Coverage Ratio

• Disclosure of Accounting Treatment:
Where in the preparation of financial statements, a treatment different from that prescribed
in an Accounting Standard has been followed, the fact shall be disclosed in the financial
statements, together with the management’s explanation as to why it believes such
alternative treatment is more representative of the true and fair view of the underlying
business transaction.
• Don’t verify just check compliance, Useful for understanding Entity
The above information presented by the management is likely to include non-financial
information, which may be outside the auditor’s area of expertise. In such situations, the
auditor may keep in mind SA 315 relating to “Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and its Environment” and the fact that he is
only required to review the compliance with disclosure requirements and not verify the
particular facts as disclosed by the management.
• Consistent with reporting in Financial Statements
The auditor should ascertain that the segment-wise or product-wise performance (sub-
clause (c)as stated above) is consistent with what is reported in financial statements
complying with AS 17(Segment Reporting)/ Indian Accounting Standard 108 (Operating
Segments) and also as per provisions of Section 133, 134 and 143 of the Companies Act,
2013.
Affirmation of compliance with the code on an New Course – (S21M)

433.020 annual basis.
BHASKAR CNO—ACCG.200
The Board of Directors of PQR Ltd. have laid down the code of conduct for all Board members and senior
management. The auditor is provided with the annual compliance affirmations received from the
Board members and explained that since there has been no change in the composition of the
senior management, the previous year’s affirmations may be considered valid. Is the contention of
the Company valid?

▪ LODR, 2015
➢ Under Regulation 26(3) of LODR, all Board members and senior management personnel have to affirm
compliance with the code on an annual basis.
➢ In the given case, the auditor is provided with the annual compliance affirmations received from the
Board members and explained that since there has been no change in the composition of the senior
management, the previous year’s affirmations may be considered valid.
➢ The decision to consider the previous year’s affirmations from the senior management personnel as
valid is not in line with the LODR Regulations.
POSH Act – Harassment New Course – (S21M)

433.030
Genuine Ltd. has established the Internal Complaints Committee under the Sexual Harassment of
Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (‘POSH Act’). The details (names,
email addresses and contact numbers) of the Committee members are available on the company
intranet which is accessible by all employees. However, no disclosure regarding number of
complaints pertaining to sexual harassment of women at workplace is being made. Are the
measures taken by the Company adequate?
▪ LODR, 2015
➢ As per Schedule V Disclosures in relation to the Sexual Harassment of Women at Workplace
(Prevention, Prohibition and Redressal) Act, 2013, amongst other matters, following should be

disclosed in the section on Corporate Governance of the Annual Report:
• number of complaints filed during the financial year.
• number of complaints disposed of during the financial year
• number of complaints pending as on end of the financial year.
➢ The POSH Act offers protection to all women, be it employees or contract staff or any other women
who are associated with the Company in any other capacity (including service providers, vendors,
professionals, etc.) By only providing the details in the intranet, the Company has failed to meet
the requirements under the POSH Act.
➢ In the given case, no disclosure regarding number of complaints pertaining to sexual harassment of
women at workplace is being made by the company.
➢ In view of above, Genuine Ltd. is required to make necessary disclosures in accordance with
Schedule V of SEBI (LODR) Regulation 2015.
QNO Independent Director- Old Course – (N18E, M19M, N19R)

434.010 Unique New Course – (M19M, N19R, S21M)
Comment on the following in the light of certificate of compliance of conditions of Corporate
Governance to be issued for a listed company where the Board consists of 10 directors including a non
-executive director as its chairman and further:
(i) There were 5 meetings held during the year as follows:
01/04/2017, 01/06/2017, 01/09/2017, 03/01/2018, 25/03/2018.
(ii) There are 4 independent directors. One of them resigned on 25/05/2017. A new independent
director was appointed on 01/09/2017.
(iii) The Chairman of Audit Committee did not attend the Annual General Meeting held on
14/09/2017.
(iv) The internal audit reports were obtained by Audit Committee on quarterly basis. Quarter 1
internal audit report commented on certain serious irregularities as regards electronic online
auction of scrap. The agenda of Audit Committee did not deliberate or take note of the
issue.
(v) There is no women director.
Answer ➢ Compliance Certificate as per LODR
As per Listing Obligation and Disclosure Requirements Regulations 2015, depending upon the
facts and circumstances, some situations may require an adverse or qualified statement or a
disclosure without necessarily making it a subject matter of qualification in the Auditors’
Certificate, in respect of compliance of requirements of corporate governance for example.
(i) The Audit Committee shall meet at least four times in a year and not more than one
hundred and twenty days shall lapse between two meetings. The numbers of days
between the meetings held on 1.9.2017 and 3.01.2018 is more than 120 days. Hence
it is a non-compliance and would require qualification in certificate of corporate
governance
(ii) Since the Chairman is the non-executive director, there should be 1/3rd of
directors (rounded to next integer) to be independent. In this case, 4 directors need
to be independent. Any vacancy during shortfall of independent directorship should
be filled within next 3 months. In the instant case, since the independent director
was appointed after lapse of 3 months (i.e. on 1.9.2017) and after next first meeting
1/6/2017, there is default which would require qualification in certificate on
corporate governance.
(iii) Chairman shall be present at Annual General Meeting to answer shareholder
queries. In the given scenario, Chairman of Audit Committee did not attend the Annual
General Meeting held on 14/09/2017, which is not in order/compliance.
(iv) The Audit Committee shall mandatorily review the Internal audit reports relating to
internal control weaknesses as per Part C (B) of Schedule II and the auditor should
ascertain from the minutes book of the Audit Committee and other sources like
agenda papers, etc. whether the Audit Committee has reviewed the above-mentioned

information. In the given situation, the agenda of Audit Committee did not deliberate
or take note of serious irregularity mention in Internal Audit Report which is again
not in compliance of conditions of Corporate Governance and warrant audit
qualification in certificate on corporate governance
(v) The auditor should ascertain whether, throughout the reporting period, the Board of
Directors comprises an optimum combination of executive and non-executive
directors, with at least one-woman director. Therefore, there should be at least
one-woman director. In the given situation there is no woman director which is
again not in compliance
Material Unlisted Subsidiary--Appointment of Old Course – (M21M)

QNO
Independent Director New Course – (M21M)
434.250
BN Limited is a listed entity having two subsidiaries namely BUS Limited and ROBUS Limited. Both the
subsidiaries are unlisted and are incorporated in Australia. The consolidated net worth of BN Limited and
its subsidiaries is Rs. 350 crore (including net worth of BUS Limited and ROBUS Limited Rs. 36 crore & Rs.
80 crore respectively) in the immediately preceding year 2019-20. On observing this fact, your senior
manager advises you to inform the management of BN limited to make certain changes in the board of
directors of both the subsidiaries, in accordance with the LODR regulation 24(1). Comment.
Answer As per SEBI - LODR Regulation 24(1), at least one independent director on the board of directors of
the listed entity shall be a director on the board of directors of the unlisted material subsidiary,
whether incorporated in India or not.
For the purpose of Regulation 24(1), notwithstanding anything to the contrary contained in
Regulation 16, the term ‘material subsidiary’ means a subsidiary, whose income or net worth exceeds
20% of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in
the immediately preceding accounting year.
In the given case, the fact that both the subsidiaries are unlisted and incorporated outside India is
irrelevant. From the above case we have the following details:
o 20% of consolidated net worth of BN Limited = 350*20% = Rs. 70 crore.

o Net worth of BUS Limited = Rs. 36 crore.
o Net worth of ROBUS Limited = Rs. 80 crore.
Accordingly, it is clear that out of the two subsidiaries, the net worth of only one subsidiary (ie.
ROBUS Limited) exceeds 20% of the consolidated net worth of BN Limited and all its subsidiaries.
Therefore, the change in the composition of board of directors needs to be made only for ROBUS
Limited and not both the subsidiaries.
Thus, contention of senior manager regarding change in composition of board of directors in BUS
Limited is not in order as per Regulation 24(1). However, change in composition of board of director
is required for ROBUS Limited.
Further, as per Regulation 24 (1) of LODR Regulation, 2015 one of the independent directors present
in the board of director of BN Limited should also be made as a director in the board of directors of
ROBUS Limited.
Material Unlisted Subsidiary--Appointment of Old Course – (M21M)

QNO
Independent Director New Course – (M21M)
434.260
RAO & Co., a Chartered Accountant Firm, is appointed as the principal auditor of a listed company,
Triumph Ltd.
Figures of income and net-worth of five out of seven components of Triumph Ltd., which are its unlisted
subsidiaries, is tabulated below for the immediate preceding financial year along with the consolidated

amount :
(Rs. in crores)
Particulars Consolidated Component Component Component Component Component
‘A’ ‘B’ ‘C’ ‘D’ ‘E’
Income 300 35 10 70 65 20
Net Worth 800 40 20 140 180 50
The remaining two components i.e., Component ‘F’ & Component ‘G’ of Triumph Ltd. were unaudited.
According to Mr. RAO, the engagement partner, Component ‘F’ is material to the consolidated financial
statements whereas Component ‘G’ is not material to consolidated financial statements and this fact
has also been discussed in writing with those charged with governance of Triumph Ltd. and it will
also form part of report as a ‘Key audit matter’ in accordance with SA 701.
(i) Which of the components of Triumph Ltd. can be termed as “material subsidiary” and in the board of
which of the unlisted subsidiaries at least one independent director of Triumph Ltd. needs to be
appointed or would be appointed?
(ii)What shall be the audit consideration in relation to reporting in case of unaudited components of
Triumph Ltd. by RAO & Co. and how RAO & Co. as a principal auditor shall report in case of Component
‘F’ & Component ‘G’, respectively?
Answer (i) As per Regulation 16(c) of the SEBI (LODR) Regulations, 2015, “material subsidiary” shall mean a
subsidiary, whose income or net worth exceeds ten percent of the consolidated income or net
worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting
year. [Explanation- The listed entity shall formulate a policy for determining ‘material’ subsidiary.]
Regulation 24(1) of the SEBI (LODR) Regulations, 2015, provides that at least one independent
director on the board of directors of the listed entity shall be a director on the board of directors of
an unlisted material subsidiary, whether incorporated in India or not.
[Explanation- For the purposes of Regulation 24(1), notwithstanding anything to the contrary
contained in regulation 16, the term “material subsidiary” shall mean a subsidiary, whose income
or net worth exceeds twenty percent of the consolidated income or net worth respectively, of the
listed entity and its subsidiaries in the immediately preceding accounting year]
On the basis of above provisions, following information is tabulated as below:

Particulars Share in Consolidated Share in Consolidated
Income Net Worth
Component ‘A’ 11.67% 5%
Component ‘B’ 3.33% 2.5%
Component ‘C’ 23.33% 17.5%
Component ‘D’ 21.67% 22.5%
Component ‘E’ 6.67% 6.25%
It can be observed that Component ‘A’, Component ‘C’ and Component ‘D’, respectively, can be
termed as “material subsidiary” as their shares in either consolidated Income or net worth exceeds
10%.
Further, at least one independent director from the board of directors of Triumph Ltd. shall be
appointed or would have been appointed on the board of Component ‘C’ and Component ‘D’,
respectively, as their shares in either consolidated income or net worth exceeds 20%.
(ii) Generally, the financial statements of all components included in consolidated financial
statements should be audited or subjected to audit procedures in the context of a multi - location
group audit. Such audits and audit procedures can be performed by the auditor reporting on the
consolidated financial statements or by the components’ auditor.
Where the financial statements of one or more components continue to remain unaudited, the
auditor reporting on the consolidated financial statements should consider unaudited components
in evaluating a possible modification to his report on the consolidated financial statements. The
evaluation is necessary because the auditor (or other auditors, as the case may be) has not been able
to obtain sufficient appropriate audit evidence in relation to such consolidated amounts/balances. In
such cases, the auditor should evaluate both qualitative and quantitative factors on the possible
effect of such amounts remaining unaudited when reporting on the consolidated financial statements
using the guidance provided in SA 705, “Modifications to the Opinion in the Independent Auditor’s
Report”.
In the given situation, two out of seven components of Triumph Ltd. have remained unaudited where
Component ‘F’ is material and Component ‘G’ is not material to the consolidated financial
statements. Since Component ‘F’ is material, therefore, it may be assumed that reporting of Key
Audit Matter in accordance with SA 701 is being done for Component ‘F’ and not for Component ‘G’.
Thus, in case of Component ‘F’, the Principal Auditor needs to consider its impact on the auditor’s
opinion on the consolidated financial statements of the group, in terms of the principles laid down
in SA 705, Modifications to the Opinion in the Independent Auditor’s Report. Whereas in case of
Component ‘G’, the principal auditor should make appropriate reporting under the “Other Matters”
paragraph, pursuant to SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs, in
the Independent Auditor’s Report.
QNO Vigil Mechanism New Course – (S21M)

434.300 BHASKAR CNO—ACCG.500
RST Ltd. has established a vigil mechanism to enable its directors and employees to report genuine
concerns and seek protection against victimization. The details of the mechanism are available on
the company intranet which is accessible by the directors and employees. Are the measures taken by
the Company in line with the LODR Regulations?
▪ LODR, 2015
➢ Under Regulation 22 of the LODR,
The vigil mechanism can be used by directors, employees and any other person.
➢ Regulation 46 of the LODR requires the details of establishment of such mechanism to be
disclosed by the Company on its website and in the Board Report.
➢ RST Ltd. has established a vigil mechanism to enable its directors and employees to report genuine
concerns and seek protection against victimization. The details of the mechanism are available on
the company intranet which is accessible by the directors and employees.
➢ By only providing the details in the intranet, the Company has failed to meet the LODR
Regulations.
QNO Compliance with LODR (Multiple Case) New Course – (N20R)

434.400 BHASKAR CNO—ACCG.280/ ACCG.480/ ACCG.100
M/s FCA & Associates, Chartered Accountants is one of the leading auditing firms in Guwahati. The firm
received an assignment to examine the compliance conditions [as stated in SEBI (LODR) Regulations] of
corporate governance by ABC Ltd., a listed entity with no outstanding SR equity shares. The firm had
made the following observations:
Observation No. 1:
Mr. Fine, one of the Director of the Company, also the Chairman of the Stakeholder Relationship
Committee, was acting as the audit committee Chairman in 4 other listed companies as well & 1
private company, simultaneously.
Observation No. 2:
The Nomination & Remuneration Committee consisted of 6 members, which regularly met
biannually.

Observation No. 3:
The Risk Management Committee consisted of 9 directors, out of which, the number of independent
directors is the majority, but it was less than two thirds of the total strength.
Which among the above three observations made by the auditor of ABC Ltd. should be reported by M/s.
FCA & Associates?
➢ Observation No. 1 –
• Mr. Fine, one of the Director of the Company, also the Chairman of the Stakeholder
Relationship Committee, was acting as the Audit committee Chairman as well in 4 other listed
companies & 1 private Company, simultaneously:
As per Regulation 26 of SEBI (LODR) Regulations, a Director cannot be a Chairman in more than 5
committees across all listed entities. However, for the purpose of reckoning the limit under this
Regulation, chairmanship of committees in a private company shall be excluded. In this case,
since Mr. Fine is the Chairman of audit committee in ABC Ltd. And Chairman in 4 other listed
companies, there is no violation of the limit specified under the Regulation 26. Accordingly, this
observation need not be reported by the auditor.
➢ Observation No. 2:
• The Nomination & Remuneration Committee consisted of 6 members, who regularly met
biannually:
As per Regulation 19, Part D of Schedule II of SEBI (LODR) Regulations, every listed company
should have a Nomination &Remuneration Committee, which shall meet at least once in a
year. Since, in the given case the committee met biannually (i.e. once in 2 years), the said
observation needs to be reported by the auditor.
➢ Observation No. 3:
• The Risk Management committee consisted of 9 directors, out of which the number of
independent directors is the majority, but it was less than two thirds of the total strength:
As per Regulation 21 of SEBI (LODR) Regulations, only in case of a listed entity having outstanding
SR equity shares, at least two thirds of Risk Management Committee shall comprise of
independent directors. In the given case, ABC Ltd. does not have outstanding SR equity shares.
Accordingly, this observation need not be reported by the auditor.
Conclusion
➢ Thus, in the given scenario, only observation 2 will be reported.
SEBI circular on auditor resignation (Applicability of Old Course – (N21M)

QNO
Circular if there is Disqualification) New Course – (N21M,N22M)
434.700
" Mr. Bharat was appointed as statutory auditor of N Limited and O Limited. Both the Companies were
having their base in Mumbai they had recently listed their shares on the Stock Exchange.For the financial
year 2020-21, Mr. Bharat had signed limited review reports for each quarter, till the quarter ended 31st
December 2020 for both the companies. Owing to his personal commitments and increased workload,
he tendered his resignation to N Limited on 30th January2021 and asked the Company to appoint
another auditor to issue audit report for the remaining quarter and the FY 2020-21 as a whole. But
the management of the Company did not accept the same.
Mr. Bharat continued to as act as auditor for O limited. During the 1st week of March 2021, Mrs. D (wife
of Mr. Bharat) had borrowed a sum of Rs. 5.85 lakh from the Company for her personal use. Having come
to know about this, Mr. Bharat immediately informed the management that he had been disqualified to
act as auditor and told them that he won ’t issue audit report for last quarter. But management of the
Company argued that it’s the legal responsibility of Mr. Bharat to do the same.
Whether contention of management of N Limited and O Limited is justified in asking Mr. Bharat to
issue audit report for the last quarter and the FY 2020-21 as a whole, despite his resignation?
Please comment on the above"
Answer In the given scenario, Mr. Bharat was appointed as statutory auditor of two listed entities i.e., N Limited
and O Limited. For the financial year 2020-21, Mr. Bharat had signed limited review reports for first
three quarter i.e., till the quarter ended 31st December 2020 for both the companies. Owing to his

personal commitments and increased workload, he resigned from N Limited and asked the Company
to appoint another auditor to issue audit report for the remaining quarter and audit report for the
FY 2020-21.
Further, Mr. Bharat immediately informed the management of O Limited that he had been
disqualified to act as auditor and told them that he won ’t issue audit report for last quarter as Mrs. D
(wife of Mr. Bharat) had borrowed a sum of ` 5.85 lakh from the Company for her personal use.
As per SEBI LODR Regulations, if the auditor has signed the limited review/ audit report for the first three
quarters of a financial year, then the auditor shall, before such resignation, issue the limited review/ audit
report for the last quarter of such financial year as well as the audit report for such financial year. This
provision will not apply if the auditor is disqualified due to Section 141 of the Companies Act, 2013.
Thus, in the given situation, in view of above conditions to be complied with upon resignation of the
statutory auditor of a listed entity/material subsidiary with respect to limited review / audit report as per
SEBI LODR Regulations, Mr. Bharat is required to issue the audit report for the last quarter and
audit report for the year 2020-21 for N Limited as he has issued audit report for the first three
quarters whereas Mr. Bharat is not required to issue the audit report for remaining quarter and
audit report for the year 2020-21 as a whole for O Limited as he is disqualified under section 141
of Companies Act.
Accordingly, contention of Management of N Limited is correct and tenable for issuing the audit report
for remaining quarter and audit report for financial year 2020-21 however, contention of management
of O Limited is not correct regarding the legal responsibility of Mr. Bharat to issue audit report
for remaining quarter and for the whole year.

QNO Applicability of Consolidated Financial Statement Old Course – (M17M, N18R)
435.000 BHASKAR CNO—CFS.020 New Course – (S21M)
Xcess Ltd., having two subsidiaries but did not have any holding company, is a company whose securities
are not listed on any stock exchange, whether in India or outside India.
The CEO of the Xcess Ltd says that since it is an unlisted company therefore consolidation of financial
statement is not applicable. Comment on the contention of the CEO.
OR
Where a company has one or more subsidiaries, it shall, in addition to its own financial statements
prepare a consolidated financial statement of the company and of all the subsidiaries in the same form
and manner as that of its own. Explain clearly with reference of relevant Sections of the Companies Act,
2013 and The Companies (Accounts) Rules, 2014.
OR
Whether preparation of consolidated financial statements is mandatory? If yes, please elaborate on the
requirements under the statute.
OR
Please elaborate on the situations wherein the requirement related to preparation of consolidated
financial statements may not apply.
▪ Companies (Accounts) Rules, 2014,
➢ Section 129(3) of the Companies Act, 2013, :
Where a company has one or more subsidiaries, including associate company and joint
venture, it shall, in addition to its own financial statements prepare a consolidated financial
statement of the company and of all the subsidiaries in the same form and manner as that of
its own.
The consolidated financial statements shall also be approved by the Board of Directors before
they are signed on behalf of the Board, along with its standalone financial statements and
shall also be laid before the annual general meeting of the company along with the laying of
its standalone financial statement.
The company shall also attach along with its financial statement, a separate statement
containing the salient features of the financial statement of its subsidiary(ies) in Form AOC-1.
➢ Section 129(4) of the Companies Act, 2013,provides that:
The provisions applicable to the preparation, adoption and audit of the financial statements
of a holding company shall, mutatis mutandis, also apply to it’s the consolidated financial
statements.
➢ According to the Companies (Accounts) Rules, 2014,
The consolidation of financial statements of the company shall be made in accordance with
the provisions of Schedule III to the Act and the applicable accounting standards.
However, a company which is not required to prepare consolidated financial statements
under the Accounting Standards, it shall be sufficient if the company complies with provisions
of consolidated financial statements provided in Schedule III of the Act [refer Appendix given
at the end of Chapter 5 for Schedule III].
➢ Exemption:
However, the requirement related to preparation of consolidated financial statements shall not
apply to a company if it meets the following conditions:
it is a wholly owned subsidiary, or is a partially-owned subsidiary of another company and all
its other members, including those not otherwise entitled to vote, having been intimated in
writing and for which the proof of delivery of such intimation is available with the company,

do not object to the company not presenting consolidated financial statements;
it is a company whose securities are not listed or are not in the process of listing on any stock
exchange, whether in India or outside India; and
Its ultimate or any intermediate holding company files consolidated financial statements with
the Registrar which is in compliance with the applicable Accounting Standards. Thus, all the
three above-mentioned conditions need to be complied for getting exemption from
preparation of consolidated financial statements.
➢ In the given case, Xcess Ltd. is itself a holding company of two subsidiaries i.e. not satisfying the
condition of being wholly/partially owned subsidiary.
➢ Therefore, contention of the CEO of the company is not tenable and the company needs to
prepare consolidated financial statements.
Temporary Holding ( AS & IND AS - Old Course – (M19E, N19E)

QNO
Combined) New Course – (S21M)
436.000
BHASKAR CNO—CFS.020
R Ltd. owns 51% voting power in S Ltd. It however, holds and discloses all the shares as “Stock-in-trade”
in its financial statements since 'the shares are held exclusively with a view to their subsequent disposal
in the near future. R Ltd. represents that while preparing Consolidated Financial Statements, S Ltd. can
be excluded from the consolidation. As the Statutory Auditor of R Ltd, how would you deal when the
consolidated financial statements are to be drawn up in compliance with Ind AS?
▪ Accounting Standard 21
▪ IND-AS 110
➢ Companies Act, 2013
Section 129(3) of the Companies Act ,2013
venture, it shall, in addition to its own financial statements prepare a consolidated
financial statement of the company and of all the subsidiaries in the same form and
manner as that of its own.
Companies (Accounts) Rules, 2014,
The consolidation of financial statements of the company shall be made in accordance
with the provisions of Schedule III to the Act and the applicable accounting standards.
under the Accounting Standards, it shall be sufficient if the company complies with
provisions on consolidated financial statements provided in Schedule III of the Act
➢ Accounting Standard
Accounting Standard 21 “Consolidated Financial Statements”, states that

Accounting Standard 21 “Consolidated Financial Statements”, states that a subsidiary
should be excluded from consolidation when control is intended to be temporary because
the shares are acquired and held exclusively with a view to its subsequent disposal in the
near future.
Control to be considered Temporary& AS 13
Where an enterprise owns majority of voting power by virtue of ownership of the shares
of another enterprise and all the shares are acquired & held exclusively with a view to
their subsequent disposal in the near future, the control by the first mentioned enterprise
would be considered temporary and the investments in such subsidiaries should be
accounted for in accordance with AS 13 “Accounting for Investments”.

Certain things that auditor should verify
In the case of an entity which is excluded from consolidation on the ground that the
relationship of parent with the other entity as subsidiary is temporary, the auditor should
verify that
• the intention of the parent, to dispose the subsidiary, in the near future, existed
at the time of acquisition of the subsidiary.
• The auditor should also verify that the reasons for exclusion are given in the
consolidated financial statements.
As per Ind AS 110 “Consolidated Financial Statements”, states
There is no such exemption for ‘temporary control’, or “for operation under severe long-
term funds transfer restrictions” and consolidation is mandatory for Ind AS compliant
financial statement in this case.
➢ In the given case, Parent Ltd. has acquired 51% shares of Child Ltd. during the year ending
31.03.2016 and sold 20% shares during the year 2016-17. Parent Ltd. did not consolidate the
financial statements of Child Ltd. for the year ending 31.03.2016 and 31.03.2017.
➢ The intention of Parent Ltd. is quite clear that the control in Child Ltd. is temporary as the former
company disposed off the acquired shares in the next year of its purchase.
AS 21 “Consolidated Financial Statements”
• Therefore, Parent Ltd. Is not required to prepare consolidated financial statement
as per AS 21
• However, for the compliance of provisions related to consolidation of financial
statements given under section 129(3) of the Companies Act, 2013, Parent Ltd. is
required to made disclosures in the financial statements as per the provisions
provided in Schedule III to the Companies Act’ 2013.
Ind AS 110 “Consolidated Financial Statements”
• However, if the Parent Ltd. is required to prepare its financial statements under
Ind AS, it shall have to prepare Consolidated Financial Statements in accordance
with Ind AS 110 as exemption for ‘temporary control’, or “for operation under
severe long -term funds transfer restrictions” is not available under Ind AS 110.
• Paragraph 20 of Ind AS 110 states that “Consolidation of an investee shall begin
from the date the investor obtains control of the investee and cease when the
investor loses control of the investee”.
Author’s Note
• Refer author’s note of QNO 436.300.
QNO Temporary Holding (AS) Old Course – (M6E, M8E, M15E, M15E, P17M,)
436.100 BHASKAR CNO—CFS.020 New Course – (S17M, N18R, M18M, S21M)
R Ltd owns 51% voting power in S Ltd It however, holds and discloses all the shares as Stock-in-trade in
its accounts The shares are held exclusively with a view to their subsequent disposal in the near future R
Ltd represents that while preparing Consolidated Financial Statements, S Ltd can be excluded from the
consolidation As a Statutory Auditor, how would you deal?
OR
Moon Ltd. acquired 51% shares of Star Ltd. during the year ending 31-3-2017. During the financial year
2017-18 the 20% shares of Star Ltd. were sold by Moon Ltd. Moon Ltd. while preparing the financial
statements for the year ending 31-3-2017 and 31-3-2018 did not consider the financial statements of Star
Ltd. for consolidation. As a statutory auditor how would you deal with it?
OR
Ajanta Ltd. owns 51% voting power in Alora Ltd. It discloses all the shares as "Stock-in-trade" in its
accounts with a view to their subsequent disposal in the near future. Ajanta Ltd. represents that while
preparing Consolidated Financial Statements, Alora Ltd. can be excluded from the consolidation. As a
Statutory Auditor, how would you deal?

➢ Companies Act, 2013
Section 129(3) of the Companies Act ,2013
venture, it shall, in addition to its own financial statements prepare a consolidated
financial statement of the company and of all the subsidiaries in the same form and
manner as that of its own.
Companies (Accounts) Rules, 2014,
The consolidation of financial statements of the company shall be made in accordance
with the provisions of Schedule III to the Act and the applicable accounting standards.
under the Accounting Standards, it shall be sufficient if the company complies with
provisions on consolidated financial statements provided in Schedule III of the Act
➢ Accounting Standard
Accounting Standard 21 “Consolidated Financial Statements”, states that

Accounting Standard 21 “Consolidated Financial Statements”, states that a subsidiary
should be excluded from consolidation when control is intended to be temporary because
the shares are acquired and held exclusively with a view to its subsequent disposal in the
near future.
Control to be considered Temporary & AS 13
Where an enterprise owns majority of voting power by virtue of ownership of the shares
of another enterprise and all the shares are acquired & held exclusively with a view to
their subsequent disposal in the near future, the control by the first mentioned enterprise
would be considered temporary and the investments in such subsidiaries should be
accounted for in accordance with AS 13 “Accounting for Investments”.
Certain things that auditor should verify
In the case of an entity which is excluded from consolidation on the ground that the
relationship of parent with the other entity as subsidiary is temporary, the auditor should
verify that
• the intention of the parent, to dispose the subsidiary, in the near future, existed
at the time of acquisition of the subsidiary.
• The auditor should also verify that the reasons for exclusion are given in the
consolidated financial statements.
➢ The intention of R Ltd. is quite clear that the control in S ltd is temporary as shares are held
exclusively with a view of subsequent disposal in the near future
➢ Therefore, R Ltd. Is not required to prepare consolidated financial statement as per AS 21.
➢ However, for the compliance of provisions related to consolidation of financial statements given
under section 129(3) of the Companies Act, 2013, R Ltd. is required to made disclosures in the
financial statements as per the provisions provided in Schedule III to the Companies Act’ 2013.
Author’s Note
• Refer author’s note of QNO 436.300.
QNO Temporary Holding (Investment Company) New Course – (N18E, S21M, N21E,N22R)
436.300 BHASKAR CNO—CFS.020
H its Financial Statements in accordance with Ind AS. The Company obtains funds from various investors
and commits its performance for fair return and capital appreciation to its investors. During the year
under audit, it had been observed that the Company had invested 25 % in SI Ltd., 50% in S2 Ltd. and 60%

in S3 Ltd. of the respective share capitals of the Investee Companies. When checking the investment
schedule of the Company, an issue cropped as to whether there would arise any need X to consolidate
accounts of any such investee companies with those of H Limited in accordance with section 129(3) of
the Companies Act, 2013 which contains no exclusion from consolidation. Analyse the issues involved
and give your opinion.
OR
"Jambu & Sudharma Investments Ltd. is a company having paid up share capital of ` 1 crore, it has a
subsidiary, Investors Fund Management Ltd. Major business of Jambu & Sudharma Investments Ltd. is to
pool money from investors on a collective basis and invest this money in various funds. This company
pooled ` 12 crore from a number of clients, which represent the Company's shareholders. While auditing
books of accounts of Jambu & Sudharma Investments Ltd. CA Vardhman observed that whole amount of
` 12 crore pooled has been invested in shares and debentures of various companies and profit earned
due to appreciation of the prices of these shares has been distributed to various shareholders of the
company. Performance of all of its investments is measured on fair value basis. Now, CA Vardhman
raised an issue while auditing financial statements of Jambu & Sudharma Investments Ltd. whether the
consolidated financial statements are required as per Section 129(3) of the Companies Act, 2013?
Analyse the above issue and give your opinion."
▪ Ind AS 110‘Consolidated Financial Statements’
▪ Companies (Accounts) Rules, 2014
Where a company has one or more subsidiaries, including associate company and joint venture, it
shall, in addition to its own financial statements prepare a consolidated financial statement of the
company and of all the subsidiaries in the same form and manner as that of its own.
➢ Companies (Accounts) Rules, 2014,
The consolidation of financial statements of the company shall be made in accordance with the
provisions of Schedule III to the Act and the applicable accounting standards. However, a company
which is not required to prepare consolidated financial statements under the Accounting
Standards, it shall be sufficient if the company complies with provisions on consolidated financial
statements provided in Schedule III of the Act.
➢ Ind AS 110‘Consolidated Financial Statements’
However, an investment entity need not present consolidated financial statements if it is required,
in accordance with Ind AS 110‘Consolidated Financial Statements’, to measure all of its subsidiaries
at fair value through profit or loss. A parent shall determine whether it is an investment entity.
An investment entity is an entity that
obtains funds from one or more investors for the purpose of providing those investor(s)
with investment management services;
commits to its investor(s) that its business purpose is to invest funds solely for returns
from capital appreciation, investment income, or both; and
measures and evaluates the performance of substantially all of its investments on a fair
value basis.
➢ In the given case, H Limited is an investment company preparing its financial statements in
accordance with Ind AS and the company had invested 25% in SI Ltd., 50% in S2 Ltd. and 60% in S3
Ltd. of the respective share capitals of the investee companies.
➢ In view of provisions discussed in Ind AS 110, the Company is not required to prepare consolidated
financial statements however, for the compliance of Companies (Accounts) Rules, 2014, it shall be
sufficient if the company complies with provisions on consolidated financial statements provided
in Schedule III of the Act.
Thus, it can be concluded that ultimate authority on consolidation is AS / Ind AS as prescribed by
law and if they give some exemption it should be followed. If out of exemption some subsidiaries
are not consolidated, then list should be disclosed in notes to accounts with reason.

Author’s Note
1.
#controversy
This answer originally when provided by ICAI in suggested of NOV 18 (New) was not correct but
later on Board of Studies changed the answer after discussion with the author.
2. AS-21 , gives two exemption from consolidation.
(a) Temporary Holding
(b) Restriction on repartrition of funds
But IND-AS 110, does not gives above two exemptions.So consolidation will be required as per IND-AS
110, even in above two points (a) & (b) are applicable.
IND-AS 110 gives exemptions in folowing cases
(i) Investment entities
(ii) Intermediary Subsidiaries(provided all conditions are satisfied)
(iii) Employee benefit plans covered under IND-AS 19
If the question is silent about whether the answer should be as per AS or IND AS ,it is advisable that answer
should be provided per both .
3. The answer provided above is with reference to Investment company, for which exempotion given
under Ind AS.
QNO Control Over Composition of Board Old Course – (M15E, P17M, N17R, M21M)
437.000 UNIQUE New Course – (S17M, S21M, M21M)
ALFA Ltd. holds the ownership of 10% of voting power and control over the composition of Board of
Directors of GAMA Ltd. While planning the statutory audit of ALFA Ltd., what factors would be
considered by you for audit of financial statements?
Answer ➢ Facts of the Case
In this case, A Ltd. holds only 10 percent of the voting power and control over the composition of
the Board of Directors of B Ltd. In such a case, A Ltd. would be considered as a parent of B Ltd.
and, therefore, it would consolidate B Ltd. in the consolidated financial statements as subsidiary
➢ Audit Procedure
(Obtain Understanding)- The auditor should make plans, among other things, for the
understanding of accounting policies of the parent, subsidiaries, associates and joint
ventures and determining and programming the nature, timing, and extent of the audit
procedures to be performed etc.
(Control overboard)- The auditor should verify whether the parent controls the
composition of the Board of Directors or corresponding governing body of any entity.
There would be various means by which such kind of control can be obtained.
In this regard, the auditor may verify the Board’s minutes, shareholder agreements
entered into by the parent, agreements with the entities to which the parent might have
provided any technology or know how, enforcement of statute, as the case may be, etc.
(Adjustments)-The auditor should verify that the adjustments warranted by the relevant
accounting standards have been made wherever required and have been properly
authorized by the management of the parent. The preparation of consolidated financial
statements gives rise to permanent consolidation adjustments and current period
consolidation adjustments.
AS 18-Further, the duties of an auditor with regard to reporting of transactions with
related parties as required by Accounting Standard 18 are given in SA 550 on Related
Parties.
SA 550-As per SA 550 on, “Related Parties”, the auditor should review information
provided by the management of the entity identifying the names of all known related
parties. A person or other entity that has control or significant influence, directly or
indirectly through one or more intermediaries, over the reporting entity are considered as

Related Party.
Framing Opinion- In forming an opinion on the financial statements the auditor shall
evaluate whether the identified related party relationships and transactions have been
appropriately accounted for and disclosed in accordance with the applicable financial
reporting framework and whether the effects of the related party relationships and
transactions prevent the financial statements from achieving true and fair presentation
(for fair presentation frameworks); or cause the financial statements to be misleading (for
compliance frameworks).
Author’s Note
• Is 10% shareholding minimum for control over the composition of Board?
o No, there is no 10% rule or criteria. Point is we can control BOD if we are able to appoint
or nominate majority of directors either because of law or contracts, even if shareholding
is below 50% and thereby control whole company. This question specifies 10% holding but
it is silent on how ALFA ltd controls BOD of GAMMA.
Permanent Consolidation Old Course – (M11R,M13E,M14R,N15E,M16R,N16M, P17M)

QNO
Adjustment New Course – (S17M, S21M)
438.000
BHASKAR CNO—CFS.080
Write a short note on - Permanent Consolidated Adjustments
Answer ➢ Definition
Permanent consolidation adjustments are those adjustments that are made only on the first
occasion or subsequent occasions in which there is a change in the shareholding of a particular
entity which is consolidated. Permanent consolidation adjustments are:
Determination of goodwill or capital reserve as per applicable accounting standards.
Determination of amount of equity attributable to minority/ no controlling interests
➢ Pre-acquisition Reserves
The auditor should verify that the above calculations have been made appropriately. The auditor
should pay particular attention to the determination of pre-acquisition reserves of the
components. Date(s) of investment in components assumes importance in this regard. The
auditor should also examine whether the pre-acquisition reserves have been allocated
appropriately between the parent and the minority interests/ non-controlling interests of the
subsidiary. The auditor should also verify the changes that might have taken place in these
permanent consolidation adjustments on account of subsequent acquisition of shares in the
components, disposal of the components in the subsequent years.
➢ Netting off of Goodwill & Capital Reserves
It may happen that while working out the permanent consolidation adjustments, in the case of
one subsidiary, goodwill arises and in the case of another subsidiary a capital reserve arises. The
parent may choose to net off these amounts to disclose a single amount in the consolidated
balance sheet where permitted by the applicable financial reporting framework. In such cases, the
auditor should verify that the gross amounts of goodwill and capital reserves arising on
acquisition of various subsidiaries have been disclosed in the notes to the consolidated financial
statements to reflect the excess/shortage over the parents’ portion of the subsidiary’s equity
QNO Responsibility of Parent Old Course – (N12E, M16M, P17M, N17M, N18M, N21R)
440.000 BHASKAR CNO—CFS.040 New Course – (S17M, S21M, N21R)
Briefly explain the responsibility of holding company for preparation of Consolidated Financial
Statements.
Answer ➢ The responsibility for the preparation and presentation of consolidated financial statements,
among other things, is that of the management of the parent. This includes:
identifying components, and
obtaining accurate and complete financial information from components; and
GAAP conversion, where applicable.
harmonization of accounting policies and accounting framework; and.
including the financial information of the components to be included in the consolidated
financial statements;
making appropriate consolidation adjustments.
where appropriate, identifying reportable segments for segmental reporting;
identifying related parties and related party transactions for reporting;
➢ Instructions to Component
Apart from the above, the parent ordinarily issues instructions to the management of the
component specifying the parent’s requirements relating to financial information of the
components to be included in the consolidated financial statements. The instructions ordinarily
cover the accounting policies to be applied, statutory and other disclosure requirements applicable
to the parent, including the identification of and reporting on reportable segments, and related
parties and related party transactions, and a reporting timetable.
QNO Dealing with Modifications in Audit Report of Subsidiary New Course- (N22M)
442.500 BHASKAR CNO—CFS.160
T Ltd. is holding 68% share of B Ltd, 51% share of C Ltd. RS & Co. Chartered Accountants are the statutory
auditors of T Ltd. MN & Co. Chartered Accountants are the statutory auditors of B Ltd. and C Ltd. MN &
Co have qualified the report of B Ltd. due to material discrepancies in standalone financial statement.
While framing the opinion on Consolidated Financial Statement of T Ltd., RS & Co. (Principal Auditor)
have ignored the qualification of B Ltd. considering it not material at Group Level. Comment.
Answer In carrying out the audit of the standalone financial statements, the computation of materiality for the
purpose of issuing an opinion on the standalone financial statements of each component would be done
component-wise on a standalone basis. However, with regard to determination of materiality during the
audit of consolidated financial statements (CFS), the auditor should consider the following:
• The auditor is required to compute the materiality for the group as a whole. This materiality should be
used to assess the appropriateness of the consolidation adjustments (i.e. permanent consolidation
adjustments and current period consolidation adjustments)
• The parent auditor can also use the materiality computed on the group level to determine whether the
component's financial statements are material to the group to determine whether they should scope in
additional components, and consider using the work of other auditors as applicable.
• The principal auditor also computes materiality for each component and communicates to the
component auditor, if he believes is required for true and fair view on CFS.
• The principal auditor also obtains certain confirmations from component auditor like independence, code
of ethics, certain information required for consolidation and disclosure requirements etc.
However, while considering the observations (for instance modification and /or emphasis of matter in
accordance with SA 705/706) of the component auditor in his report on the standalone financial
statements, the principles of SA 600 needs to be considered., The parent auditor should comply with the
requirements of SA 600, “Using the Work of Another Auditor”. Therefore, the concept of materiality would
be considered while considering the observations of the component auditor. Hence RS & Co. cannot ignore
the qualification of B Ltd. while framing the opinion on consolidated financial statements of T Ltd.
QNO Reporting Old Course – (M17R, M17E, M18R, M20M)

443.000 BHASKAR CNO—CFS.120 New Course – (M18R, N18M, M18M, M20M, S21M, N21M, M22R)
You are appointed as an auditor of Nawab Limited, a listed company which is a main supplier to the UK
building and construction market. With a turnover of 2.9 billion, the company operates through 11
business units and has nearly 180 branches across the countries. As an auditor, how will you draft the
report in case:
(a) When the Parent’s Auditor is also the Auditor of all its Components?
(b) When the Parent’s Auditor is not the Auditor of all its Components?
(c) When the Component(s) Auditor Reports on Financial Statements under an Accounting
Framework Different than that of the Parent?

(d) When the Component(s) Auditor Reports under an Auditing Framework Different than that of
the Parent?
(e) Where the financial statements of one or more components is not audited
OR
C Ltd is holding 55% shares of D Ltd M/s AB & Associates are statutory auditors of C Ltd whereas for D Ltd
there is another firm appointed as statutory auditors What are the reporting responsibilities of M/s AB &
Associates for audit of consolidated financial statements?
Answer (a) Parents Auditor While drafting the audit report, the auditor should report whether Principles /
= Auditor of all procedures for preparation / presentation is as per accounting standard.
Components
In case of any departure or deviation, the auditor should make adequate
disclosure in the audit report so that users of the consolidated financial
statements are aware of such deviation.
Auditor should issue an audit report expressing opinion whether the -consolidated
financial statements, (at b/s date)
-consolidated profit and loss statement (during the year)
-cash flow (if prepared)
give a true and fair view of the state of affairs of the Group.
(b) Parents The auditor of the CFS should consider the requirement of SA 600.
Auditor not As per SA 706-
Same as if the auditor considers it necessary to make reference to the audit of the other
component auditors i.e. considers it material, the auditor’s report on the CFS should disclose
auditor clearly the magnitude of the portion of the financial statements audited by the
other auditor(s).
This may be done by stating in aggregate:

Rs or % of total assets, revenues and cash flows of components included in the CFS
not audited by the parent’s auditor.
Above should be presented before giving effect to permanent and current period
consolidation adjustments.
Reference in audit report of CFS that part of the audit of the group was made by
other auditor(s) is not to be construed as a qualification of the opinion but rather
as an indication of the divided responsibility between the auditors of the parent
and its components.
(c) FRF of The parent may have components located outside India applying an accounting
component is framework (GAAP) that is different than that of the parent in preparing its FST.
different from
When a component’s FST are prepared under an accounting framework that is
FRF of Parent
different than that of the framework used by the parent in preparing group’s CFS ,
the parent’s management perform a conversion of the components’ audited FST
from the framework used by the component to the framework under which the
CFS are prepared.
The conversion adjustments are audited by the principal auditor to ensure that the
financial information of the component(s) is suitable and appropriate for the
purposes of consolidation.
A component may alternatively prepare financial statements on the basis of the
parent’s accounting policies, as outlined in the group accounting manual.
Group accounting manual would normally contain all accounting policies, including
relevant disclosure requirements, which are consistent with the requirements of
the financial reporting framework under which the group’s consolidated financial
statements are prepared. The local component auditor can then audit and issue an
audit report on the components financial statements prepared in accordance with
“group accounting policies”.
When applying this approach of, the principal/parent auditors should perform
procedures necessary to determine compliance of the group accounting policies

with the GAAP applicable to the parent’s financial statements.
This ensures that the information will be directly usable and relevant for the
preparation of CFS by the parent entity, eliminating the need for auditing by the
auditor, the differences between the basis used for the component’s financial
statements and that of the consolidated financial statements.
The Principal auditor can then decide whether or not to rely on the components’
audit report and make reference to it in the auditor’s report on the consolidated
(d) Auditing Audits of FST, including CFS, are performed under auditing standards generally
Framework accepted in India (“Indian GAAS”). In order to maintain consistency of the auditing
used by framework and to enable the parent auditor to rely and refer to the other
component auditor’s audit report in their audit report on the CFS, the components’ FST should
auditor is also be audited under a framework that corresponds to Indian GAAS.
different from
parent’s
auditor
(e) Financial Where the FST of one or more components continue to remain unaudited, the
Statements of auditor reporting on the CFS should consider unaudited components in evaluating
component not a possible modification to his report on the CFS.
audited.
The auditor should evaluate both qualitative and quantitative factors on the
possible effect of such amounts remaining unaudited when reporting on the
consolidated financial statements using the guidance provided in SA 705,
“Modifications to the Opinion in the Independent Auditor’s Report”.
QNO (Losses in Subsidiary) AS 21- Old Course – (M09R, M13E, M16M, P17M)
444.000 Unique New Course – (S17M, S21M)
K Ltd. had 5 subsidiaries as at 31st March 2015 and the investments in-subsidiaries are considered as
long term and valued at cost. Two of the subsidiaries net worth eroded as at 31st March 15 and the
prospects of their recovery are very bleak and the other three subsidiaries are doing exceptionally well.
The company did not provide for the decline in the value of investments in two subsidiaries because the
overall investment portfolio in subsidiaries did not suffer any decline' as the other three subsidiaries are
doing exceptionally well. Comment.
▪ AS-13 - Accounting for Investments
Part II -- Requirements of Relevant Standards & law Consolidated
➢ As per AS-13 “Accounting for Investments” issued by the Institute of Chartered Accountants of
India, long-term investments are usually of individual importance to the investing enterprise. The
carrying amount of long-term investments is therefore determined on an individual investment
basis. Investments classified as long-term investments should be carried in the financial
statements at cost. However, provision for diminution shall be made to recognize a decline, other
than temporary, in the value of the investments, such reduction being determined and made for
each investment individually.
➢ K Ltd. had 5 subsidiaries as at 31st March 2015 and the investments in-subsidiaries are considered
as long term and valued at cost. Two of the subsidiaries net worth eroded as at 31st March 15 and
the prospects of their recovery are very bleak and the other three subsidiaries are doing
exceptionally well. The company did not provide for the decline in the value of investments in two
subsidiaries because the overall investment portfolio in subsidiaries did not suffer any decline' as
the other three subsidiaries are doing exceptionally well. Comment
➢ Keeping in view the above, K Ltd should provide for the decline in the value of investments in two
subsidiaries despite the fact that the overall investment portfolio in subsidiaries did not suffer any
decline.

QNO Peculiarities which may necessitate special audit consideration- New Course – (M19E, S21M)
447.001 BHASKAR CNO—AOB.020
Banks, because of certain characteristics, are distinguished from other commercial enterprises and hence
it needs special audit consideration. As an auditor of a bank, specify the various peculiarities which may
necessitate special audit consideration to be taken care by you.
Answer ➢ Reasons
Shortcut: - Special Audit Considerations because of NewDONS in banking sector.
• the continuing development of New products and services and banking practices which may not
be matched by the concurrent development of accounting principles and auditing practices.
(E.g., Cash Backs, Reward Points with Various Conditions Attached)
• the extensive Dependence on IT to process transactions.
(E.g., Credit Cards, Debit Cards, Online Payments)
• the scale of banking Operations and the resultant significant exposures which can arise within
short period of time.
(E.g., Large number of branches, customers & transactions)
• the particular Nature of risks associated with the transactions undertaken.

(E.g., Heavy Cash Balances, Cash Movements, Assets in Lockers, Investments, Impact of Interest
Rates)
• the effect of the Statutory and regulatory requirements.
(E.g., Capital Adequacy Ratio, NPA Norms etc)
➢ Dependence on IT
Evolution of technology and providing services through Net Banking and Mobiles has exposed banks
to huge operational and financial risk. In today’s environment, the banks use different applications to
carry out different transactions which may include data flow from one application to other
application;(E.g., Customer went on vacation, duplicate sim was issued & bank account robbed)
➢ Effect of above factors
The auditor should consider the effect of the above factors in designing his audit approach. It is
imperative for Branch Auditor and SCAs to have detailed knowledge of the products offered and risks
associated with them, and appropriately address them in their audit plan to the extent they give rise
to the risk of material misstatements in the financial statements
Investment (Portfolio Management Services- Old Course – (N20R, M21M)

QNO
Separate Records) New Course – (N20R)
447.005
BHASKAR CNO—AOB.025
ABN Bank was engaged in the business of providing Portfolio Management Services to its customers, for
which it took prior approval from RBI. Your firm has been appointed as the statutory auditors of the
Bank’s financial statements for the year2019-20. Your senior has instructed you to verify the transactions
of Portfolio Management Services (PMS). While verifying the transactions you noticed that the bank has
not maintained separate record for PMS transactions from the Bank’s own investments. As a statutory
auditor what methodology will be adopted by you for verification of PMS transactions?
▪ RBI guidelines
➢ Separation of Investment Functions:
The auditor needs to examine whether the bank, as required by the RBI, is maintaining separate
www.auditguru.in PARAM 9.1 | P a g e `

accounts for the investments made by it on their own Investment Account, PMS clients’ account,
and on behalf of other Constituents (including brokers). As per the RBI guidelines, banks are
required to get their investments under PMS separately audited by external auditors.
➢ Thus, in the instant case, ABN Bank is required to prepare separate records for PMS and as per RBI
guidelines PMS investments need to be audited separately by the external auditors and the
auditors are required to give a certificate separately for the same.
➢ So, in the above case the auditor should not verify the PMS transactions and advise the bank to
segregate the PMS transactions from its own investments and provide the certificate of external
auditor as described above. In case ABN Bank does not provide the same the auditor may report
accordingly.
Bank unable to check the work and records being New Course – (S21M, N21M)
QNO
small branch with shortage of manpower -
447.006
Unique
You are auditing a small bank branch with staff strength of the manager, cashier and three other staff S1
,S2 and S3. Among allocation of work for other areas, S1 who is a peon also opens all the mail and
forwards it to the concerned person. He does not have a signature book so as to check the signatures on
important communications. S2 has possession of all bank forms (e.g., Cheque books, demand draft/pay
order books, travellers’ cheques, foreign currency cards etc.). He maintains a record meticulously which
you have test checked also. However, no one among staff regularly checks that. You are informed that
being a small branch with shortage of manpower, it is not possible to always check the work and
records. Give your comments.
➢ Banks are required to implement and maintain a system of internal controls for mitigating risks,
maintain good governance and to meet the regulatory requirements.
➢ Given below are examples of internal controls that are violated in the given situation:
• In the instant case, S1 who is a peon opens all the mail and forwards it to the concerned
person.
• Further, he does not have a signature book so as to check the signatures on important
communications are not in accordance with implementation and maintenance of general
internal control. As the mail should be opened by a responsible officer. Signatures on all
the letters and advices received from other branches of the bank or its correspondence
should be checked by an officer with the signature book.
• All bank forms (e.g. Cheque books, demand draft/pay order books, travelers’ cheques,
foreign currency cards etc.) should be kept in the possession of an officer, and another
responsible officer should verify the issuance and stock of such stationery.
• In the given case, S2 has possession of all bank forms (e.g. cheque books, demand draft/pay
order books, travelers’ cheques, foreign currency cards etc.). He maintains a record
meticulously which were also verified on test check basis.
➢ Further, contention of bank that being a small branch with shortage of manpower they are not
able to check the work and records on regular basis, is not tenable as such lapses in internal
control pose risk of fraud.
➢ The auditor should report the same in his report accordingly.
QNO (Consortium)NPA Old Course – (N11R, N12M, M13R, S17M, P17M, N17R)
451.000 BHASKAR CNO—AOB.300 New Course – (M18M, S21M)
Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The Bank follows
financial year as accounting year. The bank is a consortium member of Cash Credit Facilities of Rs 50
crores to X Ltd Bank's own share is Rs 10 crores only. During the last two quarters against a debit of Rs
1.75 crores towards interest the credits in X Ltd's account are to the tune of Rs 1.25 crores only. Based on
the certificate of lead bank, the bank has classified the account of X Ltd as performing. Advise your views
on the issue which were brought to your notice by your Audit Manager.
OR
The bank is a consortium member of Cash Credit Facilities of Rs 50 crores to X Ltd. Bank's own share is Rs

10 crores only. During the last two quarters against a debit of Rs 1.75 crores towards interest the credits
in X Ltd.’s account are to the tune of Rs 1.25 crores only. Based on the certificate of lead bank, the bank
has classified the account of X Ltd as performing.
Answer Part I -- Relevant Laws
▪ As per Classification Norms Related to NPAs
Part II -- Requirements of Relevant Laws
➢ Sometimes, several banks form a group (the 'consortium') under the leadership of a 'lead bank'
to make advance to a large customer on same conditions and security with proportionate rights.
In such cases, each bank may classify the advance given by it according to its own experience of
recovery and other factors.
➢ The bank is a consortium member of cash credit facilities of Rs 50 crores to X Ltd. Bank's own share
is Rs 10 crores only. During the last two quarters against a debit of Rs 1.75 crores towards interest,
the credits in X Ltd.’s account are to the tune of Rs 1.25 crores only.
➢ Since in the last two quarters, the amount remains outstanding and, thus, interest amount should
be reversed. This is despite the certificate of lead bank to classify that the account as performing.
Accordingly, the amount should be shown as non-performing asset.
Author’s Note
• The conclusion part of the answer says, “Interest Should be reversed”. The reason why interest
should be reversed here and the logic behind it.
o In case of consortium every bank has to see at its own status of recovery, so as to determine
whether loan is NPA or not. Even if lead bank is getting money that is not going to affect our
status. Our status depends on our recovery and not what is happening with the lead bank or
other banks. Here in consortium every bank has to see their own recovery for the purpose of
NPA. If bank not getting money it is a NPA and if it is NPA then interest should be reversed.
QNO NPA (Multiple Cases) Old Course – (N21R)

454.500 BHASKAR CNO—AOB.300 New Course – (N21R)
Gupta & Co. has been appointed as a statutory auditor of TCB Bank Ltd., a private sector bank, registered
with RBI. Mr. Kaival Gupta, the engagement partner, while performing the audit as per the checklist,
noted down the following points, which would be part of the audit queries, as tabulated below:
Sr. No. Queries

1 Interest on State Government Guaranteed advance has been taken to income even though
such advance has remained overdue for more than 90 days.
2 There is an account for which an ad hoc limit has not been reviewed for 180 days from the
date of such ad hoc sanction and such account has been treated as a performing asset in the
books.
3 One of the NPAs was sold for a value higher than the net book value. Profit was not
recognized but the excess provision in respect of the same has been reversed.
4 In case of one of the accounts, an additional temporary limit has been sanctioned for 25% of
the existing limit and for 120 days tenure.
5 On verification of outstanding forward exchange contracts, the ‘net position’ in respect
of one of the foreign currencies was not squared and was uncovered by a substantial
amount.
You are required to provide the reasons due to which such queries would have been raised by Mr. Kaival
and describe the actions that may be taken by the person responsible on behalf of TCB Bank Ltd. for
solving such queries.
Answer Sr. No. Reason for such Query Action that may be taken in response to the
query
1 A State Government Guaranteed advance Interest income recognized on such advance
has to be treated as NPA even if it remains would be reversed and would be taken to
overdue for more than 90 days and in case income only when it is realized.
of NPA, for the purpose of income
recognition, interest on such advance should
not be taken to income unless interest is
realized.
2 Accounts for which an ad hoc limit has not It’s treatment in the books would be changed
been reviewed for 180 days from the date of from performing asset to a non-performing
such ad hoc sanction, should be considered asset from the date when such change in the
as NPA. treatment was required
3 In case of sale of NPA, where the sale is for a The entry for reversal of the excess provision
value higher than the NBV, the auditor is would be cancelled in the books and such
required to ensure that no profit is excess provision would be retained to meet
recognized, and the excess provision has not the shortfall/ loss that may arise because of
been reversed but retained to meet the the sale of other non-performing financial
shortfall/ loss that may arise because of the assets.
sale of other nonperforming financial assets.
4 Additional temporary limit may be The terms of additional temporary limit in
sanctioned, for a maximum of 20% of the case of such account would be revised to 20%
existing limit and 90 days maximum tenure. of the existing limit and for 90 days maximum
tenure.
5 Net position in respect of each of the foreign The net “position” of the branch in relation to
currencies should be generally squared and each foreign currency should be squared off
should not be uncovered by a substantial and get covered by a substantial amount.
amount.
Audit Procedures to check Compliance of Audit norms New Course – (N21M)

QNO
in different situations
454.600
BHASKAR CNO—AOB.300
M/s Aadi & Co., Chartered Accountants, have been allotted the branch audit of a nationalized bank for the
year ended 31st March, 2021. You are part of audit team and have been instructed by your partner to verify
the following areas:
(i) Fulfilment of the criteria prescribed for NPA norms for government guaranteed advance.
(ii) Fulfilment of the criteria prescribed for NPA norms for the advances given for agricultural purposes.
(iii) Drawing power calculation from stock statements in respect of working capital accounts.
(iv) Accounts where regular/ad hoc limits are not reviewed within 180 days from the due date/date of ad
hoc sanction. What may be your areas of concern as regards matters specified above?
Answer Area of Focus Suggested Audit Procedures
Government Guaranteed • If government guaranteed advance becomes NPA, then for the
Advances purpose of income recognition, interest on such advance should not to
be taken to income unless interest is realized. However, for purpose of
asset classification, credit facility backed by Central Government
Guarantee, though overdue, can be treated as NPA only when the
Central Government repudiates its guarantee, when invoked. This
exception is not applicable for State Government
Guaranteed advances, where advance is to be considered NPA if it
remains overdue for more than 90 days.
• In case the bank has not invoked the Central
Government Guarantee though the amount is overdue for long, the
reasoning for the same should be taken and duly reported in LFAR
Agricultural Advances • Ensure that NPA norms have been applied in accordance with the
crop season determined by the State Level Bankers’ Committee in each
State. Depending upon the duration of crops – short term/ long term -
raised by an agriculturist, the NPA norms would also be made applicable
to agricultural term loans availed of by them. Also ensure that these
norms are made applicable to all direct agricultural advances listed in
Master Circular on lending to priority sector.
• In respect of agricultural loans, other than those
Specified in the circular, ensure that identification of NPAs has been
done on the same basis as non agricultural advances

Drawing Power • Ensure that the drawing power is calculated as per the extant
Calculation guidelines (i.e. the Credit Policy of the Bank) formulated by the Board of
Directors of the respective bank and agreed upon by the concerned
statutory
auditors. Special consideration should be given to proper reporting of
sundry creditors for the purposes of calculating drawing power.
• The stock audit should be carried out by the bank for all accounts
having funded exposure of more than
stipulated limit. The report submitted by the stock auditors should be
reviewed during the course of the audit and special focus should be
given to the comments made by the stock auditors on valuation of
security and calculation of drawing power.
The drawing power needs to be calculated carefully in case of working
capital advances to companies engaged in construction business. The
valuation of work in progress
should be ensured in consistent and proper manner. It also needs to be
ensured that mobilization advance being received by the contractors is
reduced while calculating
drawing power.
Limits not reviewed Accounts where regular/ad hoc limits are not reviewed within 180 days
from the due date/date of ad hoc sanction, should be considered as NPA.
Auditors should also ensure that the ad hoc/short reviews are not done on
repetitive basis. In such
cases, auditor can consider the classification of account based on other
parameters and functioning of the account.
QNO NPA Case -- Deficiency in Documents New Course – (N22R)

CA Prachi was conducting statutory audit of branch of a nationalized bank for the year 2021-22. While
reviewing operations and documents/papers of a borrower enjoying overdraft credit facilities of ` 50
crore (availed against security of stocks and book debts), following observations were jotted down by
her: -
(i) The balance in overdraft credit facility as on 31st March,2022 was ` 55.65 crore. The balance in
account exceeded sanctioned limit during the whole month of March 2022.
(ii) As per terms of sanction letter, stock/book debt statements were required to be submitted monthly.
Latest available stock/book debt statement for the month of February, 2022 showed drawing power of `
48.50 crore only. However, stock/book debt statements of previous months showed adequate drawing
power.
(iii) Stock audit of borrower was also conducted during the year by one of empanelled stock auditors of
the bank. Stock audit report dated 31st December,2021 placed on the record showed adequate drawing
power in the account. However, it has commented adversely on the declining turnover of borrower in
year 2021 -22(till the date of stock audit report) as compared to proportionate turnover in preceding
year.
(iv) The renewal of overdraft facilities was due on 20th October,2021. The account was short renewed by
competent authority for a period of 3 months pending submission
of complete papers.
However, borrower has not submitted complete renewal papers till 31st March,2022. There is a request
letter from borrower on record stating that valuation report of a property located at a faraway location
was taking time. The branch has classified the account as ‘Standard Asset’. Considering above, CA Prachi
is in dilemma relating to proper classification of above advance. Guide her.
Answer The borrower was enjoying overdraft credit facilities of ` 50 crore against security of stocks and debts.
Further, though latest available stock statement for the month of February, 2022 showed inadequate
drawing power, there was adequate drawing power available throughout the year. Stock audit report
dated 31.12.2021 also reflected adequate drawing power. Hence, it shows that borrower had adequate
drawing power during the year.
Further, comment on declining sales is of general informative value to management for making credit

decisions.
The fact of over drawings in account during the month of March, 2022 and inadequate drawing power in a
month are in nature of temporary deficiencies and do not require account to be classified as NPA in
accordance with asset classification and provisioning norms of RBI.
RBI instructions lay down that ordinarily credit limits need to be reviewed not later than three months
from the due date. As per Guidance note on Audit of Banks, in case of constraints such as non-availability
of financial statements and other data from the borrowers, the branch should furnish evidence to show
that renewal/ review of credit limits is underway and would be completed soon. In any case, delay beyond
six months is not considered desirable as a general discipline. Hence, an account where the credit limits
have not been reviewed/ renewed within 180 days from the due date will be treated as
NPA.
It would be pertinent to note that the counting of 180 days would be required to be done from the date of
original due date for renewal and not from the date of expiry of short reviews / technical reviews. In the
instant case, the original date of renewal was 20th October, 2021 and period of 180 days has still not
expired as on balance sheet date.
Keeping in view all above factors, CA Prachi should accept classification of account as ‘Standard Asset’
made by branch.
QNO Sale of NPA Old Course – (M15E)

455.000 BHASKAR CNO—AOB.360 New Course – (M18E, N20E, S21M,N22M)
CA K have been doing audit of branch of LUD Bank Ltd. The principal business of the branch is lending
advances to large corporates. Since last one year, many large accounts have become Non-Performing
Asset (NPA) as per guidelines. The Management of the Bank decided to sell one of the NPA account and
consequently one NPA namely DEF Ltd. amounting to Rs. 10.00 Crores was sold to Asset Reconstruction
Company. What audit points CA K should keep in mind while doing audit of this transaction?
OR
During the bank audit AB & Co. a new Chartered Accountant firm, observed the sale/purchase of NPAs.
Please help them by narrating the aspects, relating to sale/purchase of NPAs, to be considered.
OR
In the course of audit of Skip Bank Ltd., you found that the Bank had sold certain of its non-performing
assets. Draft the points of audit check that are very relevant to this area of checking.
Answer ➢ In case of a sale/ purchase of NPAs by the bank, the auditor should examine the policy laid down
by the Board of Directors in this regard relating to procedures, valuation and delegation of powers.
• Sale
In case of sale of an NPA, the auditor should also ensure that:
• only such NPA has been sold which has remained NPA in the books of the bank for at
least 2 years.
• the NPA has been sold at cash basis only.
• the assets have been sold/ purchased “without recourse‟ only.
• subsequent to the sale of the NPA, the bank does not assume any legal, operational or
any other type of risk relating to the sold NPAs.
• on the sale of the NPA, the same has been removed from the books of the account.
• the short fall in the net book value has been charged to the profit and loss account.
• where the sale is for a value higher than the NBV, no profit is recognised, and the excess
provision has not been reversed but retained to meet the shortfall/ loss on account of
sale of other non-performing financial assets.
• Purchase
Similarly, in case of purchase of NPAs, the auditor should verify that:
• the bank has not purchased an NPA which it had originally sold.
• the NPA purchased has been subjected to the provisioning requirements appropriate to
the classification status in the books of the purchasing bank.
• any recovery in respect of an NPA purchased from other banks is first adjusted against

its acquisition cost and only the recovered amount in excess of the acquisition cost has
been recognised as profit.
• for the purpose of capital adequacy, banks have assigned 100% risk weights to the NPAs
purchased from other banks.
QNO (Income, CASE) Advances Old Course – (M13E, P17M, M19M, N19R, M20R, M21M)
458.010 BHASKAR CNO—AOB.300 New Course – (S17M, M18M, N19R, M19M, M20R, S21M, M21M)
In course of audit of Good Samaritan Bank as at 31st March 15 you observed the following:
In a particular account there was no recovery in the past 18 months. The bank has not applied the NPA
norms as well as income recognition norms to this particular account. When queried the bank
management replied that this account was guaranteed by the central government and hence these
norms were not applicable. The bank has not invoked the guarantee. Please respond. Would your
answer be different if the advance is guaranteed by a State Government?
▪ Classification of Government Guaranteed Advances
➢ If a government guaranteed advance becomes NPA, then for the purpose of income recognition,
interest on such advance should not to be taken to income unless interest is realized. However, for
purpose of asset classification, credit facility backed by Central Government Guarantee, though
overdue, can be treated as NPA only when the Central Government repudiates its guarantee,
when invoked.
➢ In the above case, Since the bank has not revoked the guarantee, the question of repudiation does
not arise. Hence the bank is correct to the extent of not applying the NPA norms for provisioning
purpose. But this exemption is not available in respect of income recognition norms. Hence the
income to the extent not recovered should be reversed. The situation would be different if the
advance is guaranteed by State Government because this exception is not applicable for State
Government Guaranteed advances, where advance is to be considered NPA if it remains overdue
for more than 90 days .
➢ In case the bank has not invoked the Central Government Guarantee though the amount is
overdue for long, the reasoning for the same should be taken and duly reported in LFAR.
QNO Investment (Income, Mutual Fund) Old Course – (N11R, N12M, N16R, P17M,)
458.020 BHASKAR CNO—AOB.130 New Course – (S17M, N18R, N18M, S21M)
Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The Bank follows
financial year as accounting year. State your views on the following issues which were brought to your
notice by your Audit Manager:
The bank has recognised on accrual basis income from dividends on securities and Units of Mutual Funds
held by it as at the end of financial year. The dividends on securities and Units of Mutual Funds were
declared after the end of financial year.
▪ RBI Circulars
➢ Interest on bonds and debentures
Banks may book income from Government Securities and bonds and debentures of corporate
bodies on accrual basis, where interest rates on these instruments are pre-determined and
provided interest is serviced regularly and is not in arrears.
➢ Interest Income Guaranteed by Government
Banks may book income on accrual basis on securities of corporate bodies/ public sector
undertakings in respect of which the payment of interest and repayment of principal have been
guaranteed by the Central Government or a State Government, provided interest is serviced
regularly and as such is not in arrears.
➢ Dividend income on shares
Banks may book income from dividend on shares of corporate bodies on accrual basis provided
dividend on the shares has been declared by the corporate body in its Annual General Meeting and
the owner's right to receive payment is established.
➢ Dividend income on mutual funds
Banks may book income from units of mutual funds on cash basis.
➢ The bank has recognised on accrual basis income from dividends on securities and Units of Mutual
Funds held by it as at the end of financial year. The dividends on securities and Units of Mutual
Funds were declared after the end of financial year.
➢ Treatment given by bank is inappropriate, such dividend on mutual fund units
QNO (Audit)Advances Old Course – (N8E, M11R, N12R, N14R, M16R, N16R, P17M, M18E, M19R)
462.000 BHASKAR CNO—AOB.200 New Course – (M19R, S21M)
As the concurrent auditor of Nagpur Main Branch of XYZ Bank Ltd. state the issues which have to be
considered in the audit of advances.
OR
ABC Chartered Accountants have been appointed as concurrent auditors for the branches of Effective
Bank Ltd. for the year 2019-20. You are part of the audit team for Agra branch of the bank and have been
instructed by your senior to verify the advances of the audit period. You are required to guide your
assistant about the areas to be taken care while doing verification during the concurrent audit.
Answer ➢ Audit of Advances of a Bank:
The items to be covered in the current audit of advances of a bank are as follows-
• Ensure that loans and advances are sanctioned properly.
• Verify whether the sanctions are in accordance with the delegated authority.
• Check whether letters of credit issued by the branch are within the delegated power and
ensure that they are genuine trade transactions.
• Verify the instances of exceeding delegate powers have been promptly reported.
• Verify the frequency and geniuses of such exercise of authority beyond to delegated
powers of the concerned officials.
• Ensure that securities and documents have been received and properly
charged/registered.
• Ensure that post disbursement supervision and follow up is proper
• Verify whether there is any misuse of loans and advances and whether there are instances
indicative of diversion of funds.
• Verify the classifications of advances are as per RBI directions.
• Ensure proper follow up of overdue bills of exchange.
• Verify whether the submission of claims to DICGC and ECGC is in time.
• Check bank guarantees issued are properly worked and recorded.
Authors Note
Question w.r.t Audit of Advances, ICS over advances and LFAR report over advances have similar points
So we have created a combined common answer and have arranged it in a logical sequence .
However original text has also been kept. Students can also read that if they want.
For common answer see after QNO 466.000
QNO Advances (LIP) Old Course – (P17M, M21M)

470.000 UNIQUE New Course – (M21M)
The bank’s advance portfolio comprised of significant loans against Life Insurance Policies. Write suitable
audit program to verify these advances.
Answer ➢ Verification of Advances against Life Insurance Policies is as under-
The Audit program for the verification of advance against life insurance policies need to cover the
following:
• The auditor should inspect the policies and see whether they are assigned to the bank

and whether such assignment has been registered with the insurer.
• The auditor should also examine whether premium has been paid on the policies and
whether they are in force.
• Certificate regarding surrender value obtained from the insurer should be examined.
• The auditor should particularly see that if such surrender value is subject to payment of
certain premium, the amount of such premium has been deducted from the surrender
value.
QNO Deposits-Window dressing New Course- (N22M)

You are part of engagement team conducting statutory audit of a branch of nationalized bank. During
the course of audit, it has come to your notice that there are large number of cash credit accounts in the
branch. Many of the cash credit accounts are only partially utilized during substantial part of year.
However, in the month of March, the accounts are fully utilized. On further scrutiny, it is observed that
these account holders have made fixed deposits from these utilized amounts at the end of year. These
deposits have been liquidated in first week of April of next financial year. Comment upon how this
situation would be dealt by you as a statutory branch auditor?
Answer In the given case, many of the cash credit accounts in the branch of a nationalized bank are only partially
utilized during substantial part of year. However, in the month of March, the accounts are fully utilized.
On further scrutiny, it is observed that these account holders have made fixed deposits from these
utilized amounts at the end of year. These deposits have been liquidated in first week of April of next
financial year.
This is an example of window dressing. The branch is resorting to window dressing by artificially boosting
its advances and deposits. Utilization of advances and placing of fixed deposits at end of year in branch
and again liquidation of deposits early next year indicate that branch is resorting to window dressing to
inflate its advances as well as deposits artificially.
The auditor has to verify whether the unavailed portion of the credit facilities (overdraft, cash credit) are
used to boost the loans and deposits which might tantamount to window dressing.
The relevant regulatory guidelines also prohibit such type of practices and these might involve penal
action in terms of Banking Regulation Act, 1949.
The same needs to be suitably reported in audit report and commented in LFAR also. In appropriate
cases, making a suitable qualification in the main audit report has also to be considered
QNO Credit Card (ICS) Old Course – (M04E, N09E, M15R, P17M, N20M)
473.000 BHASKAR CNO—AOB.115 New Course – (N19E, N20M, S21M, M22R)
How will you evaluate the Internal Control system in the area of Credit Card operations of a Bank?
OR
You have been appointed as an auditor of LCO Bank, a nationalized bank. LCO Bank also deals in
providing credit card facilities to its account holders. The bank is aware of the fact that there should be
strict control over storage and issue of credit cards. As an auditor of the bank, how will you evaluate the
Internal Control System with respect to Credit Card operations maintained byte LCO Bank?
Answer ➢ Credit Card Operations
• Storage
There should be strict control over storage and issue of cards.
• Screening Before Issue
There should be effective screening of applications with reasonably good credit
assessments.
• Available Card Limit
There should be at system whereby a merchant confirms the status of unutilised limit of a

credit-card holder from the bank before accepting the settlement in case the amount to
be settled exceeds a specified percentage of the total limit of the card holder.
• Settlement Confirmation
There should be a system of prompt reporting by the merchants of all settlements
accepted by them through credit cards.
• Reimbursement
Reimbursement to merchants should be made only after verification of the validity of
merchant’s acceptance of cards.
• Charge to Customer
All the reimbursement (gross of commission) should be immediately charged to the
customer’s account.
• Statements
There should be a system to ensure that statements are sent regularly and promptly to the
customer.
• Monitoring
There should be a system to monitor and follow-up customers‟ payments.
• There should be a system of periodic review of credit card holders‟ accounts. On
this basis, the limits of customers may be revised, if necessary. The review should
also include determination of doubtful amounts and the provisioning in respect
thereof.
• Items overdue beyond a reasonable period should be identified and attended to
carefully. Credit should be stopped by informing the merchants through periodic
bulletins, as early as possible, to avoid increased losses.
Authors Note
Points are rearranged for ease of understanding and memorising
QNO Verification of Balances Old Course – (P17M, N17R, M20M)

479.000 (Foreign Country) New Course – (M20M)
UNIQUE
NAYASA Bank appointed your firm of Chartered Accountants as a branch auditor for the financial year
2016-17. Being head-in-charge of the assignment, while planning, you distributed the work among your
team members and assigned Mr. Hary for verification of Balances in account of the bank situated in
foreign country. However, Mr. Hary, being fresh to the bank audits, needs your guidance. Kindly guide.
OR
As an auditor of a nationalised bank, how would you verify the following?
Balances in account of a bank situated in a foreign country.
OR
M/s CAS & Associates have been appointed as one of the statutory central auditors of FDMH Bank., for
the Financial Year 2019-20. During the course of the audit, the auditor found that the bank has a balance
with a Zurich based bank. The auditor understands that such balance is a matter of important
consideration in the audit of the bank. Being head-in-charge of the assignment, while planning, you
distributed the work among your team members and assigned Mr. Ansh for verification of Balances in
account of the bank situated in foreign country. However, Mr. Ansh, being fresh to the bank audits,
needs your guidance. Kindly guide.
Answer ➢ Balances in Account of a Bank situated in a Foreign Country: The following procedure may be
followed while verifying balances in account of a bank situated in a foreign country-
• Verify the ledger balances in each account with reference to the bank confirmation
certificates and reconciliation statements as at the year-end.
• Review the reconciliation statements and pay particular attention to the following.
• Examine that no debit for charges or credit for interest is outstanding and all the
items which ought to have been taken to revenue for the year have been so
taken. This should be particularly observed when the bills collected, etc., are
credited with net amount and entries for commission, etc. are not made
separately in the statement of account.
• Examine that no cheque sent or received in clearing is outstanding. As per the
practice prevalent among banks, any cheques returned unpaid are accounted for
on the same day on which they were sent in clearing or on the following day.
• Examine that all bills or outstanding cheques sent for collection and outstanding
as on the closing date have been credited subsequently.
• Examine the large transactions in inter-bank accounts, particularly towards the year-end,
to ensure that no transactions have been put through for window dressing.
• Check original deposit receipts in respect of balances in deposit accounts in addition to
confirmation certificates obtained from banks in respect of outstanding deposits.
• Check whether these balances are converted into the Indian currency at the exchange
rates prevailing on the balance sheet date and ensure compliance with relevant
Accounting Standard.
QNO Contingent Liability- Old Course – (P17M, M17R, N19R)

485.000 BHASKAR CNO—AOB.500 New Course – (N19R, S21M)
While auditing APNA Bank, you observed that a lump sum amount has been disclosed as contingent
liability collectively. You are, therefore, requested by the management to guide them about the
disclosure requirement of Contingent Liabilities for Banks. Kindly guide.
Answer ➢ Contingent Liabilities
• Guarantees given on behalf of constituents
• In India
• Outside India
• Acceptances, endorsements and other obligations
• Liability on account of outstanding forward exchange contracts.
• Liability for partly paid investments
• Claims against the bank not acknowledged as debts
• Other items for which the bank is contingently liable
➢ Bills for Collection

Part - 1 INSURANCE COMPANIES (COMMON PORTION)
Joint Audit & Number of Assignments in Insurance Old Course—(M21M)

QNO
Company New Course – (M21M)
507.100
Bhaskar CNO – INS.180
R.O.K. & Co. and TNK & Co. were appointed as the joint statutory auditors at the AGM of Auspic General
Insurance Co. Ltd. Apart from the aforesaid audit, R.O.K. & Co. is also being appointed as a joint
statutory auditor of one another General Insurance Company and TNK & Co. is appointed as a joint
statutory auditor of Life Insurance Company. How many further audits can be accepted by R.O.K. & Co.
and TNK & Co., respectively, of either general or life insurance companies?
Answer The appointment of statutory auditors in the General Insurance Corporation of India, and its
subsidiaries and the divisions as well as other public sector Insurance Companies is made by the
Comptroller and Auditor General of India, as in the case of other public sector undertakings.
However, in the case of others, auditor is appointed at the AGM after ensuring that the auditor
satisfies the compliance requirements with the relevant sections of the IRDAI Guidelines on
Corporate Governance. These guidelines pose certain restrictions on the number of insurance
companies a statutory auditor can audit. Currently, an auditor can conduct audit only for three
insurance companies and not more than 2 life or 2 general. The Guidelines also mandate a
mandatory joint audit for all insurance companies.
In the given case, R.O.K. & Co. is joint statutory auditor of Auspic General Insurance Co. Ltd. And of
one another General Insurance Company. Accordingly, it can now, further, accept only one audit and
that too of a Life Insurance Company only.
Further, TNK & Co. is joint statutory auditor of Auspic General Insurance Co. Ltd. as well as of one
Life Insurance Company. Accordingly, it can now, further, accept only one audit of either a Life
Insurance Company or a General Insurance Company.

Part - 2 GENERAL INSURANCE COMPANIES
QNO Types of Reinsurance (Facultative) Old Course – (N10R, M14R, P17M)

490.000 Bhaskar CNO – GIC.040
Write a short note on - Facultative reinsurance under Insurance Act, 1938.
Answer ➢ Facultative Reinsurance –
It is that type of reinsurance whereby the contract relates to one particular risk and is expressed in
the reinsurance policy. This is the oldest method of reinsurance and it necessitates consideration of
each risk separately. Each transaction under facultative reinsurance has to be negotiated
individually. Each party to the transaction has a free choice, i.e., for the ceding company to offer
and the reinsurer to accept. The main drawbacks of this type of insurance are the volume of work
involved and time taken to cover the risk. It is, however, still used even today, mainly when:
• Automatic covers have already been exhausted.
• The risk is excluded from the Treaties.
• The insurer does not want his reinsurance treaties overburdened with particularly heavy
and abnormal risks.
• The insurer has no automatic cover at his disposal in a particular branch, where he issues
policies rarely.
• The nature of business is such that technical guidance or consultation with the reinsurer is
required at every stage of acceptance of the risk itself or for a type of business where the
number of risks is very small, for example, in atomic energy installations, oils rigs, etc.
Authors Note
Below page has the master chart to the types of reinsurance. Students can get a quick
understanding of the types of reinsurance by going through the chart. It is advisable to read it before
starting the reinsurance topic.
QNO Re-Insurance (Outward, Audit)- Old Course –(N05E,N08R,N09E,M12R,N13R,N14R,S17M,P17M,

492.000 Bhaskar CNO – GIC.060 M17M,M18M, N19R)
New Course – (S17M, M18M, S21M)
Enumerate the steps to be taken by an auditor for the verification of Re-insurance outward by a General
Insurance Company.
OR
Steps to be taken by an auditor for the audit of re-insurance ceded
Answer ➢ Verification of Re-insurance Outward
The following steps may be taken by the auditor in the verification of re-insurance outward:
• In the flow of reinsurance outward process
• Parameters and Guidelines applicable
The auditor should check whether the pattern of re-insurance underwriting for
outward cessions fits within the parameters and guidelines applicable to the
relevant year. The auditor should also check whether the cessions have been
made as per the stipulation applicable to various categories of risk.
• Agreements
The auditor should verify whether the cessions have been made as per the
agreements entered into with various companies.
• Foreign Exchange Payment to Foreign Reinsurers
It should also be seen whether the outward remittances to foreign re-insurers
have been done as per the foreign exchange regulations.
• Commission Receivable
o It should also be seen whether the commission on cession has been
calculated as per the terms of the agreement with the re-insurers.

o The auditor should verify the computation of profit commission for
various automatic treaty arrangements in the light of the periodical
accounts rendered and in relation to outstanding loss pertaining to the
treaty.
• Losses Confirmed by Re-insurers
He should see whether provisioning for outstanding losses recoverable on
cessions have been confirmed by the re-insurers and in the case of major claims,
documentary support should be insisted and verified.
• Cash Loss Recoveries (Immediate Payment if loss amount exceeds pre
decided limit)
The auditor should examine whether the cash loss recoveries have been claimed
and accounted on a regular basis.
• Records & Accounting

• Underwriting Returns
The auditor should verify that re-insurance underwriting returns received from
the operating units regarding premium, claims paid, outstanding claims tally with
the audited figures of premium, claims paid and outstanding claims.
• Accounting
Accounting aspects of the re-insurance cession premium, commission receivable,
paid claims recovered, and outstanding losses recoverable on cessions have to be
checked.
• Sub Ledger
The auditor should also check that the re-insurers balance on cessions and
whether the sub edger balances tallies with the general ledger balances.
• Opening Outstanding Claims Receivable
He should verify whether opening outstanding claims not received during the
year find place in the closing outstanding claims vis-a-vis the reinsurance inwards
outstanding losses payable on cessions appears in both opening and closing list. If
not, the reason for the same should be analysed.
• Closing Claims Received Shown as Outstanding
The auditor should also verify whether the Claims Received item appears in
Outstanding Claims list by error. This can be verified at least in respect of major
claims.
• Confirmation
He should verify whether the balances with re-insurers are supported by
necessary confirmation obtained from them.
• Provisioning
The auditor should review the individual accounts to find out whether any
balance requires provisioning / write off or write back.
• Subsequent Events
Any major event after the Balance Sheet date which might have wider impact
with reference to subsequent changes regarding the claim recovery both paid and
outstanding and also re - insurance balances will need to be brought out suitably.
• Percentage Pattern (Analytical Procedures)
The auditor should check percentage pattern of gross to net premium, claims
paid and outstanding claims to ensure comparative justification.
Author’s Note:-
This answer is taken from new study module. It may not match with the old answer.

Don’t Issue Policy Documents in these New Course – (N21E,N22M)
QNO
Circumstances
493.500
Bhaskar CNO – GIC.080
CA M has been appointed as an auditor of Life Secure Insurance Ltd. He observed that few insurance
policies have been sold by the company in the last month of the financial year ending 31st March, 2021.
While recognizing income in the income statement of the company, it is the responsibility of CA M to
make an assessment of the reasonability of the risk pattern managed by the management.
Also, it is to be ensured by him that Life Secure Insurance Ltd. should not issue policies, if the risk is not
established before the closure of the F.Y.2020-21.
Indicate the circumstances when the company should not issue the policy documents.
Answer The auditor, CA M appointed as an auditor of Life Secure Insurance Ltd. should ensure that policy
documents have not been issued, in case:
(i) Premium had not been collected at all;
(ii) Premium had been collected but the relevant cheques have been dishonoured; (refer Cheque
Dishonoured Book);
(iii) premium had not immediately been collected due to furnishing of a bank guarantee or cash deposit but
either the deposit or guarantee had fallen short or has expired or the premium had been collected beyond
the stipulated time limit (i.e., there is a shortfall in bank guarantee account or cash deposit account of the
insured);
(iv) premium had not been collected due to risk cover being increased or where stipulated limits have been
exhausted in respect of open declaration policies (i.e., where premium has accrued but has not been
received); and
(v) instalments of premium have not been collected in time in respect of certain categories of policies, e.g.,
marine-cum-erection policies where facility has been granted for premium being paid in instalments (such
facility is normally available subject to certain conditions, e.g., that the first equated instalment is more by
5 per cent of the total premium payable by instalments).
(vi) Premium collected but policies not issued for long periods of time.
(vii) Whether the premium received during the year but pertaining to risk commencing in the following
year has been accounted for under the head ‘Premium Received in Advance’ and has been disclosed
separately
QNO Premium (Policy Issued Without Actual Old Course – (M13E, M16E, P17M)
494.000 Receipt) New Course – (S17M, M18M, M19R, M19E, S21M, N21M)
Bhaskar CNO – GIC.080
You have been appointed as an auditor of ABC Insurance Co. Ltd. and found that M/s PQR Ltd. got their
Plant & Machinery insured on 01-10-2018 but the amount of premium has been paid by them on 15-10-
2018. In the meanwhile, on 10-10-2018 a fire has broken out in the factory and the company filed a claim
for damages of plant & machinery with the Insurance company. Advise the insurance company in this
regard.
OR
As on 31st March 2020 while auditing Safe Insurance Ltd, you observed that a policy has been issued on
25th March 2020 for fire risk favouring one of the leading corporate houses in the country without the
actual receipt of premium and it was reflected as premium receivable. The company maintained that it is
a usual practice in respect of big customers and the money was collected later on. As an auditor discuss
the steps to be taken while verifying the Premium of Life Insurance Company.
Answer ➢ No Risk Assumption without Premium –
No risk can be assumed by the insurer unless the premium is received. According to section 64VB
of the Insurance Act, 1938, no insurer should assume any risk in India in respect of any insurance
business on which premium is ordinarily payable in India unless and until the premium payable is
received or is guaranteed to be paid by such person in such manner and within such time, as
maybe prescribed, or unless and until deposit of such amount, as may be prescribed, is made in
advance in the prescribed manner. The premium receipt of insurance companies carrying on
general insurance business normally arise out of three sources, viz., premium received from direct
business, premium received from reinsurance business and the share of co - insurance premium.

➢ Calculation of Premium:
• Check that Accounting system, employed by the Company, calculates premium amounts
and its respective due dates correctly.
• Check that system employed as such is equipped to calculate all types of premium modes
correctly.
➢ Accounting of ‘Advance Premium’:

• Check, whether system has capability to identify regular and advance premium.
• Check whether there is a process of applying advance premium to a contract when
premium is due.
➢ Collection of Premium:
• Check that there is appropriate mechanism to ensure all the collections are deposited into
the Bank on timely basis.
• Check whether there is daily reconciliation process to reconcile the amounts collected,
entered into the system and deposited into the bank.
➢ Recognition of Income:
• Check that premium is recognised only on the basis of ‘Issued Policies’ and not on
underwriting dates.
• Check that there is inbuilt mechanism the system all the premium collected are correctly
allocated all various components of the Policies
• Check that there is appropriate mechanism in place to conduct reconciliation on daily
basis and reconciling items, if any, are rectified/ followed up.
➢ Reporting of Premium figures to IRDA/ Management:
• Check the methodology for generation of MIS from the system and there is no manual
intervention.
• Check the procedure for Maker/ Checker before finalising the MIS.
• Check whether there is a reconciliation process between premium Income as per
financials and as reported.
➢ Other Areas:
• Check whether there are appropriate SOPs developed by the Companies and are strictly
followed by all the departments/ branches of the Company.
• Ensure duly approved Delegation of Authority parameters matrix already in place for
authorisation limits.
• Premium recognition and refund of premium are independent processes with adequate
segregation of duties amongst the personnel.
• Check that the Company conducts premium reconciliation on daily basis.
• Check the robustness of interface between administration and accounting system.
Therefore, in the instant case, PQR Ltd. signed the insurance documents on 01.10.2018 but did not paid the
premium. In case of non-payment of insurance premium if any accidental incident occurs insurance
company will have no liability to pay claim.
In the given case, fire is occurred on 10th October, 2018 in factory and premium has been paid on 15
October 2018, the ABC Insurance Company Ltd. will not be liable for claim for damages of plant and
machinery.
Authors Note
• The answer above has been rearranged in the flow of logical sequence. Students should read
it in the same manner to get better understanding of the answer
• Last line of second question is inappropriate, it should be simply insurance company and not
life insurance company or ICAI should have removed fire insurance from second line

QNO Premium (Policy Issued Without Actual Receipt) Old Course – (N20M)
494.500 Bhaskar CNO – GIC.080
While auditing Innocent Insurance Ltd, you observed that a policy has been issued on 31stMarch, 2020
evening to LMN Company. LMN Company had signed all the papers and taken insurance policy (value
insured = ` 11 lac) for its new godown and premium for the same was paid through cheque subject to
realization. However, on the night of 31st March, a huge fire accident took place in LMN Company and
goods worth `15 lac were destroyed. Further, cheque was also dishonoured due to insufficient fund. The
Company informed the incident to Innocent Insurance Ltd and a claim was lodged for the same. The
insurance company also made a provision for claim. Advise the Innocent Insurance Ltd in this regard.
Answer ➢ Most Important Basic Rule -- No Risk Assumption without Premium
No risk can be assumed by the insurer unless the premium is received. According to section 64VB
of the Insurance Act, 1938, no insurer should assume any risk in India in respect of any insurance
business on which premium is ordinarily payable in India unless and until the premium payable is
received or is guaranteed to be paid by such person in such manner and within such time, as may
be prescribed, or unless and until deposit of such amount, as may be prescribed, is made in
advance in the prescribed manner. The premium receipt of insurance companies carrying on
general insurance business normally arise out of three sources, viz., premium received from direct
business, premium received from reinsurance business and the share of co - insurance premium.
➢ Therefore, in the instant case, LMN Company signed the insurance documents on 31.03.2020
and paid the premium through cheque which later on dishonoured due to insufficiency of funds.
➢ In such case insurance premium is not being received, thus, if any accidental incident occurs,
insurance company will have no liability to pay claim. In the given case, fire is occurred on
31stMarch night and premium was not received, the Innocent Insurance Ltd. will not be liable for
claim for damage of goods amounting rupees 15 lac hence no provision for claim is required.
QNO Commission Paid- Old Course – (N15R, N16M, P17M, M17E, M20R, M21M, N21R)
495.000 BHASKAR CNO—GIC.100 New Course – (N18M, N18E, S21M, M21M,N21R)
You have been appointed to carry out the audit of Sky Insurance Company Ltd. for the year 2017-18. In
the course of your audit, you observed that the commission paid to agents constituted a major expense
in operating expenses of the Company. Enumerate the audit concerns that address to the assertions
required for the Auditor to ensure the continued existence of internal control as well as fairness of the
amounts in accounting of commission paid to agents.
OR
While auditing Secure Insurance Ltd., you observed that the major proportion of expense of the
company is the remuneration/commission paid to its insurance agents. As the auditor of the company,
what audit procedure would you adopt for verification of such expense?
Answer ➢ Commission:
• Definition of Commission & Its 2 types
The commission is the consideration payable for getting the insurance business. The
term ‘commission’ is used for the payment of consideration to get Direct business.
Commission received on amount of premium paid to a re-insurer is termed
‘Commission on reinsurance ceded and is reduced from the amount of commission
expenditure.
• Internal Control Over Commission
The internal control with regard to commission is aimed at ensuring that commission is
paid in accordance with the rules and regulations of the company and in accordance
with the agreement with the agent, commission is paid to the agent who brought the
business and the legal compliances, for example, tax deduction at sources, GST on
reverse charge mechanism and provisions of the Insurance Act, 1938 have been
complied with.
➢ Role of Auditor:
The auditor should, inter alia, do the following for verification of commission:

• Ensure that the agent is not blacklisted by IRDA and is not terminated for fraud etc.
• Ensure that commission is paid to the agent/broker who has solicited the business
• Ensure that commission is paid as per rates with the agent and rates filed with IRDAI
• Test check correctness of amounts of commission allowed.
• Check whether the vouchers are authorized by the officers-in–charge as per rules in
force and income tax is deducted at source, as applicable.
• Ensure that commission is not paid in excess of the limits specified by IRDAI
• Vouch disbursement entries with reference to the disbursement vouchers with copies of
commission bills and commission statements.
• Check whether commission outgo for the period under audit been duly accounted.
• Scrutinize agents’ ledger and the balances, examine accounts having debit balances, if
any, and obtain information on the same. Necessary rectification of accounts and other
remedial actions have to be considered.
Authors Note
The answer above has been rearranged in the flow of logical sequence. Students should read it
in the same manner to get better understanding of the answer. Words in “Headings in Comics
font” which are used as heading are only for helping students in retention. Students may or may
not write it in the exam.
QNO Claim (Provision)- Old Course – (N14E, N16R, P17M, M20R)

495.020 BHASKAR CNO—GIC.120 New Course – (M18E, M20R, S21M)
ABC & Co., Chartered Accountants are the Auditors of Just Care General Insurance Company Limited. As
on March 31, 2015 the Management made a provision for claims outstanding. Enumerate the steps to be
taken by the Auditor while verifying the "Claims Provision".
OR
You are the Auditor of Good Luck General Insurance Company. You want to ensure that there exists good
system that effectively serves the requirements of true and fair accounting of claim-related expenses
and liabilities. Suggest how this can be ensured.
Answer ➢ Claims Provisions –
• Verification
The auditor should satisfy himself that the estimated liability provided for by the
management is adequate with reference to the relevant claim files/dockets, keeping in
view the following:
• that intimation of loss is received within a reasonable time and reasons for undue
delay in intimation are looked into.
• that due provision has been made in respect of claims lodged at any office of the
company other than the one from where the policy was taken, e.g., a vehicle
insured at Mumbai having met with an accident at Chennai necessitating claim
intimation at one of the offices of the company at Chennai.
• that provision has been made for only such claims for which the company is
legally liable, considering particularly, (a) that the risk was covered by the policy,
if in force, and the claims arose during the currency of the policy; and (b) that
claim did not arise during the period the company was not supposed to cover the
risk, e.g., where the premium was not paid or where cheques covering premium
have been dishonored (refer section 64VB of the Insurance Act, 1938) or where a
total loss under a policy has already been met/settled.
• Insurance companies normally have an ‘initial provision’ or ‘default provision’
based on a pre-determined formula or on a primary assessment of the damage by
a surveyor. The auditor would need to review the pre-determined formula to
ensure that initial reserving made is adequate
In certain circumstances, the claims are incurred by the insurance company but
are not reported at the balance sheet date by the insured. Such claims are known
as claims incurred but not reported (IBNR). The auditor should check the records
for subsequent periods to ascertain that adequate provision has been created for

such claims also.
• that in determining the amount of provision, the ‘average clause’ has been
applied in case of under-insurance by parties.
• that the provision made is net of payments made ‘on account’ to the parties
wherever such payments have been booked to claims.
• that the claims are provided for net of estimated salvage, wherever applicable
• that in case of co-insurance arrangements, the company has made provisions
only in respect of its own share of anticipated liability (11) that provision has been
made for all unsettled claims as at the year-end on the basis of claims
lodged/communicated by the parties against the company. The date of loss (and
not the date of communication thereof) is important for recording/ recognizing
the claim as attributable to a particular year.
• that the provision made is normally not in excess of the amount insured except in
some categories of claims where matters may be sub-judices in legal proceedings
which will determine the quantum of claim, the amount of provision should also
include survey fee and other direct expenses.
(Year End)
• that provision has been made for all unsettled claims as at the yearend on the
basis of claims lodged/communicated by the parties against the company. The
date of loss (and not the date of communication thereof) is important for
recording/ recognizing the claim as attributable to a particular year.
• that the claims status reports recommended to be prepared by the Divisional
Manager on large claims outstanding at the year-end have been reviewed with
the contents of relevant files or dockets for determining excess/short provisions.
The said report should be complete as to material facts to enable the auditor to
take a fair view of the provision made.
• that wherever legal advice has been sought or the claim is under litigation, the
provision is made according to the legal advisor’s view and differences, if any, are
explained.
• those provisions have been retained as at the year-end in respect of guarantees
given by company to various Courts for claims under litigation.
• that in the case of amounts purely in the nature of deposits with courts or other
authorities, adequate provision is made, and deposits are stated separately as
assets and provisions are not made net of such deposits.
• that in determining the amount of provision, events after the balance sheet date
have been considered, e.g., (a) claims settled for a materially higher/lower
amount in the post -audit period; (b) claims paid by other insurance companies
during the year under audit and communicated to company after the balance
sheet date where other companies are the leaders in co-insurance arrangements;
and (c) further reports by surveyors or assessors & (d), re-insurance cover
available is considered.
• that wherever an unduly long time has elapsed after the filing of the claim and
there has been no further communication and no litigation or arbitration dispute
is involved, the reasons for carrying the provision have been ascertained.
• that no contingent liability is carried in respect of any claim intimated in respect
of policies issued.
(Special Points)
• Consolidated Figures
The outstanding liability at the year-end is determined at the divisions/branches where
the liability originates for outstanding claims. Thereafter, based on the total consolidated
figure for all the divisions/branches, the Head Office considers a further provision in
respect of outstanding claims
• Obtain information and Sampling
The auditor should obtain from the divisions/branches, the information for each class of
business, categorizing the claims value-wise before commencing verification of the

claim’s provisions, so that appropriate statistical sampling techniques may be applied, to
ensure that representative volume of claims is verified for each class of business. The
auditor should determine the total number of documents to be checked giving due
importance to claim provisions of higher value.
• Material Differences
In cases of material differences in the liability estimated by the management and that
which ought to be provided in the opinion of the auditor, the same must be brought out in
the auditor’s report after obtaining further information or explanation from the
management. For determining the adequacy of the provisions in respect of any category
of business, the auditor may resort to the method of testing the actual payments,
wherever made, with the provisions made earlier for that category of business. Whether
such liability has been estimated in the past on a fair and realistic basis can, thus, be
examined by looking into current year’s payments against provisions of the earlier year.
Authors Note
The answer above has been rearranged in the flow of logical sequence. Students should read it in
the same manner to get better understanding of the answer. Words in “Headings in Comics font”
which are used as heading are only for helping students in retention. Students may or may not
write it in the exam.
QNO Outstanding Premium & Agent Balances- Old Course –(M12M,M13R,M14E,N15E, P17M)
502.000 BHASKAR CNO—GIC.160 New Course – (S17M, M18R ,S21M, M22R)
Mr. Bhavya is appointed as an auditor of General Insurance Company limited. State the verification
procedure to be followed by Mr. Bhavya in case of outstanding premium and agent’s balances.
Answer ➢ The following are the audit procedures to be followed for verification of outstanding premium and
agents’ balances:
• Check age-wise, sector-wise analysis of outstanding premium.
• Verify whether outstanding premiums have since been collected.
• Check the availability of adequate bank guarantee or premium deposit for outstanding
premium.
• Examine inoperative balances and treatment given for old balances with reference to
company rules.
• Enquire into the reasons for retaining the old balances.
• Scrutinise and review control account debit balances and their nature should be enquired
into.
• Verify old debit balances which may require provision or adjustment. Notes of
explanation may be obtained from the management in this regard.
Authors Note
The answer above has been rearranged in the flow of logical sequence. Students should read it in the
same manner to get better understanding of the answer
QNO Solvency Margin Old Course – (N06E, N09R, N11R, M12E, P17M, M19E, N20R)
506.000 BHASKAR CNO—GIC.180 New Course – (N20R, N21M)
M/s MPS & Associates, Chartered Accountants started the statutory audit of their client Contingencies
Ltd., a General Insurance company, which has a paid-up capital of ` 16,800/- lac. During the course of the
audit, it was found that the Company was not maintaining the required solvency margin as per the
provisions of Insurance Act ,1938. When the issue was escalated to the management, they replied that
solvency margin needs to be maintained as per limits prescribed only on last day of the financial year.
Comment whether reply of management is tenable or not.
OR
Write a short note on - Solvency margin in case of an insurer carrying on general insurance business.
▪ Section 64VA of the Insurance Act, 1938

➢ Solvency Margin in Case of an Insurer Carrying on General Insurance Business:
Section 64VA of the Insurance Act, 1938 as amended by Insurance Laws (Amendment) Act, 2015
requires every insurer and re-insurer to maintain an excess of the value of assets over the amount
of liabilities at all times which shall not be less than 50% of the amount of minimum capital as
stated under section 6 (requirement as to capital) of the Act and arrived at in the manner specified
by the regulations.
The Authority, by way of regulation, shall specify a level of solvency margin known as ‘control level
of solvency’. However, in certain special circumstances, the authority may direct application of this
provision with some modifications provided this shall not result in the control level of solvency
being less than what is stipulated in above para.
If, at any time, an insurer or re-insurer does not maintain the required control level of solvency
margin, he is required to submit a financial plan to the Authority indicating the plan of action to
correct the deficiency. If, on consideration of the plan, the Authority finds it inadequate, the
insurer has to modify the financial plan.
Maintenance of solvency margin has a great importance for an insurance company considering
their size and nature of business and also involvement of public money. Sub-section (2) of section
64VA states that if an insurer or re-insurer fails to comply with the prescribed requirement of
maintaining excess of value of assets over amount of liabilities, it shall deem to be insolvent and
may be wound up by the Court on an application made by the authority.
➢ In the said case Contingencies Ltd has not maintained the Solvency Margin throughout the year.
➢ Accordingly, contention of Contingencies Ltd. That solvency margin is required to be maintained as
per limits prescribed only on last day of the financial year is not tenable.
Author’s Note
• In our notes, Solvency margin is specified as higher of the following –
o 50% of minimum capital
o 20% of net premium
o 30% of net claim
• But here in the above answer only the 1st limit i.e. 50% of minimum capital is specified.
• It is to bring to your notice that the other 2 limits are specified in regulations and not in Insurance
Act, hence it is not specified by ICAI in the answer. If you specify it properly , it is absolutely fine
• Control Level Solvency should be 150% of minimum solvency margin
QNO Trade credit Old Course – (N16E, N18M)

507.000 BHASKAR CNO—GIC.200 New Course – (M22M, N22M)
“Trade credit insurance policy” and basic requirements of a trade credit insurance product.
OR
You are an auditor of Great Insurance Company Ltd. which offers variety of risk management products to
business entities wishing to protect their business activities against losses due to various probable risks.
Great Insurance Company Ltd. is in the process of offering to Uniqu e Ltd., a multinational group having
worldwide market, “Trade Credit Insurance Policy” to cover domestic risk, export risk and political risk.
You as an auditor of Insurance Company have been requested to ensure that all the requirements have
been met by Great Insurance Company Ltd. before Trade Credit Insurance Product is offered to Unique
Ltd. List down those requirements.
Answer ➢ "Trade credit insurance" means insurance of suppliers against the risk of non-payment of goods or
services by their buyers who may be situated in the same country as the supplier (domestic risk) or
a buyer situated in another country (export risk) against non-payment as a result of insolvency of
the buyer or non-payment after an agreed number of months after due date (protracted default)
or non-payment following an event outside the control of the buyer or the seller (political risk
cover). Political risk cover is available only in case of buyers outside India and in countries agreed
upon at the proposal stage.

➢ Requirements of Trade Credit Insurance: -
• Policyholder's loss is non-receipt of trade receivable arising out of a trade of goods or
services.
• Policyholder is a supplier of goods or services in consideration for a fair market value.
• Policyholder's trade receivable does not arise out of factoring or reverse factoring
arrangement or any other similar arrangement.
• Policyholder has a customer (i.e. Buyer) who is liable to pay a trade receivable to the
policyholder in return for the goods and services received by him from the policyholder, in
accordance with a policy document filed with the insurer.
• Policyholder undertakes to pay premium for the entire Policy Period.
• Any other requirement that may be specified by the Authority from time to time.

Part - 3 LIFE INSURANCE COMPANIES
QNO Actuarial Process- New Course – (M18R, N18M,S21M)

507.030 Bhaskar CNO – LIC.080
Briefly discuss the importance and role of auditor with respect to actuarial process for Life Insurance
business
OR
High Life Insurance is into life insurance business and has established presence in this field since last 25
years. Your firm, SR & Co. are appointed auditors of the High Life Insurance company. While conducting
its audit, you come across several important actuarial processes being followed in accordance with
general regulatory guidelines. You also understand & realise that the actuarial department is calculating
and modelling hub of the company. In the above context explain the role of auditors.
Answer ➢ Actuarial Process:
(Change in Role from Supervision to Certification)
• Actuaries in Life Insurance business have gained tremendous importance. The role of
Actuary in life insurance has shifted from supervising compliance to certify whether
products and financial reports are in accordance with the general regulatory guidelines.
(Affects Pricing & Valuations)
• The job of actuary or actuarial department in any Life Insurance Company involves
detailed analysis of data to quantify risk. The actuarial department is calculating and
modelling hub of the Company. Within the department fundamentals of Insurance
business is determined from pricing to policy valuations techniques.
(Certification of Actuarial Valuation)
• Auditors in the Audit report are required to certify, whether the actuarial valuation of
liabilities is duly certified by the appointed actuary, including to the effect that the
assumptions for such valuation are in accordance with the guidelines and norms, if any,
issued by the authority and/or the Actuarial Society of India in concurrence with the IRDA.
(Certificate of Actuary & Evaluation of Actuaries Work)
• Hence, Auditors generally rely on the Certificate issued by the Appointed Actuary,
certifying the Policy liabilities. However, Auditor may discuss with the Actuaries with
respect to process followed and assumptions made by him before certifying the Policy
liabilities.
➢ Actuarial department broadly concentrates following key areas of Insurance business:
• Product Development/ Pricing and Experience analysis.
• Model Development.
• Statutory Valuations and reserving.
• Business Planning.
• Solvency management.
• Management reporting on various business valuations and profitability models of the
Life Insurance business.
Authors Note
Actuary concentrates on
Weekdays – “PMS” (portfolio management services)
Weekend -“BMS” (book my show)

Premium (Audit, LIC), Premium Collection, Accounting and New Course – (S17M, N18R, S21M)
QNO
reconciliation
507.040
Bhaskar CNO – LIC.170
What are the steps to be taken while verifying the Premium of Life Insurance Company?
OR
Auditors should evaluate various sub-processes, employed by the Insurance Companies in accounting of
premiums like collection of premiums from the policy holders, booking of premium, banking, accounting
and reconciliation of the same. In view of above, you are required to briefly discuss some illustrative
points, auditors are required to follow during the Audit of Accounting of Premiums in case of Life
Insurance Companies.
Answer ➢ Calculation of Premium:
• Check that Accounting system, employed by the Company, calculates premium amounts
and its respective due dates correctly.
• Check that system employed as such is equipped to calculate all types of premium modes
correctly.
➢ Accounting of ‘Advance Premium’:
• Check, whether system has capability to identify regular and advance premium.
• Check whether there is a process of applying advance premium to a contract when
premium is due.
➢ Collection of Premium:
• Check that there is appropriate mechanism to ensure all the collections are deposited into
the Bank on timely basis.
• Check whether there is daily reconciliation process to reconcile the amounts collected,
entered into the system and deposited into the bank.
➢ Recognition of Income:
• Check that premium is recognised only on the basis of ‘Issued Policies’ and not on
underwriting dates.
• Check that there is inbuilt mechanism the system all the premium collected are correctly
allocated all various components of the Policies.
• Check that there is appropriate mechanism in place to conduct reconciliation on daily
basis and reconciling items, if any, are rectified/ followed up.
➢ Reporting of Premium figures to IRDA/ Management:
• Check the methodology for generation of MIS from the system and there is no manual
intervention.
• Check the procedure for Maker/ Checker before finalising the MIS.
• Check whether there is a reconciliation process between premium Income as per
financials and as reported.
➢ Other Areas:
• Check whether there are appropriate SOPs developed by the Companies and are strictly
followed by all the departments/ branches of the Company.
• Ensure duly approved Delegation of Authority parameters matrix already in place for
authorisation limits.
• Premium recognition and refund of premium are independent processes with adequate
segregation of duties amongst the personnel.
• Check that the Company conducts premium reconciliation on daily basis.
• Check the robustness of interface between administration and accounting system.
Authors Note
• The answer above has been rearranged in the flow of logical sequence. Students should
read it in the same manner to get better understanding of the answer.
• Can steps for auditing premium of General insurance, be applied to audit of premium of
life insurance companies?
o Both are very bulky, majority points in both are same, so I will suggest to remember only
one and apply it on both answers. This will be good strategy and feasible also.
QNO Free Look Cancellation (FLC) New Course – (N22R)
"Write a short note on:- Free look Cancellation (FRC)
Answer Free Look Cancellation (FLC) : As per clause 6(2) of IRDA (Protection of Policyholders Interest)
Regulations, 2002, “the insurer shall inform by the letter forwarding the policy that he has a period
of 15 days from the date of receipt of the policy document to review the terms and conditions of the
policy and where the insured disagrees to any of those terms or conditions, h e has the option to
return the policy stating the reasons for his objection, when he shall be entitled to a refund of the
premium paid, subject only to a deduction of a proportionate risk premium for the period on cover
and the expenses incurred by the insurer on medical examination of the proposer and stamp duty
charges”.
Accordingly, FLC is an option provided to the policyholder wherein he has a period of 15 days from
the date of receipt of the policy document to review the Terms & Conditions of the poli cy and in case
of disagreement to any of the terms & conditions, he/ she has the option to return the policy stating
the reason for policy’s cancellation. FLC requests can be received through any mode –e-mail, fax and
letters depending on insurer’s policy. In case of written letters, the signature of the policy holder
should be matched with the original proposal form. FLC request is processed only when the policy
holder is not satisfied with the terms and conditions of the policy document and not for any ot her
reasons. FLC refund is paid either by cheque or in case the policy holder wants direct credit, then
consent for direct credit along with cancelled cheque for bank account details is submitted.
QNO Investments (Audit)- New Course – (S17M, N19R, S21M)

ABC & Co., Chartered Accountants are the Auditors of Just Care Life Insurance Company Limited.
Enumerate the steps to be taken by the auditor while verifying the "Investment".
OR
Auditor’s considerations while reviewing of Investment Department of Life Insurance Company.
Answer ➢ Investments:
The Investment portfolio of Life Insurance companies comprise of Shareholders ‘funds and
Policyholders’ funds. Policyholders’ funds can further be segregated as linked and non - linked.
Investment regulations are however prescribed separately for the following investment categories:
As Insurers essentially manage the funds for policyholders it becomes imperative for the insurer to
have adequate systems and processes that should not only ensure robust internal controls,
financial transparency and equity but also bring effective governance so as to serve the interests of
the management, stakeholders, consumers and the society, at large.
IRDA (Investment) regulations, 2000 gives details of the pattern in which Funds of the Life
Insurance business, should be kept invested at any given point of time.
➢ The overall functioning of the Investment function should include the following
independent functions:
• Investments front office / dealing desk
• Investments mid office – Compliance, Risk Management, Reporting, Reconciliations
• Treasury – Cash Management, Deal settlement, Broker empanelment, Custody
• Investment accounting – Fund accounting, NAV computation and declaration.
The Auditor during his review of Investment Department should mainly consider the following:
Regulation & Split
• Compliance with Regulations
Compliance of all Investment regulations, various other circulars specified by IRDA and
other regulations specified in the Insurance Act, 1938
• Split
Ensure that there is split between Shareholders’ and Policyholders’ funds, and earmarking
of securities between various funds namely Life (Participating & Non-Participating), Pension
& Group (Participating & Non-Participating) and Unit Linked Fund
Policy Related Points
• Investment Policy
Review of insurer’s Investment policy
• Risk Management Policy
Insurer’s risk management policies and processes to manage investment risk such as
Market risk, Liquidity risk, Settlement risks, etc.
• Accounting & Valuation Policy
Review and check insurer’s Investment Accounting and valuation policy and the controls
around this process
Structure & Control Related Points
• Investment Committee
Review of functioning and scope and minutes of Investment Committee.
• Investment Management Structure

Review the Investment management structure to ensure adequate segregation of duties
between Investment Front office, Mid Office and Back office
• SOPs
Review of insurer’s Standard Operating Procedures which are prescribed by the IRDA
Regulations and are required to cover the entire gamut of investment related processes
and policies
• Policy Management System Vs Investment System
Flow of data from PMS to the Investment Accounting system
• Controls over Interfaces
Controls over various system interfaces such as Seamless integration of data, between front
office and back office, in the Investments accounting system
• Access Controls, Authorization Process & Deal Execution
Review of access Controls, authorization process for Orders and Deal execution, etc.
• Cash Management System
Review of insurer’s Cash Management System to track funds available for Investment
considering the settlement obligations and subscription and redemption of units, etc. The
system should be validated not to accept any commitment beyond availability of funds and
restrict Short Sales at the time of placing the order. Further insurer’s system should be able
to determine the amount of Investible surplus
• Control over Outsourcing
Determine the extent of activities outsourced and the controls over such activities
• Controls Over NAV Computation
Controls over NAV computation and declaration

Reconciliation related Points
• Fund wise Reconciliation
Review of fund wise reconciliation with Investment Accounts, Bank, and Custodian records.
• Reconciliation between holdings & custodian
Review the arrangements and reconciliations of holdings with the insurer’s custodian.
Other Points
• Disaster Recovery etc.
Review of insurer’s Disaster Recovery, Backup and Contingency Plan
• Monitoring
Ensure that the system is be able to automatically monitor various Regulatory limits on
Exposure and Rating of debt instruments.
• Personal, Insider Trading, Front Running Avoidance
Controls around personal dealings, insider trading and front running.
Authors Note
The answer above has been rearranged in the flow of logical sequence. Students should read it in
the same manner to get better understanding of the answer
Commission Payable - Life Insurance Company New Course – (S21M, M22M)

507.070
Bhaskar CNO – LIC.178
As an auditor of Life Insurance Company, how will you verify the ‘Commission Payable’ to its Agents?
➢ Commission payable to Agent:
Insurance business is generally solicited by the Insurance agents. The remuneration of agent is paid
by way of commission which is calculated by applying percentage to premium collected by him.
Agency commission contributes towards significant portion of expenses incurred by the Insurance
Commission. Commission is payable towards generation of new business and towards settlement
of renewal premium
➢ Role of Auditor: The Auditor during his review of Commission paid to Agents should mainly
consider the following:
• Review the system established by the Insurer with respect to calculation of commission to
eligible agents accurately and processing the same in timely manner.
• Review the commission payment system is in sync with the premium collection system.
• Check whether commission paid is within the limit prescribed under Insurance Act.
• Check whether commission is clawed-back on the cancelled policies.
• Check the completeness of commission processing system.
Authors Note:
Answer for QNO 495.000 & QNO 507.070, both are similar. Students can write any of the answers,
it is expected that institute will give marks for both. However, answer of QNO 495.000 is
preferred

QNO Identification of Company as NBFC -- Case Study New Course –(N21E,N22R)
513.900 BHASKAR CNO—NBFC.020
ABC Ltd. is a company registered under the Companies Act, 2013. The company is engaged in the business
of loans and advances, acquisition of shares / stocks / bonds / debentures/securities issued by Government
or local authorities. For the year ended 31st March, 2021 following are some extracts from the financial
statements:
(i) Paid-up share capital ` 40.53 Cr.
(ii) Non-Current Assets - Loans & Advances ` 55.90 Cr.
(iii) Current Assets - Loans and advances ` 344.47 Cr.
(iv) Total assets of the company ` 530 Cr.
(v) Intangible assets ` 3 Cr.
(vi) Profit for the Year ` 7.25 Cr.
(vii) Income from interest and dividends ` 52 Cr.
(viii) Gross income ` 102.57 Cr.
Directors intend to apply for registration as Non-Banking Financial Company (NBFC) under
Section 45-IA of the Reserve Bank of India (Amendment) Act, 1997. Advise.
Answer In order to identify a particular company as Non-Banking Financial Company (NBFC), it will consider both
assets and income pattern as evidenced from the last audited balance sheet of the company to decide its
principal business. The company will be treated as NBFC when a company's
(i) Financial assets constitute more than 50 per cent of the total assets (netted off by intangible assets) and
(ii) Income from financial assets constitute more than 50 per cent of the gross income. A company which
fulfils both these criteria shall qualify as an NBFC and would require to be registered as NBFC by RBI.
In the given case of ABC Ltd, its Financial Assets are = 55.90 + 344.47= 400.37 Cr
Total Assets (netted off by intangible assets) = 527 Cr
Income from financial assets = 52 Cr
Gross Income = 102.57 Cr
From the above, it is clear that ABC Ltd.’s financial assets constitute more than 50 per cent of the total
assets (netted off by intangible assets) and income from financial assets constitutes more than 50 per cent
of the gross income. Hence, ABC Ltd. fulfills both these criteria to qualify as an NBFC.
Thus ABC Ltd. can apply for registration under Section 45-IA of Reserve Bank of India (Amendment) Act,
1997 in prescribed form along with the necessary documents.
QNO NBFC-General Audit Procedures New Course – (M22M,N22M)

515.300 BHASKAR CNO—NBFC.143
"OM & Co. is the statutory auditor of OTAPS NBFC Ltd. While planning the audit procedures to be done
during the audit of entity, there was a difference of opinion between Mr. O and his partner Mr. M. Mr. O
is of the opinion that evaluation of internal control system and verification of registration with RBI
should not be the part of audit procedure, as it is the part of interna l audit only. Briefly state what broad
areas should mandatorily become part of the audit procedure of OM & Co. for conducting the audit of
OTAPS NBFC Ltd.? Also comment whether contention of Mr. O is correct?"
Answer Following are broad areas that should be mandatorily part of the audit procedure for conducting the
audit of NBFC:
1. Ascertaining the Business of the Company - The first step in carrying out the audit of a NBFC is to

scan through the Memorandum and Articles of Association of the company, so as to acquaint
oneself with the type of business that the company is engaged into. The task of ascertaining the
principal business activity of any NBFC is of paramount importance since the very classification
of a company as a NBFC and its further classification would all depend upon its principal
business activity. Based on the classification of a company, it will be required to comply with the
provisions relating to limits on acceptance of public deposits as contained in the NBFC Public
Deposit Directions.
2. Evaluation of Internal Control System - An auditor should gain an understanding of the

accounting system and related internal controls adopted by the NBFC to determine the nature,
timing and extent of his audit procedures. An auditor should also ascertain whether the internal
controls put in place by the NBFC are adequate and are being effectively followed. In particular,
an auditor should review the effectiveness of the system of recovery prevalent at the NBFC. He
should ascertain whether the NBFC has an effective system of periodical review of advances in
place which would facilitate effective monitoring and follow up. The absence of a periodical
review system could result in non-detection of sticky advances at their very inception which may
ultimately result in the NBFC having an alarmingly high level of NPAs.
3. Registration with the RBI - Section 45-IA of the RBI Act, 1934, has made it incumbent on the part
of all NBFCs to comply with registration requirements and have minimum net owned funds. An
auditor should obtain a copy of the certificate of registration granted by the RBI or in case the
certificate of registration has not been granted, a copy of the application form filed with the RBI
for registration. It may particularly be noted that NBFCs incorporated after 9th January, 1997 are
not entitled to commence business without first obtaining a registration certificate from the RBI.
An auditor should, therefore, verify whether the dual conditions relating to registration with the
RBI and maintenance of minimum net owned funds have been duly complied with by the
concerned NBFC. The auditor should ascertain whether investment in prescribed liquid assets
have been made and whether quarterly returns as mentioned above have been regularly filed
with the RBI by the concerned NBFC.
4. The auditors must ascertain whether the company properly classified as per the requirements of
various regulations. In case, the NBFC has not been classified by the RBI, the classification of a
company will have to be determined after a careful consideration of various factors such as
particulars of earlier registration granted, if any, particulars furnished in the application form for
registration, company’s Memorandum of Association and its financial results.
5. NBFC Prudential Norms Directions - Check compliance with prudential norms encompassing
income recognition, income from investments, accounting standards, accounting for
investments, asset classification, provisioning for bad and doubtful debts, capital adequacy
norms, prohibition on granting of loans by a NBFC against its own shares, prohibition on loans
and investments for failure to repay public deposits and norms for concentration of
credit/investments.
In the given situation, OM & Co., is the statutory auditor of OTAPS NBFC Ltd. While planning the audit
procedures to be done during the audit of entity, there was difference of opinion between O and his
partner M regarding evaluation of internal control and verification of registration with RBI. As
discussed above NBFCs are not entitled to commence business without first obtaining a registration
certificate from the RBI. An auditor should, therefore, verify whether the dual conditions relating to
registration with the RBI and maintenance of minimum net owned funds have been duly complied with
by the concerned NBFC. Further, auditor should gain an understanding of the accounting system and
related internal controls adopted by the NBFC to determine the nature, timing and extent of his audit
procedures. An auditor should also ascertain whether the internal controls put in place by the NBFC
are adequate and are being effectively followed. Accordingly, contention of Mr. O regarding evaluation
of internal control system and verification of registration with RBI should not be part of the audit
procedure as it is part of internal audits only, is not correct.
QNO Investment Co (Audit)- Old Course – (M08R, N15E, N18R, M19M)

517.000 BHASKAR CNO—NBFC.160 New Course – (S17M, N18R, M19M)
You are appointed as the auditor of a NBFC which an Investment company is registered with RBI. What
shall be the special points to be covered for the audit of NBFC in case of Investment companies?
Answer INVESTMENT COMPANIES: -
(Buying & Selling)
➢ Verify the Board Minutes for purchase and sale of investments. Ascertain from the Board
resolution or obtain a management certificate to the effect that the investments so acquired are
current investments or Long-Term Investments.
➢ Test check bills/contract notes received from brokers with reference to the prices vis-à-vis the
stock market quotations on the respective dates.
(Conditions while Purchasing)
➢ NBFC Prudential Norms stipulates that NBFCs should not lend more than 15% of its Owned funds
to any single borrower and not more than 25% to any single group of borrowers. The ceiling on
investments in shares by a NBFC in a single entity and the aggregate of investments in a single
group of entities has been fixed at 15% and 25% respectively. Moreover, a composite limit of
credit to and investments in a single entity/group of entities has been fixed at 25% and 40%
respectively of the owned fund of the concerned NBFC. Verify that the credit facilities extended,
and investments made by the concerned NBFC are in accordance with the prescribed ceiling.
➢ Obtain a list of subsidiary/group companies from the management and verify the investments
made in subsidiary/group companies during the year. Ascertain the basis for arriving at the price
paid for the acquisition of such shares.
➢ Check whether investments in unquoted debentures/bonds have not been treated as
investments but as term loans or other credit facilities for the purposes of income recognition
and asset classification.
(Income)
➢ Verify that securities of the same type or class are received back by the lender/paid by the
borrower at the end of the specified period together with all corporate benefits thereof (i.e.
dividends, rights, bonus, interest or any other rights or benefit accruing thereon.)
(Verification / Confirmation / Valuation)
➢ Physically verify all the shares and securities held by a NBFC. Where any security is lodged with
an institution or a bank, a certificate from the bank/institution to that effect must be verified.
➢ In respect of shares/securities held through a depository, obtain a confirmation from the
depository regarding the shares/securities held by it on behalf of the NBFC.
➢ Check whether the investments have been valued in accordance with the NBFC Prudential
Norms Directions and adequate provision for fall in the market value of securities, wherever
applicable, have been made there against, as required by the Directions.
➢ An auditor will have to ascertain whether the requirements of AS 13 “Accounting for
Investments” (to the extent they are not inconsistent with the Directions) have been duly
complied with by the NBFC.
(Securities Lending / Borrowing)
➢ Verify charges received or paid in respect of securities lend/borrowed.
➢ Obtain a confirmation from the approved intermediary regarding securities deposited with/
borrowed from it as at they earned.
QNO NBFC-Investment & Credit Company- Old Course – (N19R, N19M)

520.050 BHASKAR CNO—NBFC.160 New Course – (N19R, N19M, S21M)
Shivam & Co LLP are the auditors of NBFC (Investment and Credit Company). Some of the team members
of the audit team who audited this NBFC have left the firm and the new team members are in discussion
with the previous team members who are still continuing with the firm regarding the verification

procedures to be performed. In this context, please explain what verification procedures should be
performed in relation to audit of NBFC - Investment and Credit Company (NBFC-ICC).
Answer Investment Business Related Points
Buying & Selling
➢ Verify the Board Minutes for purchase and sale of investments. Ascertain from the Board
resolution or obtain a management certificate to the effect that the investments so acquired are
current investments or Long-Term Investments.
➢ Test check bills/contract notes received from brokers with reference to the prices vis-à-vis the
stock market quotations on the respective dates.
Conditions while Purchasing
➢ Obtain a list of subsidiary/group companies from the management and verify the investments
made in subsidiary/group companies during the year. Ascertain the basis for arriving at the price
paid for the acquisition of such shares.
➢ Check whether investments in unquoted debentures/bonds have not been treated as
investments but as term loans or other credit facilities for the purposes of income recognition and
asset classification.
Dividend & Interest
➢ Verify that dividend income wherever declared by a company, has been duly received by an
NBFC and interest wherever due [except in case of NPAs] has been duly accounted for.
➢ NBFC Prudential Norms directions require dividend income on shares of companies and units of
mutual funds to be recognised on cash basis.
➢ However, the NBFC has an option to account for dividend income on accrual basis, if the same has
been declared by the body corporate in its Annual General Meeting and its right to receive the
payment has been established.
➢ Income from bonds/debentures of corporate bodies is to be accounted on accrual basis only if
the interest rate on these instruments is predetermined and interest is serviced regularly and
not in arrears.
Verification / Confirmation / Valuation
➢ Physically verify all the shares and securities held by a NBFC. Where any security is lodged with an
institution or a bank, a certificate from the bank/institution to that effect must be verified.
➢ In respect of shares/securities held through a depository, obtain a confirmation from the
depository regarding the shares/securities held by it on behalf of the NBFC.
➢ Check whether the investments have been valued in accordance with the NBFC Prudential Norms
Directions and adequate provision for fall in the market value of securities, wherever applicable,
have been made there against, as required by the Directions.
➢ An auditor will have to ascertain whether the requirements of AS 13 “Accounting for
Investments” (to the extent they are not inconsistent with the Directions) have been duly
complied with by the NBFC.
Securities Lending / Borrowing
➢ Verify charges received or paid in respect of securities lend/borrowed.
➢ Obtain a confirmation from the approved intermediary regarding securities deposited with/
borrowed from it as at they earned.
➢ Verify that securities of the same type or class are received back by the lender/paid by the
borrower at the end of the specified period together with all corporate benefits thereof (i.e.
dividends, rights, bonus, interest or any other rights or benefit accruing thereon.)
Loan Company Related Points

(Own Shares)
➢ Check whether the NBFC has not advanced any loans against the security of its own share.
(Internal Control System)
➢ An auditor should verify whether the NBFC has an adequate system of proper appraisal and
follow up of loans and advances. In addition, he may analyse the trend of its recovery
performance to ascertain that the NBFC does not have an unduly high level of NPAs.
(Sanction & Conditions Attached)
➢ An auditor should examine whether each loan or advance has been properly sanctioned. He

should verify the conditions attached to the sanction of each loan or advance i.e. limit on
borrowings, nature of security, interest, terms of repayment, etc.
➢ Check whether the NBFC has not lent/invested in excess of the specified limits to any single
borrower or group of borrowers as per NBFC Prudential Norms Directions.
(Security & Agreement)
➢ An auditor should verify the security obtained and the agreements entered into, if any, with the
concerned parties in respect of the advances given. He must ascertain the nature and value of
security and the net worth of the borrower / guarantor to determine the extent to which an
advance could be considered realisable.
(Classification)
➢ Check the classification of loans and advances (including bills purchased and discounted) made by
a NBFC into Standard Assets, Sub-Standard Assets, doubtful assets and loss assets and the
adequacy of provision for bad and doubtful debts as required by NBFC Prudential Norms
Directions
(Confirmation)
➢ Obtain balance confirmations from the concerned parties. (2 Special Lending)
(Bill Discounting)
➢ As regards bill discounting, verify that proper records/documents have been maintained for every
bill discounted/rediscounted by the NBFC. Test check some transactions with reference to the
documents maintained and ascertain whether the discounting charges, wherever, due, have been
duly accounted for by the NBFC.
Author’s Note:-
In this answer the points are simply combination of QNO 517.000 and 520.000.
QNO Exception Report Old Course – (N16E, M20M, M21E)

523.000 BHASKAR CNO—NBFC.280 New Course – (S21M, N21M,N22M)
What are the obligations of auditor to submit Exception Report to RBI in case of nonbanking financial
companies?
OR
Kammo & Co LLP, a firm of Chartered Accountants, was appointed as auditor of an NBFC. The audit work
has been completed. The audit team which was involved in the fieldwork came across various
observations during the course of audit of this NBFC and have also limited understanding about the
exceptions which are required to be reported in the audit report. They would like to understand in detail
regarding the obligations on the part of an auditor in respect of exceptions in his report so that they can
conclude their work. Briefly explain.
Answer Exception Report
Obligation of auditor to submit an exception report to the Bank.
➢ Where, in the case of a non-banking financial company, the statement regarding any of
the items referred to in paragraph 3 above, is unfavourable or qualified, or in the opinion of the
auditor the company has not complied with:
• the provisions of Chapter III B of RBI Act (Act 2 of 1934); or
• Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 2016; or
• Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking
Company (Reserve Bank) Directions, 2016 and Non-Banking Financial Company -
Systemically Important Non-Deposit taking Company and Deposit taking Company
(Reserve Bank) Directions, 2016.
It shall be the obligation of the auditor to make a report containing the details of such
unfavourable or qualified statements and/or about the non-compliance, as the case may be, in
respect of the company to the concerned Regional Office of the Department of Nonbanking
Supervision of the Bank under whose jurisdiction the registered office of the company is located
as per first Schedule to the Non-Banking Financial Companies Acceptance of Public Deposits
(Reserve Bank) Directions, 2016.

➢ The duty of the Auditor under sub-paragraph (I) shall be to report only the contraventions of the
provisions of RBI Act, 1934, and Directions, Guidelines, instructions referred to in sub-paragraph
(1) and such report shall not contain any statement with respect to compliance of any of those
provisions
Frauds- Old Course – (M14E, M16M, N16R, N16M, P17M, N17R, N17M, N17E, N17M,
QNO
BHASKAR CNO— N18M,N20R)
524.000
NBFC.240 New Course – (M19R ,N20R)
Under what heads can the frauds committed by Non-Banking Financial Companies (NBFCs) be classified?
OR
Classification of frauds by NBFC.
Answer ➢ Classification of Frauds by NBFC (RBI Circular July 2015)
In order to have uniformity in reporting, frauds have been classified as under based mainly on the
provisions of the Indian Penal Code:
• Misappropriation and criminal breach of trust.
• Negligence and cash shortages.
• Fraudulent encashment through forged instruments, manipulation of books of account or
through fictitious accounts and conversion of property.
• Unauthorized credit facilities extended for reward or for illegal gratification.
• Cheating and forgery.
• Irregularities in foreign exchange transactions.
• Any other type of fraud not coming under the specific heads as above.
Cases of ‘negligence and cash shortages’ and ‘irregularities in foreign exchange transactions’
referred to in items (b) and (f) above are to be reported as fraud if the intention to cheat/ defraud
is suspected/ proved. However, the following cases where fraudulent intention is not suspected/
proved, at the time of detection, will be treated as fraud and reported accordingly:
(a) cases of cash shortages more than Rs 10,000/- and
(b) cases of cash shortages more than Rs 5000/- if detected by management/
auditor/ inspecting officer and not reported on the occurrence by the
persons handling cash.
NBFCs having overseas branches/offices should report all frauds perpetrated at such
branches/offices also to the Reserve Bank as per the prescribed format and procedures.
QNO NBFC -Applicability & differences in the presentation Old Course – (M20R, M21M)
525.000 requirements between Division II & Division III New Course –(N19E,M20R,S21M, M21M)
of Schedule III
BHASKAR CNO—NBFC.340/ NBFC.360/ NBFC.380
Mr. G has been appointed an auditor of LMP Ltd, T a NBFC company registered with RBI Mr. G is
concerned about whether the format of financial statements prepared by LMP Ltd. is as per notification
issued by the Ministry of Corporate Affaire (MCA) dated October 11, 2018 The notification prescribed the
format in Envision III under Schedule Ill of the Companies Act, 2013 applicable to NBFCs complying with
Ind-AS. Mr. G wants to know the differences in the presentation requirements between Division II and
Division III of Schedule III of the Companies Act, 2013. Help Mr. G.
Answer ➢ Applicability of Indian Accounting Standards (IND- AS) on NBFCS
• Accounting periods beginning 1 April 2018:
Listed and unlisted NBFCs having a net worth of Rs 500 crore or more and holding, subsidiary,
joint venture or associate companies of such NBFCs;
• Accounting periods beginning 1 April 2019:
• All other listed NBFCs, unlisted NBFCs having a net worth of Rs 250 crore or more
but less than Rs 500 crore and holding, subsidiary, joint venture or associate
companies of such NBFCs.
• The net worth shall be calculated in accordance with the standalone financial
statements of the NBFCs as on 31st March 2016 or the first audited financial
statements for accounting period which ends after that date.
• Format for preparation of financial statements by NBFCs under Ind- AS –
The Ministry of Corporate Affairs (MCA) vide notification dated October 11, 2018
introduced Division III under Schedule III of the Companies Act, 2013, wherein a
format for preparation of financial statements by NBFCs complying with Ind-AS has
been prescribed.
➢ Differences Between Division Ii (Ind- AS- Other Than NBFCS) And Division Iii (Ind- AS-
NBFCS) of Schedule III
The presentation requirements under Division III for NBFCs are similar to Division II (Non NBFC) to a
large extent except for the following:
• Classification & Order in Balance Sheet
NBFCs have been allowed to present the items of the balance sheet in order of their liquidity
which is not allowed to companies required to follow Division II. Additionally, NBFCs are
required to classify items of the balance sheet into financial and non-financial whereas other
companies are required to classify the items into current and non-current.
• Material Items Disclosure
An NBFC is required to separately disclose by way of a note any item of ‘other income’ or
‘other expenditure’ which exceeds 1 per cent of the total income. Division II, on the other
hand, requires disclosure for any item of income or expenditure which exceeds 1 per cent of
the revenue from operations or Rs10 lakhs, whichever is higher.
• Separate Disclosures
o NBFCs are required to separately disclose under ‘receivables’, the debts due from
any Limited Liability Partnership (LLP) in which its director is a partner or member.
o Separate disclosure of trade receivable which have significant increase in credit
risk & credit impaired.
o The conditions or restrictions for distribution attached to statutory reserves have
to be separately disclose in the notes as stipulated by the relevant statute.
• Common Point
NBFCs are also required to disclose items comprising ‘revenue from operations’ and ‘other
comprehensive income’ on the face of the Statement of profit and loss instead of as part of
the notes

Authors Note
• We have experienced from our interaction with the students that they find this chapter difficult
One of the reason we found out was students find the answers in this chapter very lengthy and
difficult to understand. So to deal with it we have done certain changes in the answer such as
changing the flow and style of presentation of the answers. Some answers have also been
summarized where we thought was required, so that it becomes easy for the students to read and
understand the topic.
• GST audit - PARAM covers those question which are asked by ICAI in EXAMS, RTP, MTP, SM, PM. It
has question on GST audit too which were issued by ICAI. ICAI collection is most important and
that itself is huge, so we didn’t include new questions from our side we may issue new questions in
future.
Applicability (Multiple Items Adjustment, Old Course – (N13E, N14R, M15E, P17M, M19M)
QNO
Numerical, Concession Ltd)- New Course – (S17M, M18R, M18M, M19M, S21M, N21M)
526.000
Bhaskar CNO – TAXAUD.040
Concession Ltd. is engaged in the business of manufacturing of threads. The company recorded the
turnover of Rs 1.13 crore during the financial year 2017-18 before adjusting the following:
Discount allowed in the Sales Invoice Rs 8,20,000
Cash discount (other than allowed in
Cash memo/ sales invoice) Rs 9,20,000
Trade discount Rs 2,90,000
Commission on Sales Rs 6,00,000
Sales Return (F.Y. 2016-17) Rs 1,60,000
Sale of Investment Rs 6,60,000
You are required to ascertain the effective turnover to be considered for the prescribed limit of tax audit
under the relevant Act and guide the company whether the provisions relating to tax audit applies.
OR
Comment with respect to computation of total sales, turnover or gross receipts in business exceeding the
prescribed limit under Section 44 AB of Income Tax Act, 1961.
(i) Discount allowed in the sales invoice
(ii) Cash discount
(iii) Price of goods returned related to earlier year
(iv) Sale proceeds of fixed assets.
OR
Mr. A engaged in business as a sole proprietor presented the following information to you for the FY 16-17.
Turnover made during the year Rs 124 lacs. Goods returned in respect of sales made during FY 14-15 is Rs
20 lacs not included in the above. Cash discount allowed to his customers Rs 1 lac for prompt payment.
Special rebate allowed to customer in the nature of trade discount Rs 5 lacs. Kindly advise him whether he
has to get his accounts audited u/s 44AB of the Income Tax Act, 1961.

▪ Section 44AB of Income Tax Act 1961
➢ As per section 44AB of income tax act 1961 if total sales, turnover or gross receipts exceeds the limit
prescribed the person shall be liable for tax audit.
Section 44AB of the Income Tax Act, 1961 applies to every person carrying on business or profession,
if his total sales, turnover or gross receipts in case of:
• Business exceeds the limit of Rs 1 crore and
• Profession, if his gross receipts exceed the limit of Rs 50 lakhs (w.e.f. A.Y. 2017-18) in any
previous year.
The term "sales", "turnover" or "gross receipts" are not defined in the Act however the institute has
given some guidance on calculation of total sales, turnover or gross receipt
Part III – Case Discussion & Conclusion
Particulars Amount Amount Treatment
Turnover 1.13 crore 113 lakhs Total Turnover
Discount in invoice 8.20 lakhs (8.20 lakhs) To be deducted from T/O-As it reduces the sale price
Cash discount 9.20 lakhs Not to be deducted- not related to turnover, are of
nature financing charge nature
Trade discount 2.90 lakhs (2.90 lakhs) Deducted: if it is in the nature of trade discount.
Not Deducted: If it is in the nature of commission on
sales
Commission on 6 lakhs Deducted: if it is in the nature of trade discount.
Sales Not Deducted: If it is in the nature of commission on
sales
Sales Return (F.Y. 1.60 lakhs (1.60 lakhs) To be Deducted- even if the sales returns is related to
2016-17) earlier year/s.
Sale of Investment 6.60 lakhs Include in T/O-If held as stock-in-trade

Not to be included in T/O- If Held as investment.
Total Turnover 100.30 The effective turnover of Concession Ltd exceeds the
prescribed limit of 1 crore for tax audit under section
44AB of the Income Tax Act, 1961. Thus, the provisions
related to tax audit are applicable to the company and
is therefore liable for tax audit
Author’s Note
Note 1:
• Why sale of investment Rs6,60,000 is not deducted to arrive at TO? It is not Stock in trade; It is
investment.
o Turnover given is before giving adjustments, so we ignored it. If turnover would have been
after giving adjustment, we would have deducted.
Note 2:
• CONDITIONAL INCREASE IN TO LIMIT
o With effect from assessment year 2022-23, the threshold limit, for a person carrying on
business, has been increased from Rs 1 crore to Rs 10 crores in case when cash receipts and
payments made during the year does not exceed 5% of total receipt or payment, as the case
may be. In other words, 95% or more of the business transactions should be done through
banking channels.

QNO Tax Audit Applicability -- Application of 5% Criteria Old Course – (M21M)
526.500 Bhaskar CNO – TAXAUD.040 New Course – (M21M)
Mr. Abhinandan engaged in business as a sole proprietor presented the following information to you for
the FY 2020-21. Turnover expected to be made during the year Rs. 1024 lacs. Goods returned in respect of
sales made during FY 2019-20 is Rs. 20 lacs not included in the above. Cash discount allowed to his
customers Rs. 1 lac for prompt payment. Special rebate allowed to customer in the nature of trade
discount Rs. 5 lacs. Further, the aggregate of all amounts received including amount received for sales,
turnover or gross receipts during the previous year, in cash, does not exceed five per cent of the said
amount and aggregate of all payments made including amount incurred for expenditure, in cash, during
the previous year does not exceed five per cent of the said payment. Kindly advise him whether he has to
get his accounts audited u/s 44AB of the Income Tax Act, 1961.
Answer Turnover limit for the purpose of Tax Audit: The following points merit consideration as stated in the
Guidance note on Tax Audit issued by the Institute of Chartered Accountants of India –
(i) Price of goods returned should be deducted from the figure of turnover even if the return are from
the sales made in the earlier years.
(ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a
financing charge and is not related to turnover. The same should not be deducted from the figure of
turnover.
(iii) Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade
discount.
Applying the above stated points to the given problem,
Sr. No. Particulars Amount

1 Total Turnover 1042 Lac
2 Less- (i) Good Returned 20 Lac
(ii) Special rebate allowed to customer in the nature of trade discount 5 Lac
would be deducted
3 Balance 999 Lac
Since the aggregate of all amounts received including amount received for sales, turnover or gross
receipts during the previous year, in cash, does not exceed five per cent of the said amount and
aggregate of all payments made including amount incurred for expenditure, in cash, during the
previous year does not exceed five per cent of the said payment, limit for tax audit is ten crore rupees.
In the given situation, Abhinandan would not be required to get his accounts audited under section
44AB of the Income Tax Act, 1961 as Rs. 999 lac is below prescribed tax audit limit i.e. ten crore
rupees.
QNO Tax Audit Applicability -- Application of 5% Criteria New Course – (N22R)

526.600 Bhaskar CNO – TAXAUD.040
Billimoria & Billimoria, a partnership firm, is engaged in providing engineering consultancy services to
insurance corporates in automobile sector. The firm conducts risk inspection of vehicles and submit their
reports to insurance companies. Both the partners are Chartered Engineers. The Firm is one of your
regular tax audit clients. The following information is culled out from the account books of the company
for financial year 2021-22 by the firm:
Particulars Rupees in Crore
Turnover 8.50
Receipt on account of sales/debtors 6.00
Cash receipt from debtors 0.10
Expenditure during year 7.00
Cash expenditure 0.21
Cash loan repayment 0.05

The partner of said firm informs you that due to changes in income-tax laws, their firm is not liable for
audit under section 44 AB of Income tax Act (commonly called as tax audit). How would you deal with the
matter? Is contention of partner in accordance with law?
Answer Section 44 AB(a) of the Income Tax Act, 1961 prescribes that a person carrying on business shall get his
accounts audited if his total sales, turnover or gross receipts exceed ` 1 crore in any previous year.
However, this limit was enhanced to ` 10 crore in the following case where: -
a. aggregate of all amounts received including amount received for sales, turnover or gross receipts
during the previous year, in cash, does not exceed five per cent of the said amount; and
b. aggregate of all payments made including amount incurred for expenditure, in cash, during the
previous year does not exceed five per cent of the said payment.
However, section 44 AB(b) of the Income Tax Act, 1961 states that in case of profession, every
person shall get his accounts audited, if his gross receipts in profession exceed ` 50 lakh. The
above said firm is engaged in providing engineering consultancy services to insurance corporates.
Hence, the benefit of enhanced threshold limit is not available to persons engaged in professional
activities.
The information regarding cash receipt and payment although falling within 5% of total
receipts/payments is not relevant in the instant case.
Hence, contention of partner is not correct, and firm is required to get its accounts audited under
income tax law.
QNO Applicability (Multiple Clients) Old Course – (N21R)

528.500 Bhaskar CNO – TAXAUD.020 New Course – (N21R)
UT & Co. is a Chartered Accountant Firm, that provides consultancy services. Recently, it got queries
from different clients with respect to applicability of tax audit provisions to their businesses.
In response to such queries, UT & Co., asked from them details such as turnover, total receipts and total
payments made during the year respectively along with mode of receipt/payment, whether filing return
of Income under normal tax provisions or presumptive tax provisions such as section 44AD, 44AE, etc.
So, in the trailing mail, UT & Co., got the aforesaid details from different clients, which it classified into
following categories for ease of framing an opinion, as follows:
Client Turnover (in % of Cash % of Cash Remarks
Sr. No. crore) Receipts in Total Payments in
Receipts Total Payments
1 9.5 5% 5% Has been filing return as per the
regular provisions of income tax.
2 1.8 7% 4% Has declared business income as
per presumptive taxation under
section 44AD of the Income-tax
Act, 1961.
section 44AD of the Income-tax
Act, 1961 during last 2 previous
years but during current previous
year has declared income lower
than as per section 44AD and the
total income is less than basic
exemption limit.
section 44AE of the Income-tax
Act, 1961 during last 4 previous
years but during current previous
year has declared income lower

than as per section 44AE and the
total income is less than basic
exemption limit.
On behalf of UT & Co., please provide your opinion, along with reasons, as a consultant in case of
aforesaid clients that whether tax audit is applicable to them or not?
Answer Applicability of Tax Audit:
Client Opinion(Tax Reason
Sr. No. Audit
Applicable or not)
1 No As the turnover is upto ` 10 crore, Cash Receipts and Cash
Payments are upto 5% of total receipts & total payments,
respectively, and has been filing return as per the regular
provisions of income tax, so tax audit is not applicable.
2 No Even though turnover exceeds ` 1 crore and Cash Receipts are
greater than 5% of Total Receipts but as the business income has
been declared as per presumptive taxation under section 44AD of
the Income-tax Act, 1961, so tax audit is not applicable.
3 No Even though business income as per presumptive taxation under
section 44AD of the Income-tax Act, 1961 has been declared
during last 2 previous years but has not been declared during the
current previous year but as the total income is less than basic
exemption limit, so tax audit is not applicable.
4 Yes Has been declaring total income as per presumptive taxation
under section 44AE of the Income-tax Act, 1961 during last 4
previous years but during current previous year has declared
income lower than as per section 44AE, so tax audit is applicable.
QNO Matters tax auditor should consider to while furnishing New Course – (N19E, S21M)
530.500 the particulars in Form No, 3CD
Mr. PK is conducting the Tax audit under section 44 AB of the Income Tax Act, 1961 of MG Ltd. for the
year ended 31st March, 2019. There is a difference of opinion between Mr. PK and the Management in
respect of certain information to be furnished in Form No. 3CD. As a tax auditor, Mr. PK has to report
whether the statement of particulars in Form 3CD are true and correct and the same is to be annexed to
the report in Form No. 3CA. Advise on the matters to be considered by Mr. PK while furnishing the
particulars in Form No. 3CD.
Answer ➢ The statement of particulars given in Form No. 3CD as annexure to the audit report contains 44
clauses (counting wise 50). The tax auditor has to report whether the particulars are true and
correct. This Form is a statement of particulars required to be furnished under section 44AB. The
same is to be annexed to the reports in Forms No. 3CA and 3CB in respect of a person who carries
on business or profession and whose accounts have been audited under any other law and in
respect of person who carries on business or profession but who is not required by or under any
other law to get his accounts audited respectively.
➢ While furnishing the particulars in Form No. 3CD it would be advisable for the tax auditor
to consider the following:
• If a particular item of income/expenditure is covered in more than one of the specified
clauses in the statement of particulars, care should be taken to make a suitable cross
reference to such items at the appropriate places.
• If there is any difference in the opinion of the tax auditor and that of the assessee in
respect of any information furnished in Form No. 3CD, the tax auditor should state both
the view points and also the relevant information in order to enable the tax authority to
take a decision in the matter.
• If any particular clause in Form No. 3CD is not applicable, he should state that the same is
not applicable.
• In computing the allowance or disallowance, he should keep in view the law applicable in

the relevant year, even though the form of audit report may not have been amended to
bring it in conformity with the amended law.
• In case the prescribed particulars are given in part or piecemeal to the tax auditor or
relevant form is incomplete and the assessee does not give the information against all or
any of the clauses, the auditor should not withhold the entire audit report. In such a case,
he can qualify his report on matters in respect of which information is not furnished to
him. In the absence of relevant information, the tax auditor would have no option but to
state in his report that the relevant information has not been furnished by the assessee.
• The information in Form No. 3CD should be based on the books of accounts, records,
documents, information and explanations made available to the tax auditor for his
examination.
• In case the auditor relies on a judicial pronouncement, he may mention the fact as his
observations in clause (3) of Form No. 3CA or clause (5) provided in Form No. 3CB, as the
case may be.
QNO Cl 11--Stock Register Not Maintained- Old Course – (N09E, N11R, M13R, P17M, M20R)
532.000 Bhaskar CNO – TAXAUD.240 New Course – (S17M, M20R, S21M)
ABC Printing Press, a proprietary concern, made a turnover of above Rs 1.03 crore for the year ended
31.03.2018. The Management explained its auditor Mr. Z that it undertakes different job work orders
from customers. The raw materials required for every job are dissimilar. It purchases the raw materials
as per specification/ requirements of each customer, and there is hardly any balance of raw materials
remaining in the stock, except pending work-in-progress at the year end. Because of variety and
complexity of materials, it is rather impossible to maintain a stock-register. Give your comments.
▪ Clause 35(b) of Form 3CD
▪ Clause 11(b) of Form 3CD
➢ The explanation given by the entity for the use of varieties of raw materials for different jobs
undertaken may be valid.
But the auditor needs to verify:
• The job-orders received, and the different raw materials purchased for each job
separately.
• The use of different papers (quality, quantity and size) ink, colour etc.
If possible, the auditor may also enquire with the other similar printers in the locality to
ensure the prevailing custom.
➢ Reporting Requirement
• Under the clause 35(b) and clause 11(b) of Form 3CD:
Auditor has to report and certify under the clause 35(b) and clause 11(b) of Form 3CD
about the details of stock and account books (including stock register) maintained. He
must verify the closing stock of raw materials, work-in-progress and finished goods of the
concern, at least on the date of its balance sheet.
➢ Non-maintenance of stock register due to variety and complexity of materials.
➢ In case the said details are not properly maintained, he has to specifically mention the same with
reasons of non-maintenance of stock register by the entity.
QNO Cl 21--Cash Payment Exceeding Prescribed Old Course – (N15R, N16M, P17M, M18M, N18E)
543.000 Limit (Transporter)- New Course – (N21M)
Ploy Ltd., engaged in the leasing of goods carriage, appointed you as the tax auditor for the financial year
2017-18. How would you deal with the following payments relating to the leasing transactions in your
tax audit report?
(i) Payments of 6 invoices of Rs 5,000 each made in cash to Mr. X on 4th July, 2017.

(ii) Payments of 2 invoices of Rs 18,000 each made in cash to Mr. Y on 5th July, 2017 and 6th July,
2017 respectively.
(iii) Payment of Rs 40,000 made in cash to Mr. Z on 7th July, 2017 against an invoice for expenses
booked in 2016-17.
▪ Section 44AB of the Income Tax Act, 1961
▪ Section 40A (3) & Section 40A (3A) of the Income Tax Act, 1961
▪ Clause 21(d)(A) of Form 3CD
➢ Section 44AB of the Income Tax Act, 1961
As per section 44AB of the Income Tax Act, 1961, the tax auditor should report whether in his
opinion the particulars in respect of Form 3CD are true and correct.
It is the primary responsibility of the assessee to prepare the information in form 3CD.
➢ Section 40A (3) of the Income Tax Act, 1961 to be read with
Disallowance under section 40A(3) of the Income Tax Act, 1961 is attracted if the assessee incurs
any expenses in respect of which payment or aggregate of payments made to a person in a day,
otherwise than by an account payee cheque drawn on bank or account payee draft, exceeds Rs
10,000. However, in case of payment made for plying, hiring or leasing of goods carriage, limit is Rs
35,000 instead of Rs 10,000.
➢ Section 40A (3A) of the Income Tax Act, 1961
Further, as per section 40A(3A) of the Income Tax Act, 1961, where an allowance has been made
in the assessment for any year in respect of any liability incurred by the assessee for any
expenditure and subsequently during any previous year the assessee makes payment in respect
thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank
draft, the payment so made shall be deemed to be the profits and gains of business or profession
and accordingly chargeable to income-tax as income of the subsequent year if the payments made
to a person in a day, exceeds Rs 10,000 (Rs 35,000 in case of plying, hiring or leasing of goods
carriages).
➢ Rule 6DD
However, exemption is provided under Rule 6DD having regard to nature and extent of banking
facilities available and other relevant factors.
➢ Clause 21(d)(A) and 21(d)(B) of Form 3CD
Subsequently, under clause 21(d) (A) and 21(d) (B) of Form 3CD, the tax auditor has to scrutinize
on the basis of the examination of books of account and other relevant documents/evidence,
whether the expenditure covered under section 40A (3) and 40A (3A) respectively read with rule
6DD were made by account payee cheque drawn on a bank or account payee bank draft. If not,
the same has to be reported under abovementioned clauses.
Part III – Case Discussion & Conclusion
➢ Therefore, as per the provisions and explanations discussed above, the given cases are dealt as
under-
• Payments of 6 invoices of Rs 5,000 each aggregating Rs 30,000 made in cash on 4th July,
2017 need not be reported as the aggregate of payments do not exceed Rs 35,000.
• Payments of 2 invoices of Rs 18,000 each made in cash on 5th July, 2017 and 6th July,
2017 respectively aggregating Rs 36,000 need not be reported as the payment does not
exceed Rs 35,000 in a day.
• Payment of Rs 40,000 made in cash against an invoice for expenses booked in 2016-17 is
likely to be deemed to be the profits and gains of business or profession under section
40A(3A) of the Income Tax Act, 1961.
Thus, the details of such amount need to be furnished under clause 21(d) (B) of Form 3CD.
Author’s Note
Limit of 35000 is applicable when payment is made for plying, hiring or leasing goods carriage, such
payment can be made by any business, it can be transporter or anyone else. Purpose should be seen and
not the nature of assesses business. Further question clearly specifies that payment is for leasing, so limit
of 35000 is relevant.

QNO Cl 21--Entrance fees paid to Clubs- Old Course – (N11E, M12R, N12E, P17M, N20R)
544.000 Bhaskar CNO – TAXAUD.240 New Course –(N20R)
Case 1
As an auditor of a partnership firm under section 44AB of the Income Tax Act, 1961, how would you
report on the following:
Expenditure incurred at clubs.
OR
Case 2
M/s PQRS & Associates is appointed for conducting tax audit as per Income Tax Act ,1961 of QW Ltd., a
cotton textile company. The Company had incurred ` 6 lac towards advertisement expenditure on a
brochure/ pamphlet published by a political party in Pune. Advise the auditor whether such expenditure
should be included in the tax audit report or not.
➢ Clause 21(a) of Form 3CD
➢ Case 1
As per Clause 21(a) of Form 3CD, the amount of expenditure incurred at clubs by the assessee
during the year being entrance fees and subscriptions and being cost for club services and facilities
used should be indicated.
The payments made may be in respect of directors and other employees in case of companies, and
for partners or proprietors in other cases. The fact whether such expenses are incurred in the
course of business or whether they are of personal nature should be ascertained.
The tax auditor is required to furnish the details of amounts debited to the profit and loss account,
being in the nature of capital, personal, advertisement expenditure etc.
➢ Case 2
As per Clause 21(a) of Form 3CD, the auditor is required to furnish the details of amounts debited
to the Profit and Loss Account, being in the nature of advertisement expenditure in any souvenir,
brochure, tract, pamphlet or the like published by a political party in his tax audit report.
In the given situation, M/s PQRS & Associates is appointed for conducting tax audit as per Income
Tax Act, 1961 of QW Ltd., a cotton textile company. The Company had incurred ` 6lac towards
advertisement expenditure on a brochure/ pamphlet published by apolitical party.
Therefore, advertisement expenditure of ` 6 lac on brochure/pamphlet published by a political
party shall be reported in the tax audit report as per Clause 21 (a) of Form3CD.
QNO Report under clause 27(b) of 3CD Old Course – (N19E)

546.500 Bhaskar CNO – TAXAUD.240 New Course – (S21M)
How will you verify the Income & Expenditure of earlier years credited/debited in current year for
reporting under clause 27(b) of 3CD while carrying out Tax Audit u/s 44AB of the Income Tax Act, 1961?
Answer ➢ Clause 27(b) of 3CD- Particulars of income or expenditure of prior period credited or debited to
the profit and loss account to be verified as:
• It may be noted that information under this clause would be relevant only in those cases
where the assessee follows mercantile system of accounting.
• Under cash system of accounting, expenses debited/ income credited to the profit and loss
account would be current year’s expenses/income even though they may relate to earlier
years.
• The tax auditor should obtain the particulars of expenditure or income of any earlier year
debited or credited to the profit and loss account of the relevant previous year when
mercantile system of accounting is followed.
• In the case of a person whose accounts of the business or profession have been audited
under any other law, the information may be available from annual accounts.
• In the case of a person who carries on business or profession but who is not required by or
under any other law to get his accounts audited, however, a close scrutiny of the ledger in
regard to the period for which expenditure or income is entered in the account books may

be necessary.
• The tax auditor should maintain the following information in his working papers file for the
purpose of reporting in the format provided in the e-filing utility:
QNO Cl 29B --Shares Received 1,000- Old Course – (M16E, P17M)

547.000 Bhaskar CNO – TAXAUD.240 New Course— (S17M, N19E, M18M)
ABC Pvt. Ltd. and XYZ Pvt. Ltd. are the companies in which public are not substantially interested. During
the previous year 2018-19, ABC Pvt. Ltd. received some property, being shares of XYZ Pvt. Ltd., the
details of which are provided below:
No. of Shares: 1,000
Aggregate fair market value of shares: Rs 75,000
Consideration value: Nil
The management of the company contends that the shares need not to be furnished in Form No. 3CD. As
the tax auditor of ABC Pvt. Ltd., how would you deal with the matter?
OR
While doing Tax Audit, under section 44AB of the Income Tax Act, 1961, of the accounts of Glue Private
Limited for the Assessment Year 2018-19, it was found that during the Financial Year 2017-18, Glue
Private Limited had received 9,000 shares, the market value of which was Rs 90,000 on the date of
transfer, at a price of Rs 45,000 from Stick Private Limited. The Management of Glue Private Limited
maintained that the transaction was as per the terms of negotiations and there would be no cause for
the Auditor to bring this matter in his Tax Audit Report-Comment.
▪ Clause 29B of Form 3CD
▪ Section 56(2)(x) of Income Tax Act, 1961
➢ Clause 29B of Form 3CD
A tax auditor has to furnish the details of shares received during the previous year, under clause
29B of Form 3CD, in case, the assessee has received any property, being share of a company not
being a company in which public are substantially interested, without consideration or for
inadequate consideration as referred to in section 56(2) (x) of the Income Tax Act, 1961.
➢ Section 56(2)(x) of Income Tax Act, 1961
Where a firm or a company not being a company in which the public are substantially interested,
receives, in any previous year any property being shares of a company not being a company in
which the public is substantially interested,
• without consideration, the aggregate fair market value of which exceeds Rs 50,000, the
whole of the aggregate fair market value of such property;
• for a consideration which is less than the aggregate fair market value of the property by
an amount exceeding Rs 50,000, the aggregate fair market value of such property as
exceeds such consideration, shall be chargeable to income-tax under the head “Income
from other sources”.
The fair market value of shares means the value as determined in accordance with the
method prescribed in Income Tax Rules, 1962.
➢ In this case, ABC Pvt. Ltd. is a company, other than a company in which the public are substantially
interested. During the previous year 2018-19, the company received property, being shares, for no
consideration, the aggregate fair market value of which is s Rs 75,000.
➢ As per the facts of the case, provisions and explanations given above, the income generated by
ABC Pvt. Ltd., being whole of the aggregate fair market value of shares received (i.e. Rs 75,000), is
chargeable to income-tax under the head “Income from other sources” as per section 56(2)(x) of
the Income Tax Act, 1961.
Therefore, the tax auditor of ABC Pvt. Ltd. is required to furnish the details of such shares received
under clause 29B of Form 3CD. The contention of the management of the company, for not
reporting such receipt of shares, is not acceptable.
Author’s Notes:

Clause 28 was relevant till 1st April 2017, now such cases are covered in Clause 29B
QNO Cl 34--Not furnished statement on list of details not New Course – (M22M,N22M)
550.500 reported in Statement of TDS
While conducting the tax audit of RRR Ltd. you observed that company has timely filed ETDS return for
TDS deducted on salary under section 192 of the Income Tax Act, 1961 in form 24Q in respect of fourth
quarter period from 1st January 2021 to 31st March 2021. The company has not furnished list of details
which are not reported in the statement of tax deducted at source under the pretext that TDS
statements are furnished within the prescribed time. As a Tax Auditor of RRR Ltd. How you would deal
and report?
Answer ➢ As per Clause 34 (b) of the Form 3CD, the auditor has to report whether the assessee is required to
furnish the statement of tax deducted or tax collected. If yes, please furnish the details:
Tax deduction Type Due date for Date of Whether the statement of tax If not, please
and collection of furnishing furnishing, deducted or collected furnish list of
Account Form if contains information about all details/trans
Number furnished transactions which are actions which
(TAN) required to be reported are not
reported
➢ Accordingly, clause 34 (b) requires, a list of details/transactions which are not reported in the
statement of tax deducted at source and statement of tax collected at source are required to be
furnished. The reporting requirement is notwithstanding the fact that the assessee has furnished
the statements of tax deducted at source and tax collected at source within the prescribed time.
➢ In the given situation, RRR Ltd., has timely filed ETDS return for TDS deducted on Salary under
section 192 of the Income Tax Act in Form 24Q in respect of 4th quarter. The company has not
furnished list of details which are not reported in the statement of tax deducted at source under
the pretext that TDS Statements are furnished within the prescribed time. Therefore, in view of
above, RRR Ltd. is required to furnish list of details which are not reported in the statement of tax
deducted at source.
QNO Cl 41--Demand Notice under Excise Act New Course – (N20E,N22M)

555.500 Bhaskar CNO – TAXAUD.240
M/s. NKB Ltd. is engaged in the manufacturing of textile products having an annual capacity of producing
1,00,000 units of garments. NKB Ltd. is covered under the provisions of Goods and Service Tax Act with
an applicable rate of 12%. During the financial year 2019-2020, NKB Ltd. received a demand notice of `
15.00 Lacs pertaining to the F.Y 2013-14 when the provisions of Central Excise Act were applicable. NKB
Ltd. deposited the demand amount after discussing with its legal department. Are you, as a tax auditor
of NKB Ltd., required to report the same?
Answer NKB Ltd. Is a manufacturer of textile products and is covered under GST Act. During financial year
2019-2020 NKB has received a demand notice of 15 lakhs which pertains to financial year 2013-2014
when the Central Excise Act was prevalent. As a tax auditor of NKB Ltd., reporting would be under
Clause 41 which is given hereunder:
“Please furnish the details of demand raised or refund issued during the previous year under any tax
laws other than Income Tax Act, 1961 and Wealth tax Act, 1957 along with details of relevant
proceedings. “
It may be noted that even though the demand/refund order is issued during the previous year, it may
pertain to a period other than the relevant previous year. In such cases als o, reporting has to be done
under this clause. If there is any adjustment of refund against any demand, the auditor shall also
report the same under this clause.
In this case, liability is of excise duty i.e. under Central Excise Act, other than Income Ta x Act and
Wealth Tax Act, thus this clause gets attracted and the reporting has to be done as per format:
S Name of Demand/ Date of Financial Amount of Adjustment Remarks
No. the Refund demand year to demand/raise of refund
Applicable Order raised/ref which the d/refund against
Act no., if und demand/ref issued demand, if
any issued und relates any
QNO ICDS & AS- Old Course – (M09E, N13R, N16R, P17M)
557.010 Bhaskar CNO – TAXAUD.240 New Course – (M18E, M22R))
ABC Ltd. is consistently following Accounting Standards as required under section 133 of the Companies
Act, 2013. During your fax audit under section 44AB of the Income Tax Act, 1961, the Board of Directors
informed you that profits of the Company is properly arrived at and the Accounting Standards applicable
to it have been followed consistently and as such, there need not be any adjustments to be made as per
Income Computation and Disclosure Standards notified under section 145 of Income Tax Act, 1961.
Based on the requirements of Law in this regard, examine the validity of the stand of Management in
this regard.
OR
Discuss briefly Income Computation and Disclosure Standards (ICDS) to be followed by assessee under
the Income-tax Law.
▪ Clause 13 of the form 3CD
➢ As per Clause 13 of the form 3CD assesse shall disclose
(d) Whether any adjustment is required to be made to the profits or loss for complying
with the provisions of income computation and disclosure standards notified under
section 145(2)
(e) If answer to (d) above is in the affirmative, give details of such adjustments:
(f)Disclosure as per ICDS:

➢ Income Computation and Disclosure Standards (ICDS):
Section 145 of the Income Tax Act, 1961 deals with the method of accounting.
Under section 145(1), income chargeable under the heads “Profits and gains of business
or profession” or “Income from other sources” shall be computed in accordance with
either the cash or mercantile system of accounting regularly employed by the assessee.
Section 145(2) empowers the Central Government to notify in the Official Gazette from
time to time, income computation and disclosure standards to be followed by any class of
assessee or in respect of any class of income.
Accordingly, the Central Government has, in exercise of the powers conferred under
section 145(2), notified ten income computation and disclosure standards (ICDSs) to be
followed by all assesses (other than an individual or a HUF who is not required to get his
accounts of one previous year audited in accordance with the provisions of section
44(AB)), following the mercantile system of accounting, for the purposes of computation
of income chargeable to income-tax under the head “Profit and gains of business or
profession” or “ Income from other sources”. from the A.Y. 2017-18.
All the notified ICDSs are applicable for computation of income chargeable under the head
“Profits and gains of business or profession” or “Income from other sources” and not for
the purpose of maintenance of books of accounts.
In the case of conflict between the provisions of the Income‐tax Act, 1961 and the
notified ICDSs, the provisions of the Act shall prevail to that extent.
The Central Government has prescribed 10 Income Computation and Disclosure Standards
(ICDSs) as under:
See List Given Above.
Conclusion
➢ In the instant case, ABC Ltd. is consistently following Accounting Standards in compliance with
section 133 of the Companies Act, 2013 but not complying with the provisions of Income
Computation and Disclosure Standards notified under section 145 of the Income Tax Act, 1961.
Contention of the management that they are following Accounting Standards and need not to
make any adjustments as per ICDS, is not correct. Thus, ABC Ltd. is required to adjust the profits in
compliance with ICDS.

Authors Note
• Clause 13 of form 3CD has not been inserted by the institute in this answer but since
clause 13 of form 3CD is the clause that speaks about ICDS we have included it in the answer.
Ajay devgan white colour ki Van leke Construction site pe pahuch tha hai. Wahake labour logo se
puch tha hai kita Revenue kamate ho. Fir bolta hai jinke paas Fixed Assets nahi hai aur Foreign
exchange nahi unki list banao. List le jaata hai aur Government grant mangta hai, jab tak
government grant nahi deti khud ka ghar as Security jama karata hai, Borrowing cost aur
Provisions khud bear karta hai.
Ajay devgan white colour ki (Accounting Policy)
Van leke (Valuation of Inventory)
Construction site pe pahuch tha hai. Wahake labour logo se puchtha hai kita (Construction
Contracts)
Revenue kamate ho. Fir bolta hai jinke paas (Revenue Recognition)
Fixed Assets nahi hai aur (Tangible Fixed Assets)
Foreign exchange nahi unki list banao. List le jaata hai aur (Changes in Foreign Exchange Rate)
Government grant mangta hai, jab tak government grant nahi deti khud ka ghar as (Government
Grants)
Security jama karata hai (Securities),
Borrowing cost aur (Borrowing Cost)
Provisions khud bear karta hai. (Provisions, Contingent Liabilities and Contingent Assets
• First table comes under sub clause (e) where we have to explain impact on profits because of
ICDS and next table comes under sub clause (f) which gives disclosures. Yes, 2 clauses are
missing in 2nd table, department has done same in original form 3CD also, may be because they
don’t need disclosure on them.
QNO Applicability of Revision of Audit- Old Course – (N08E, N13R, P17M, N18R, N19R)
558.010 Bhaskar CNO – TAXAUD.200 New Course – (S17M, N18R, N19R, S21M)
You are doing the tax audit of a Limited Company. After submission of Tax Audit Report, management
notices that there was apparent mistake of law and due to this mistake, revised the final accounts. As a
tax auditor, company seeks your opinion whether the tax audit can also be revised or not.
OR
State whether a Tax audit report can be revised and if so state those circumstances.
Answer ➢ Revision of Tax Audit Report:
Normally, the report of the tax auditor cannot be revised later.
However, when the accounts are revised in the following circumstances, the tax Auditor may have
to revise his Tax audit report also.
• Revision of accounts of a company after its adoption in the annual general meeting.
• Change in law with retrospective effect.
• Change in interpretation of law (e.g.) CBDT Circular, Notifications, Judgments, etc. The
Tax Auditor should state it is a revised Report, clearly specifying the reasons for such
revision with a reference to the earlier report.
Amendment in Rule 6G
• The report of audit furnished under this rule may (option) be revised
• by the person (assessee) by getting revised report of audit from an accountant, duly
signed and verified by such accountant, and
• furnish it before the end of the relevant assessment year for which the report pertains,
• if there is payment by such person after furnishing of report under subrule (1) and (2)
which necessitates recalculation of disallowance under section 40 or section 43B.
➢ After submission of Tax Audit Report, management notices that there was apparent mistake of
law and due to this mistake, revised the final accounts. Tax auditor wants to know whether tax

audit report can be revised or not.
➢ The Tax Auditor should state it is a revised Report, clearly specifying the reasons for such revision
with a reference to the earlier report. Thus, the Tax Audit Report can be changed under the given
circumstances.

QNO Powers of C&AG Old Course-- (N07E, N11E, N12E, N13R, M15R, M16R, N16M, P17M, M20M)
597.000 UNIQUE New Course-- (S17M, M18R, M20M, S21M)
Ceta Ltd. is a company in which 58% of the paid-up share capital is held by Rajasthan Government. The
company is engaged in the business of providing consultancy services in relation to construction projects.
The audit of the financial statements of Ceta Ltd. for the financial year ended 31 March 2019 got
completed with lot of intervention of Comptroller & Auditor General of India, wherein C&AG was giving
directions to the auditors on the manner in which audit should be conducted in respect of certain areas.
Further, it also received comments from C&AG on the audit report of the auditors. Ceta Ltd is seeking
advice to go against C&AG so that they can avoid unnecessary interference of C&AG. You are required to
advise Ceta Ltd. with respect to role of C&AG in the audit of a Government company.
OR
Being an expert in the field of government audit, you are required to briefly explain the powers of
Comptroller and Auditor General of India with respect to supplementary audit and test audit as stated
under section 143(6) and 143(7) of the Companies Act, 2013.
OR
Enumerate the right of C&AG of India to conduct a supplementary audit of the financial statement of a
company, or comment upon or supplement audit report provided under section 143(6) of the Companies
Act, 2013.
Answer ➢ Powers of Comptroller and Auditor-General of India.
Appointment of the auditor in the case of a Government company: In the case of a
Government company, the comptroller and Auditor-General of India shall appoint the
auditor under sub-section (5) or sub-section (7) of section 139 i.e. appointment of First
Auditor or Subsequent Auditor and direct such auditor the manner in which the accounts
of the Government company are required to be audited and thereupon the auditor so
appointed shall submit a copy of the audit report to the Comptroller and Auditor-General
of India which, among other things, include the directions, if any, issued by the
Comptroller and Auditor-General of India, the action taken thereon and its impact on the
accounts and financial statement of the company.
Supplementary audit under section 143(6)(a) of the Companies Act, 2013:
The Comptroller and Auditor-General of India shall within 60 days from the date of receipt
of the audit report have a right to conduct a supplementary audit of the financial
statement of the company by such person or persons as he may authorize in this behalf;
and for the purposes of such audit, require information or additional information to be
furnished to any person or persons, so authorised, on such matters, by such person or
persons, and in such form, as the Comptroller and Auditor-General of India may direct.
Comment upon or supplement such Audit Report under section 143(6)(b) of the
Companies Act, 2013: Any comments given by the Comptroller and Auditor-General of
India upon, or supplement to, the audit report shall be sent by the company to every
person entitled to copies of audited financial statements under sub-section (1) of section
136 of the said Act i.e. every member of the company, to every trustee for the debenture-
holder of any debentures issued by the company, and to all persons other than such
member or trustee, being the person so entitled and also be placed before the annual
general meeting of the company at the same time and in the same manner as the audit
report.
Test audit under section 143(7) of the Companies Act, 2013: Without prejudice to
the provisions relating to audit and auditor, the Comptroller and Auditor-General of India
may, in case of any company covered under sub-section (5) or sub-section (7) of section
139 of the said Act, if he considers necessary, by an order, cause test audit to be
conducted of the accounts of such company and the provisions of section 19A of the
Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971,

shall apply to the report of such test audit.
QNO Comprehensive Audit Old Course-- (M09R, N10R, N11R, N12R, M14R, N14R, N15R, M16M,
599.000 Bhaskar CNO – PSU.120 N16R, P17M, M17M, N17R, M18M, N18R, M19R, N19M, M20R, N20M, M21M)
New Course-- (M18M, N18E, M19R, N19M, M20R, N20M, N20E, S21M, M21M,
N21M, M22M,N22M)
The Comptroller and Auditor General of India has appointed a chartered accountant firm to conduct the
comprehensive audit of Metro Company Limited (a listed government company) which is handling the
Metro project of the metropolitan city for the period ending 31-03-2020. The work to be conducted
under Project A handled by the Metro Company Limited was of laying down railway line of 124
kilometres. [The chartered accountant firm reviewed the internal audit report and observed the
shortcoming reported about the performance of Project A regarding the understatement of the Current
liabilities and Capital work in progress by Rs. 84.68 crore.] Explain some of the matters to be undertaken
by the chartered accountant firm while conducting the comprehensive audit of Metro Company Limited.
OR
The Comptroller and Auditor General assists the legislature in reviewing the performance of public
undertakings. He conducts an efficiency-cum-performance audit other than the field which has already
been covered either by the internal audit of the individual concerns or by the professional auditors. He
locates the area of weakness for managements’ information. Explain stating clearly the issues examined
in comprehensive audit.
OR
The areas covered in comprehensive audit vary from enterprise to enterprise depending on the nature of
the enterprise, its objectives and operations. You are required to list down some of the broad areas to be
examined in comprehensive audit.
OR
XYZ & Co., a CA. firm was appointed by C&AG to conduct comprehensive audit of ABC Public
undertaking. C&AG advised to cover areas such as investment decisions, project formulation,
organisational effectiveness, capacity utilisation, management of equipment, plant and machinery,
production performance, use of materials, productivity of labour, idle capacity, costs and prices,
materials management, sales and credit control, budgetary and internal control systems, etc.
Discuss stating the issues examined in comprehensive audit.
OR
Solar Limited is a public sector undertaking engaged in production of electricity from solar power. It has
started a new project near Pondicherry with a new technology for a cost of` 9,750 crore. Though there is
delay in commencement of project and accordingly, there has been overrun in the cost. State the
matters C&AG while conducting Comprehensive Audit may cover in reporting on the performance and
efficiency of this project.
Answer ➢ The Comptroller and Auditor General assist the legislature in reviewing the performance of public
undertakings. He conducts an efficiency-cum-performance audit other than the field which has
already been covered either by the internal audit of the individual concerns or by the professional
auditors. He locates the area of weakness and extravagance for managements’ information
➢ The areas covered in comprehensive audit naturally vary from enterprise to enterprise depending
on the nature of the enterprise, its objectives and operations. However, in general, the covered
areas are those of investment decisions, project formulation, organizational effectiveness, capacity
utilization, management of equipment, plant and machinery, production performance, use of
materials, productivity of labour, idle capacity, costs and prices, materials management, sales and
credit control, budgetary and internal control systems, etc.
➢ Areas to be covered:
The areas covered in comprehensive audit naturally vary from enterprise to enterprise depending
on the nature of the enterprise, its objectives and operations. Some of the issues examined in
comprehensive audit are: (Below points should be explained in sentence form to make answer
more presentable)
Research and development programmes.
Project planning.
Systems of project formulation and implementation.
Comparison of the overall capital cost of the project with the approved planned costs.
Accepted production or operational outputs been achieved? Has there been
underutilization of installed capacity or shortfall in performance?
Cost control measures adequate and are there inefficiencies, wastages in raw materials
consumption, etc.
Undue waste, unproductive time for men and machines, wasteful utilization or even non-
utilization of resources.
Effective and economical.
Planned rate of return.
System of repairs and maintenance.
➢ The efficiency and effectiveness audit of public enterprises is conducted on the basis of certain
standards and criteria. Profit is not the key criterion on performance; management’s performance
in the economical and efficient use of public funds and in the achievement of objectives is more
relevant. Public enterprises have been set up with certain socio-economic purposes and for
fulfillment of certain objectives. The objectives vary from enterprise to enterprise. Audit appraisal
analyses the performance of an enterprise to bring out the extent to which the objectives for
which the enterprise was set up have been served.
QNO Performance Audit Planning Old Course-- (M14E, P17M, N17R)

599.200 Bhaskar CNO – PSU.180 New Course-- (S17M, M18M, S21M, M22R)
The objectives of audit in connection with a State Electricity Distribution Company were to ascertain
whether the:
(i) total cost of providing electricity is being recovered by timely submissions to the State Electricity
Regulatory Commission;
(ii) tariff orders, sales circulars and sales instructions were issued timely, without any ambiguity. They
were implemented in time;
(iii) metering, billing and collection was managed efficiently and effectively;
(iv) monitoring and internal controls were efficient.
What kind of audit is referred in the above scenario? Also briefly discuss the steps suggested to the
auditors for planning such an audit.
Answer ➢ In the given scenario, in view of the objectives discussed, performance audit is being referred.
The following steps are suggested to the auditors for planning while conducting the performance
audit:
(A) Understanding the Entity/Programme - It is the starting point for planning individual
performance audit.
➢ The auditor may use the following sources for understanding the entity:
(i) Documents of the entity: Documents on administration and functions of the entity, policy files,
annual reports, budget documents, accounts, minutes of meetings, information on the website,
internal audit reports, electronic databases and MIS reports, RTI material etc.
(ii) Legislative documents: Legislation, parliamentary questions and debates, reports of the Public
Accounts Committee, the Committee on Public Undertakings, the Estimates Committee, and
letters from Members of Parliament.

(iii) Policy documents: Documents of Planning Commission, Ministry of Finance etc.
(iv) Academic or special research: Independent evaluations on the entity, academic research and
similar work done by other governments and other SAIs.
(v) Past audits: Past financial and performance audits of the entity provide a major source of
information and understanding.
(vi) Media coverage: Print and electronic media - their systematic documentation on regular basis
in a transparent manner.
(vii) Special focus groups: Audit Advisory Committee concerns, annual and special reports of World
Bank, Reserve Bank of India, reports by special interest groups, NGOs, etc.
QNO Performance Audit- Issues addressed Old Course-- (N15R, M16R, M16E, M17R, N18E, M20R)
600.000 Bhaskar CNO – PSU.160 New Course-- (N18R, M20R, S21M)
“A performance audit is an objective and systematic examination of evidence for the purpose of
providing an independent assessment of the performance of a government organization, program,
activity, or function in order to provide information to improve public accountability and facilitate
decision-making by parties with responsibility to oversee or initiate corrective action.” Briefly discuss the
issues addressed by Performance Audits conducted in accordance with the guidelines issued by C&AG.
OR
Write short notes on Issues addressed in Performance Audit of PSUs?
Answer According to the guidelines issued by the C&AG, Performance Audits usually address the issues of:
➢ Economy-
It is minimising the cost of resources used for an activity, having regard to appropriate
quantity, quality and at the best price.
Judging economy implies forming an opinion on the resources (e.g. human, financial and
material) deployed. This requires assessing whether the given resources have been used
economically and acquired in due time, in appropriate quantity and quality at the best
price.
➢ Efficiency-
It is the input-output ratio. In the case of public spending, efficiency is achieved when the output is
maximised at the minimum of inputs, or input is minimised for any given quantity and quality of
output.
Auditing efficiency embraces aspects such as whether:
• sound procurement practices are followed;
• resources are properly protected and maintained;
• public sector programmes, entities and activities are efficiently managed,
regulated, organised and executed
• efficient operating procedures are used;
• optimum amount of resources (staff, equipment, and facilities) are used in
producing or delivering the appropriate quantity and quality of goods or services
in a timely manner; human, financial and other resources are efficiently used;
• the objectives of public sector programmes are met cost-effectively.
➢ Effectiveness-
It is the extent to which objectives are achieved and the relationship between the intended impact
and the actual impact of an activity.
In auditing effectiveness, performance audit may, for instance:
• assess compliance with laws and regulations applicable to the program; and
• assess whether the objectives of and the means provided (legal, financial, etc.)
for a new or ongoing public sector programme are proper, consistent, suitable or
relevant to the policy;
• identify factors inhibiting satisfactory performance or goal-fulfilment;
• assess the adequacy of the management control system for measuring,
monitoring and reporting a programme’s effectiveness;
• determine the extent to which a program achieves a desired level of program

results;
• assess and establish with evidence whether the observed direct or indirect social
and economic impacts of a policy are due to the policy or to other causes;
• assess the effectiveness of the program and/or of individual program
components;
• determine whether management has considered alternatives for carrying out the
program that might yield desired results more effectively or at a lower cost;
• identify ways of making programmes work more effectively.
• assess whether the programme complements, duplicates, overlaps or counteracts
other related programmes;
Author’s Note
There is controversy in this question — Answer provided as per May 16 RTP / Nov 18 RTP / Nov 18 exams
differ from each other, I think answer of Nov 18 RTP is best and recent, answer for Nov 18 Exams is too
short Above is the answer as per Nov 18 RTP which should be followed.
QNO Performance Audit - Audit Report Rejected New Course-- (N22R)

600.005 #Unique
"Comptroller & Auditor General appointed Sambhav & Associates, a chartered accountant firm, to
conduct Performance audit of MAP Ltd., a public sector undertaking of Government of India. The firm
conducted the audit with a view to check all the expenses of the unit are in conformity with the public
interest and publicly accepted customs. The audit report submitted by audit firm was rejected by C&AG.
Give your opinion on the action of C&AG."
Answer In the given scenario, C&AG appointed Sambhav & Associates, a chartered accountant firm, to conduct
Performance Audit of MAP Ltd., a PSU of Government of India. The firm conducted audit with a view to
check all the expenses of the unit are in conformity to the public interest and publicly accepted customs
which is not Performance Audit.
A performance audit is an objective and systematic examination of evidence for the purpose of providing
an independent assessment of the performance of a government organization, program, activity, or
function in order to provide information to improve public accountability and facilitate decision-making by
parties with responsibility to oversee or initiate corrective action.
Performance audit in PSUs is conducted by the C&AG (Supreme Audit Institutions) through various
subordinate offices of Indian Audit and Accounts Department (IAAD). In conducting performance audit, the
subordinate offices are guided by manual and auditing standards prescribed by C&AG.
Therefore, the objectives of performance auditing are evaluation of economy, efficiency, and effectiveness
of policy, programmes, organization and management. It also promotes accountability by assisting those
charged with governance and oversight responsibilities to improve performance; and transparency by
affording taxpayers, those targeted by government policies and other stakeholders an insight into the
management and outcomes of different government activities.
Performance auditing focuses on areas in which it can add value which have the greatest potential for
development. It provides constructive incentives for the responsible parties to take appropriate action.
Regulations on Audit and Accounts issued by C&AG lay down that the responsibility for the development of
measurable objectives and performance indicators as also the systems of measurement rests with the
Government departments or Heads of entities. They are also required to define intermediate and final
outputs and outcomes in measurable and monitorable terms, standardise the unit cost of delivery and
benchmark quality of outputs and outcomes.

Propriety Audit (Company Act)- Old Course-- (M04E, M12R, N12E, M15R, N16M, P17M,
QNO
Unique M19M, N19R)
603.000
New Course-- (S17M, M18E, N19R, M19M, S21M)
Write a short explanatory note on – Areas of propriety audit under Section 143(1) of the Companies Act,
2013
Answer ➢ Areas of propriety audit under Section 143(1):

Section 143(1) of the Companies Act, 2013 requires the auditor to make an enquiry into certain
specific areas. In some of the areas, the auditor has to examine the same from propriety angle as
to
whether loans and advances made by the company on the basis of security have been
properly secured and whether the terms on which they have been made are prejudicial to
the interests of the company or its members;
whether transactions of the company which are represented merely by book entries are
prejudicial to the interests of the company; Again, considering the propriety element,
rationalizing the proper disclosure of loans and advance given by company is made;
where the company not being an investment company or a banking company, whether so
much of the assets of the company as consist of shares, debentures and other securities
have been sold at a price less than that at which they were purchased by the company;
whether loans and advances made by the company have been shown as deposits;
whether personal expenses have been charged to revenue account;
where it is stated in the books and documents of the company that any shares have been
allotted for cash, whether cash has actually been received in respect of such allotment,
and if no cash has actually been so received, whether the position as stated in the account
books and the balance sheet is correct, regular and not misleading. A control has been set
up to verify the receipt of cash in case of allotment of shares for cash. Further, if cash is
not received, the books of accounts and statement of affairs shows the true picture.
Functioning of Finance Committee & Role of New Course-- (N18M)

QNO
C&AG –
604.010
Unique
The Comptroller &Auditor General of India plays a key role in the functioning of the financial
committees of Parliament and the State Legislatures. He has come to be recognized as a 'friend,
philosopher and guide' of the Committees. In view of above, you are required to list down any four
roles.
Answer ➢ The Comptroller & Auditor General of India plays a key role in the functioning of the financial
committees of Parliament and the State Legislatures. He has come to be recognized as a 'friend,
philosopher and guide' of the Committees.
His Reports generally form the basis of the Committees' working, although they are not
precluded from examining issues not brought out in his Reports;
He scrutinizes the notes which the Ministries submit to the Committees and helps the
Committees to check the correctness of submissions to the Committees and facts and
figures in their draft reports;
The Financial Committees present their Report to the Parliament/ State Legislature with
their observations and recommendations.
The various Ministries / Department of the Government are required to inform the
Committees of the action taken by them on the recommendations of the Committees
(which are generally accepted) and the Committees present Action Taken Reports to
Parliament / Legislature;
In respect of those Audit Reports, which could not be discussed in detail by the
Committees, written answers are obtained from the Department / Ministry concerned
and are sometimes incorporated in the Reports presented to the Parliament / State
Legislature.
This ensures that the Audit Reports are not taken lightly by the Government, even if the entire
report is not deliberated upon by the Committee.
Author’s Note
Explanation & Corresponding Summary
There are 2 committees, Public Accounts Committee and Committee on Public Sector Undertakings
which read, study reports of CAG on government department and government corporations and then
ask for explanations from ministries.
Now answer
(Intro same as question)
The Comptroller & Auditor General of India plays a key role in the functioning of the financial
committees of Parliament and the State Legislatures. He has come to be recognized as a ‘friend,
philosopher and guide’ of the Committees.
Step 1: - Reports of CAG are discussed in Financial Committees & Questions are asked to ministries
His Reports generally form the basis of the Committees’ working, although they are not precluded from
examining issues not brought out in his Reports;
Step 2: - Replies from ministries are received and CAG checks correctness of replies and helps
committees to understand there replies
He scrutinizes the notes which the Ministries submit to the Committees and helps the Committees to
check the correctness of submissions to the Committees and facts and figures in their draft reports;
Step 3: - Committees send their reports to parliament
The Financial Committees present their Report to the Parliament/ State Legislature with their
observations and recommendations.
Step 4: - Ministers has to submit action taken report to parliament as per recommendations of
committees
The various Ministries / Department of the Government are required to inform the Committees of the
action taken by them on the recommendations of the Committees (which are generally accepted) and
the Committees present Action Taken Reports to Parliament / Legislature;
Extra Points
(Treatment of Confidential Audit Reports)
In respect of those Audit Reports, which could not be discussed in detail by the Committees, written
answers are obtained from the Department / Ministry concerned and are sometimes incorporated in the
Reports presented to the Parliament / State Legislature.
(Because of these committee’s government doesn’t take CAG reports lightly)
This ensures that the Audit Reports are not taken lightly by the Government, even if the entire report is
not deliberated upon by the Committee.
QNO Draft Audit Criteria

605.000 Bhaskar CNO – PSU.220 New Course-- (S21M, N21M)
You have been appointed as auditor of a AKY Ltd. After having determined the audit objectives, now you
have been requested to draft audit criteria. What are the sources that you will use while doing the task?
➢ Determining Audit Criteria
Audit criteria are the standards used to determine whether a program meets or exceeds
expectations. It provides a context for understanding the results of the audit. Audit criteria are
reasonable and attainable standards of performance against which economy, efficiency and
effectiveness of programmes and activities can be assessed.
The audit criteria may be sought to be obtained from the following sources:
• procedure manuals of the entity.
• policies, standards, directives and guidelines.
• criteria used by the same entity or other entities in similar activities or programmes.
• independent expert opinion and know how.
• new or established scientific knowledge and other reliable information.
• general management and subject matter literature and research papers

QNO Criminal Liabilities Old Course – (N13E, M15R, M16R, M16M, M16E, P17M, N17M, N18R)
370.000 Bhaskar CNO – LOA.060 New Course – (S17M, M18M, S21M)
Mr. Fresh, a newly qualified chartered accountant, wants to start practice and he requires your advice,
among other things, on criminal liabilities of an auditor under the Companies Act, 2013. You are required to
briefly explain the same to Mr. Fresh.
OR
Briefly explain the criminal liabilities of an auditor under the Companies Act, 2013.
Answer The circumstances in which an auditor can be prosecuted under the Companies Act, and the penalties to which
he may be subjected are briefly stated below:
➢ Sec 34
• Criminal liability for Misstatement in Prospectus- As per Section 34 of the Companies Act,
2013, where a prospectus, issued, circulated or distributed includes any statement which is
untrue or misleading in form or context in which it is included or where any inclusion or
omission of any matter is likely to mislead, every person who authorises the issue of such
prospectus shall be liable under section 447
• (Relief)
This section shall not apply to a person if he proves that such statement or omission was
immaterial or that he had reasonable grounds to believe and did up to the time of issue of
the prospectus believe, that the statement was true, or the inclusion or omission was
necessary.
(a) Immaterial- Last name of auditor was misspelled, it was not resembling to anyone
else / Last digit of firm registration number, was accidentally omitted while finalising.
(b) Reasonable grounds to believe -Auditor believed that employees working with
company were on full time basis and not part time on contract basis
➢ Sec 448
• Punishment for false statement- According to Section 448 of the Companies Act, 2013if in
any return, report, certificate, financial statement, prospectus, statement or other
document required by, or for, the purposes of any of the provisions of this Act or the rules
made there under, any person makes a statement —
(a) which is false in any material particulars, knowing it to be false; or
(b) which omits any material fact, knowing it to be material, he shall be liable under
section 447

➢ Sec 447
Any Person Found Guilty of FRAU D
Amount of Fraud >= Limit

Limit = 10 Lakhs or 1% of Co Turnover which ever is Lower
No
Yes
Then See Public Interest
Yes No
Min 6 Months Min NIL

Imprisonment Silent
Max 10 Years Max 5 Years
Min Amt of Fraud Min NIL

Fine Silent
Max 3 x Amt of Fraud Max 50Lakh
If Public Interest Involved

Then Imprisonment
Min 3 Years
➢ Punishment for fraud.

Without prejudice to any liability including repayment of any debt under this Act or any other law for
the time being in force, any person who is found to be guilty of fraud [involving an amount of at least
ten lakh rupees or one per cent of the turnover of the company, whichever is lower], shall be
punishable with imprisonment for a term which shall
• not be less than six months but which may extend to ten years and
• shall also be liable to fine which shall not be less than the amount involved in the fraud,
but which may extend to three times the amount involved in the fraud
Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less
than three years:
[Provided further that where the fraud involves an amount less than ten lakh rupees or one per cent of the
turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such
fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may
extend to 48c [ fifty lakh rupees ] or with both.]
Explanation.—For the purposes of this section—
(i) "fraud" in relation to affairs of a company or anybody corporate, includes any act,
omission, concealment of any fact or abuse of position committed by any person or any
other person with the connivance in any manner, with intent to deceive, to gain undue
advantage from, or to injure the interests of, the company or its shareholders or its
creditors or any other person, whether or not there is any wrongful gain or wrongful loss;
(ii) "wrongful gain" means the gain by unlawful means of property to which the person gaining
is not legally entitled
(iii) "wrongful loss" means the loss by unlawful means of property to which the person losing is
legally entitled.
➢ Sec 140 (5)

Direction by Tribunal in case auditor acted in a fraudulent manner: As per sub-section (5) of the
section 140, the Tribunal either Suo moto or on an application made to it by the Central Government
or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or
indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the
company or its directors or officers, it may, by order, direct the company to change its auditors.
However, if the application is made by the Central Government and the Tribunal is satisfied that any
change of the auditor is required, it shall within fifteen days of receipt of such application, make an

order that he shall not function as an auditor and the Central Government may appoint another
auditor in his place.
It may be noted that an auditor, whether individual or firm, against whom final order has been passed
by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company
for a period of five years from the date of passing of the order and the auditor shall also be liable for
action under section 447.
It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every partner
or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to,
the company or its director or officers.
SUO MOTO
Direct Company to
Change it Auditors
Auditor acted in Shall not be eligible

On Application fraudulent manner appointed as auditor
TRIUBUNAL or abetted or colluded of ANY Co for 5 years
by CG
in fraud with from date of order
Co / Directors / Officer
Also liable U/S 447
On Application (6M – 10Y / 3 times
by any the amount of fraud)
Concerned If application is sent by CG & tribunal is satisfied
Person that change is required, shall make order within
15 days and CG may appoint new auditor
Prospectus Sec 35 Old Course – (N09R,M10E,N11R,M12R,N12R,M13M,N13R, N15R,

QNO
Bhaskar CNO – LOA.020 P17M)
374.000
New Course – (S17M, N18M, S21M)
Explain the liability of the auditor under section 35 of the Companies Act, 2013, for making an untrue
statement in the report (as an expert forming a part of the prospectus).
Or
You are the auditor of a company, which raised finance from the capital market on the basis of a
prospectus issued a few years back The main object for raising the finance was specified to be setting up
a project on information technology. The company advanced monies so raised to various parties
‘related’ to directors These parties had no standing whatsoever with information technology In the
Balance Sheet, these advances appeared as a current asset under the head “loans unsecured –
considered good” There was no mention in the notes to accounts about nature and purpose of such
advances You have given routine audit report without any qualifications One fine morning the directors
and these ‘related’ parties disappear The company has just vanished. Can you be hauled up for
professional misconduct? Do you have any liability under any law?
OR
Indicate the precise nature of auditor's liability in the following situations and support your views with
authority, if any:
(i) A misstatement had occurred in the prospectus issued by the company.
A civil action against the auditor may either take the form of claim for damages on account of negligence
or that of misfeasance proceeding for breach of trust or duty:
➢ Damages for negligence:
Sec 35 of Companies Act 2013 (Damages due to misleading content in Prospectus).
Civil liability for misstatement in prospectus under Section 35 of the Companies Act, 2013, are:
• Condition for Civil Liability
Where a person has subscribed for securities of a company acting on any statement

included, or the inclusion or omission of any matter, in the prospectus which is misleading
and has sustained any loss or damages a consequence thereof, the company and every
person who-
Examples
• Any statement: - Company has 50 acres of land near Delhi.
• Inclusion: - Graph showing false growth of sales in past 12 months.
• Omission: - Schedule of cases against company was missing.
• Apart from company who will be responsible?
• (Promoter)
is a promoter of the company;
• (Director)
is a director of the company at the time of the issue of the prospectus
• (To be director)
has authorized himself to be named and is named in the prospectus as a director of
the company or has agreed to become such director either immediately or after an
interval of time;
• (Authoriser)
has authorised the issue of the prospectus; and
• (Expert)
o is an expert referred to in sub-section (5) of section 26 (Who is engaged &
given consent to issue prospectus), shall, without prejudice to any punishment
to which any person may be liable under section 36, be liable to pay
compensation to every person who has sustained such loss or damage.
(Amendment)
o No person above shall be liable , if he proves
That, as regards every misleading statement purported to be made by an
expert or contained in what purports to be a copy of or an extract from a
report or valuation of an expert, it was a correct and fair representation of
the statement, or a correct copy of, or a correct and fair extract from, the
report or valuation; and he had reasonable ground to believe and did up to
the time of the issue of the prospectus believe, that the person making the
statement was competent to make it and that the said person had given
the consent required by sub-section (5) of section 26 to the issue of the
prospectus and had not withdrawn that consent before delivery of a copy of
the prospectus for registration or, to the defendant's knowledge, before
allotment there under.
• Punishment
Notwithstanding anything contained in this section, where it is proved that a prospectus
has been issued with intent to defraud the applicants for the securities of a company or
any other person or for any fraudulent purpose, every person referred to in subsection (1)
shall be personally responsible, without any limitation of liability, for all or any of the
losses or damages that may have been incurred by any person who subscribed to the
securities on the basis of such prospectus.
• Relief from punishment
(a) No person shall be liable under sub-section (1), if he proves—
• (Withdrawal of consent and issue without consent)
that, having consented to become a director of the company, he
withdrew his consent before the issue of the prospectus, and that it was
issued without his authority or consent or
• (Issue without consent and reasonable public notice given about the
same)
That the prospectus was issued without his knowledge or consent, and
that on becoming aware of its issue, he forthwith gave a reasonable
public notice that it was issued without his knowledge or consent.
• (Any of above people prove that misleading statement / report /
extract of report is made by expert and he has reason to believe
that such expert was competent and given consent to prospectus
and has not withdrawn it or informed to such defendant, then he
will not be responsible and punishable)
o No person shall be liable under sub-section (1), if he proves
(Promoter / Director / To be Director / Authorizer / Other Expert)
o That, as regards every misleading statement purported to be made
by an expert or contained in what purports to be a copy of or an
extract from a report or valuation of an expert, it was a correct and
fair representation of the statement, or a correct copy of, or a
correct and fair extract from, the report or valuation; and he had
reasonable ground to believe and did up to the time of the issue of
the prospectus believe, that the person making the statement was
competent to make it and that the said person had given the
consent required by sub-section (5) of section 26 to the issue of the
prospectus and had not withdrawn that consent before delivery of
a copy of the prospectus for registration or, to the defendant's
knowledge, before allotment there under.
• Expert
It may be noted that the term “expert” as defined in Section 2(38) of the Companies Act,
2013 includes an engineer, a valuer, a chartered accountant, a company secretary, a cost
accountant and any other person who has the power or authority to issue a certificate in
pursuance of any law for the time being in force. Also, that under Section 26 of the Act a
statement may be considered to be untrue, not only because it is so but also if it is
misleading in the form and context in which it is included. (5 years old profits figures were
highlighted as annual profits at many places)
The liability would arise if the written consent of the auditor to the issue of the
prospectus, including the report purporting to have been made by him as an “expert” has
been obtained.
➢ Liability for misfeasance:
The term “misfeasance” implies a breach of trust or duty. The auditor of a company would be
guilty of misfeasance if he has been guilty of any breach of trust or negligence in the performance
of his duties which has resulted in some loss or damage to the company or its property. (Auditor
disclosed confidential information about company / made public draft audit report before
discussing it with management etc)
Author’s Note
“Headings in Comics font “are included by author to help the students in remembering the
points.
Prospectus Sec 35 (Case Study on becoming Director

QNO
after some interval of time) New Course – (N21M)
374.500
Bhaskar CNO – LOA.020
As a part of the listing process, M/s FRAD Limited had prepared and issued its prospectus to the public.
The top executives thought that a pending litigation against the company (which would cause a cash
outflow of ` 1 crore) may affect the demand for share application. Due to this, they had omitted the fact,
for the well-being of the company. Mr. K, who was well aware of this matter,had authorized himself to
be named in the prospectus as a director. However, Mr. K was little reluctant, so he informed and agreed
that he shall become such director after an interval of some time. Unfortunately, after few days, this
matter got leaked and several subscribers sustained huge loss. Mr. K is now defending himself stating
that he is currently not holding the director post hence no action can be taken against him. Analyse.

Answer Damages for negligence: Civil liability for mis-statement in prospectus under section 35 of the Companies
Act, 2013, includes where a person has subscribed for securities of a company acting on any statement
included, or the inclusion or omission of any matter, in the prospectus which is misleading and has
sustained any loss or damage as a consequence thereof, the company and every person who has
authorized himself to be named and is named in the prospectus as a director of the company or has agreed
to become such director either immediately or after an interval of time; shall, without prejudice to any
punishment to which any person may be liable under section 36, be liable to pay compensation to every
person who has sustained such loss or damage.
Further As per Section 447 of the Companies Act, 2013, without prejudice to any liability including
repayment of any debt under this Act or any other law for the time being in force, any person who is found
to be guilty of fraud [involving an amount of at least ten lakh rupees or one percent of the turnover of the
company, whichever is lower] shall be punishable with imprisonment for a term which shall not be less
than six months but which may extend to ten years and shall also be liable to fine which shall not be less
than the amount involved in the fraud, but which may extend to three times the amount involved in the
fraud. It may be noted that where the fraud in question involves public interest, the term of imprisonment
shall not be less than three years.
Hence, in this case, Mr. K is liable for punishment even though he is currently not a director in the company
as per section 35 of the Companies Act, 2013. He shall be liable to punishment as per section 447 discussed
above as he was aware of the litigation against the company which may cause outflow of Rs. 1 crore which
may affect the demand for share application and had also authorized himself to be named in the
prospectus as director.
QNO Two Set of Books Old Course – (M14E, M16R, P17M)

376.000 Bhaskar CNO – LOA.140 New Course – (S17M, M18R, S21M,N22M)
In assessment procedure of M/s Cloud Ltd., Income Tax Officer observed some irregularities. Therefore,
he started investigation of Books of Accounts audited and signed by Mr. Old, a practicing Chartered
Accountant. While going through books he found that M/s Cloud Ltd. used to maintain two sets of Books
of Accounts, one is the official set and other is covering all the transactions. Income Tax Department filed
a complaint with the Institute of Chartered Accountants of India saying Mr. Old had negligently
performed his duties. Comment
Answer ➢ “It is the auditor’s responsibility to audit the statement of accounts and prepare tax returns on
the basis of books of accounts produced before him. Also, if he is satisfied with the books and
documents produced to him, he can give his opinion on the basis of those documents only by
exercising requisite skill and care and observing the laid down audit procedure.
Case Discussion
➢ In the instant case, Income tax Officer observed some irregularities during the assessment
proceeding of M/s Cloud Ltd. Therefore, he started investigation of books of accounts audited and
signed by Mr. Old, a practicing Chartered Accountant. While going through the books, he found
that M/s Cloud Ltd. Used to maintain two sets of Books of Accounts, one is the official set and
other is covering all the transactions. Income Tax Department filed a complaint with the ICAI
saying Mr. Old had negligently performed his duties.
Conclusion
➢ Mr. Old, the auditor was not under a duty to prepare books of accounts of assesses and he should,
of course, neither suggest nor assist in the preparations of false accounts. He is responsible for the
books produced before him for audit. He completed his audit work with official set of books only.
In this situation, as Mr. Old, performed the auditing with due skill and diligence; and, therefore, no
question of negligence arises. It is the duty of the Department to himself investigate the truth and
correctness of the accounts of the assesses.
QNO Weakness in ICS lead to Fraud Old Course – (N09R, N11R, N13R,N14R, N16R, P17M,M19R)
378.000 Bhaskar CNO – LOA.120 New Course – (S17M, M19R, S21M)
Certain weaknesses in the internal control procedure in the payment of wages in a large construction
company were noticed by the statutory auditor who in turn brought the same to the knowledge of the
Managing Director of the company. In the subsequent year huge defalcation came to the notice of the
management. The origin of the same was traced to the earlier year. The management wants to sue the

auditor for negligence and also plans to file a complaint with the Institute.
Answer ➢ Internal Control Deficiency Identified by Auditor
In the given case, certain weaknesses in the internal control procedure in the payment of wages in
a large construction company were noticed by the statutory auditor and brought the same to the
knowledge of the Managing Director of the company. In the subsequent year, a huge defalcation
took place, the ramification of which stretched to the earlier year. The management of the
company desires to sue the statutory auditor for negligence.
➢ Is Auditor Responsible?
The precise nature of auditor's liability in the case can be ascertained on the basis of the under
noted considerations:
• (Communication of Weakness)
Whether the defalcation emanated from the weaknesses noticed by the statutory auditor,
the information regarding which was passed on to the management; and
• (Change in Audit Procedures)

Whether the statutory auditor properly and adequately extended the audit programme of
the previous year having regard to the weaknesses noticed.
➢ Requirements of SA 265
SA 265 on “Communicating Deficiencies in Internal Control to Those Charged with Governance and
Management” clearly mentions that,
• (Auditor should determine is there a deficiency?)
“The auditor shall determine whether, on the basis of the audit work performed, the
auditor has identified one or more deficiencies in internal control.
• (Is it significant deficiency?)
If the auditor has identified one or more deficiencies in internal control, the auditor shall
determine, on the basis of the audit work performed, whether, individually or in
combination, they constitute significant deficiencies.
• (Communicate in Writing)
The auditor shall communicate in writing significant deficiencies in internal control
identified during the audit to those charged with governance on a timely basis. The
auditor shall also communicate to management at an appropriate level of responsibility
on a timely basis”.
• (Additional Audit Procedures?)
The fact, however, remains that, weaknesses in the design of the internal control system
and non-compliance with identified control procedures increase the risk of fraud or error.
If circumstances indicate the possible existence of fraud or error, the auditor should
consider the potential effect of the suspected fraud or error on the financial information.
If the auditor believes the suspected fraud or error could have a material effect on the
financial information, he should perform such modified or additional procedures as he
determines to be appropriate.
Conclusion
➢ Thus, normally speaking, as long as the auditor took due care in performing the audit work, he
cannot be held liable. The fact that the matter was brought to the notice of the managing director
may be a good defence for the auditor as well. According to the judgement of the classic case in re
Kingston Cotton Mills Ltd., (1896) it is the duty of the auditor to probe into the depth only when
his suspicion is aroused. The statutory auditor, by bringing the weakness to the notice of the
managing director had alerted the management which is judicially held to be primarily responsible
for protection of the assets of the company and can put forth this as defence against any claim
arising subsequent to passing of the information to the management. In a similar case S.P.
Catterson & Sons Ltd. (81 Acct. L. R.68), the auditor was acquitted of the charge.

Author’s Note
“Headings in Comics font “are included by author to help the students in remembering the
points.
QNO False information to Tax Authorities Old Course – (M17E, N18M,)

378.100 Bhaskar CNO – LOA.080 New Course – (N18M, N18E, S21M)
A practicing Chartered Accountant was appointed to represent a company before the tax authorities. He
submitted on behalf of his client’s certain information and explanations to the authorities, which were
found to be false and misleading. Discuss briefly the liabilities of Mr. Ram under Income Tax Act, 1961.
OR
CA Prince, a Chartered Accountant has appeared before the Income Tax Authorities as the authorized
representative of his client and delivers to the Income Tax Authorities a false declaration. What are the
liabilities of CA. Prince under Income Tax Act, 1961?
▪ Section 277 of the Income Tax Act 1961
▪ Section 278 of the Income Tax Act 1961
➢ False Declaration as Authorized Representative:
In connection with proceedings under the Income Tax Act 1961, a Chartered Accountant often acts
as the authorised representative of his clients and attends before an Income Tax Authority or the
appellate tribunal.
➢ Under Section 277 & 278: Any person who acts or induces, in any manner another person
to make and deliver to the Income Tax Authorities a false account, statement, or
declaration, relating to any income chargeable to tax which he knows to be false or does
not believe to be true. he shall be punishable,
• in a case where the amount of tax, penalty or interest which would have been evaded, if
the declaration, account or statement had been accepted as true, or which is wilfully
attempted to be evaded, exceeds Rs 25,00,000, with rigorous imprisonment for a term
which shall not be less than 6 months, but which may extend to 7 years and with fine;
• In any other case, with rigorous imprisonment for a term which shall not be less than 3
months, but which may extend to 2 years and with fine.
➢ In the instant case, Mr. Ram, a chartered accountant has appeared before the Income Tax
Authorities as the authorized representative of his client and delivered a false declaration.
➢ He would be liable under section 277 &278 of the Income Tax Act, 1961.art
Author’s Note
Here it is assumed CA was aware that facts were incorrect and misleading.
This question has been answered specifically as per Income Tax Act as the question asked for it. Look for
similar question in Professional Ethics under QNO 753.000

PART - 1 INTERNAL AUDIT
QNO Appraisal of Organisational Structure New Course-- (N18M, N18E)

614.010 Bhaskar CNO – IA.030
Internal auditor makes an appraisal of organization structure to ensure that it is in harmony with the
objectives of the entity, besides checking of financial transactions and operational activities of the
entity- Elaborate.
OR
ABC Ltd. is engaged in manufacturing of Yarns and Towels. It sells its product in both domestic as well as
in International Market. It has achieved turnover of 200 crores in the F.Y. 2016-17. Directors of the
company realized that they are not managing the company professionally and thereby request your firm
of Internal Auditors for appraisal of its organizational structure to ascertain whether it is in harmony
with the objectives of ABC (P) Ltd. Comment.
Answer ➢ Review of the Organisation Structure –
Introduction, Harmony between Structure & Objectives
The internal auditor should conduct an appraisal of the organisation structure to
ascertain whether it is in harmony with the objectives of the enterprise and whether the
assignment of responsibilities is in consonance therewith.
What to evaluate?
For this purpose:
• He should review the manner in which the activities of the enterprise are
grouped for managerial control. It is also important to review whether
responsibility and authority are in harmony with the grouping pattern.
• The internal auditor should examine the organization chart to find out whether
the structure is simple and economical and that no function enjoys an undue
dominance over the others.
• He should particularly see that the responsibilities of managerial staff at
headquarters do not overlap with those of chief executives at operating units.
He should examine whether there is a satisfactory balance between authority
and responsibility of important executives.
• The internal auditor should examine the reasonableness of the span of control
of each executive (the number of sub-ordinates that an executive controls). He
should examine whether there is a unity of command i.e., whether each person
reports only to one superior.
• Where dual responsibilities cannot be avoided, the primary one should be
specified and the specific responsibility to each senior fixed. This must be
made known to all concerned.
• Finally, he should evaluate the process of managerial development in the
enterprise. This is a vital aspect in a fast-growing enterprise.

PART - 2 MANAGEMENT & OPERATIONAL AUDIT
QNO MAQ- Old Course-- (N08R, P17M, N18M, N18E)

609.000 Bhaskar CNO – MA.060 New Course-- (N22R)
What are the Management Audit Questionnaires? Give a sample questionnaire for Audit of Inventory.
Answer ➢ Introduction: -
• A management audit questionnaire is an important tool for conducting the management
audit.
• Through these questionnaires’ auditors make an inquiry into important facts by measuring
current performance.
➢ Objectives: -
• Comprehensive and Constructive examination of an organization’s management and its
assigned tasks.
• Appraisals of management actions in accomplishing the organizations objectives.
• Highlights Weakness and Deficiencies of the organization.
• Review of management functions of planning, organizing, directing, and controlling.
• Evolution of effectiveness of decision-making process in accomplishing the organization
objectives.
➢ Working: -
• There are three possible answer in management audit questions “YES, NO and N.A.”.
• “YES” answer indicates that the specific area or function under study is functioning in an
acceptable manner, no written explanation needed in that case.
• ‘NO’ answer indicates unacceptable performance and requires explanation in writing.
• Those questions which are unacceptable and shall be ignored in the audit are checked in
the N.A. column.
➢ Importance:-
• It not only serves as a management tool to analyze the current situation; but also, it
enables the management auditors to identify the elements that are causing organizational
difficulties and deficiencies.
QNO Steps to Prepare Management Audit Report (M22M)

609.500 Bhaskar CNO – MA.030
Moksh Ltd. is a manufacturing company and started its business in the year 2000. The net profit after tax of
the company was 15% up to the financial year 2019-20, but for the financial year 2020- 21 and 2021-22 the
company’s profit declined even when there was increase in the sales and production of goods by the
company. So, the management of AS Ltd. felt a need to get the management audit conducted with the
objective of detecting and overcoming current managerial deficiencies. Briefly discuss the steps to prepare
the management audit report.
Answer Steps to Prepare the Management Audit Report:
Planning the Audit Report - Before starting the report, the auditor should ask himself, “What do I want to
tell the reader about this audit?” The answer will enable him to communicate effectively.
Supporting information - The management auditor should supplement his report with appropriate audit
evidence which sufficiently and convincingly supports the conclusions.
Preparing draft report - Before writing the final report, the auditor should prepare a draft report. This
would help him in finding out the most effective manner of presenting his report. It would also indicate
whether there is any superfluous information or a gap in reasoning.
Writing and issuing the final report - The final report should be written only when the auditor is
completely satisfied with the draft report. The head of the management auditing department may review
and approve the final report. Before issuing the final report, the auditor should discuss conclusions and
recommendations at appropriate levels of management. The report should be duly signed and dated.
Follow-up of the audit report - The management auditor should review whether follow-up action is taken

by management on the basis of his report. If no action is taken within a reasonable time, he should draw
management’s attention to it.
Action / Response of Management on Audit Report: Where management has not acted upon his
suggestions or not implemented his recommendations, the auditor should ascertain the reasons thereof. In
cases where he finds that non-implementation is due to a gap in communication, he should initiate further
discussions to bridge such gaps. The actions and responses to the Management Audit Report reflect
management’s attitude to the audit. In any case, the auditor to retain the usefulness of the audit function
should ascertain from the management, preferably in writing, the reasons for non- implementation. It is
possible that because of change in circumstances, the audit observation did not require any action on the
part of the management. The auditor should satisfy himself on the appropriateness of such reasons as well
to close the issue.
QNO Summary Written Report- Old Course-- (M13R, P17M, N21R)

610.000 Bhaskar CNO – MA.030 New Course-- (S17M, S21M, N21R)
Write a short note on - Summary Written Report.
Answer ➢ These are known as flash reports. They are significant highlights for immediate attention of top
management. Generally suspected defalcations are reported briefly to the appropriate
management official on the 'flash' basis, often ending up in referral for criminal investigation and
legal action. It is common practice in number of companies of issuing a report quite frequently
summarising the various individual reports issued and describing the range of their contents in a
very brief and comprehensive manner where only important points are highlighted. Such reports
are primarily issued for audit committees of Board of Directors and for other top-level managers
who do not have sufficient time to go through the elaborate reports and matters which are
required to be brought to their notice for immediate action.
Behavioural Aspects( Causes & Old Course-- (M04E, N11R, N16R, N16M, P17M, M19R, N21M)
QNO
Solution in short) New Course-- (M18E, M19R, S21M, N21M)
611.000
Bhaskar CNO – MA.040
The “management audit‟ concern with the whole field of activities of the concern, from top to bottom,
starting, as always where management control is concerned because we are primarily concerned with
whether the general management is functioning smoothly and satisfactorily.
Briefly explain the behavioural aspects encountered in the management audit and state the ways to
solve them.
OR
Explain in brief the behavioural aspects encountered in the management audit and state the ways to
solve them.
OR
Answer ➢ Causes: -
• Staff/Line conflict: -
• Management auditors are staff people, while the members of other departments
are line people.
• Management auditors has superiority complex and they may think that their
approach and solutions are the only answers.
• Staff do not consider the line before advising, as a result Line may not use advise
of staff properly.
• Line does not co-operate with staff and do not provide sufficient information to
staff.
• Control: -
The management auditor is expected to evaluate the effectiveness of controls, there is an
instinctive reaction from the auditee that the report of the auditor may affect them.
There is fear that his actions based on the management audit report will affect the line
people. The causes are as under;
• Fear of criticism stemming from adverse audit findings.
• Fear of changes in day-today working habits because of changes resulting from
audit recommendations.
• Punitive action by superiors prompted by reported deficiencies.
• Hostile audit style.
➢ Solution to behavioural problems: -
• Demonstrate that audit is part of an overall programme of review for protective and
constructive benefit.
• Demonstrate the objective of the review is to provide maximum service in all feasible
managerial dimensions.
• Perform the review to ensure with minimum interference with regular operations of the
operating personnel.
• Involve the responsible officers will be kept fully informed and have an opportunity to
review findings and recommendations before any audit report is formally released.
• Create an atmosphere of trust and friendliness.
QNO Hostile Management Old Course-- (N07E, N09R, N10E, N12R, N13R, M16R, P17M, N20M, M21M)
612.000 Bhaskar CNO – MA.040 New Course-- (M18R, N20M, S21M, M21M)
The Marketing Department of XYZ Ltd. has been consistently showing a lower performance whereas the
cost of the department is increasing in spurts over the years. The management believes that since the
marketing department is under a regular radar of the CFO, an audit might result in the employee
hostility. Also, an operational audit of Marketing Department was done two years back however, the
recommendations of the previous audit were not followed by the concerned employees. Please advise
the management if another audit is the solution and whether only one-time operational audit is enough?
Further, advise on the ways to deal with the employee hostility.
OR
DLF Ltd., a manufacturing unit does not accept the recommendations for improvements made by the
Operational Auditor. Suggest an alternative way to tackle the hostile management
OR
The management of Amazon, a manufacturing unit does not accept the recommendations for
improvements made by the Operational Auditor. Suggest an alternative way to tackle the hostile
management.
Answer The Operational Audit is not one-time activity. It should be viewed as a continuous improvement cycle.
All the significant operations must be subjected to the scrutiny of operational audit, at least, once in
three years. Therefore, the operational audit should be done in the current scenario. Ways to tackle
the hostile management:
➢ Audit Findings
While conducting the operational audit the auditor has to come across many irregularities and
areas where improvement can be made and therefore he gives his suggestions and
recommendations.
➢ Cold war
These suggestions and recommendations for improvements may not be accepted by the hostile
managers and in effect there may be cold war between the operational auditor and the managers.
This would defeat the very purpose of the operational audit.
➢ Participative Approach
They come to the help of the auditor. In this approach the auditor discusses the ideas for
improvements with those managers that have to implement them and make them feel that they
have participated in the recommendations made for improvements. By soliciting the views of the
operating personnel, the operational audit becomes co-operative enterprise.
➢ Benefit of Participative Approach
This participative approach encourages the auditee to develop a friendly attitude towards the
auditors and look forward to their guidance in a more receptive fashion. When participative
method is adopted then the resistance to change becomes minimal, feelings of hostility disappear
and gives room for feelings of mutual trust. Team spirit is developed. The auditors and the auditee
together try to achieve the common goal. The proposed recommendations are discussed with the

auditee and modifications as may be agreed upon are incorporated in the operational audit report.
With this attitude of the auditor it becomes absolutely easy to implement the proposed
suggestions as the auditee themselves take initiative for implementing and the auditor do not
have to force any change on the auditee.
Hence, Operational Auditor of DLF manufacturing unit should adopt above mentioned
participative approach to tackle the hostile management of DLF.
QNO Operational Audit -- One Time Activity & Employee Hostility New Course-- (M22M)
615.030 #Unique
"The Marketing Department of Charitra Ltd. has been consistently showing a lower performance
whereas the cost of the department is increasing in spurts over the years. The management believes that
since the marketing department is under a regular radar of the CFO, an audit might result in the
employee hostility. Also, an operational audit of Marketing Department was done two years back
however, the recommendations of the previous audit were not followed by the concerned employees.
Please advise the management if another audit is the solution and whether only one-time operational
audit is enough? Further, advise on the ways to deal with the employee hostility."
Answer ➢ The Operational Audit is not one-time activity. It should be viewed as a continuous improvement
cycle:
All the significant operations must be subjected to the scrutiny of operational audit, at least, once in
three years. Therefore, the operational audit should be done in the current scenario. However, to
deal with the employee hostility the participative approach of the audit should be adopted:
In this approach the auditor discusses the ideas for improvements with those managers that have to
implement them and make them feel that they have participated in the recommendations made for
improvements. By soliciting the views of the operating personnel, the operational audit becomes a
co-operative enterprise.
This participative approach encourages the auditee to develop a friendly attitude towards the
auditors and look forward to their guidance in a more receptive fashion. When the participative
method is adopted then the resistance to change becomes minimal, feelings of hostility disappear
and gives room for feelings of mutual trust. Team spirit is developed. The auditors and the auditee
together try to achieve the common goal. The proposed recommendations are discussed with the
auditee and modifications as may be agreed upon are incorporated in the operational audit report.
With this attitude of the auditor, it becomes absolutely easy to implement the proposed suggestions
as the auditee themselves take initiative for implementing and the auditor does not have to force
any change on the auditee.
QNO Shortcomings of traditional sources Old Course-- (N19R)

615.050 Bhaskar CNO – OA.040 New Course-- (N19R, S21M)
Perfect Steel Ltd. has reported a higher turnover of ` 560 crores in the year 2018-19 as compared to
earlier years but its sales return has also increased to 10% from only 4% up to the last year. The
management is concerned about the high sales returns and feels a need to get the operational audit
done for sales and production department of the company. The company is also having an internal audit
system in the company. Elaborate the possible reason/s, why management is getting operational audit
done when internal audit has already been done for both the departments by stating the shortcomings
of conventional information sources.
Answer ➢ Why Operational Audit:
• Inadequacy of Traditional Sources
• Conventional sources of management information are departmental managers,
routine performance report, internal audit reports, and periodic special
investigation and survey.
• These conventional sources fail to provide information for the best direction of
the departments all of whose activities do not come under direct observation of
managers.
• The need for operational auditing has arisen due to the inadequacy of traditional
sources of information for an effective management of the company.
• Management is at distance & there are many layers of Delegation
• Where the management is at a distance from actual operations due to layers of
delegation of responsibility, separating it from actualities in the organisation.
• Specifically, operational auditing arose from the need of managers responsible for
areas beyond their direct observation to be fully, objectively and currently
informed about conditions in the units under control.
• Specialised Management Information Tool
Operational audit is considered as a specialized management information tool to fill the
void that conventional information sources fail to fill.
• The shortcomings of these sources can be stated as under:
• P- Executives and managers are too preoccupied with implementation of plans
and achieving of targets. They are left with very little time to collect information
and locate problems. They may come across problems that have come to surface
but they are hardly aware of problems that are brewing and potential.
• T- Managers or their aides are generally relied upon for transmitting information
than for booking for information or for analyzing situations.
• B - The information that is transmitted by managers is not necessarily objective -
often it may be biased for various reasons.
• M-Conventional internal audit reports are often routine and mechanical in
character and have a definite leaning towards accounting and financial
information. They are also historical in nature
• A-Other performance reports contained in the annual audited accounts and the
routine reports prepared by the operating departments have their own
limitations. The annual audited accounts are good as far as an overall evaluation
is concerned in monetary terms.
o Example:-
Sales may be shown at a higher monetary value compared to the previous
year and this may apparently suggest that the functioning of the sales
department is satisfactory. But this may have been caused by a number of
factors in spite of a really bad performance on the sales front. This fact
may not be readily known unless one cares to analyse the sales data by
reference to notes and explanations to the accounts and other related
accounting data. Even a study of this nature may not fully reveal the
weakness. It is quite possible that the established market for sales has
been lost partly while some fortuitous sales have compensated the loss.
o Example:-
The routine weekly production report may include production ‘that is
subsequently rejected by the quality control staff, or to avoid showing a
bad production performance; even the partly produced goods may also be
included. Remember, all this can happen inspite of specific management
instructions about the basis on which the production report is to be made
out.
• P-Another important point may be noticed in the matter of routine departmental
reports. The busy management people, who can afford time only to glance over
the performance reports, cannot be expected to make an integrated reading of
several reports or to undertake an analysis of such reports. What they need is
reliable, un manipulated and objective report which they would like to look into
to understand the situation.
• R-Operations of controls in a satisfactory manner cannot be relied upon to bring
to light the environmental conditions. Controls are specific and their satisfactory
operation is related to the specific situation under control. Also monitoring of the
breakdown or non-operation of controls is a periodic phenomenon.
• O-Surveys and special investigations, no doubt, are very useful but these are at
the best occasional in character. Also, they are costly, time consuming and keep
the departmental key personnel busy during the period they are on. These are
basically an attempt to carry out a post-mortem rather than to enlighten the
management about the ways on improvement or for better performance or to
give a signal for dangers and disasters to come.
Author’s Note
A-bhishek B-Bacchan is not PROMPT
A-Annual audited accounts/B-Biased for various reasons. /P-Preoccupied/R-cannot be relied / O -
Occasional in character/M-routine and Mechanical/ P- Glance over the performance reports/T-
Transmitting information
Management Audit or the Operational Audit -penal New Course-- (S21M)

QNO
interest payments and the delays in shipping-
617.050
#Unique
M/s ABC & Co., Chartered Accountants have been approached by PQR Ltd., a company engaged in iron
and steel manufacturing industry. The company has been facing following operational issues:
(a) Penal interest for delayed payments to the overseas vendors despite having enough cash flows; and
(b) Despite having regular production and enough inventory, delays in shipping the final goods to the
customers leading to its deteriorating vendor rating.
As a partner of M/s ABC & Co., through detailed discussion with the Senior Manager of PQR Ltd., you
have concluded that all these delays are because of long decision-making cycles in the company. As a
consultant to the Company, would you recommend Management Audit or Operational Audit?
➢ A comparison between the Management Audit & the Operational Audit is as follows:
➢ Management audit is concerned with the “Quality of managing”, whereas operational audit focuses
on the “Quality of operations”.
➢ Management audit is the “Audit of management” while the operational audit is the “Audit for the
management”. The focus of Management Audit is on “Quality of Decision Making” rather than the
effectiveness or efficiency of operations.
➢ The basic difference between the two audits, then, is not in method, but in the level of appraisal.
➢ In a management audit, the auditor is to make his tests to the level of top management, its
formulation of objectives, plans and policies and its decision making. It is not that he just verifies the
operations of control and procedures and fulfillment of plans in conformity with the prescribed
policies.
➢ Since the delays in payments and consequent penal interest payments and the delays in shipping and
the consequent deteriorating vendor ratings are happening because of the delays in decision-making
process of the management. Therefore, it appears that this is not just an internal control or
operational issue but an issue of management process.
➢ Therefore, management audit would be recommended in this case.
Attrition Rate Old Course-- (M13E, M16M, N16R, P17M, N17R, N17M,
QNO
Bhaskar CNO – OA.120 N18M, M20M)
619.000
New Course-- (M20M)
The Managing Director of Beta Ltd is concerned about high employee attrition rate in his company. As
the internal auditor of the company he requests you to analyse the causes for the same. What factors
would you consider in such analysis?
OR
You have been appointed as an internal auditor of a company RSM Ltd. The Managing Director Rakesh is
worried about employee attrition in large number. Rakesh requests you to analyse the causes for high
employee attrition rate in his company. What factors would you consider in such analysis?
Answer ➢ The factors responsible for high employee attrition rate are as under:
(Trainings & Work Culture)
• Does the organization provide facilities for staff training so that employees and workers
keep themselves abreast of current techniques and practices? (Outdated work culture,
Using Type Writer)
(Timings)
• Job Stress & work life imbalance (12 hours of work&3 hours of travel, 6 hours of sleep, 2
hours of routine work, 1 hour for family)
(Seniors)
• Whether the organization has properly qualified and experienced personnel for the
various levels of works? (Inexperienced seniors & HRs)
• Unbearable behaviour of Senior Staff (Shouting & Abusing)
(Colleagues)
• Is the number of people employed at various work centre’s excessive or inadequate?
(Excess Staffing or Understaffing leading to strain on few)
(Salary & Schemes)
• Low monetary benefits (Salary 30-40% lower than market)
• Lack of labour welfare schemes (No Development & Encouragement)
(Safety)
• Safety factors (Office is at remote location, prone to thefts)
Author’s Note
Answer has been rearranged to create a flow,“Headings in Comics font “are included by author
for helping the students to understand and remember the answer
QNO Personal Qualities Of Operational Auditor New Course—(N22M)

621.400 #UNIQUE
Employees of MIG Ltd. have to travel frequently for business purposes, so the company entered into a
contract with a Chinmay Travels Ltd. for managing booking, cancellation and other services required by
their employees. As per contract terms, Chinmay travels has to raise its monthly bills for the tickets
booked or cancelled during the period and the same are paid by MIG Ltd. within 15 days of the bill date.
The bills raised by Chinmay travels were of huge amount, so the management of MIG Ltd. decided to get
an audit conducted of the process followed for booking/ cancellation of tickets and verify the accuracy of
bills raised by the travel agency. Which audit do you feel the management should opt for? Also briefly
discuss the qualities the auditor should possess for such audit.
Answer Operational audit, (functional audit) as it is the audit for the management and involves verifying the
effectiveness, efficiency and economy of operations done by the Chinmay travels for the organisation.
The operational auditor should possess some very essential personal qualities to be effective in his work:
1. In areas beyond accounting and finance, his knowledge ordinarily would be rather scanty, and this is a
reason which should make him even more inquisitive.
2. He should ask the who, why, how of everything. He should try to visualise whether simpler alternative
means are available to do a particular work.
3. He should try to see everything as to whether that properly fits in the business frame and organisational
policy. He should be persistent and should possess an attitude of skepticism.
4. He should not give up or feel satisfied easily. He should imbibe a constructive approach rather than a
fault-finding approach and should give a feeling that his efforts are to help attaining an improved operation
and not merely fault finding.
5. If the auditor succeeds in giving a feeling of help and assistance through constructive criticism, he will be
able to obtain co-operation of the persons who are involved in the operations. This will itself be a
tremendous achievement of the operational auditor. He should try to develop a team comprised of people
of different backgrounds. Involvement of technical people in operational auditing is generally helpful.

PART - 1 DUE DILIGENCE
Financial Due Diligence Old Course-- (M11R, N12R, N12M,N14R,M16R,

QNO Bhaskar CNO – DD.060 P17M,N17E,M21M)
623.000 New Course-- (S17M, S21M, M21M)
Mr. Q is the proprietor of a very profitable business dealing in speciality chemicals. Due to his old age, Mr.
Q wants to sell his business and has approached XYZ Pvt. Ltd., a competitor, for the same. As an advisor
to XYZ Pvt. Ltd., you are appointed to do a 'Due Diligence' of the business. Enumerate the points which
you would look into as part of the Due diligence exercise.
OR
Sri Rajan is above 80 years old and wishes to sell his proprietary business of manufacture of specialty
chemicals. Ceta Ltd. wants to buy the business and appoints you to carry out a due diligence audit to
decide whether it would be worthwhile to acquire the business. What procedures you would adopt
before you could render any advice to Ceta Ltd.?
OR
PB Ltd. entered into a deal with SV Ltd. for buying its business of manufacturing wooden products/ goods.
PB Ltd. has appointed your firm for conducting due diligence review and they want to know the cash
generating abilities of SV Ltd. What points will you check in order to ensure that the manufacturing unit
of SV Ltd. will be able to meet the cash requirements internally?
Answer Some of the significant key areas which shall be covered under the review are as under:
➢ Historical Background: The accountant should begin the financial due diligence review by looking
into the history of the company and the background of the promoters. The details of how the
company was set up and who were the original promoters have to be gone into, before verification
of financial data in detail. An eye into the history of the company may reveal its turning points,
survival strategies adopted from time to time, the market share enjoyed by and changes therein,
product life cycle and adequacy of resources. It could also help the accountant in determining
whether, in the past, any regulatory requirements have had an impact on the business of the said
company. This could, inter alia, include the nature of business(es), location of production facilities,
warehouses, offices, products or services and markets.
➢ Financial Projections: The projections for the next five years with detailed assumptions and
workings and the appropriateness of assumption used in the preparation and presentation of
financial projections. If the accountant is of the opinion that as assumption used by the company
are unrealistic, the accountant should consider its impact on the overall valuation of the company.
➢ Significant Accounting Policies: The accounting policies being followed by the company and the
appropriateness thereof is another key area. The impact of the recent changes in the accounting
policies in the recent past keeping in view its intention of offering itself for sale. The accountant
has to look at the main effect of accounting policies on the overall profitability and their
correctness. It is also quite important to ascertain significant accounting policies used by the
company, that changes that have been made to the accounting policies in the recent past, the areas
in which accounting policies followed by the company are different from those adopted by the
acquiring enterprise and the effect of such differences. Finally, examine whether the financial
statements of the company have been prepared in accordance with the governing statutory
requirements.
➢ Review of Financial Statements: An evaluation of the profit reported by the company would be
largely based upon its operating results. Any extraordinary item of income or expense that might
have affected the operating results would require close examination.
It is advisable to compare the actual figures with the budgeted figures for the period under
review and those of the previous accounting period. It is important that the trading results for the
past four to five years are compared and the trend of normal operating profit arrived at. The
normal operating profits should further be benchmarked against other similar companies. Besides
the above, and based on the trend of operating results, the accountant has to advise the acquiring
enterprise, through due diligence report, on the indicative valuation of the business. The exercise
to evaluate the balance sheet of the company has to take into consideration the basis upon which
assets have been valued and liabilities have been recognized. The net worth of the business has to
be arrived at by taking into account the impact of over/under valuation of assets and liabilities.
➢ Cash Flow: A review of historical cash flows and their pattern would reflect the cash generating
abilities of the company and should highlight the major trends. It is important to know if the
company is able to meet its cash requirements through internal accruals or does it have to seek
external help from time to time. It is necessary to check:
Whether the company is able to honour its commitments to its trade payables, to the
banks, to government and other stakeholders;
How well is the company able to turn its trade receivables and inventories;
How well does it deploy its funds; and
Whether any funds are lying idle or is the company able to reap maximum benefits out of
the available funds.
➢ Statutory Compliance: This is one area that has to be examined in detail. It is important to make a
list of laws that are applicable to the entity as well as to make a checklist of compliance required
from the company under those laws. If the company has not been regular in its legal compliance, it
could lead to punitive charges under the law. The impact on such violations be quantified and
assessed in respect of entity; financial status and even on its governing concern status.
➢ Human Resources: In the Indian context, the status of work force, staff and employees is a complex
problem. It is important to work out how much of the labour force has to be retained. It is also
important to judge the job profile of the administrative and managerial staff to gauge which of
these matches the requirements of the new incumbents. The aspects whether all employee
benefits like PF, Gratuity, ESI and superannuation have been properly paid/funded. The pay
packages of the key employees will be thoroughly reviewed since this can be a crucial factor in
future employee costs.
Author’s Note
• If the question asks about due diligence but it is silent on which type of due diligence, then we
have to assume and write answer considering financial due diligence.
• Question may also ask about any specific requirement such as the 3rd question which specifically
asks for “What points will you check in order to ensure that company will be able to meet the
cash requirements internally?”, in such case such write the 5th para of the answer that deals with
cash flow.
• If question is on due diligence on proprietary business then give answer for financial due
diligence i.e QNO 623.000 and if it is on investigation of proprietary business answer as per QNO
643.050.

DD (Under / Old Course-(N05E, N10E, M12E, N13E, M15R, P17M, M17R, N17M, N19R, N20R,
QNO
Over Valuation) N20E)
627.000
Bhaskar CNO – DD.100 New Course-- (M18E, N19R, N20R, N20E, S21M,N22M)
M Limited is going to acquire S Limited The purchase consideration has been decided at Rs 4000 Crores M
Limited is worried about hidden liabilities or overvalued assets of S Limited and approached you to
examine the same List out eight important transactions/items which you would like to investigate in the
Due Diligence exercise.
OR
Zeta Ltd is anticipating taking over a manufacturing concern and appoints you for due diligence review
While reviewing, it requests you to look specifically for any hidden liabilities and overvalued assets State
in brief the major areas you would examine for hidden liabilities and overvalued assets.
OR
Vita Ltd. is anticipating taking over a manufacturing concern and appoints you for due diligence review.
While reviewing, it requests you to look specifically for any hidden liabilities. State in brief the major
areas you would examine for hidden liabilities.
OR
K.DK Bank Ltd., received an application from a pharmaceutical company for takeover of their outstanding
term loans secured on its assets, availed from and outstanding with a nationalized bank. KDK Bank Ltd.,
requires you to make a due diligence audit in the areas of assets of pharmaceutical company especially
with reference to valuation aspect of assets. State what may be your areas of analysis in order to ensure
that the assets are not stated at overvalued amounts.
Answer ➢ Different Types
Due diligence is an all-pervasive exercise to review all important aspects like financial, legal,
commercial, etc. before taking any final decision in the matter.
➢ Review of Financial Statements
As far as any hidden liabilities or overvalued assets are concerned, this shall form part of such a
review of Financial Statements. Normally, cases of hidden liabilities and overvalued assets are not
apparent from books of accounts and financial statements. Review of financial statements does not
involve examination from the viewpoint of extraordinary items, analysis of significant deviations,
etc.
➢ Hidden Liabilities
However, in order to investigate hidden liabilities, the auditor should pay his attention to the
following areas
Government
• The company may not show any show cause notices which have not matured into
demands, as contingent liabilities. These may be material and important.
• Tax liabilities under direct and indirect taxes.
• Long pending sales tax assessments.
• Pending final assessments of customs duty where provisional assessment only has
been completed.
Share Holders
• Agreement to buy back shares sold at a stated price.
Financers
• The company may have given “Letters of Comfort” to banks and Financial Institutions.
• Since these are not “guarantees”, these may not be disclosed in the Balance sheet of
the target company.
Subsidiaries
• The Company may have sold some subsidiaries/businesses and may have agreed to take
over and indemnify all liabilities and contingent liabilities of the same prior to the date
of transfer. These may not be reflected in the books of accounts of the company.
Employees
• Unfunded gratuity/superannuation/leave salary liabilities; incorrect gratuity valuations.
• Huge labour claims under negotiation when the labour wage agreement has already
expired.
Customer
• Product and other liability claims; warranty liabilities; product returns/ discounts;
liquidated damages for late deliveries etc. and all litigation.
Other Third-Party Liabilities
• Environmental problems/claims/third party claims.
• Future lease liabilities.
• Contingent liabilities not shown in books.
➢ Regularly Overvalued Assets
The auditor shall have to specifically examine the following areas:
Fixed Assets
• Underused or obsolete Plant and Machinery and their spares;
• Asset values which have been impaired due to sudden fall in market value etc.
• Litigated assets and property.
Investments
• Investments carried at cost though realizable value is much lower.
• Investments carrying a very low rate of income / return.
Inventory
• Obsolete, slow non-moving inventories or inventories valued above NRV; huge
inventories of packing materials etc. with name of company.
Trade Receivables
• Uncollected / uncollectable receivables.
• Group Company balances under reconciliation etc.
Authors Note
Students are advices to see in the question what is asked, whether hidden liabilities or overvalued assets
or both and then shall answer accordingly.
Due Diligence Report Old Course-- (M07E, N08R, N15E, N16R, P17M, N17R, M19M, N21R)
QNO
Bhaskar CNO – DD.120/ CNO – New Course-- (N18M, M19M, S21M, N21R)
628.000
DD.060
A Japanese Company engaged in the business of manufacturing and distribution of industrial gases, is
interested in acquiring a listed Indian Company having a market share of more than 65% of the industrial
gas business in India, request you to conduct a “Due Diligence” of this Indian Company and submit your
report.
As a due diligence auditor:
(a) indicate the key areas you will cover in your review.
(b) list out the contents of your Due Diligence Review Report that you will submit to your Japan based
Client.
Answer (a)Some of the significant key areas which shall be covered under the review are as under:
➢ Historical Background: The accountant should begin the financial due diligence review by looking
into the history of the company and the background of the promoters. The details of how the
company was set up and who were the original promoters have to be gone into, before verification
of financial data in detail. An eye into the history of the company may reveal its turning points,
survival strategies adopted from time to time, the market share enjoyed by and changes therein,
product life cycle and adequacy of resources. It could also help the accountant in determining
whether, in the past, any regulatory requirements have had an impact on the business of the said
company. This could, inter alia, include the nature of business (es), location of production facilities,
warehouses, offices, products or services and markets.
➢ Financial Projections: The projections for the next five years with detailed assumptions and
workings and the appropriateness of assumption used in the preparation and presentation of
financial projections. If the accountant is of the opinion that as assumption used by the company
are unrealistic, the accountant should consider its impact on the overall valuation of the company.

➢ Significant Accounting Policies: The accounting policies being followed by the company and the
appropriateness thereof is another key area. The impact of the recent changes in the accounting
policies in the recent past keeping in view its intention of offering itself for sale. The accountant
has to look at the main effect of accounting policies on the overall profitability and their
correctness. It is also quite important to ascertain significant accounting policies used by the
company, that changes that have been made to the accounting policies in the recent past, the areas
in which accounting policies followed by the company are different from those adopted by the
acquiring enterprise and the effect of such differences. Finally, examine whether the financial
statements of the company have been prepared in accordance with the governing statutory
requirements.
➢ Review of Financial Statements: An evaluation of the profit reported by the company would be
largely based upon its operating results. Any extraordinary item of income or expense that might
have affected the operating results would require close examination.
It is advisable to compare the actual figures with the budgeted figures for the period under
review and those of the previous accounting period. It is important that the trading results for the
past four to five years are compared and the trend of normal operating profit arrived at. The
normal operating profits should further be benchmarked against other similar companies. Besides
the above, and based on the trend of operating results, the accountant has to advise the acquiring
enterprise, through due diligence report, on the indicative valuation of the business. The exercise to
evaluate the balance sheet of the company has to take into consideration the basis upon which
assets have been valued and liabilities have been recognized. The net worth of the business has to
be arrived at by taking into account the impact of over/under valuation of assets and liabilities.
➢ Cash Flow: A review of historical cash flows and their pattern would reflect the cash generating
abilities of the company and should highlight the major trends. It is important to know if the
company is able to meet its cash requirements through internal accruals or does it have to seek
external help from time to time. It is necessary to check:
Whether the company is able to honour its commitments to its trade payables, to the
banks, to government and other stakeholders;
How well is the company able to turn its trade receivables and inventories;
How well does it deploy its funds; and
Whether any funds are lying idle or is the company able to reap maximum benefits out of
the available funds.
➢ Statutory Compliance: This is one area that has to be examined in detail. It is important to make a
list of laws that are applicable to the entity as well as to make a checklist of compliance required
from the company under those laws. If the company has not been regular in its legal compliance, it
could lead to punitive charges under the law. The impact on such violations be quantified and
assessed in respect of entity; financial status and even on its governing concern status.
➢ Human Resources: In the Indian context, the status of work force, staff and employees is a complex
problem. It is important to work out how much of the labour force has to be retained. It is also
important to judge the job profile of the administrative and managerial staff to gauge which of
these matches the requirements of the new incumbents. The aspects whether all employee
benefits like PF, Gratuity, ESI and superannuation have been properly paid/funded. The pay
packages of the key employees will be thoroughly reviewed since this can be a crucial factor in
future employee costs.
(b)The contents of a due diligence report can be discussed under:
(Start of the Report)

➢ Terms of reference and scope of verification.
➢ Objective of due diligence.
➢ Brief history of the company including shareholding pattern.
(Legal DD Related)
➢ Assessment of possible liabilities on account of litigation and legal proceedings against the company
and suggestion on ways and means including affidavits, indemnities, to be executed to cover
unforeseen and undetected contingent liabilities.
➢ Status of franchises, license and patents.

(Operational / Commercial DD Related)
➢ Assessment of operating results.
(Environment DD Related)
➢ Assessment on Environment Related Policies
(Personnel DD Related)
➢ Assessment of Management Structure.
(Financial DD Related)
➢ Assessment of valuation of assets including comments on properties, terms of leases, lien and
encumbrances including status of charges, liens, mortgages, assets and properties of the company.
➢ Assessment of financial liabilities with special emphasis on Interlocking investments and financial
obligations with group/associates’ companies, amounts receivables subject to litigation, any other
likely liability which is not provided for in the books of account.
➢ Assessment of net worth.
(TAX DD Related)
➢ Assessment of taxation and statutory liabilities.
(IT DD Related)
➢ Assessment of Information Technology
(Conclusion Related)
➢ Suggestions on various aspects to be taken care of before and after the proposed merger /
acquisition.
➢ Finally, an executive summary may be prepared highlighting the significant areas.

Part – 2 INVESTIGATION
QNO Investigation (Incoming Partner) Old Course-- (N10R, M14R,P17M, M20M)

625.000 Bhaskar CNO – INTG.100 New Course-- (S17M, M18M, M20M, S21M)
What are the important steps involved while conducting Investigation on behalf of an Incoming Partner?
OR
Dalal, Banerji and Mallick are partners in a firm sharing profits and losses in the ratio 2:2:1. The partners
have agreed to take Mr. Mistri as a partner with effect from 1st April 2018 as 1/4th partner.
What are the important steps involved while conducting investigation on behalf of Mr. Mistri, the
incoming partner?
Answer ➢ Purpose: -
To know whether the terms offered to him are reasonable having regard to the nature of
the business, profit records, capital distribution, personal capability of the existing
partners, socio-economic setting, etc.
To ascertain whether the capital to be contributed by him would be safe and applied
usefully.
➢ Areas to be covered: -
Reasons & History
• Ascertain reasons for the offer of admission to a new partner should be ascertained
and it should be determined whether the same synchronizes with the retirement of
any senior partner whose association may have had considerable bearing on the firm’s
success.
• Ascertainment of the history of the firm, since inception and growth of the firm.
Present Situation & Partnership Deed
• Study the composition and quality of key personnel employed by the firm and any
likelihood of their leaving the organization.
• Assess position of orders at hand and the range and quality of clientele should be
thoroughly examined, which the firm is presently operating.
• Studies of the provisions of the Deed of partnership, particularly for composition of
partners, their capital contribution, drawing rights, retirement benefits, job allocation,
financial management, goodwill, etc.
• Examine whether any special clause exists in the deed of partnership to allow
admission in future of a new partner, who may be specified, on concessional terms.
Financial Statement Analysis
• Appraisal of the record of capital employed and the rate of return. It is necessary to
have a comparison with alternative business avenues for investments.
• Ascertain manner of computation of goodwill on admission as also on retirement, if
any
• Scrutinize terms of loan finance to assess its usefulness and implication for the overall
financial position.
• Examine whether the incomplete contracts which will be transferred to the
reconstituted firm will be a liability or a loss.
• Scrutiny of the record of profitability of the firm’s business over a suitable number of
years.
• Examination of the asset and liability position to determine the tangible asset backing
for the partner’s investment, appraisal of the value of intangibles like goodwill, know
how, patents, etc. impending liabilities including contingent liabilities and those for
pending tax assessment.

QNO Audit Vs Investigation Old Course- (N04E, N10R, N12M, P17M, M17R, N18E, N19R)
632.000 Bhaskar CNO – INTG.020 New Course-- (N19R, S21M)
General objective of an audit is to find out whether the financial statements show true and fair view. On
the other hand, investigation implies systematic, critical and special examination of the records of a
business for a specific purpose. In view of the above, you are required to brief out the difference
between Audit and Investigation.
Answer ➢ Auditing
It involves examination of financial information contained in financial statements to express an
opinion whether or not the same have been prepared properly. In essence, auditing involves
independent examination of financial information prepared by the management of an entity.
➢ Investigation: -
It implies systematic, critical and special examination of the records of a business for a
specific purpose.
The examination conducted under investigation is intensive as well as exhaustive so far as
the activities or areas of accounting is concerned. Investigation requires a concentrated focus
on the subject matter of inquiry and related matters.
Basis INVESTIGATION AUDIT
➢ Objective It aims at establishing a fact or a To verify whether the financial
happening or at assessing a particular statements display a true and
situation fair view of the state of affairs
and the working results of an
entity.
➢ Legal Voluntary, in some companies it may be Mandatory for Companies.
Requirement ordered as per LAW For others, it is voluntary
➢ Who performs Any person, who may not be a Chartered A Chartered Accountant within
/ Conducted by Accountant. the meaning of the Chartered
Accountants Act 1949.
➢ Scope The scope of investigation may be The scope of audit is wide and in
governed by statute OR it may be non- case of statutory audit the scope
statutory. of work is determined by the
provisions of relevant law.
➢ Time Frame The work is not limited by rigid time The audit is carried on either
(Period frame. It may cover several years, as the quarterly, half-yearly or yearly.
Covered) outcome of the same is not certain
➢ Nature of Requires a detailed study and Involves tests checking or sample
activities examination of facts and figures technique to draw evidences for
performed forming a judgement and
expression of opinion
➢ Application of It is analytical in nature and requires a Is governed by compliance with
accounting thorough mind, capable of observing, generally accepted accounting
principles collecting and evaluating facts. There principles, audit procedures and
may not be any focus on accounting disclosure requirements.
principles and disclosures.
➢ Evidence It seeks conclusive evidence Audit is mainly concerned with
prima- facie evidence (Persuasive
Evidence).
➢ Reporting The outcome is reported to the person(s) The outcome is reported to the
on whose behalf investigation is carried owners of the business Entity.
out. (No particular format) (Format is generally fixed)
➢ Inherent No inherent limitation owing to its Audit suffers from inherent
Limitations nature of engagement. Limitation.
➢ Pre-Condition Its essence lies in going into the matter Audit is not based on suspicion
with some pre-conceived notion suited unless circumstances exist to
to the objective arouse suspicion

QNO Investigate Frauds of Inventory defalcation Old Course- (M19R, N19M)
637.010 Bhaskar CNO – INTG.140 New Course-- (N19E, N19M,M19R, S21M)
Mr Sharma is reviewing the anti-fraud controls for a construction company. The company has witnessed
a few frauds in the past mainly in the nature of material stolen from the sites and fake expense
vouchers.
Mr. Sharma is evaluating options for verifying the process to reveal fraud and the corrective action to be
taken in such cases. As an expert, you are required to brief Mr. Sharma about the inventory fraud and
verification procedure with respect to defalcation of inventory?
Answer ➢ Inventory frauds- Inventory frauds are many and varied but here we are concerned with
misappropriation of goods and their concealment.
Employees may simply remove goods from the premises.
Theft of goods may be concealed by writing them off as damaged goods, etc.
Inventory records may be manipulated by employees who have committed theft so that
book quantities tally with the actual quantities of inventories in hand.
➢ Verification Procedure for Defalcation of inventory- It may be of trading stock, raw materials,
manufacturing stores, tools or of other similar items (readily) capable of conversion into cash. The
loss may be the result of a theft by an employee once or repeatedly over a long period, when the
same have not been detected. Such thefts usually are possible through collusion among a number
of persons. Therefore, for their detection, the entire system of receipts, storage and despatch of
all goods, etc. should be reviewed to localise the weakness in the system.
The determination of factors which have been responsible for the theft and the establishment of
guilt would be difficult in the absence of:
a system of inventory control, and existence of detailed record of the movement of
inventory, or
availability of sufficient data from which such a record can be constructed.
The step in such an investigation is to establish the different items of inventory defalcated and
their quantities by checking physically the quantities in inventory held and those shown by the
Inventory Book.
Defalcations of inventory, sometimes, also are committed by the management, by diverting a part
of production and the consequent shortages in production being adjusted by inflating the
wastage in production; similar defalcations of inventories and stores are covered up by inflating
quantities issued for production. For detecting such shortages, the investigating accountant
should take assistance of an engineer. For that he will be more conversant with factors which are
responsible for shortage in production and thus will be able to correctly determine the extent to
which the shortage in production has been inflated.
In this regard, guidance can also be taken from past records showing the extent of wastage in
production in the past. Similarly, he would be able to better judge whether the material issued for
production was excessive and, if so to what extent.
The per hour capacity of the machine and the time that it took to complete one cycle of
production, also would show whether the issues have been larger than those required.
Investigation (Future Maintainable Old Course- (M13E, M16M, P17M, M18M, M19M)
QNO
Turnover)- New Course-- (S17M, M19M, S21M)
639.000
Unique
H Ltd. is interested in acquiring S Ltd. The valuation of S Ltd. is dependent on future maintainable sales.
As the person entrusted to value S Ltd., what factors would you consider in assessing the future
maintainable sales?
Answer ➢ Factors to be considered in Assessing Future Maintainable Sales:
In assessing the sales which the business would be able to maintain in the future, the following
factors should be taken into account-
(Past)
Trend: Whether in the past, sales have been increasing consistently or they have been
fluctuating. A proper study of this phenomenon should be made.

(Present)
Political and economic considerations: Are the policies pursued by the Government likely to
promote the extension of the market for goods to other countries? Whether the sales in the
home market are likely to increase or decrease as a result of various emerging economic
trends?
Competition: What is the likely effect on the business if other manufacturers enter the same
field or if products which would sell in competition are placed on the market at cheaper price?
Is the demand for competing products increasing? Is the company’s share in the total trade
constant or has it been fluctuating?
(Future)
Marketability: Is it possible to extend the sales into new markets or that these have been
fully exploited? Product wise estimation should be made.
QNO Investigation of Borrower Old Course- (M12R, M13R, N15R, P17M, M18E, M20R)
643.000 Bhaskar CNO – INTG.120 New Course-- (S17M, N18R, M18M, M20R, S21M)
A nationalised bank received an application from an export company seeking sanction of a term loan to
expand the existing sea food processing plant. In this connection, the General Manager, who is in charge
of Advances, approaches you to conduct a thorough investigation of this limited company and submit a
confidential report based on which he will decide whether to sanction this loan or not. Decide the points
you will cover in your investigation before submitting your report to the General Manager.
Answer ➢ Purpose: -
Reason for obtaining the loan
Determining of sources of repayment.
Availability of security, if borrower fails to repay.
➢ Collection of Information: -
Investigator is required to collect the information with respect to;
The financial standing and reputation for business integrity enjoyed by directors and
officers of the company.
History of growth and development of the company and its performance during the
past 5 years.
Authorization under Memorandum or the Articles of Association to borrow money for the
purpose for which the loan will be used.
The purpose for which the loan is required.
Manner in which the borrower proposes to invest the amount of the loan.
Schedule of repayment of loan submitted by the borrower, particularly the assumptions
made therein as regards amounts of profits that will be earned in cash and the amount of
cash that would be available for the repayment of loan to confirm that they are
reasonable and valid in the circumstances of the case.
➢ Examination of Financial Statements: -
From the Statement of Profit and Loss for the previous five years, showing separately
therein various items of income and expenses, the amounts of gross and net profits
earned, and taxes paid annually during each of the five years.
The purpose is to ascertain strengths of profitability
➢ Computation of relevant Ratios: -
Equity to Fixed Assets.
Equity to Long Term Loans.
Sales to Fixed Assets.
Sales to Average Inventories held.
Sales to Book Debts.
Current Assets to Current Liabilities.

Quick Assets (the current assets that are readily realizable) to Quick Liabilities.
Return on Capital Employed.
➢ Break-up of annual sales: -
Product-wise to show their trends.
➢ Schedule of assets and liabilities: -
Assets: -
• To ensure their existence, ownership and proper valuation.
• To examine whether assets have been adequately insured.
Liabilities: -
• To determine present and future obligations.
• To ensure completeness of recording.
QNO Investigation of borrower-Special Focus on Assets & Old Course-- (N20M)

643.020 liabilities - Unique New Course—(N20M)
A nationalized bank received an application from a Limited company seeking sanction of a term loan to
expand its existing business. In this connection, the Loan Manager of the Bank approaches you to
conduct a thorough investigation of the items of the Balance Sheet of this Limited company and submit a
confidential report based on which he will decide whether to sanction this loan or not. List out the major
steps an investigating accountant would keep in mind while verifying assets and liabilities included in the
Balance Sheet of the borrower company which has been furnished to the Bank.
➢ Steps involved in the verification of assets and liabilities included in the Balance Sheet of the borrower
company which has been furnished to the Bank - The investigating accountant should prepare
schedules of assets and liabilities of the borrower and include in the particulars stated below:
Fixed assets –
A full description of each item, its gross value, the rate at which depreciation has been charged
and the total depreciation written off. In case the rate at which depreciation has been adjusted is
inadequate, the fact should be stated. In case any asset is encumbered, the amount of the charge
and its nature should be disclosed. In case an asset has been revalued recently, the amount by
which the value of the asset has been decreased or increased on revaluation should be stated
along with the date of revaluation. If considered necessary, he may also comment on the
revaluation and its basis.
Inventory –
The value of different types of inventories held (raw materials, work-in-progress and finished
goods) and the basis on which these have been valued. Details as regards the nature and
composition of finished goods should be disclosed. Slow moving or obsolete items should be
separately stated along with the amounts of allowances, if any, made in their valuation. For
assessing redundancy, the changes that have occurred in important items of inventory
subsequent to the date of the Balance Sheet, either due to conversion into finished goods or sale,
should be considered. If any inventory has been pledged as a security for a loan the amount of
loan should be disclosed.
Trade Receivables, including bills receivable - Their composition should be disclosed to indicate
the nature of different types of debts that are outstanding for recovery; also whether the debts
were being collected within the period of credit as well as the fact whether any debts are
considered bad or doubtful and the provision if any, that has been made against them.
Further, the total amount outstanding at the close of the period should be segregated as follows:
• debts due in respect of which the period of credit has not expired;
• debts due within six months; and
• debts due but not recovered for over six months.
If any debts are due from directors or other officers or employees of the company, the particulars
thereof should be stated. Amounts due from subsidiary and affiliated concerns, as well as those
considered abnormal should be disclosed. The recoveries out of various debts subsequent to the
date of the Balance sheet should be stated.

Investments–
The schedule of investments should be prepared. It should disclose the date of purchase, cost
and the nominal and market value of each investment. If any investment is pledged as security
for a loan, full particulars of the loan should be given.
Secured Loans–
Debentures and other loans should be included together in a separate schedule. Against the
debentures and each secured loan, the amounts outstanding for payments along with due dates
of payment should be shown. In case any debentures have been issued as a collateral security,
the fact should be stated. Particulars of assets pledged or those on which a charge has been
created for re-payment of a liability should be disclosed.
Provision of Taxation–
The previous years up to which taxes have been assessed should be ascertained. If provision for
taxes not assessed appears in be inadequate, the fact should be stated along with the extent of
the shortfall.
Other Liabilities–
It should be stated whether all the liabilities, actual and contingent, are correctly disclosed. Also,
an analysis according to ages of trade payables should be given to show that the company has
been meeting its obligations in time and has not been depending on trade credit for its working
capital requirements.
Insurance –
A schedule of insurance policies giving details of risks covered, the date of payment of last
premiums and their value should be attached as an annexure to the statements of assets,
together with a report as to whether or not the insurance -cover appears to be adequate, having
regard to the value of assets.
Contingent Liabilities-
By making direct enquiries from the borrower company, from members of its staff, perusal of the
files of parties to whom any loan has been advanced those of machinery suppliers and the legal
adviser, for example, the investigating accountant should ascertain particulars of any contingent
liabilities which have not been disclosed. In case, there are any, these should be included in a
schedule and attached to the report.
Finally, the investigating accountant should ascertain whether any application for loan to another
bank or any other party has been made. If so, the result thereof should be examined.
Author’s Note
In QNO 643.000 and 643.020 questions are similar but QNO 643.000 asks about investigation of
borrower in general and QNO 643.020 focuses on investigation of assets and liabilities of borrower.
QNO Investigation (Propriety Business) – Old Course- (M04E,P17M)

643.050 Unique New Course-- (S17M, S21M)
Mr. Clean who proposes to buy the proprietary business of Mr. Perfect, engages you as investigating
accountant. Specify the areas which you will cover in your investigation
Answer ➢ Following are the areas which shall be covered under investigation while proposing to buy a
proprietary business-
Studying the overall picture:
• The first and foremost important aspect in any business investigation is to have an overall
picture of the position of the business which is being investigated before the details are gone
into.
• Further, it is important to know whether the business is engaged in the manufacture of one or
two important lines of products, is principally processing materials or is concerned only with
the sale of a single product.
• Also, whether it is a business which depends for its success on imported raw materials or
supply of parts and components from ancillary businesses or uses indigenous materials and
parts which are manufactured locally.
• If the business is labour - intensive, its future profitability would be dependent on availability
of skilled labour and relations of the management with the trade unions. Labour relations thus
can affect the future profitability of the business.
• The method of distribution of products, either through wholesalers or retailers also must be
examined.
• For studying the economic and financial position of the business, the following should be
considered-
o The adequacy or otherwise of fixed and working capital. Are these sufficient for the
growth of the business?
o What will be the trend of the sales and profits in the future?
The success of a business in the future would depend on the position enjoyed by it in
the past in relation to its competitors. A business may be successful because it enjoys
a monopoly.
In such a case, the possibility of emergence of competition must be examined. This
may be ascertained on the basis of the trend in market share of the product and the
licensing policy followed by the government. Establishing the trend of sales, product-
wise and area-wise will ordinarily help in drawing a conclusion on whether the trend
will be maintained in the future.
o Whether the profit which the business could be expected to maintain in the future
would yield an adequate return on the capital employed?
From the accountant’s view point, the following specific areas need to be looked into:
• Statement of Profit and Loss:
To study the Statement of Profit and Loss of a concern and consider each item, included
therein, in relation to the corresponding items in the Statement of Profit and Loss of the
previous years. It is therefore, necessary that a summary, in a columnar form, should be
prepared of the balances included in the Statement of Profit and Loss of the business for a
period, say of 5 to 7 years.
• Fixed Assets:
Fixed assets, usually, are shown in accounts at cost less depreciation but the accounts do not
show the ages of different assets. It is desirable, therefore, to obtain age analysis of various
items of fixed assets. Assets which are old or are obsolete would naturally have to be
replaced. It should be seen that their values are not in excess of the value of service that they
could be expected to render to the business during the balance period of their active life and
the amount they would fetch on sale as scrap.
• Inventories:
It should be seen that stocks have been valued consistently and that the basis of valuation was
such that the value placed on inventories did not include any element of profit. Also, there
should be due allowance for damaged, obsolete and slow-moving inventories.
• Other liquid assets:
It should be ascertained that the assets so described are readily realisable. Money with a bank
in liquidation should be taken only to the extent guaranteed by Deposit Insurance Scheme.
• Idle assets:
On a scrutiny, it may appear that certain assets are remaining idle and are not being properly
applied in the business. For example, certain plant and machinery may have been put to use
after a considerable period of time after acquisition. Some of the fixed assets may be awaiting
installation even at the valuation time.
• Liabilities:
The important matter to investigate in this regard is whether those are stated fully or
understated or overstated. In other words, whether the profits of the business have been
inflated by suppression of liabilities or there are any free reserves included in the liabilities. In
either case, an adjustment would be necessary. Secondly, it should be ascertained that
liabilities are not unduly ‘large or are not outstanding for a long time, in such cases, it would
be necessary to pay off some of them which would cause a drain on the liquid resources of the
concern. The fact should be stated in the report.

• Taxation:
Orders in respect of assessments completed should be studied and it should be verified that
an adequate provision has been made in respect of liabilities for taxes which have not been
assessed. Also, it should be seen that in the past there has been no reopening of assessments.
If so, the company may be liable for an undisclosed sum of taxes plus penalties. Any
temporary tax benefit should also be disregarded.
Apart from the above areas, the other factors relating to the management, skilled labour, etc.
May also be covered in the investigation.
Author’s Note
If question is on due diligence on proprietary business, then give answer for financial due diligence i.e
QNO 623.000 and if it is on investigation of prop business answer as per QNO 643.050.

PART- 3 FORENSIC AUDIT
QNO Forensic Accountants Service – Areas New Course-- (S21M, N22R)

628.500 Bhaskar CNO – FA.140
What are the areas where the services of forensic accountants/ auditors are generally required?
Answer The services rendered by the forensic accountants are in great demand in the following areas:
Criminal • Matters relating to financial implications the services of the forensic accountants
Investigation: are availed of. The report of the accountants is considered in preparing and
presentation as evidence.
Professional • Professional negligence cases are taken up by the forensic accountants. Non-
Negligence conformation to Generally Accepted Accounting Standards (GAAS) or
Cases : noncompliance to auditing practices or ethical codes of any profession, Forensic
Auditors are needed to measure the loss due to such professional negligence or
shortage in services.
Arbitration • Forensic accountants render arbitration and mediation services for the business
service: community. Their expertise in data collection and evidence presentation makes
them sought after in this specialized practice area.
Fraud • Forensic accountants render such services both when called upon to investigate
Investigation specific cases as well for a review of or for implementation of Internal Controls.
And Risk / Another area of significance is Risk Assessment and Risk Mitigation.
Control
Reviews:
Settlement of • Insurance companies engage forensic accountants to have an accurate
insurance assessment of claims to be settled.
claims:
• In case of policyholders seek the help of a forensic accountant when they need
to challenge the claim settlement as worked out by the insurance companies. A
forensic accountant handles the claims relating to consequential loss policy,
property loss due to various risks, fidelity insurance and other types of insurance
claims.
Dispute • Business firms engage forensic accountants to handle contract disputes,
settlement: construction claims, product liability claims, infringement of patent and trade
marks cases, liability arising from breach of contracts and so on.
QNO Forensic Accounting Vs Audit New Course-- (S17M, M18R, M18E, M22R)
ABC Ltd. is a listed company having turnover of ` 50 crores & plans expansion by installation of new
machines at new building-having total additional project cost of ` 20 crore.
OR
Rupees (In crore) Purpose
10.0 - for Building
8.5 - for Machinery
1.5 - for Working Capital
20 crore
Project gets implemented in 2017-18 and one of the accountants points out to Managing Director that
something wrong has happened in the purchase of building material. On hearing this, the management is
planning to appoint Forensic Auditor. Advise management that how is a forensic accounting analysis is
different from an audit.
OR
Explain how a Forensic Audit differs from an Assurance Engagement
OR

Forensic audit is unlike other audits Explain
Answer Difference between a forensic audit and financial audit:
Sr. Particulars Financial Audit Forensic Audit
No.
1 Objectives Express an opinion as to Whether fraud has taken
‘True & Fair’ presentation place in books
2 Techniques Substantive & Compliance. Investigative, substantive
Sample based or in-depth checking
3 Period Normally for a particular No such limitations

accounting period.
4 Verification of Relies on the management Independent/verification of
stock, Estimation certificate/Management suspected/selected items
realisable value Representation where misappropriation in
of assets, suspected
provisions,
liability etc.
5 Off balance sheet Used to vouch the Regulatory & propriety of
items (like arithmetic accuracy & these
contracts etc.) compliance with transactions/contracts are
procedures examined.
6 Adverse findings Negative opinion or Legal determination of
if any qualified opinion expressed fraud impact and
with/without quantification identification of
perpetrators depending on
scope.
QNO Points to keep in mind while appointing a forensic auditor New Course-- (S21M, M22M)
BR Construction was into the business of building roads and other infrastructure facilities for
government contracts. Mr. Tiwari, one of the senior official, was looking after the procurement of
cement required at the construction sites. There was a substantial increase in the price of cement bags
bought as compared to those bought prior to the appointment of Mr. Tiwari. The management of the
company decides to get a forensic audit done for the transactions handled by Mr. Tiwari. What points
should be kept in mind by the management while appointing a forensic auditor?
A Forensic Auditor is often retained to analyze, interpret, summarize and present complex financial and
business-related issues in a manner which is both understandable and properly supported. Forensic
Accountants are trained to look beyond the numbers and deal with the business reality of the situation.
Forensic auditor needs to have an understanding on various frauds that can be carried off and how
evidence need to be collected.
While appointing a forensic auditor, the Management of BR Construction must initially consider whether
the firm has the necessary skills and experience to accept the work. In view of above, Management of BR
Construction should ensure that the forensic auditor should necessarily possess the following
characteristics and skills:
➢ Crafting questions to be posed.

➢ Responding to questions posed.
➢ Identifying documents to be requested and/or subpoenaed.
➢ Identifying individuals to be most knowledgeable of facts.
➢ Conducting research relevant to facts of the case.
➢ Identifying and preserving key evidence.
➢ Evaluating produced documentation and information for completeness.
➢ Analysing produced records and other information for facts.
➢ Identifying alternative means to obtain key facts and information.
➢ Providing questions for deposition and cross examination of fact and expert witnesses.

QNO Forensic Audit Techniques New Course-- (S17M,N20E, S21M, M22M,M22E,N22M)
Briefly mentioned the forensic audit techniques name.
OR
CA Robo has been appointed as Forensic Auditor by BMY Bank Limited for one of its borrowal accounts
WRONG Ltd. CA Robo started the audit by first reviewing the transactions of the borrower in Bank
statement as per Bank records to identify any hidden patterns in that information. She had to review
huge volume of data, as the number of transactions per day were in hundreds and the data was to be
reviewed for the last three years. So, she was stuck up as to how to proceed further to identify any
hidden patterns in information, if any. Guide CA Robo, suggesting which technique to be used for
identifying any hidden patterns in the information.
OR
TQR Limited is engaged in the business of garment manufacturing having registered office at Mumbai
and branches across India. Mr. Shyam, one of the senior Managers was involved in creating false
documents and legitimate documents were altered to support fictitious transactions. Consequently, the
management appointed you to get forensic audit done based on the digital foot-print of transactions
handled by Mr. Shyam. The use of sound techniques will enable to discover the defalcations on a timely
basis. As a forensic auditor how will you deal and suggest Technology based/Digital forensic techniques.
Answer (Fraud can be in any corner of financial statements)
➢ Detecting fraud is difficult, especially frauds involving material financial statement misstatements,
which occur only in about 2 percent of all financial statements.
(Concealed – Omission or Falsification & Collusion)
➢ Fraud is generally concealed and often occurs through collusion. Normally, the documents
supporting omitted transactions are not kept in company files. False documentation is often
created, or legitimate documents are altered to support fictitious transactions.
While fraud detection techniques will not identify all fraud, the use of sound techniques can
increase the likelihood that misstatements or defalcations will be discovered on a timely basis.
➢ Forensic Audit Technique will be very important technique as per GST - Discussion at CCD
Some of the techniques that a forensic auditor may use are listed below:
General Audit Techniques:
• Testing defences: A good initial forensic audit technique is to attempt to circumvent
these defences yourself. The weaknesses you find within the organizations control will
most probably guide you down the sea path taken by suspected perpetrators. This
technique requires you to attempt to put yourself in the shoes and think like your
suspect.
Generalized Audit Software (GAS): Generalized Audit Software (GAS) is a class of CAATs
that allows auditors to undertake data extraction, querying, manipulation, summarization
and analytical tasks. GAS focuses on the fully exploiting the data available in the entity’s
application systems in the pursuit of audit objectives. GAS support auditors by allowing
them to examine the entity’s data easily, flexibly, independently and interactively in data-
based auditing.
Using GAS, an auditor can formulate a range of alternative hypotheses for a particular
potential misstatement in the subject matter and then test those hypotheses immediately.
“What if” scenarios can be developed with the results and the auditors can examine the
generated report rapidly. Currently, the latest versions of GAS include the Audit Command
Language (ACL), Interactive Data Extraction and Analysis (IDEA) and Pan audit.
Statistical & Mathematical Techniques:
• Trend Analysis: Businesses have cycles and seasons much akin to nature itself. An
expense or event within a business that would be analogous to a snowy day in the
middle of summer is worth investigating. Careful review of your subject organization's
historical norms is necessary in order for you to be able to discern the outlier event
should it arise within your investigation.

• Ratio Analysis: Another useful fraud detection technique is the calculation of data
analysis ratios for key numeric fields. Like financial ratios that give indications of the
financial health of a company, data analysis ratios report on the fraud health by
identifying possible symptoms of fraud.
Technology based /Digital Forensics Techniques: Every transaction leaves a digital

footprint in today's computer-driven society. Close scrutiny of relevant emails, accounting
records, phone logs and target hard drives is a requisite facet of any modern forensic audit.
Before taking steps, such as obtaining data from email etc. the forensic auditor should take
appropriate legal advice so that it doesn’t amount to invasion of privacy. Digital
investigations can become quite complex and require support from trained digital
investigators. However, many open-source digital forensics tools are now available to assist
you in this phase of the investigation.
CD should be checked by S2MELL technique
• Cross Drive Analysis (Earlier each hard disk / pen drive etc. were analysed one by one,
in this approach they are analysed at the same time)
• Deleted Files
• Stochastic Forensics (Analysing change in pattern, to detect insider data theft)
• Steganography (Understanding hidden message in electronic file, images,
communication)
• MD5 (Software used to investigate computers)
• Encase (Software used to extract evidence from sized hard drives etc.)
• Live Analysis (When cyber-attack takes place)
• Log Related
• Tracking Log Files
• PC System Log
• Free Log Tools (To extract meaningful information form logs)
Data Mining Techniques:

It is a set of assisted techniques designed to automatically mine large volumes of data for
new, hidden or unexpected information or patterns. Data mining techniques are categorized
in three ways: Discovery, Predictive modelling and Deviation and Link analysis. It discovers
the usual knowledge or patterns in data, without a predefined idea or hypothesis about
what the pattern may be, i.e. without any prior knowledge of fraud. It explains various
affinities, association, trends and variations in the form of conditional logic.
Computer Assisted Auditing Techniques (CAATs):Changing patterns of businesses,
regulatory framework, scarcity of resources at auditors’ disposal on one side and the ever-
increasing mountainous data on other hand is making audit a complex process. Use of
CAATTs is, thus, indispensable to the Auditors and forensic auditors. Computer-assisted
audit techniques (CAATs) or computer-assisted audit tools and techniques (CAATTs) are
computer programs that the auditors use as part of the audit procedures to process data of
audit significance contained in a client’s information systems, without depending on him.
Common Software Tool (CST):Due to shortcomings of GASs, CSTs have become popular
over a period. Spreadsheets (like MS Excel, Lotus, etc.), RDBMS (like MS Access, etc.) and
Report writers (like Crystal reports, etc.) are few examples of CSTs. Their widespread
acceptability is due to its instant availability and lower costs. While spreadsheets may be
extremely easy to use due to its simplicity and versatility, other CSTs may need some
practice.
Whether one uses GAS or CST, it is imperative that the auditor is aware about the manner
and processes that have led to the data generation, the control environment revolving
around the data and the source from where the data samples are imported into the
GAS/CST.
Laboratory Analysis of Physical and Electronic Evidences:

• Computer Forensics
o Chain of Custody
o Hard disk imaging
o Search for erased files
• E-mail analysis
o Analyze use & possible misuse
o Computer software to analyze data
• Protection/Validation of Evidence
o Altered & Fictitious Document
o Physical examination
o Document dating
o Ink sampling
o Fingerprint analysis
o Forgeries
o Federal Rules of Evidence
Note: In Question of (CA Robo) only Points related to Data Mining Techniques should be given.

Part – 1 PEER REVIEW
QNO Scope of Peer Review - Case Study Old Course-- (M21M)

647.500 Bhaskar CNO – PR.080 New Course-- (M21M,M22M)
CA. Sudarshan, appointed as a Peer Reviewer for M/s. Preet Associates, has asked for all the
management consultancy engagements and engagements solely to assist the client in preparing,
compiling or collating information other than financial statements carried out by M/s. Preet Associates
for peer review during the period considered for peer review purposes by the board. Peer Reviewer CA.
Sudarshan has also sent out a mail to Peer Review Board regarding his selection. Mr. Preet, the
managing partner of the firm seeks your advise on this matter.
OR
CA. Sita, appointed as a Peer Reviewer for M/s. Ram Associates, has asked for all the compilation and
the Due Diligence engagements carried out by M/s. Ram 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. Ram, the managing partner of the firm seeks your advice on this
matter.
Answer Selection of Assurance Service Engagements for Review: The Statement on Peer Review defines the
scope of peer review which revolves around compliance with technical, ethical and professional
standards; quality of reporting; office systems and procedures with regard to compliance of
assurance engagements; and, training programmes for staff including articled and audit assistants
involved in assurance engagements. The entire peer review process is directed at the assurance
services.
Assurance Services means assurance engagements services as specified in the “Framework for
Assurance Engagements” issued by the Institute of Chartered Accountants of India and as may be
amended from time to time. Assurance engagements does not include management consultancy
engagements or engagements solely to assist the client in preparing, compiling or collating
information other than financial statements.
In the given situation, CA. Sudarshan is appointed as a peer reviewer for M/s Preet Associates, has
asked for all management consultancy engagements and engagements solely to assist the client in
preparing, compiling or collating information other than financial statements carried out by M/s
Preet Associates for her peer review. In view of above, Peer Review of management consultancy
engagements and engagements solely to assist the client in preparing, compiling or collating
information other than financial statements at the time of execution step by CA. Sudarshan is not
correct as management consultancy engagements and engagements solely to assist the client in
preparing, compiling or collating information other than financial statements are not covered in the
scope of Assurance engagement and Peer Review is directed at assurance engagement only
Technical Standards Old Course-- (M13E, M16M, P17M, N17M, M18M,

QNO
Bhaskar CNO – PR.120 M19R, M20M)
648.000
New Course-- (S17M, M18R, M19R, M20M, S21M)
Technical, ethical and professional standards as per statement on peer review.
OR
“The Statement defines the scope of peer review which revolves around compliance with technical,
ethical and professional standards; quality of reporting; office systems and procedures with regard to
compliance of assurance engagements; and, training programmes for staff including articled and audit
assistants involved in assurance engagements.” You are required to explain the meaning assigned to
Technical, Ethical and Professional Standards as per Peer Review Statement.

Answer As per the Statement, Technical, Professional and Ethical Standards – means
Accounting Standards 3
• Accounting Standards issued by ICAI that are applicable for entities other than companies
under the Companies Act, 2013;
• Accounting Standards prescribed under section 133 of the Companies Act; 2013 by the
Central Government based on the recommendation of ICAI and in consultation with the
National Financial Reporting Authority (NFRA) and notified as Accounting Standards Rules
2006, as amended from to time to time
• Indian Accounting Standards prescribed under section 133 of the Companies Act 2013 by
the Central Government based on the recommendation of ICAI and in consultation with
NFRA and notified as Companies (Indian Accounting Standards) Rules, 2015, as amended
from time to time.
Standards issued by the Institute of Chartered Accountants of India including
• Engagement and Quality Control Standards 4
• Statements 5
• Guidance notes 7
• Standards on Internal Audit 6
• Notifications / Directions / Announcements / Guidelines / Pronouncements /Professional
standards issued from time to time by the Council or any of its committees. 8
Framework for the preparation and presentation of financial statements, Preface to the Standards
on Quality Control, Auditing, Review, Other Assurance and Related Services and Framework for
Assurance engagements;2
Provisions of the relevant statutes and / or rules or regulations which are applicable in the
context of the specific engagements being reviewed including instructions, guidelines,
notifications, directions issued by regulatory bodies as covered in the scope of assurance
engagements1
QNO Collection of Evidence Old Course-- (N09E, N11R, N13R, N14R, M16R, N16M, P17M, M17M)
649.000 Bhaskar CNO – PR.140
Collection of Evidence by Peer Reviewer.
Answer ➢ Collection of Evidence by Peer Reviewer:
A Peer Reviewer collects evidence by applying the following methods:
Inspection- Inspection mainly consists of examination of documentation (working papers)
and other records maintained by the practice unit.
Observation- Observation consists of witnessing a procedure or process being performed
by others. For example, while conducting on-site review, the reviewer may review the
performance of internal control.
Inquiry-Inquiry consists of seeking appropriate information from the partner (designated
by the practice unit for the purpose)/sole proprietor or other knowledgeable persons
within the practice unit. The inquiries may originate from the responses to the questions
given in the questionnaire. The inquiries may also arise from the inspection of
documentation maintained by the practice unit.
While observation and inquiry may be considered as external independent sources of
review evidence, inspection remains the most significant method for confirming the
effective observance of control procedures in the practice unit. Observation and inquiry
may also corroborate the evidence provided by inspection. The reviewer, in order to carry
out the review effectively, should have an understanding of the documentation
maintained by the practice unit.
QNO Selection of Sample – Timing & Intimation Old Course-- (N20R)

650.500 Bhaskar CNO – PR.180 New Course--(N20R)

Selection of sample by the reviewer in case of peer review.
Selection of Sample by the Reviewer:
• The Reviewer shall within 7 days of receiving the information from the Practice Unit select
a sample of the assurance services that he would like to Review and intimate the same
to the Practice Unit and the Peer Review Board
• The Reviewer may also seek further / additional clarification from the Practice Unit on
the information furnished / not furnished.
• The Reviewer shall plan for an on–site Review visit or initial meeting in consultation
with the Practice Unit. The Reviewer shall give the Practice Unit at least five days’ time to
keep ready the necessary records of the selected assurance services.
• The Reviewer and Practice Unit shall mutually co-operate and ensure that the entire
Review process is completed within 60 days from the date of notifying the Practice
Unit about its selection for Review.
Author’s Note
Question talks about selection of sample in general, but answer focuses on timing of selection and
intimation.
Reporting (Areas of Control) Old Course-- (M05E, M09E, N12M, M15R, M17R, P17M ,M18M,
QNO
Bhaskar CNO – PR.180 N20M)
651.000
New Course-- (N20M)
ABC & Co LLP is a large firm of Chartered Accountants based out of Chennai. ABC & Co. LLP is subject to
peer review which was last conducted 3 years back. For the peer review of the financial year ended 31
March 2020, the firm got an intimation on 31 May 2020. The process of peer review got started and was
completed on 29 September 2020. In view of peer reviewer, the systems and procedures of ABC & Co.
LLP are deficient / non-compliant. The peer reviewer did not share any of his observations with ABC & Co
LLP as draft and final report was submitted tithe Board. Comment.
OR
Areas of Control for Reporting Stage of Peer Review.
OR
Preliminary Report under Peer Review.
Answer Reporting:
➢ The Peer Review Report should state that the system of quality control for the assurance services
of the Practice Unit for the period under Review has been designed so as to carry out the
assurance services in a manner that ensures compliance with Technical, Professional and Ethical
standards.
The Peer Review Report shall address his report of compliance or otherwise on the following areas
of controls:
Staff recruitment, Supervision and Development
Independence
Maintenance of Professional skills and standards.
Outside Consultation
Office Administration.
➢ Discussion/Communication of Findings
After completing the on-site Review, the Reviewer, before making his Report to the Board, shall
communicate his findings in the Preliminary Report to the Practice Unit if in his opinion, the
systems and procedures are deficient or non-compliant with reference to any matter that has
been noticed by him or if there are other matters where he wants to seek clarification.
The Practice Unit shall, within 5 days of the date of receipt of the findings, make its submissions or
representations, in writing to the Reviewer (i.e. Response to the Preliminary Report).
➢ Peer Review Report of Reviewer
At the end of an on-site Review if the Reviewer is satisfied with the reply received from the
Practice Unit, he shall submit a Peer Review Report to the Board along with his initial findings,
response by the Practice Unit and the manner in which the responses have been dealt with. A copy

of the report shall also be forwarded to the Practice Unit.
In case the Reviewer is of the opinion that the response by the Practice Unit is not satisfactory, the
Reviewer shall accordingly submit a modified Report to the Board incorporating his reasons for the
same. The Reviewer shall also submit initial findings (i.e. Preliminary Report), response by the
Practice Unit (Response to Preliminary Report) and the manner in which the responses have been
dealt with. A copy of the report shall also be forwarded to the Practice Unit.
➢ In case of a modified report, The Board shall order for a “Follow On” Review after a period of
one year from the date of issue of report as mentioned in (b) above. If the Board so decides, the
period of one year may be reduced but shall not be less than six months from the date of issue
of the report.
➢ In the instant case, in view of peer reviewer systems and procedures in ABC & Co. LLP are
deficient, therefore, peer reviewer should not submit the report directly to the Board. Thus,
contention of ABC & Co. LLP is correct.
QNO Preliminary Report Not Shared with PU New Course-- (N22R)

Prabhu & Co LLP is a large firm of Chartered Accountants based out of Mumbai. Prabhu & Co. LLP is
subject to peer review which was last conducted 3 years back. For the peer review of the financial year
ended 31st March 2021, the firm got an intimation on 29th May 2021. The process of peer review got
started and was completed on 27th September 2021. In view of peer reviewer, the systems and
procedures of Prabhu & Co. LLP are deficient / non-compliant. The peer reviewer did not share any of his
observations with Prabhu & Co LLP as draft and final report was submitted to the Board. Comment.
Answer Peer Review Report of Reviewer: After completing the on-site Review, the Peer Reviewer, before making
his Report to the Board, shall communicate his findings in the Preliminary Report to the Practice Unit if in
his opinion, the systems and procedures are deficient or non-compliant with reference to any matter that
has been noticed by him or if there are other matters where he wants to seek clarification.
The Practice Unit shall within 5 days after the date of receipt of the findings, make any submissions or
representations, in writing to the Reviewer. (i.e. Response to the Preliminary Report).
At the end of an on-site Review if the Reviewer is satisfied with the reply received from the Practice Unit,
he shall submit a Peer Review Report to the Board along with his initial findings, response by the Practice
Unit and the manner in which the responses have been dealt with. A copy of the report shall also be
forwarded to the Practice Unit.
In case the Reviewer is of the opinion that the response by the Practice Unit is not satisfactory, the
Reviewer shall accordingly submit a modified Report to the Board incorporating his reasons for the same.
The Reviewer shall also submit initial findings (i.e. Preliminary Report), response by the Practice Unit
(Response to Preliminary Report) and the manner in which the responses have been dealt with. A copy of
the report shall also be forwarded to the Practice Unit.
In case of a modified report, The Board shall order for a “Follow On” Review after a period of one year
from the date of issue of report as mentioned above. If the Board so decides, the period of one year may
be reduced but shall not be less than six months from the date of issue of the report.
In the instant case, in view of Peer Reviewer systems and procedures in Prabhu & Co. LLP are deficient,
therefore, Peer Reviewer should not submit the report directly to the Board. Thus, contention of Prabhu &
Co. LLP is correct.
QNO Eligibility criteria Old Course-- (M18E, M19E)

653.010 Bhaskar CNO – PR.280 New Course-- (M18E, S21M,N21M, M22R)
Eligibility criteria to be a Peer Reviewer.
OR

The elements of skill, experience and independence of reviewers are ensured before initiating them in
Peer Review process. In the above light, state few eligibility criteria fixed for a person to be empanelled
and also for being appointed as a Peer Reviewer.
Answer A Peer Reviewer shall:
Experience2
• Shall be a member in practice with at least 7 years of audit experience.
• In case a member has moved from industry to practice and is currently in practice he
should have at least 10 years of audit experience in industry and at least 3 years audit
experience in practice.
• Should have undergone the requisite training and cleared the requisite test for Peer
Review as prescribed by the Board. Is in Practice as per the Chartered Accountants Act,
1949. 1
Should have undergone the requisite training as prescribed by the Board.3
Declaration4
• a declaration as prescribed by the Board, at the time of Empanelment as a Peer Reviewer.
• a Declaration of Confidentiality as per Annexure A to this Statement while giving consent
for appointment as a Peer Reviewer.
For being a Reviewer, a member should not have: -5
• Disciplinary action / proceedings pending against him
• been found guilty by the Council or the Disciplinary Board or Committee at any time.
• been convicted by a Competent Court whether within or outside India, of an offence
involving moral turpitude and punishable with transportation or imprisonment.
• any Obligation or conflict of interest in the Practice Unit or its Partners / Personnel.
• He has undergone training/articleship under any of the partner of Practice Unit.
➢ A Reviewer shall not accept any professional assignment from the Practice Unitfor a period two
years from the date of appointment. Further, he should not have accepted any professional
assignment from the Practice Unit for a period of two years before the date of appointment as
reviewer of that Practice Unit.6
QNO Classification of Firms in Level I & Level II [Case New Course – (N21M)
653.012 Study 2]
Bhaskar CNO – PR.240
Name of the Firm Data of assurance services provided by such firms

Abhinanadan & Co. Conducted statutory audit of a private company which is an
associate of a company, the net worth of which is ` 279 crore.
Sambhav & Co. Conducted statutory audit of a mutual fund company and of a
branch of a regional rural bank, respectively.
Kunthu & Associates Conducted statutory audit of LLP which has raised has a loan
of ` 29 crore from a bank and a loan of ` 18 crore from an
NBFC, respectively.
Dharam & Co. Conducted statutory audit of an unlisted public company
having net worth of ` 3.79 crore and turnover of ` 63 crore.
The net worth of its parent company is ` 295 crore.
Answer Classification of Entity as per Statement of Peer Review
Name of Entity Type of Reason for such classification based on the Statement

Entity of Peer Review
Abhinanadan & Co. Level I entity A Practice Unit which has undertaken Statutory Audit of
a company which is an associate of an entity having net
worth of more than ` 250 Crores at any time during the
period under Review, shall be treated as a Level I
entity.
Before Amendment, If firm is doing audit of parent,

subsidiary or associate of entities given in level I list
should be treated as level I firm. But now this point is
removed so if you are doing audit of associate of high net
worth company, firm will not come in level I. So above
answer will change it will not be level I firm. It will be
level II.
Sambhav & Co. Level I entity A Practice Unit which has undertaken Statutory Audit of
a mutual fund shall be treated as a Level I entity.
Kunthu & Level II entity A Practice Unit which has undertaken Statutory Audit of
Associates an entity which has raised funds from public or banks or
financial institutions of more than ` 25 crore but less
than `50 crore during the period under Review, shall be
treated as a Level II entity.
In amendment this point is removed. If borrowing

crosses 50 crore it will become level I, but it is only 47
crores, so it is not level I and firms which are not level I
are considered level II, so this firm will again come in
level II, even after amendment but reason has changed.
Dharam & Co. Level I entity A Practice Unit which has undertaken Statutory Audit of
a company which is a subsidiary of an entity having net
worth of more than ` 250 Crores at any time during the
period under Review, shall be treated as a Level I entity.

should be treated as level I firm. But now this point is
removed so if you are doing audit of associate of high
net worth company, firm will not come in level I. So
above answer will change it will not be level I firm. It will
be level II.
QNO Classification of Firms in Level I & Level II Old Course – (N21R)

653.015 Bhaskar CNO – PR.240 New Course – (N21M,N21R)
You are required to classify the following practice units into Level I entity or Level II entity for the
purpose of peer review along with providing the reason for such classification, assuming the services
have been undertaken in the period under review by such CA firms:
Name of the Firm Data of assurance services provided by such firms
MT & Co. Conducted statutory audit of a private company which is an associate of
a company, the net worth of which is ` 300 crore.
GBL & Co. Conducted statutory audit of a Mutual Fund Company.
IML & Associates Conducted statutory audit of a company registered under Section 8 of
the Companies Act, 2013 but is not covered as a public interested entity.
However, it has raised a contribution of ` 60 crore.
BTS & Co. Conducted statutory audit of an unlisted public company having net
worth of ` 4 crore and turnover of ` 55 crore. The net worth of its parent
company is ` 325 crore.

TJK & Associates Conducted statutory audit of LLP which has raised has a loan of ` 35
crore from a bank and a loan of ` 10 crore from an NBFC, respectively
Answer Classification of Entity as per Statement of Peer Review
Name of the Firm Type of Entity Reason for such classification based on the
Statement of Peer Review
MT & Co. Level I entity A Practice Unit which has undertaken Statutory
Audit of a company which is an associate of an
entity having net worth of more than ` 250 Crores
at any time during the period under Review, shall
be treated as a Level I entity.

should be treated as level I firm. But now this point
is removed so if you are doing audit of associate of
high net worth company, firm will not come in level
I. So above answer will change it will not be level I
firm. It will be level II.
GBL & Co. Level I entity A Practice Unit which has undertaken Statutory
Audit of a mutual fund shall be treated as a Level I
entity.
IML & Associates Level I entity A Practice Unit which has undertaken Statutory
Audit of an Entity which has raised donations and /
or contributions over ` 50 crore during the period
under Review, shall be treated as a Level I entity.
BTS & Co. Level I entity A Practice Unit which has undertaken Statutory
Audit of a company which is a subsidiary of an
entity having net worth of more than ` 250 Crores
at any time during the period under Review, shall
be treated as a Level I entity.

should be treated as level I firm. But now this point
is removed so if you are doing audit of associate of
high net worth company, firm will not come in level
I. So above answer will change it will not be level I
firm. It will be level II.
TJK & Associates Level II entity A Practice Unit which has undertaken Statutory
Audit of an entity which has raised funds from
public or banks or financial institutions of more
than ` 25 crore but less than ` 50 crore during the
period under
Review, shall be treated as a Level II entity.
In amendment this point is removed. If borrowing

crosses 50 crore it will become level I, but it is only
45 crores, so it is not level I and firms which are not
level I are considered level II, so this firm will again
come in level II, even after amendment but reason
has changed.

QNO Eligibility Criteria Case Study New Course- (N22M)
CA. Vimal wants to apply in the empanelment of peer reviewer. He was into employment till 2012 since
then he shifted from industry and started his own practice. Below is his experience and employment
record from 1995 to 2012. Name of Company Designation From Date To Date Parshav Ltd Project
Implementation Manager 1-4-1995 31-3-1998 Suparshava Ltd Financial Reporting Senior Manager
(Assisting in Audits) 1-4-1998 31-3-2007 Parasnath Ltd Project & Improvement Director 1-4-2007 31-3-
2012 Own Practice – Sole Prop Audit & Taxation 1-4-2012 31-3-2022 Kindly assess whether CA. Vimal can
apply and is qualified to get admitted in the empanelment of Peer Reviewer.
Answer As per Peer Review Statement,
1. A Peer Reviewer shall: -
(a) Shall be a member in practice with at least 7 years of audit experience.
(b) In case a member has moved from industry to practice and is currently in practice he should have
at least 10 years of audit experience in industry and at least 3 years audit experience in practice.
(c) Should have undergone the requisite training and cleared the requisite test for Peer Review as
prescribed by the Board.
2. A member on being appointed as a Reviewer shall be required to furnish-

(a) a declaration as prescribed by the Board, at the time of Empanelment as a Peer Reviewer.
(b) a Declaration of Confidentiality as per Annexure A to this Statement while giving consent for
appointment as a Peer Reviewer.
3. A member shall not be eligible for being appointed as a Reviewer of a Practice Unit, if –
(i) any disciplinary action / proceeding is pending against him;
(ii) he has been found guilty of professional or other misconduct by the Council or the Board of
Discipline or the Disciplinary Committee at any time
(iii) he has been convicted by a competent court whether within or outside India, of an offence
involving moral turpitude and punishable with imprisonment,
(iv) he or his partners have any obligation or conflict of interest in the Practice Unit.
(v) He has undergone training/articleship under any of the partner of Practice Unit.
4. A Reviewer shall not accept any professional assignment from the Practice Unit for a period of next
two years from the date of appointment. Further, he should not have accepted any professional
assignment from the Practice Unit for a period of two years before the date of appointment as
reviewer of that Practice Unit.
In the current scenario, CA. Vimal was in employment for a period from 1-4-95 to 31-3-12 i.e., 17
years. Out of which, he was having audit experience for 9 years. However, he is in practice since 10
years i.e. 2012 to 2022. Hence, he will be eligible for Peer Reviewer by virtue of the condition
stipulating that a Peer Reviewer shall be a member in practice with at least 7 years of audit
experience.
QNO Inherent limitations of Peer Review – New Course-- (N18E, S21M)

653.030 Unique
What are the inherent limitations of Peer Review?
Answer ➢ Inherent Limitations of Peer Review:
Not expected to show all deficiencies.
The reviewer conducts the review in accordance with the Statement on Peer Review.
The review would not necessarily disclose all weaknesses in compliance of technical
standards and maintenance of quality of assurance services since it would be based on
selective tests.
System of quality control has its own deficiencies.
As there are inherent limitations in the effectiveness of any system of quality control
which happens to be subject matter of review, departure from the system may occur
and may not be detected.

QNO Difference Between Peer Review & Quality Review Old Course-- (M21M)
653.035 Bhaskar CNO – PR.320 New Course--(M21M)
Briefly explain the difference between Peer Review and Quality Review.
Answer Difference Between Peer Review and Quality Review: Peer review is a review of the systems and
procedures of an audit firm. Although sample audit files are inspected by the peer reviewer, it is
done for the purpose of testing the effectiveness of the systems and procedures. The intention is to
not to find faults but to help the firm develop effective systems. It is a kind of mentoring process.
Peer review is a part of the activities of ICAI aimed at improving the quality of service.
In contrast, a quality review is supposed to act as a deterrent. Quality Review Board (QRB) is
constituted by the Central Government and is independent of ICAI. As per Section 28A of the
Chartered Accountant’s Act, the Central Government has the authority to constitute a Quality Review
Board. QRB carries out supervisory and disciplinary functions. A quality review normally pertains to
one particular audit conducted by an audit firm. The main objective quality review is to find errors or
inadequacies, if any, committed by the auditor while conducting the audit. Serious errors detected in
quality review lead to disciplinary action against the member.
elements of Quality Review Report.

Part -2 QUALITY REVIEW
QNO Objectives of QR New Course-- (S17M, N18R, S21M)

653.040 Bhaskar CNO – QR.020
What are the objectives of the Quality review?
Answer ➢ Evaluate Audit Quality
Quality review is directed towards evaluation of audit quality and adherence to various statutory
and other regulatory requirements.
➢ Identify & Address Weaknesses & Identify Deficiency & Failures
They are designed to identify, and address weaknesses and deficiencies related to how the audits
were performed by the audit firms.
In the course of reviewing aspects of selected audits, a review may identify ways in which a
particular audit is deficient, including failures by the firm to identify, or to address appropriately,
aspects in which an entity’s financial statements do not present fairly the financial position or the
results of operations in conformity with the applicable Generally Accepted Accounting Principles
(GAAP) and other technical standards.
➢ Review Aspects of Selected Statutory Audits & Firms Quality Control System
To achieve that goal, quality reviews included reviews of certain aspects of selected statutory
audits performed by the firm and reviews of other matters related to the firm’s quality control
system.
➢ Not the Purpose to Review all Audits
It is not the purpose of a review, however, to review all of a firm’s audits or to identify every
aspect in which a reviewed audit is deficient. Accordingly, a review should not be understood to
provide any assurance that the firm’s audits, or its clients’ financial statements or reporting
thereon, are free of any deficiencies.
QNO Qualifications by QR New Course-- (S17M, N18M, S21M)

Give examples of areas on which the reviewer may qualify the report
Answer ➢ A reviewer may qualify the report due to one or more of the following:
• quality control system design deficiency;
• non-compliance with quality control policies and procedures; or
• non-existence of adequate training programmes for staff.
• non-compliance with relevant laws and regulations;
• non-compliance with technical standards;
QNO General Reporting Responsibilities of QR- New Course-- (S17M, S21M)

653.060 Unique
What are the reporting responsibilities of the technical reviewer while carrying out a Quality review
assignment?
Answer ➢ The Technical Reviewers expresses an opinion on whether the system of quality control for the
attestation services of the firm under review has been designed so as to carry out professional
attestation services assignments in a manner that ensures compliance with the applicable
Technical standards and maintenance of the quality of attestation service work they perform. The
Technical Reviewer’s review would not necessarily disclose all weaknesses in the quality of
attestation work or all instances of lack of compliance with applicable Technical Standards. As
there are inherent limitations in the effectiveness of any system of quality control, departure from
the system may occur and not be detected. Also, projection of any evaluation of system of
quality control to future periods is subject to the risk that the system of quality controls may
become inadequate because of changes in conditions, or that the degree of compliance with
the policies and procedures may deteriorate. In the process, the Technical Reviewers also

identified what they considered to be deficiencies and any defects in, or criticisms of the firm’s
quality control system.
QNO Eligibility of Technical Reviewer for Quality Review (M22M)

While assigning the quality review work to the respective Technical Reviewers, in order to ensure
independence and avoid conflict of interest, certain eligibility conditions were specified for carrying out
the specified quality review assignment to the Technical Reviewers who were required to submit a
declaration of eligibility before starting the assignment. In view of above, briefly discuss those eligibility
conditions prescribed for Technical Reviewer.
Answer While assigning the quality review work to the respective Technical Reviewers, in order to ensure
independence and avoid conflict of interest, the following eligibility conditions were specified for carrying
out the specified quality review assignment to the Technical Reviewers who were required to submit a
declaration of eligibility before starting the assignment.
For being a technical reviewer (TR):
• He should not have disciplinary proceeding under the Chartered Accountants Act, 1949 pending
against him/her or any disciplinary action under the Chartered Accountants Act, 1949 / penal action under
any other law taken/pending against him during last three financial years and/or thereafter.
• He or his/her firm or any of the network firms or any of the partners of the firm or that of the
network firms should not have been the statutory auditor of the company, as specified, or have
rendered any other services to the said entity during last three financial years and /or thereafter.
• He or his/her firm or any of the network firms or any of the partners of the firm or that of the network
firms should not have had any association with the specified AFUR, during the last three financial
years and /or thereafter.
• He should comply with all the eligibility conditions laid down for appointment as an auditor of a
company u/s 141(3) of the Companies Act, 2013 which apply mutatis mutandis in respect of the review of
the quality of statutory audit of the entity, as specified, so far as applicable.
• He does not belong to the city/region of head office of the AFUR.
QNO Stages of Quality Review New Course-- (M18R, S21M)

Various Stages involved in the Conduct of the Quality Review Assignments
Answer ➢ Stages of Quality Review
Various Stages involved in the Conduct of the Quality Review Assignments: The following table
describes the various stages involved in the conduct of the quality review assignments:
(Selection of Audit Firm & TR – Offer Letter to TR – TR Acceptance – Confidentiality Statement –
Intimation to Audit Firm – TR to send Quality Review Programme General Questionnaire – Call for
Additional Firm – Carry out Quality Review , Visit Audit Firm – TR will send Preliminary Report –
Audit Firm to submit Representation – TR to submit Final Report – Within 45 days from Acceptance
– Audit Firm to send Submission to QRB – TR to submit final findings on reply of Audit Firm—
Quality Review Group will consider Report , Reply of audit firm and TR’s final findings and send
recommendations to Quality Review Board – QRB to consider final course of action)
• Selection of Audit Firm and Technical Reviewer to conduct Quality Review and
• Sending Offer Letter of Engagement to the Technical Reviewer.
• Technical Reviewer to convey his acceptance of Letter of Engagement by sending
necessary declarations for meeting eligibility conditions and furnishing statement of
confidentiality by the Technical Reviewer and his assistant/s, if any.
• Intimation to the Audit Firm about the proposed Quality Review and acceptance of the
assignment by the Technical Reviewer. Also marking a copy of the intimation to the
Technical Reviewer.

• Technical Reviewer to send the specified Quality Review Program General Questionnaire
to the Audit firm for filling-up and call for additional information from the Audit Firm, if
required.
• Technical Reviewer to carry out the Quality Review by visiting the office of the Audit Firm
by fixing the date as per mutual consent.
• Technical Reviewer to send the preliminary report to Audit firm.
• Audit firm to submit representation on the preliminary report to the Technical Reviewer.
• Technical Reviewer to submit final report along with a copy of Annual report of the
company/entity for the year, to the Board in the specified format, on their (individual)
letterhead, duly signed and dated within 45 days from the date of acceptance of the
assignment.
• Technical Reviewer should also send a copy of their final report to the Statutory
Auditor/Audit firm, requesting the firm to send their submissions thereon to the Board
within 7 days of receipt of the final report with a copy to Technical Reviewer. Upon
receipt of their final submission, Technical Reviewer shall submit within next 7 days a
summary of their findings, reply of the audit firm thereon along with their final comments
in the specified format.
• Quality Review Group to consider the report of the Technical Reviewer and responses of
the Audit firm and make recommendations to Quality Review Board.
• Quality Review Board to consider the report of the Quality Review Group and decide the
final course of action.
QNO Actions by QRB New Course-- (S17M, M18M, S21M)

List out the consequences if the Quality review board notices major non-compliances with the
requirements of the Standards on quality control or standards on auditing or accounting standards?
Answer ➢ The actions that may be recommended by the Board include one or more of the following:
• Consider the matter complete and inform the audit firm/auditor accordingly.
• Referring the case to the Director (Discipline) of the Institute for necessary action under
the Chartered Accountants Act, 1949;
• Informing the details of the non-compliance to the regulatory bod(y)/ies relevant to the
enterprise;
• Intimating the concerned auditor as to the findings of the Report as well as action
initiated under(b) and/or (c) above;
QNO Professional judgment exercised by the auditor is one Old Course—(N21R)

653.098 of the important aspects under Quality review- Unique New Course--(S21M, N21R, N22M,N22R)
Evaluating the professional judgment exercised by the auditor is one of the important aspects under
Quality review, please explain the situation with reference to applicable SA.
Evaluating the professional judgment exercised by the auditor: It is also important for the Technical
Reviewer (hereinafter referred as TR) to understand that “professional judgment”, as defined in SA 200,
“Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards
on Auditing” is an integral concept in the context of an audit and application of SAs in real life audit
scenarios. SA 200 defines professional judgment as “the application of relevant training, knowledge
and experience, within the context provided by auditing, accounting and ethical standards, in
making informed decisions about the course of action that is appropriate in the circumstances of the audit
engagement.”
The concept of “professional judgment” underscores the fact that Standards, particularly, Standards on
Auditing are written to lay down the fundamental principles that would apply to an audit situation. Hence,
no Standard can have straight jacketed application/solutions for all audit scenarios. Above all, the
Standards on Auditing issued by the Institute of Chartered Accountants of India are principle based
rather than rule based. Hence, almost all the SAs envisage exercise of professional judgment by the

auditor in their application in real life audit scenarios.
The TR would need to appreciate that the exercise of professional judgment in any particular case is based
on the facts and circumstances that are known to the auditor as at the time of exercising that professional
judgment. Normally, exercise of professional judgement by an auditor is preceded by consultation
on the relevant matters both within the engagement team and between the engagement team and
others at the appropriate level within or outside the firm.
In evaluating the professional judgment exercised by the auditor, the TR should consider the
following factors:
• whether the judgment reached reflects a due consideration and application of the relevant
auditing and accounting principles; and
• whether the judgment is appropriate in the light of, and consistent with, the facts and
circumstances that were known to the auditor up to the date of the auditor’s report. Hence, the TR
and the QR Team should not, under any circumstance, use “hindsight” (i.e. perception or
retrospection) in their evaluation of exercise of professional judgment by the auditor.
Since the auditor needs to exercise professional judgment throughout the audit, the latter also needs to be
appropriately documented. Hence, the TR can expect to find such audit documentation as a part of the
audit engagement file. It is important to note that professional judgment cannot be used by an auditor as a
justification for decisions that are not otherwise supported by the facts and circumstances of the
engagement or sufficient appropriate audit evidence.
The
elements of Quality Review Report.

Part 1 - Introduction & CA Act
Sec 2 --MCS (Portfolio Management Services) Old Course – (M06E, N08R, M12R, M12M, M13R,
QNO
Bhaskar CNO – PE.400 N15E, S17M, P17M, M18M, N18R)
654.000
New Course – (S20M)
P, a Chartered Accountant in practice provides management consultancy and other services to his
clients. During 2015, looking to the growing needs of his clients to invest in the stock markets, he also
advised them on Portfolio Management Services whereby he managed portfolios of some of his clients.
OR
Mr. Sam, a Chartered Accountant in practice, provides guidance on post -issue activities to his clients
e.g., follow up steps which include listing of instruments, dispatch of certificates and refunds etc. with the
various agencies connected with the work. During the year 2017-18, looking to the growing needs of his
clients to invest in the stock markets, he also started advising them on Portfolio Management Services
whereby he managed portfolios of some of his clients.
▪ Section 2(2)(iv) of the Chartered Accountants Act, 1949
➢ The Council of the Institute of Chartered Accountants of India (ICAI) pursuant to Section 2(2)(iv) of
the Chartered Accountants Act, 1949 has passed a resolution permitting “Management Consultancy
and other Services” by a Chartered Accountant in practice.
A clause of the aforesaid resolution allows Chartered Accountants in practice to act as advisor or
consultant to an issue of securities including such matters as drafting of prospectus, filing of
documents with SEBI, preparation of publicity budgets, advice regarding selection of brokers, etc.
It is, however, specifically stated that Chartered Accountants in practice are not permitted to
undertake the activities of broking, underwriting and portfolio management services. Thus, a
chartered accountant in practice is not permitted to manage portfolios of his clients.
➢ A Chartered Accountant in practice provides management consultancy and other services to his
clients. He also advised them on Portfolio Management Services whereby he managed portfolios of
some of his clients
➢ In view of this, P would be guilty of misconduct under the Chartered Accountants Act, 1949.
QNO Sec 27 --Sec 27 (Separate branch In charge) / Old Course –(N12E, N15E, P17M, M17M, M19E)
658.000 ITO Bhaskar CNO – PE.520 New Course – (S17M,S21M)
Mr. G, a Chartered Accountant in practice as a sole proprietor has an office in Mumbai near Church Gate.
Due to increase in professional work, he opens another office in a suburb of Mumbai which is
approximately 80 kilometres away from his existing office. For running the new office, he employs
three retired Income-tax Officers
OR
K, Chartered Accountant in practice as a sole proprietor at Chennai has an office in the suburbs of
Chennai. Due to increase in the income tax assessment work, he opens another office near the income
tax office. For running the new office, he has employed a retired income Tax Commissioner.
▪ Section 27 of Chapter VII of the Chartered Accountants Act, 1949

➢ In terms of section 27 of the Chartered Accountants Act, 1949, if a chartered accountant in practice
has more than one office in India, each one of these offices should be in the separate charge of a
member of the Institute.
There is however an exemption for the above if
• the second office is located in the same premises, in which the first office is located; or
• the second office is located in the same city, in which the first office is located; or
• the second office is located within a distance of 50 kms from the municipal limits of a city,
in which the first office is located.
➢ Since the second office is situated beyond 50 kms of municipal limits of Mumbai city which is
approximately 80 kilometres away from his existing office. For running the new office, he employed
three retired Income-tax Officers whereas he should have created a separate charge of a member
of the Institute.
➢ Thus, he would be liable for committing a professional misconduct.
Author’s Note
# Mistake point
• Here it is written that another office is opened in a suburb of Mumbai which is approximately 80
kilometres away from his “existing office”.
As per section 27 of the CA Act ,1949 - Distance from existing office is of no importance. What is
important is distance from “Municipal Limits” in which existing office is situated.
Here institute has assumed the distance from existing office is same as distance from Municipal
limits. (Also refer chart in previous question)
• In second question of “Chennai city” kms are not specified. Further word suburbs is not defined
in law. It simply means residential area either on outskirts of city or after city limit. So in this
question we don’t know exact distance between city limits and office.
So in this question we should give conditional answer after explaining requirements of Sec 27
and exemptions.
If its within 50 km then no need of separate CA in charge, so not violating sec 27
if it’s beyond 50km then separate CA in charge required, so violating sec 27
QNO Sec 27 (Separate branch In charge) Same Board at Residence Old Course – (N07E, P17M)
660.000 Bhaskar CNO – PE.520/ CNO – PE.600 New Course – (N21M,N22M)
XY & Co., a firm of Chartered Accountant having 2 partners X & Y, one in charge of Head Office and another
in charge of Branch at a distance of 80 kms, puts up a name-board of the firm in both premises and also
in their respective residences.
▪ Section 27 of Chapter VII of the Chartered Accountants Act, 1949
➢ The council of the Institute has decided that with regard to the use of the name-board, there will be
no bar to the putting up of a name-board in the place of residence of a member with the designation
of chartered accountant, provided, it is a name-plate or board of an individual member and not of
the firm.
➢ In the given case, partners of XY & Co., put up a name board of the firm in both offices and also in
their respective residences. Distance given in the question is not relevant.
Part IV– Conclusion
➢ Thus, the chartered accountants are guilty of misconduct as name board of the firm cannot be
used in place of residence.

QNO Sec 27 --Sec 27 (Separate branch In charge) Hilly Region Old Course—(M21M)
660.500 Branch Bhaskar CNO – PE.520 New Course—(M21M)
Mr. Z, a newly qualified chartered accountant started his practice in February 2018 by setting up an office
in the hill station Kodaikanal. Initially, since he was getting very less assignments, he decided to set up a
temporary office in the nearby city Marudai, situated at about 100 kms from the main office. As
planned, he took an office space on rent for the months of April, May & June. During these months, his
regular office was not closed and Mr. Z was in-charge for both the offices. Mrs. A, another newly
qualified chartered accountant who is also in practice in Marudai came to know about the new office of
Mr. Z. Thinking that he could be a potential competitor, she informed the institute stating that Mr. Z
had violated the provisions of the Chartered Accountant Act. As a member of the Board of Discipline
of ICAI, you are requested to analyse this complaint.
Answer As per section 27 of Chartered Accountants Act 1949, if a Chartered Accountant in practice or a Firm
of Chartered Accountants has more than one office in India, each one of such offices should be in the
separate charge of a member of the Institute. Failure on the part of a member or a firm to have a
member in charge of its branch and a separate member in case of each of the branches, where there
is more than one, would constitute professional misconduct. This condition applies to any additional
office situated at a place beyond 50 kms from the municipal limits in which any office is situated.
However, exemption has been given to members in practicing in hill areas subject to certain conditions
such as:
− Such member/ firm be allowed to open temporary offices in a city in the plains for a limited period
not exceeding 3 months in a year.
− The regular office need not be closed during this period and all correspondence can continue to be
made at the regular office.
− The name board of the firm in temporary office should not be displayed at times other than the
period such office is permitted to function.
− The temporary office should not be mentioned in letter head, visiting card, any other documents
as a place of business of the member/ firm.
− Before commencement of every winter, it shall be obligatory on the member/firm to inform the
Institute that he/it is opening the temporary office from a particular date and after the office is closed
at the expiry of the period of permission, an intimation to that effect should also be sent to the office
of the Institute by registered post.
In the given case, Mr. Z has set up his regular office in the hill area of Kodaikanal, he decided to set up
a temporary office in the nearby city Marudai, situated at about 100 kms from the main office. As
planned, he took an office space on rent for the months of April, May & June. During these months,
his regular office was not closed. Further he was in-charge for both the offices. In view of
abovementioned criteria’s, he is eligible to avail the benefits of the above exemptions. Also, it is given
that the temporary office was open in Madurai for only 3 months and not beyond that. The fact that
Mr. Z is in-charge for both the offices, the temporary office being set-up in the plains which is 100 kms
away and the regular office kept open during the 3 months does not constitute any violation of the
provisions of the Chartered Accountant Act. Assuming Mr. Z has informed the Institute regarding
such temporary office in the prescribed manner.
Therefore, in the given case, no penal action needs to be taken on the basis of complaint registered
by Mrs. A, as Mr. Z is not guilty of professional misconduct.

Part 2 -- SCHEDULE 1
QNO First Schedule, Part I,Cl,1-Working on behalf of CA or CA firm New Course – (M19E,M22M)
660.100 Bhaskar CNO – PE.580
CA Sant, a newly qualified professional with certificate of practice, approached CA Pant, the auditor of his
father’s company M/s Max Ltd., to allow him to have some practical and professional knowledge and
experience in his firm before he can set up his own professional practice. CA Pant allowed him to sit in his
office for 6 month and allotted a small chamber with other office infrastructure facility. In the course of
his association with CA Pants office, he used to provide tax consultancy independently to the client of
the firm and also filed few IT and GST return and represented himself before various tax authorities on
behalf of the firm although no documents were signed by him. During his association in CA Pants office
he did not get any salary or share of profit or commission but only re-imbursement of usual
expenses like conveyance, telephone etc. was made to him. After the end of the agreed period, he was
given a lump sum amount of 3,00,000 by CA Pant for his association out of gratitude. Examine the case
in the light of code of professional misconduct.
▪ Clause (1) of Part I of the First Schedule to the Chartered Accountants Act, 1949
➢ It states that a chartered accountant in practice shall be deemed to be guilty of professional
misconduct if he allows any person to practice in his name as a chartered accountant unless such
person is also a chartered accountant in practice and is in partnership with or employed by him.
➢ The above clause is intended to safeguard the public against unqualified accountant practicing under
the cover of qualified accountants. It ensures that the work of the accountant will be carried out by
a Chartered Accountant who may be his partner, or his employee and would work under his control
and supervision.
➢ In the instant case, CA Pant allowed CA Sant (who is a newly qualified CA professional with COP) to
sit in his office for 6 months, and allowed him to provide tax consultancy independently to his firm’s
clients, filing of some IT and GST Returns.
➢ He also allowed him to appear before various tax authorities on behalf of his firm. CA Sant was only
reimbursed with his usual expenses and was not paid any salary or share of profit for the same.
➢ However, after the end of agreed period he was given a lump-sums of rupees 3,00,000 for his
association out of gratitude.
Part IV– Conclusion
➢ Thus, in the present case CA. Pant will be held guilty of professional misconduct as per Clause (1) of
Part I of First Schedule to the Chartered Accountants Act, 1949 as he allowed CA Sant to practice in
his name as Chartered accountant and CA Sant is neither in partnership nor in employment with CA.
Pant.
Author’s Note
Here it is clearly written that he “did not” get any share in salary or commission. So, no question of Clause
(2) of Part I of First Schedule to the Chartered Accountants Act, 1949
First Schedule, Part I,Cl,2 –Sharing with Old Course – (M12E, N13E, M16E, P17M, N17M, N19M, N19E)
QNO
of Fees New Course – (S17M, N19M, S21M,N22M)
662.000
Bhaskar CNO – PE.600
Mr. X who passed his CA examination of ICAI on 18th July 2015 and started his practice from August 15,
2015. On 16th August 2015, one female candidate approached him for article ship. In addition to monthly
stipend, Mr. X also offered her 1 % profits of his CA firm. She agreed to take both 1 % profits of the CA
firm and stipend as per the rate prescribed by the ICAI. The Institute of Chartered Accountants of India
sent a letter to Mr. X objecting the payment of 1 % profits. Mr. X replies to the ICAI stating that he is paying
1 % profits of his firm over and above the stipend to help the articled clerk as the financial position of the
articled clerk is very weak. Is Mr. X Liable to professional misconduct?

OR
CA Ciya, a practicing Chartered Accountant gave 60% of the audit fees received by her to Mr. Suhas, who
was not a Chartered Accountant, under the nomenclature of office allowances.
OR
CA. P is a newly qualified Chartered Accountant in practice and in order to increase his professional
practice and client base, entered into an agreement with Mr. A, a qualified and experienced registered
valuer to share 20% professional fees for all cases of valuation referred to him by CA. P. Based on
this, CA. P received? 1,20,000 during the year 2018-19 from Mr. A. Is' CA. P guilty of misconduct under the
Chartered Accountants’ Act, 1949?
▪ Clause (2) of Part I of First Schedule to the Chartered Accountants Act 1949
➢ A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he
pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage
in the fees or profits of his professional business, to any person other than
• a member of the Institute or
• a partner or
• a retired partner or
• the legal representative of a deceased partner, or
• a member of any other professional body or
with such other persons having such qualification as may be prescribed, for the purpose of rendering
such professional services from time to time in or outside India.
➢ In view of the above, the objections of the Institute of Chartered Accountants of India, as given in
the case, are correct and reply of Mr. X, stating that he is paying 1 % profits of his firm over and
above the stipend to help the articled clerk as the position of the articled clerk is weak is not tenable.
➢ Hence, Mr. X is guilty of professional misconduct in terms of Clause (2) of Part I of First Schedule to
the Chartered Accountants Act 1949.
First Schedule, Part I,Cl,2 --Sharing with Digital New Course – (M22R)
QNO
Marketer
662.005
Mr. Avi, a newly qualified Chartered Accountant, started his practice and sought clients through telephone
calls from his family and friends, almost all of them employed in one or the other retail trade business.
One of his friends Mr. Ravi gave him an idea to start online services and give stock certifications to traders
with Cash Credit Limits in Banks. Mr. Avi started a website with colourful catchy designs and shared the
website address on his all social media posts and stories and tagged 40 traders of his local community with
the caption “Simple Online Stock Certification Services”. Besides, Mr. Avi entered into an agreement with
a Digital Marketer to give him 8% commission on each service procured through him. Discuss if the
actions of Mr. Avi are valid in the light of the Professional Ethics and various pronouncements and
guidelines issued by ICAI.
Answer (a)As per Clause (6) of Part I of the First Schedule of the Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he solicits clients or professional
work either directly or indirectly by circular, advertisement, personal communication or interview or by any
other means. Mr. Avi is wrong in seeking clients through family and friends. Creating a website is not a non-
compliance provided it is in line with the guidelines issued by the Institute in this regard. One of the
guidelines is that the website should not be in push mode. Further, mentioning of clients’ names is also
prohibited as per the guidelines. In the given situation, Mr. Avi shared the website address on his all social
media posts and stories and tagged 40 traders of his local community with the caption “Simple Online Stock
Certification Services” mentioning his current clients as well. This is in complete contravention of the
guidelines on the website issued by the ICAI. Thus, CA, Avi would be held guilty of professional misconduct
under clause 6 of Part
1 of First Schedule of the Chartered Accountants Act, 1949.

QNO First Schedule, Part I,Cl 4 Partnership (Advocate) Old Course – (N05E, M09R, P17M, M19R)
665.000 Bhaskar CNO – PE.640 New Course – (S17M, N18R, N18M)
Mr. P, a Chartered Accountant in practice entered into a partnership with Mr. L, an advocate for sharing
of fees for work sent by one to the other. However, due to some disputes, the partnership was dissolved
after 1 month without any fees having been received.
▪ Regulation 53B of the Chartered Accountants Regulations, 1988
➢ Clause (4) of Part I of the First Schedule to the Chartered Accountants Act, 1949
A chartered accountant will be guilty of professional misconduct if he enters into partnership with
any person other than
• a chartered accountant in practice or
• Member of any other body having prescribed qualifications
• a person resident outside India who but for his residence abroad would be entitled to be
registered as a member under Clause (v) of Sub-section (1) of Section 4 or
• whose qualification are recognized by the Central Government or the Council for the
purpose of permitting such partnership.
➢ Regulation 53B of the Chartered Accountants Regulations, 1988
A Chartered Accountant in practice to enter into partnership with other prescribed Professionals
which includes an Advocate, a member of Bar Council of India.
➢ In the instant case, Mr. P, a chartered accountant, has entered into partnership with Mr. L, an
advocate.
➢ Thus, he would not be guilty of professional misconduct as per Clause (4) of Part I of First Schedule
read with Regulation 53B.
First Schedule, Part I,Cl,6 Clarification (Greeting Cards & Old Course – (M16R, N16M,N20R)
QNO
Invitations) Sonu/Monu New Course – (N20R)
670.000
CA. Sonu and CA. Monu are two partners of the CA firm ‘Sonu Monu and Associates’. Being very pious,
CA. Sonu organised a religious ceremony at his home for which he instructed his printing agent to
add his designation “Chartered Accountant” with his name in the invitation cards. Later on, the
invitations were distributed to all the relatives, close friends and clients of both the partners.
OR
(a) CA. Srishti and CA. Mishti are two partners of the CA firm ‘Srishti Mishti & Associates’.
Being very pious, CA. Srishti organised a religious ceremony at her home for which she instructed her
printing agent to add her designation “Chartered Accountant” with her name in the invitation cards. Later
on, the invitations were distributed to all the relatives, close friends and clients of both the partners.
➢ Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949
solicits clients or professional work either directly or indirectly by circular, advertisement, personal
communication or interview or by any other means.
However, the Council of the ICAI is of the view that the designation “Chartered Accountant” as well
as the name of the firm may be used in greeting cards, invitations for marriages, religious
ceremonies and any other specified matters, provided that such greeting cards or invitations etc.
are sent only to clients, relatives and close friends of the members concerned.

➢ In the given case, CA. Sonu has instructed to write designation “Chartered Accountant” on invitation
cards for a religious ceremony and distributed the same to all the relatives, close friends and clients
of both the partners.
➢ In this context, it may be noted that the Council has allowed using designation “Chartered
Accountant” in invitations for religious ceremony, provided these are sent to clients, relatives and
close friends of the members concerned only.
Therefore, CA. Sonu would be held guilty of professional misconduct under the said clause for
sending such invitations to the relatives, close friends and clients of CA. Monu as well.
Author’s Note
Here invitations are sent to relatives, close friends and clients of CA. Monu as well. If the invitations were
only sent to relatives, close friends and clients of CA Sonu then he would not have been guilty.
First Schedule, Part I,Cl,6 Clarification (Mass Communication to Other Old Course – (N14R, P17M,
QNO
CA in Practice) M20M)
672.000
Bhaskar CNO – PE.680 New Course – (M20M)
CA. N, in practice, started project consultancy work as a part of his practice and to advance the same, sent
mail to all the CAs in the country informing them of his services and for securing professional
work.
▪ Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949
➢ As per Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949, a chartered
accountant in practice is deemed to be guilty of professional misconduct, if he solicits clients or
professional work either directly or indirectly by circular, advertisement, personal communication
or interview or by any other means.
However, nothing herein contained shall be construed as preventing or prohibiting, any chartered
accountant from applying or requesting for or inviting or securing professional work from another
chartered accountants in practice.
➢ In the instant case, CA. N has written email to all the CA for securing professional work from them
and has not approached any other person or professional or communicated with any client,
➢ Thus, as per exception to the Clause (6) CA. N is well within the regulation of the act and has not
committed any professional misconduct.
Author’s Note
If paper advertisement is given, it goes to everyone - “Guilty” If email sent only to CA’s - “Not Guilty”
First Schedule, Part I,Cl,6 Clarification (Public Interview) [TV Old Course – (N08R, P17M)
QNO
Interview Case] New Course – (S17M, S21M)
674.000
A partner of a firm of chartered accountants during a T.V. interview handed over a bio-data of his firm
to the chairperson. Such bio-data detailed the standing of the international firm with which the firm was
associated. It also detailed the achievements of the concerned partner and his recognition as an expert in
the field of taxation in the country. The chairperson read out the said bio-data during the interview.
Discuss whether this action by the Chartered Accountant would amount to misconduct or not.

➢ The clause prohibits solicitation of client or professional work either directly or indirectly by circular,
advertisement, personal communication or interview or by any other means since it shall constitute
professional misconduct.
➢ The bio-data was handed over to the chairperson during the T.V. interview by the Chartered
Accountant which included details about the firm and the achievements of the partner as an expert
in the field of taxation. The chairperson simply read out the same in detail about association with
the international firm as also the achievements of the partner and his recognition as an expert in
the field of taxation. Such an act would definitely lead to the promotion of the firms’ name and
publicity thereof as well as of the partner and as such the handing over of bio-data cannot be
approved.
➢ The partner would be held guilty of professional miscount under Clause (6) of Part I of the First
Schedule to the Chartered Accountants Act, 1949.
Author’s Note
Conclusion
If there is reference to word interview go for clause 6 where firm name is allowed but not highlighting
and publicity.
If there is appearance in programs of television / radio or films then firm name is not allowed.
If question specifies TV interview apply clause 6, as we have specific clarification about “Public Interview”
First Schedule, Part I,Cl,6 Clarification (Representation by Old Course – (M15R, M16M, P17M, M18M,
QNO
CA Under Company Act) M19M)
675.000
Bhaskar CNO – PE.680 New Course – (M18M, M19M)
A special notice has been issued for a resolution at 3rd annual general meeting of Fiddle Ltd. providing
expressly that CA. Smart shall not be re-appointed as an auditor of the company. Consequently, CA. Smart
submitted a representation in writing to the company as provided under section 140(4)(iii) of the
Companies Act, 2013. In the representation, CA. Smart incorporated his independent working as a
professional throughout the term of office and also indicated his willingness to continue as an
auditor if reappointed by the shareholders of the Company
➢ A Chartered Accountant in practice is deemed to be guilty of professional misconduct if he solicits
clients or professional work either directly or indirectly by circular, advertisement, personal
communication or interview or by any other means except applying or requesting for or inviting or
securing professional work from another chartered accountant in practice and responding to
tenders.
Further, section 140(4)(iii) of the Companies Act, 2013, provides a right, to the retiring auditor, to
make representation in writing to the company. The retiring auditor has the right for his
representation to be circulated among the members of the company and to be read out at the
meeting. However, the content of letter should be set out in a dignified manner how he has been
acting independently and conscientiously through the term of his office and may, in addition,
indicate, if he so chooses, his willingness to continue as auditor, if reappointed by the shareholders.
➢ CA. Smart submitted a representation in writing to the company as provided under section 140(4)(iii)
of the Companies Act, 2013. In the representation, CA. Smart incorporated his independent working
as a professional throughout the term of office and also indicated his willingness to continue as an
auditor if reappointed by the shareholders of the Company.

➢ Thus, the incorporation as an independent professional, made by CA. Smart, while submitting
representation under section 140(4)(iii) of the Companies Act, 2013 and indication of willingness to
continue as an auditor if reappointed by shareholders, does not leads to solicitation.
Therefore, CA. Smart will not be held guilty for professional misconduct under Clause (6) of Part I of
First Schedule to the Chartered Accountants Act, 1949.
Author’s Note
If any question is related to clarification of Clause 6, you have to apply Clause 6. Don’t make word by word
interpretation like we do in Tax or Companies Act. Professional Ethics cases are solved by pattern and not
by interpretation. This pattern is very simple i.e. if it is related to clarification of clause 6 apply clause 6
and if it is related to clarification of clause 7 apply clause 7.
QNO First Schedule, Part I,Cl,6 Solicitation (Tender) No Minimum Fees Old Course – (M17R, N17R, M20R)
682.000 Bhaskar CNO – PE.680 New Course – (M20R)
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto:
M/s LMN & Associates, a firm of Chartered Accountants responded to a tender issued exclusively for
Chartered Accountants by an organisation in the area of tax audit. However, no minimum fee was
prescribed in the tender document.
OR
PK Foundation decided to review its historical financial statements For this, it proposed a tender
exclusively for Chartered Accountants to obtain assurance, primarily by performing inquiry and
analytical procedures, about whether the financial statements as a whole are free from material
misstatement However, the foundation did not prescribe the minimum fee in the tender document M/s
Sodhi & Co, a Chartered Accountant firm, responded to such tender
➢ The clause lays down guidelines for responding to tenders, etc. It states that a member may respond
to tenders or enquiries issued by various users of professional services or organizations from time
to time and secure professional work as a consequence.
However, a member of the Institute in practice shall not respond to any tender issued by an
organization or user of professional services in areas of services which are exclusively reserved for
Chartered Accountants, such as audit and attestation services.
Though, such restriction shall not be applicable where minimum fee of the assignment is prescribed
in the tender document itself or where the areas are open to other professionals along with the
Chartered Accountants.
➢ In the instant case, M/s LMN & Associates responded to a tender of tax audit which is exclusively
reserved for Chartered Accountants even though no minimum fee was prescribed in the tender
document.
➢ Therefore, M/s LMN & Associates shall be held guilty of professional conduct for responding to such
tender in view of abovementioned guideline.
Author’s Note
For better understanding of tendering refer Chart in QNO 681.000
QNO First Schedule, Part I,Cl,6 -Website (Push Technology) Old Course – (P17M, M17R, M20R)
687.000 Bhaskar CNO – PE.680 New Course – (S17M, M20R, S21M)
M/s ABZ & Co., a firm of Chartered Accountants, develops a website “abz.com”. The colour chosen for the
website was a very bright green and the website was to run on a “push” technology where the names
of the partners of the firm and the major clients were to be displayed on the website without any
disclosure obligation from any regulator.

➢ The Council of the Institute had approved posting of particulars on website by Chartered
Accountants in practice under Clause (6) of Part I of First Schedule to the Chartered Accountants
Act, 1949 subject to the prescribed guidelines. The relevant guidelines in the context of the website
hosted by M/s ABZ & Co. are:
• No restriction on the colours used in the website
• The websites are run on a “pull” technology and not a “push” technology
• Names of clients and fees charged not to be given.
However, disclosure of names of clients and/or fees charged, on the website is permissible only
where it is required by a regulator, whether or not constituted under a statute, in India or outside
India, provided that such disclosure is only to the extent of requirement of the regulator. Where
such disclosure of names of clients and/or fees charged is made on the website, the member/ firm
shall ensure that it is mentioned on the website [in italics], below such disclosure itself, that “This
disclosure is in terms of the requirement of [name of the regulator] having jurisdiction in [name of
the country/area where such regulator has jurisdiction] vide [Rule/ Directive etc. under which the
disclosure is required by the Regulator].
➢ A firm of Chartered Accountants develops a website “abz.com”. The colour chosen for the website
was a very bright green and the web-site was to run on a “push” technology where the names of the
partners of the firm and the major clients were to be displayed on the web-site without any
disclosure obligation from any regulator.
➢ In view of the above, M/s ABZ & Co. would have no restriction on the colours used in the website
but failed to satisfy the other two guidelines.
Thus, the firm would be liable for professional misconduct since it would amount to soliciting work
by advertisement.
QNO First Schedule, Part I,Cl,6 --Online Coaching New Course- (N22M)
CA Praful has recently qualified and has obtained certificate of practice. In the initial years, it is taking time
to set up his clientele base. He is also conducting audit of few entities. Simultaneously, he plans to provide
coaching to CA students online taking advantage of his fresh reservoir of knowledge. Therefore, he
advertises his classes on various social media platforms. Comment with reference to the Chartered
Accountants Act, 1949, and Schedules thereto.
Answer Regulation 190A of Chartered Accountants Regulations, 1988 provides that a chartered accountant in
practice shall not engage in any business or occupation other than the profession of accountancy except
with the permission granted in accordance with a resolution of the Council.
The Council has passed a resolution under Regulation 190A granting general permission for private
tutorship and part time tutorship under coaching organization of the Institute. Such general permission is
subject to the condition that direct teaching hours devoted to such activities taken together should not
exceed 25 hours a week in order to be able to perform attest functions.
However, Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949 states that
Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he solicits
clients or professional work either directly or indirectly by circular, advertisement, personal communication
or interview or by any other means;
Further, an advertisement of online coaching activities through social media platforms amounts to indirect
solicitation as well as solicitation by another means and is, therefore, violative of Clause 6 of Part I of the
First Schedule to Chartered Accountants Act, 1949.

Therefore, although a member in practice can engage in private tutorship subject to Council Guidelines but
he cannot advertise by any means for coaching activities as it amounts to indirect solicitation of clients and
professional work.
In the given case, CA Praful is providing coaching to CA students online and also advertising his classes on
various social media platforms. In view of above, CA. Praful is guilty of professional misconduct under Clause
(6) of Part I of First Schedule to the Chartered Accountants Act 1949 for advertising his classes on various
social media platforms.
First Schedule, Part I,Cl,10 -- Charging Percentage of Debt Old Course – (M17R, M18E, M20R)
QNO
Recovery New Course – (M18M, M20R)
707.000
PQR Pvt Ltd. approached CA. Whai, a Chartered Accountant in Practice, for debt recovery services. CA
Whai accepted the work and insisted for fees to be based on 2% of the debt recovered.
OR
Alora Pvt. Ltd. approached CA. Neha, a practicing Chartered Accountant since 1998, for recovery of debts
amounting Rs 20 crore. CA Neha accepted the work and requested to charge fees @ 1.5% of the debt
recovered. Later on she raised a bill for debts recovered and charged ` 27 lacs for recovering 90% of the
debts.
➢ This clause prohibits a Chartered Accountant in practice to charge, to offer, to accept or accept fees
which are based on a percentage of profits or which are contingent upon the findings or results of
such work done by him.
➢ Regulation 192
However, this restriction is not applicable where such payment is permitted by the Chartered
Accountants Act, 1949. The Council of the Institute has framed Regulation 192 which exempts debt
recovery services where fees may be based on a percentage of the debt recovered.
➢ In the given case, CA. What has insisted for fees to be based on percentage of the debt recovered
(which is exempted under Regulation 192).
➢ Hence, CA. What will not be held guilty for professional misconduct.
First Schedule, Part I,Cl,10 Fees on Percentage Old Course – (M15E, M16M, P17M, N17M, N18M,
QNO
Basis (Liquidator) M20M)
709.000
Bhaskar CNO – PE.760 New Course – (M20M)
XYZ & Co. appointed CA. M, a practicing chartered accountant, as liquidator of the company. CA. M
charged his professional fees based on percentage of the realisation of assets
charges or offers to charge, accepts or offers to accept in respect of any professional employment
fees which are based on a percentage of profits or which are contingent upon the findings, or results
of such employment, except as permitted under any regulations made under this Act.
However, CA Regulation allow the Chartered Accountant in practice to charge the fees in respect of
any professional work which are based on a percentage of profits, or which are contingent upon the
findings or results of such work, in the case of a receiver or a liquidator, and the fees may be based
on a percentage of the realization or disbursement of the assets.

➢ In the given case, CA. M, a practicing Chartered Accountant, has acted as liquidator of XYZ & Co. and
charged his professional fees on percentage of the realisation of assets.
➢ Therefore, CA. M shall not be held guilty of professional misconduct as he is allowed to charge fees
on percentage of the realisation of assets being a liquidator.
QNO First Schedule, Part I,Cl,11 Business Occupation Old Course – (N08E, N11R, N12M, N13E, N15R, P17M,
713.000 (Trading in Derivative) M17E,)
Bhaskar CNO – PE.780 New Course – (S17M, M18R, N21M)
CA. Raj is a leading income tax practitioner and consultant for derivative products. He resides in Bangalore
near to the XYZ commodity stock exchange and does trading in commodity derivatives. Every day, he
invests nearly 50% of his time to settle the commodity transactions, though he has not taken any
permission for this. Is CA. Raj liable for professional misconduct?
➢ A Chartered Accountant in practice is deemed to be guilty of professional misconduct if he engages
in any business or occupation other than the profession of Chartered Accountant unless permitted
by the Council so to engage.
However, the Council has granted general permission to the members to engage in certain specific
occupation. In respect of all other occupations specific permission of the Institute is necessary.
➢ In this case, CA. Raj is engaged in the occupation of trading in commodity derivatives
➢ Trading in commodity derivatives is not covered under the general permission. Hence, specific
permission of the Institute has to be obtained otherwise he will be deemed to be guilty of
professional misconduct under clause (11) of Part I of First Schedule of Chartered Accountants Act,
1949.
First Schedule, Part I,Cl,11 --Business Occupation New Course – (N21M,N22M)

QNO
(Multiple Occupation)
713.500
C.A. Bahubali is Special Executive Magistrate. He also took over as the executive chairman of Software
Company on 1.4.2021. He is also a leading income tax practitioner and consultant for derivative
products. He resides in Chennai near to the ION commodity stock exchange and does trading in
commodity derivatives. Every day, he invests nearly 38% of his time to settle the commodity transactions.
He has not taken any permission for becoming Special Executive Magistrate. However, he has got special
permission of Council of ICAI for becoming executive chairman and for trading in commodity
derivatives. Is C.A. Bahubali liable for professional misconduct? Comment with reference to the Chartered
Accountants Act, 1949, and Schedules thereto.
Answer As per Clause (11) of Part I of First Schedule of Chartered Accountants Act, 1949, a Chartered Accountant in
practice is deemed to be guilty of professional misconduct if he engages in any business or occupation other
than the profession of Chartered Accountant unless permitted by the Council so to engage.
In this case, C.A. Bahubali is Special Executive Magistrate, engaged in the occupation of trading in commodity
derivatives and also took over as the Executive Chairman on 01.04.2021. In this context, it may be noted that
the Special Executive Magistrate which is generally permitted for Members of the Institute in practice,
further specific permission is required for holding the position of Executive Chairman and getting engaged in
the occupation of trading in commodity derivatives.
In the given situation, C.A. Bahubali is acting as Special Executive Magistrate which is generally permitted for
Members of the Institute in practice. Further, He is engaged in the occupation of trading in commodity
derivatives which is not covered under the general permission. He also took over as the Executive Chairman
for which specific permission is required. CA. Bahubali got the permission for the same from the Council of
ICAI.
Conclusion: Hence, CA. Bahubali is not guilty for acting as Special Executive Magistrate as it is covered under
the general permission. He is also not guilty for holding the position of Executive Chairman after getting
specific permission of the Institute. However, he is guilty of professional misconduct under Clause (11) of
Part I of First Schedule of Chartered Accountants Act, 1949 for getting engaged in the occupation of trading
in commodity derivatives which is not covered under the general permission.
First Schedule, Part I,Cl,11 --Directorship in Holding Company where Old Course—(M21M)
QNO
he is auditor in Subsidiary Case Study & Recover Consultant New Course—(M21M)
714.500
M/s SS limited is a partly owned subsidiary of M/s HH limited. For the upcoming financial year, M/s DD
& Co., Chartered Accountants, were appointed as the statutory auditors of SS limited. The CEO of the
holding company was impressed with the knowledge and experience of Mr. D, one of the partners of the
firm and hence, he offered Mr. D to take up the position of Director (not MD/ whole time director) of
HH limited. At the same time, Mr. D’s friend approaches him with an assignment to act as a Recovery
Consultant for a bank. Mr. D is now confused whether to accept or reject the offers. He approaches
you and seeks your advice on the same. Advise what Mr. D about what he can do with the offers with
reference to the Chartered Accountants Act, 1949 and Schedules thereto
Answer As per Clause (11) of Part I of First Schedule of Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he engages in any business
or occupation other than the profession of Chartered Accountant unless permitted by the Council so
to engage.
Provided nothing contained herein shall disentitle a chartered accountant from being a director of a
company (not being MD or whole-time director) unless he or his partners is interested in such company
as auditor.
The Ethical Standards Board (ESB) noted that Public conscience is expected to be ahead of law.
Members, therefore, are expected to interpret the requirement as regards independence much more
strictly than what the law requires and should not place themselves in positions which would either
compromise or jeopardise their independence. In the view of the above, the Board, via a clarification,
decided that the auditor of a Subsidiary company cannot be a Director of its Holding company, as it
will affect the independence of the auditor.
occupation. In respect of all other occupations specific permission of the Institute is necessary. ‘acting
as Recovery Consultant in the banking sector’ is covered under general permission.
In the given situation, M/s SS limited is a partly owned subsidiary of M/s HH limited. For the upcoming
financial year, M/s DD & Co., Chartered Accountants, were appointed as the statutory auditors of SS
limited. The CEO of the holding company was impressed with the knowledge and experience of Mr. D,
one of the partners of the firm and hence, he offered Mr. D to take up the position of Director (not
MD/ whole-time director) of HH limited. Further, Mr. D’s friend approached him for an assignment for
acting as a Recovery Consultant for a bank.
Therefore, in view of above in the given case, Mr. D should not accept the offer to be appointed as
director of HH Limited. However, he can accept the assignment offered by his friend and can act as
a recovery consultant for a bank.
First Schedule, Part I,Cl,11 General Permission (Editorship of Old Course – (M16R, N20R, M21M)
QNO
Professional Magazine) New Course – (N20R, M21M)
715.000
Comment on the following with reference to the Chartered Accountants Act, 1949, and Schedules thereto:

CA. Sufi is practicing since 2008 in the field of company auditing. Due to his good practical knowledge, he
was offered editorship of a ‘Company Audit’ Journal which he accepted. However, he did not take any
permission from the council regarding such editorship.
➢ -Clause (11) of Part I of the First Schedule to the Chartered Accountants Act, 1949
➢ A Chartered Accountant in practice will be deemed to be guilty of professional misconduct if he
engages in any business or occupation other than the profession of Chartered Accountant unless
permitted by the Council so to engage.
➢ In the instant case, CA. Sufi accepted editorship of a journal for which he did not take any permission
from the Council
➢ In this context, it may be noted that the editorship of professional journals is covered under the
general permission. Therefore, CA. Sufi shall not be held guilty of professional misconduct in terms
of Clause (11) of Part I of First Schedule to the Chartered Accountants Act, 1949.
First Schedule, Part I, Cl 11 --Agricultural Activity on Own New Course- (M22M)

QNO
Land
717.500
"Sanyam, a chartered accountant in practice is owner of three agriculture lands. He lost his father due to
Covid Pandemic. After death of his father, he started carrying out agricultural activities. His neighbour Raja
who is a farmer, filed a complaint against him to ICAI that being a member he is carrying out agricultural
activities, therefore, he is liable for misconduct. You are required to examine the same with reference to
the Chartered Accountants Act, 1949 and Schedules thereto."
Answer ➢ Engaging into Agricultural Activity: As per Clause (11) of Part I of First Schedule of Chartered
Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional
misconduct if he engages in any business or occupation other than the profession of Chartered
Accountant unless permitted by the Council so to engage.
➢ However, the Council has granted general permission to the members to engage in certain specific
➢ In this case, CA. Sanyam is owner of 3 agriculture lands, and he is carrying out agricultural activities
which is covered under the general permission.
➢ Therefore, CA Sanyam is not guilty of professional misconduct under Clause (11) of Part I of First
Schedule of Chartered Accountants Act, 1949 and complain of neighbor to the Institute is not
correct.
First Schedule, Part I,Cl,11 --Specific Permission (After Old Course – (M10E, M16M, P17M,
QNO
Accepting Job) N17M,N18M)
719.000
Bhaskar CNO – PE.780 New Course-(S17M, M18M)
CA. Aman, a practicing Chartered Accountant, took over as the executive chairman of Signora IT Ltd.
on 01.04.2016. However, realizing about obtaining prior approval from the Council of the ICAI for engaging
into other business, he applied to the Council for permission within 10 days
▪ Regulation 190A to the Chartered Accountants Regulations, 1988

A Chartered Accountant in practice will be deemed to be guilty of professional misconduct if he
engages in any business or occupation other than the profession of Chartered Accountant unless
➢ Regulation 190A of the Chartered Accountants Regulation, 1988
A Chartered Accountant in practice shall not engage in any other business or occupation other than
the profession of accountancy except with the permission granted in accordance with a resolution
of the Council. According to the same, specific permission from the council would be necessary for
holding office of managing director or a whole-time director of a body corporate.
➢ In the instant case, CA. Aman took over as the executive chairman on 01.04.2016 and applied for
permission later. Based on the given facts, he was engaged in other occupation, after 01.04.2016
and before the application for approval, without the permission of the Council.
➢ Therefore, CA. Aman is guilty of professional misconduct in terms of Clause (11) of Part I of First
First Schedule, Part I,Cl,12 - Old Course – (M11E, M14E, P17M, M17M)
QNO
Signing (Multiple Matters) New Course – (S17M, M18M, N19R, N19E, S21M, N21M)
723.000
Mr. 'A' is a practicing Chartered Accountant working as proprietor of M/s A & Co. He went abroad for 3
months. He delegated the authority to Mr. 'Y' a Chartered Accountant his employee for taking care of
routine matters of his office. During his absence Mr. 'Y' has conducted the under mentioned jobs in the
name of M/s A & Co.
(i) He issued the audit queries to client which were raised during the course of audit.
(ii) He issued production certificate to a client under Central Excise Act, 1944.
(iii) He attended the Income Tax proceedings for a client as authorized representative
before Income Tax Authorities.
Please comment on eligibility of Mr. 'Y' for conducting such jobs in name of M/s A & Co. and liability of
Mr. 'An' under the Chartered Accountants Act, 1949.
OR
CA. Smart, a practicing Chartered Accountant was on Europe tour between 15-9-15 and 25-9-15. On 18-9-
15 a message was received from one of his clients requesting for a stock certificate to be produced to
the bank on or before 20-9-15. Due to urgency, CA. Smart directed his assistant, who is also a Chartered
Accountant, to sign and issue the stock certificate after due verification, on his behalf.
OR
Mr. 'K’, a practicing Chartered Accountant is the proprietor of M/s K & Co. since 1995. He went abroad in
the month of December 2018. He delegated the authority to Mr. ‘Y’ a Chartered Accountant, his employee
for taking care of the important matters of his office. During his absence Mr. 'Y' has conducted the
undermentioned jobs in the name of M/s K & Co.
(i) He issued Net worth certificate to a client for furnishing to a Bank.
(ii) He attended the GST proceedings for a client as authorized representative before GST
Authorities.
➢ A Chartered Accountant in practice is deemed to be guilty of professional misconduct “if he allows
a person not being a member of the Institute in practice or a member not being his partner to sign
on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or financial
statements”.
The Council has clarified that the power to sign routine documents on which a professional opinion
or authentication is not required to be expressed may be delegated and such delegation will not
attract provisions of this clause like issue of audit queries during the course of audit, asking for
information or issue of questionnaire, attending to routing matters in tax practice, subject to
provisions of Section 288 of Income Tax Act etc.

➢ In this case CA. ‘A’ proprietor of M/s A & Co., went to abroad and delegated the authority to another
Chartered Accountant Mr. Y, his employee, for taking care of routine matters of his office who is not
a partner but a member of the Institute of Chartered Accountants of India. In the given case, Mr. ‘Y’,
a chartered accountant being employee of M/s A & Co. has issued audit queries which were raised
during the course of audit.
➢ Here “Y” is right in issuing the query, since the same falls under routine work which can be delegated
by the auditor. Therefore, there is no misconduct in this case as per Clause (12) of Part I of First
schedule to the Act.
(i)
a partner but a member of the Institute of Chartered Accountants of India. In the given case, Mr. ‘Y’,
a chartered accountant being employee of M/s A & Co. has issued production certificate to a client
under Central Excise Act, 1944.
➢ Issuance of production certificate to a client under Central Excise Act, 1944 by Mr. “Y” being an
employee of M/s A & Co. (an audit firm), is not a routine work and it is outside his authorities. Thus,
CA. ‘A’ is guilty of professional misconduct under Clause (12) of Part I of First Schedule of the
Chartered Accountants Act, 1949.

a partner but a member of the Institute of Chartered Accountants of India. In this instance, Mr. “Y”,
CA employee of the audit firm M/s A & Co. has attended the Income tax proceedings for a client as
authorized representative before Income Tax Authorities.
➢ Since the council has allowed the delegation of such work, the chartered accountant employee can
attend to routine matter in tax practice as decided by the council, subject to provisions of Section
288 of the Income Tax Act.
Therefore, there is no misconduct in this case as per Clause (12) of Part I of First schedule of the
Author’s Note
Refer Note of QNO 722.000 for better understanding of what does not falls under routine work.
First Schedule, Part I,Cl,12 – Delegation of works to his articles

QNO
and staff New Course – (S21M, N21M)
724.500
Mr. S, the auditor of ABC Pvt. Ltd. has delegated following works to his articles and staff:
i. Issue of audit queries during the course of audit.
ii. Issue of memorandum of cash verification and other physical verification.
iii. Letter forwarding draft observations/financial statements.
iv. Issuing acknowledgements for records produced.
v. Signing financial statements of the company.
Is this correct as per the Professional Ethics and ICAI’s guidelines and pronouncements?
Part I -- Relevant Laws
▪ Council Clarification
A Chartered Accountant in practice is deemed to be guilty of professional misconduct if he allows a
person not being a member of the institute in practice or a member not being his partner to sign on
his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or financial
statements.
➢ Council Clarification
The Council has clarified that the power to sign routine documents on which a professional opinion
or authentication is not required to be expressed may be delegated in the following instances and
such delegation will not attract provisions of this clause:
• Issue of audit queries during the course of audit.
• Asking for information or issue of questionnaire.
• Letter forwarding draft observations/financial statements.
• Initiating and stamping of vouchers and of schedules prepared for the purpose of audit.
• Acknowledging and carrying on routine correspondence with clients.
• Issue of memorandum of cash verification and other physical verification or recording the
results thereof in the books of the clients.
• Issuing acknowledgements for records produced. Raising of bills and issuing
acknowledgements for money receipts.
• Attending to routine matters in tax practice, subject to provisions of Section 288 of Income
Tax Act.
• Any other matter incidental to the office administration and routine work involved in
practice of accountancy.
➢ In the instant case, Mr. S, the auditor of ABC Pvt. Ltd. has delegated certain task to his articles and
staff such as issue of audit queries during the course of audit, issue of memorandum of cash
verification and other physical verification, letter forwarding draft observations/financial
statements, issuing acknowledgements for records produced and signing financial statements of the
company.
➢ Therefore, Mr. S is correct in allowing first four tasks i.e. issue of audit queries during the
course of audit, issue of memorandum of cash verification and other physical verification, letter
forwarding draft observations/financial statements, issuing acknowledgements for records
produced to his staff and articles.
➢ However, if the person signing the financial statements on his behalf is not a member of the
institute in practice or a member not being his partner to sign on his behalf or on behalf of his
firm, Mr. S is wrong in delegating signing of financial statements to his staff.
➢ In view of this, S would be guilty of professional misconduct for allowing the person signing the
financial statements on his behalf to his articles and staff under Clause 12 of Part 1 of First Schedule
of the Chartered Accountants Act, 1949.
First Schedule, Part II,Cl,2 --Share of Fees from Old Course – (M14E, M16M, P17M, N19E)
QNO
Lawyer of Company New Course – (S17M, N19E)
729.000
Mr. 'C', a Chartered Accountant holds a certificate of practice while in employment also, recommends a
particular lawyer to his employer in respect of a case. The lawyer, out of the professional fee received
from employer paid a particular sum as referral fee to Mr. 'C'.
OR
Mr. C a Chartered Accountant employed as Senior executive in charge of Tax in a company, and not
holding certificate of practice recommends a particular lawyer to his employer in respect of a case. The
lawyer, out of the professional fee received from the employer of Mr. C paid a particular sum as
referral fee to Mr. C . Comment with reference to the Chartered Accountants Act, 1949 and schedules
thereto
▪ Clause (2) of Part II of the First Schedule to the Chartered Accountants Act, 1949

➢ A member of the Institute(other than a
member in practice) shall be guilty of
professional misconduct, if he being an
employee of any company, firm or person
accepts or agrees to accept any part of
fee, profits or gains from a lawyer, a
chartered accountant or broker engaged
by such company, firm or person or agent
or customer of such company, firm or
person by way of commission or
gratification.
➢ In the present case, Mr. C who beside
holding a certificate of practice, is also an
employee and by referring a lawyer to the company in respect of a case, he receives a particular
sum as referral fee from the lawyer out of his professional fee.
➢ Therefore, Mr. C is guilty of professional misconduct by virtue of Clause (2) of Part II of First schedule.
Author’s Note
AABCC is the shortcut to remember this clause.
A,A- Advocate ,Agent / B-Broker / C-CA, C-Customer
First Schedule, Part III, Cl,2 --Not Responding to ICAI Old Course – (M10E,P17M)
QNO
(Date of Leaving Services of the Firm) New Course-(S17M, M22M)
730.000
Mr. X, a Chartered Accountant, employed as a paid Assistant with a Chartered Accountant firm. On 31st
December 2016 he leaves the services of the firm. Despite many reminders from ICAI he fails to reply
regarding the date of leaving the services of the firm.
▪ Clause (2) of Part III of the First Schedule to the Chartered Accountants Act, 1949
➢ A member, whether in practice or not, will be deemed to be guilty
of professional misconduct if he does not supply the information
called for, or does not comply with the requirements asked for, by
the Institute, Council or any of its Committees, Director
(Discipline), Board of Discipline, Disciplinary Committee, Quality
Review Board or the Appellate authority.
➢ In the given case, Mr. X has failed to reply to the letters of the
Institute asking him to confirm the date of leaving the service as a
paid assistant.
➢ Therefore, Mr. X is held guilty of professional misconduct as per Clause (2) of Part III of the First
Author’s Note
Students don’t write the names of all authorities and that’s why loose ,marks in this clause.
There are total 8 authorities in the picture above . The first 4 are in ICAI hierarchy in the order of
importance and the next 4 are in Discipline hierarchy in the order of importance

First Schedule, Part IV,Cl,2 --Disrepute to the Institute Old Course – (P17M, N20M)
QNO
(RCM Misappropriation ) New Course – (N20M)
736.000
Mr. R, a Chartered Accountant in practice has been elected as the treasurer of a Regional Council of the
Institute. The Regional Council had organized an international tour through a tour operator during the
year for its members. During the audit of the Regional Council, it was found that Mr. R had received a
personal benefit of ` 50,000 from the tour operator.
▪ Section 21 & 22 of CA Act.
➢ Section 21 of the Chartered Accountants Act, 1949
It provides that a member is liable for disciplinary action if he is guilty of any professional or “Other
Misconduct.” Though the term “Other Misconduct” has not been defined in the said Act, this
provision enables the Council to enquire into any misconduct of a member even if it does not arise
out of his professional work. This is considered necessary because a chartered accountant is
expected to maintain the highest standards of integrity even in his personal affairs and any deviation
from these standards even in his non-professional work, would expose him to disciplinary action.
The Council has also laid down that among other things “misappropriation by an office-bearer of a
Regional Council of the Institute of a large amount and utilization thereof for his personal use” would
amount to “other misconduct”.
➢ In the present case, Mr. R, Treasurer of Regional Council participated in an international tour and
received personal benefit of INR 50000 from the tour operator.
➢ Thus, in the instant case, Mr. R would be liable for disciplinary action.
Author’s Note
In case where there is a other misconduct always mentioned section 21 & 22 of CA Act. These sections
explain that Institute has right to go beyond defined misconduct of 1st and 2nd schedule and its process.
One should also mention Clause 2, Part 4, Schedule 1 which covers act involving disrepute to the Institute.
ICAI has been inconsistent, sometimes they mention section 21 & 22 and sometimes clause 2 . So, both
should be always mentioned.
First Schedule, Part IV,Cl,2 --Disrepute to the Institute Old Course – (N10E, P17M, M19M)
QNO
(Use of Influence on Get Loans) New Course – (S17M, M19M)
737.000
Bhaskar CNO – PE.940/ CNO – PE.1160
YKS & Co., a proprietary firm of Chartered Accountants was appointed as concurrent auditor of a bank.
YKS used his influence for getting some cheques purchased and thereafter failed to repay the
loan/overdraft.

▪ Clause (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949.
➢ As per Clause (2) of Part IV of First Schedule to the Chartered Accountants Act, 1949, a member of
the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he, in
the opinion of the Council, brings disrepute to the profession or the Institute as a result of his action
whether or not related to his professional work.
Here the Chartered Accountant is expected to maintain the highest standards of integrity even in
his personal affairs and any deviation from these standards calls for disciplinary action.
➢ In the present case, YKS & Co, being a concurrent auditor used his position to obtain the funds and
failed to repay the same to the bank.

➢ This brings disrepute to the profession of a Chartered Accountant. This act of YKS & Co is not
pardonable. Therefore, YKS & Co will be held guilty of other misconduct under Clause (2) of Part IV
of First Schedule to the Chartered Accountants Act, 1949.
First Schedule, Part IV,Cl,2 --Disrepute to the Institute

Old Course – (N19R)
737.010 (Other Work by Article)
New Course –(N18R,N19R, M22R)
CA Kumar who is contesting Central Council Elections of Institute, engages his Articled Assistant for his
election campaigning promising him that he will come in contact with influential people which will
help to enhance his career after completion of his training period.
▪ Part IV of the First Schedule to the Chartered Accountants Act, 1949
▪ Part III of the Second Schedule to the Chartered Accountants Act, 1949
➢ ‘Other Misconduct’ which has been defined in Part IV of the First Schedule and Part III of the Second
Schedule. These provisions empower the Council even if it does not arise out of his professional
work This is considered necessary because a Chartered Accountant is expected to maintain the
highest standards of integrity even in his personal affairs and any deviation from these standards,
even in his non-professional work, would expose him to disciplinary action.
➢ CA Kumar has engaged his Articled Assistant for his own election campaigning for the central Council
elections of ICAI.
➢ Thus, when a Chartered Accountant uses the services of his Articled Assistant for purposes other
than professional practice, he is found guilty under ‘Other Misconduct’. Hence, CA Kumar is guilty of
'Other Misconduct'.
Author’s Note
ICAI has answered this question differently. All the cases which are of other misconduct, generally ICAI
refers to Sec 21 / 22 and Clause 2, Part IV, First Schedule.
But here they have in general referred to other misconduct of BOTH SCHEDULES, I would suggest
this approach if same question is asked and if you remember it. Else give standard answer of other
misconduct.

Part - 3 SECOND SCHEDULE
Second Schedule, Part I, Cl,1 --Confidentiality Old Course-- (M04E, N14E, N16R, P17M)
QNO
Breached While Presenting Paper New Course—(S17M,M22M)
739.000
Mr. Parekh, a Chartered Accountant was invited by the Chamber of Commerce to present a paper in a
symposium on the issues facing Indian Leather Industry. During the course of his presentation he shared
some of the vital information of his client’s business under the impression that it will help the Nation to
compete with other countries at international level
OR
Mr. Shreyansh, a Chartered Accountant in practice was invited to deliver a seminar on Amendments in
Schedule III and CARO 2020 which was attended by professionals as well as by representatives of various
Industries. One section of audience raised a particular issue unique to the industry to which it pertains.
Mr. Shreyansh enthusiastically explained the issue and elaborated how he solved this, for his client
facing the same issue with worked out examples from the computer storage device using the actual data
of one of his clients with full identification of client details being displayed to the group for the sake
giving clarity on a topic in a real-life situation. Comment with reference to the Chartered Accountants
Act, 1949, and Schedules thereto.
▪ Clause (1) of Part I of the Second Schedule to the Chartered Accountants Act, 1949
▪ Code of Ethics
▪ SA 200 on "Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing"
➢ Disclosure of Client’s Information:
Clause (1) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 deals with the
professional misconduct relating to the disclosure of information by a chartered accountant in
practice relating to the business of his clients to any person other than his client without the
consent of his client or otherwise than as required by any law for the time being in force would
amount to breach of confidence.
➢ The Code of Ethics
The Code of Ethics further clarifies that such a duty continues even after completion of the
assignment. The Chartered Accountant may however, disclose the information in case it is
required as a part of performance of his professional duties.
➢ SA 200 on " Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance with Standards on Auditing"
SA 200 on " Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing" also reiterates that, "the auditor should respect the
confidentiality of information acquired in the course of his work and should not disclose any such
information to a third party without specific authority or unless there is a legal or professional
duty to disclose".
➢ In the given case, Mr. Parekh has disclosed vital information of his client’s business without the
consent of the client under the impression that it will help the nation to compete with other
countries at International level.
➢ Thus, it is a professional misconduct covered by Clause (1) of Part I of Second Schedule to the
Chartered Accountants Act, 1949
Author’s Note
# Mistake point
Clause 1 talks about breach of confidentiality. Code of ethics further clarifies that it is applicable to past

clients also. ICAI is inconsistent in referring to code of ethics in answers. You can make a rule to refer it
wherever there is breach of confidentiality.
ws
Second Schedule, Part I,Cl,4 -- Resigned as Director Old Course— (M21M)
QNO and accepted the Statutory Auditor Position (One New Course— (M21M)
747.080 More Case)
Mr. Dhawal, a practicing CA, is appointed as a Director Simplicitor in Gautam Pvt. Ltd. After three year
of appointment, Mr. Dhawal resigned as the Director and accepted the Statutory Auditor position
of the Company. Is Mr. Dhawal right in accepting the auditor position? Comment with reference to
the Chartered Accountants Act, 1949, and Schedules thereto.
As per Clause (4) of Part I of the Second Schedule of the Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he expresses his opinion on
financial statements of any business or enterprise in which he, his firm, or a partner in his firm has a
substantial interest.
Section 141 of the Companies Act, 2013 specifically prohibits a member from auditing the accounts of a
company in which he is an officer or employee. Although the provisions of the aforesaid section are not
specifically applicable in the context of audits performed under other statutes, e.g. tax audit, yet the
underlying principle of independence of mind is equally applicable in those situations also. Therefore, the
Council’s views are clarified in the following situations.
As per the clarifications issued by the Council, a member shall not accept the assignment of audit of a
Company for a period of two years from the date of completion of his tenure as Director, or resignation as
Director of the said Company.
In the instant case, Mr. Dhawal, a practicing CA, is appointed as a Director Simplicitor in Gautam Pvt. Ltd.
After three year of appointment, Mr. Dhawal resigned as the Director and accepted the Statutory Auditor
position of the Company. In view of above provisions Mr. Dhawal can accept the Directorship of the
company as tenure of two years after his resignation is completed.
Thus, CA, Dhawal would not be held guilty of professional misconduct under clause 4 of Part 1 of
Second Schedule of the Chartered Accountants Act, 1949.
Second Schedule, Part I,Cl,4 --Issuing Certificate for New Course— (N22R)
QNO
Relative
747.090
"Comment on the following with reference to the with reference to the Chartered Accountants Act, 1949
and Schedules thereto:
(a) CA Dev started practice in Punjab in the year 2019. CA Dev issued ‘Turnover Certificate’ for M/s.
ASAUS Traders to be forwarded to the Bank for the purpose of availing cash credit facility and machinery
term loan. Brother of CA Dev was proprietor of M/s. ASAUS Traders.
As per Clause (4) of Part I of Second Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty if he expresses his opinion on financial statements of any
business or enterprise in which he, his firm, or a partner in his firm has a substantial interest.
Further, it is not permissible for a member to undertake the assignment of certification, wherein the client
is relative of the member. The “relative" for this purpose would refer to the definition mentioned in
Accounting Standard (AS) - 18.
In the given situation, CA Dev started practice in Punjab in the year 2019. CA Dev issued Turnover
certificate for M/s. ASAUS Traders to be forwarded to the Bank for the purpose of obtaining Loan. Brother
of CA Dev is proprietor of M/s. ASAUS Traders. Brother is very well covered in the definition of relative
mentioned in Accounting Standard (AS)-18.
Hence, CA Dev is guilty of professional misconduct.

QNO Second Schedule, Part I, Cl 5 --Loan from PF Fund Old Course-- (M04E, P17M)
749.000 Bhaskar CNO – PE.1040 New Course-- (N21M)
Mr. Joe, a Chartered Accountant during the course of audit of M/s XYZ Ltd. came to know that the
company has taken a loan of 10 lakhs from Employees Provident Fund. The said loan was not
reflected in the books of account. However, the auditor ignored this information in his report

▪ Clause (5) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
➢ A chartered Accountant in practice will be held liable for misconduct if he fails to disclose a
material fact known to him, which is not disclosed in the financial statements but disclosure of
which is necessary to make the financial statements not misleading.
➢ In this case, Mr. Joe has come across information that a loan of `10 lakhs has been taken by the
company from Employees Provident Fund. This is contravention of Rules and the said loan has not
been reflected in the books of accounts.
➢ Further, this material fact has also to be disclosed in the financial statements. The very fact that
Mr. Joe has failed to disclose this fact in his report, he is attracted by the provisions of professional
misconduct under Clause (5) of Part I of Second Schedule to the Chartered Accountants Act, 1949.
Author’s Note
In SA’s misstatement include Omission, But this is old Law both are covered in different Clauses. Let’s
Stick to it.
Second Schedule, Part I, Cl,5 --Loan from PF Fund Old Course-- (M09E, N11E, P17M, M18E, N18E,
QNO
Bhaskar CNO – PE.1040 M19M)
750.000
New Course—(S17M, M19M)
In the course of his audit assignment in M/s Bailey Ltd., CA Soft came to know that the company, due to
financial crunch and unable to meet employee’s salary, has taken a loan of Rs 50 lacs from Employees
Gratuity Fund. The said loan was not reflected in the book of account of the company and the
auditor ignored this transaction in his report.
➢ A chartered Accountant in practice will be held liable form is conduct if he fails to disclose a
material fact known to him, which is not disclosed in the financial statements but disclosure of
which is necessary to make the financial statements not misleading.
➢ In this case, CA. Soft has come across information that a loan of `50 lakhs have been taken by the
company from Gratuity Fund.
➢ This is contravention of Rules and the said loan has not been reflected in the books of account.
Further, this material fact has also to be disclosed in the financial statements. The very fact that
CA. Soft has failed to disclose this fact in his report, he would be guilty for professional misconduct
under Clause (5) of Part I of Second Schedule to the Chartered Accountants Act, 1949.
Second Schedule, Part I, Cl 6 --False information Old Course -- (N07E, M11R, N13R, P17M)
QNO
to Tax Authorities New Course -- (S17M, N18E)
753.000
A practicing Chartered Accountant was appointed to represent a company before the tax authorities. He
submitted on behalf of his client’s certain information and explanations to the authorities, which
were found to be false and misleading.

➢ Clause (5) of Part I of the Second Schedule
If a member in practice fails to disclose a material fact known to him which is not disclosed in a
financial statement, but disclosure of which is necessary to make the financial statement not
misleading, where he is concerned with that financial statement in a professional capacity, he will
be held guilty under Clause (5).

As per Clause (6) of Part I of Second Schedule if he fails to report a material misstatement known
to him to appear in a financial statement with which he is concerned in a professional capacity, he
will be held guilty under Clause (6).
➢ In given case, the Chartered Accountant had submitted the statements before the taxation
authorities. These statements are based on the data provided by the management of the
company. Although the statements prepared were based on incorrect facts and misleading, the
Chartered Accountant had only submitted them acting on the instructions of his client as his
authorized representative.
➢ Hence the Chartered Accountant would not be held liable for professional misconduct
Author’s Note
Here it is assumed CA was not aware that facts were incorrect and misleading. You can take
other assumption and write alternative answer possible.
This question has been answered as per Professional Ethics. Look for QNO 378.100 in “Liabilities of
Auditor” for similar question when it is specifically asked to answer as per Income Tax Act.
QNO Second Schedule, Part I, Cl,6 Orders Under Negotiation Old Course-- (M15R, P17M, M20M)
754.000 Bhaskar CNO – PE.940/ CNO – PE.1040 New Course-- (M20M)
Mr. Brainy, a Chartered Accountant in practice, is the auditor of Fair Ltd. He advised the Managing
Director of the company to include ‘orders under negotiation’ in sales, to reflect higher profit and
better financial position for obtaining bank loans in future. Mr. Brainy, thereafter, gave clean reports on
the balance sheet prepared accordingly without examining the accounts.
▪ Clause (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949
It states that a Chartered Accountant in practice shall be deemed to be guilty of professional
misconduct if he does not exercise due diligence or is grossly negligent in the conduct of his
professional duties.
➢ Clause (2) of Part IV of the First Schedule
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he, in the opinion of the Council, brings disrepute to the profession or the Institute
as a result of his action whether or not related to his professional work.
➢ In the given case, Mr. Brainy, a Chartered Accountant in practice, is grossly negligence in conduct
of his professional duties by issuing clean reports on the balance sheet without examining the
accounts. Further, he has also brought disrepute to the profession by advising unethical practice to
the managing director of the company.

➢ Therefore, Mr. Brainy will be held guilty for professional and other misconduct under above
mentioned Clauses to the Chartered Accountants Act, 1949.
Author’s Note
Clause (6) of Part I of Second Schedule can also be referred as over valuation of sales consists a material
misstatement, and a clean report has been issued by auditor
Second Schedule, Part I, Cl,7 –Audit Old Course-- (M13E, P17M, N17M, N19R, N20M)
QNO
Report Not Filed Within Time New Course-- (S17M, N18R, N19R, N20M)
755.000
CA Dev, a practicing Chartered Accountant, did not complete his work relating to the audit of the
accounts of a company and had not submitted his audit report in due time to enable the company to
comply with the statutory requirements
does not exercise due diligence or is grossly negligent in the conduct of his professional duties.
It is a vital clause which unusually gets attracted whenever it is necessary to judge whether the
accountant has honestly and reasonably discharged his duties. The expression negligence covers a
wide field and extends from the frontiers of fraud to collateral minor negligence.
Where a Chartered Accountant had not completed his work relating to the audit of the accounts a
company and had not submitted his audit report in due time to enable the company to comply
with the statutory requirement in this regard, it was held, under a case, that he was guilty of
professional misconduct under Clause (7).
➢ In the given case, CA. Dev has not completed his audit work in time and consequently could not
submit audit report in due time and consequently, company could not comply with the statutory
requirements.
➢ Therefore, CA. Dev will be held guilty of professional misconduct under Clause (7) of Part I of the
Second Schedule of the Chartered Accountants Act, 1949.
Second Schedule, Part I,Cl,7 --Putting Digital Signature on Resignation New Course-- (N22R)
QNO
Letter of Previous Auditor
756.500
Comment on the following with reference to the with reference to the Chartered Accountants Act, 1949
and Schedules thereto:
Aagam Private Limited requested CA Sheetal, a practicing Chartered Accountant, to digitally sign the
form related to resignation of Mr. Rohit, one of the Director of Aagam Private Limited, along with the
copy of Resignation Letter to be uploaded on the website of Registrar of Companies. The signature of
Mr. Rohit was simply copied and pasted by another Director of Aagam Private Limited. CA Sheetal,
without verifying the genuineness of the resignation letter, digitally signed the form and the said form
was uploaded on the website of Registrar of Companies.
Answer As per Clause (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty if he does not exercise due diligence or is grossly negligent in
the conduct of this professional duties.
In the given case, Aagam Private Limited requested CA Sheetal, a practicing chartered accountant, to
digitally sign the form related to resignation of Mr. Rohit, one of the Director of Aagam Private Limited,
along with the copy of Resignation Letter to be uploaded on the website of Registrar of Companies. The
signature of Mr. Rohit was simply copied and pasted by another Director of Aagam Private Limited.

CA Sheetal, without verifying the genuineness of the Resignation Letter, digitally signed the Form and the
said form was uploaded on the website of Registrar of Companies.
Due to forged resignation letter, the resignation of Mr. Rohit from directorship of the Aagam Private
Limited had been occurred. It was noted that CA Sheetal had not taken any step to verify forged signature
on resignation letter which anyone would have taken in normal circumstances.
Consequently, CA. Sheetal would be held liable for professional misconduct as per Clause (7) of Part I of
Second Schedule to the Chartered Accountants Act, 1949.
Second Schedule, Part I, Cl,8 –No Checking as No Change in Old Course-- (M10E, P17M, N20M)
QNO
Balance (Investments) New Course-- (S17M, N18M, N20M)
759.000
Bhaskar CNO – PE.980/ CNO – PE.1040
Mr. A, a Chartered Accountant was the auditor of 'A Limited'. During the financial year 2015-16, the
investment appeared in the Balance Sheet of the company of `10 lakhs and was the same amount as in
the last year. Later on, it was found that the company's investments were only `25,000, but the value of
investments was inflated for the purpose of obtaining higher amount of Bank loan.
➢ As per Part I of Second Schedule to the Chartered Accountants Act, 1949, a Chartered Accountant
in practice shall be deemed to be guilty of professional misconduct, under
• Clause (2) of Part I of the Second Schedule
If he, certifies or submits in his name or in the name of his firm, a report of an examination
of financial statements unless the examination of such statements and the related records
has been made by him or by a partner or an employee in his firm or by another chartered
accountant in practice
Does not exercise due diligence or is grossly negligent in the conduct of his professional
duties.

If fails to obtain sufficient information which is necessary for expression of an opinion or
its exceptions are sufficiently material to negate the expression of an opinion
➢ The primary duty of physical verification and valuation of investments is of the management.
However, the auditor’s duty is also to verify the physical existence and valuation of investments
placed, at least on the last day of the accounting year. The auditor should verify the documentary
evidence for the cost/value and physical existence of the investments at the end of the year. He
should not blindly rely upon the Management’s representation.
➢ In the instant case, such non-verification happened for two years. It also appears that auditors
failed to confirm the value of investments from any proper source. In case auditor has simply
relied on the management’s representation, the auditor has failed to perform his duty.
➢ Accordingly, Mr. A, will be held liable for professional misconduct under Clauses (2), (7) and (8) of
Part I of the Second Schedule to the Chartered Accountants Act, 1949.
QNO Second Schedule, Part II, Cl,1 Stipend Payment Old Course-- (N12R, N15R, N17E, N18M)
766.000 Bhaskar CNO – PE.1080 New Course-- (N21M)
Case1
CA. X is a chartered accountant in practice. He has an articled trainee H. X has informed H that since his
practice and receipt of fees is seasonal, the stipend would not be paid in the months of April to
December, but would be paid from January to March and the shortfall for the earlier 9 months will be
made good in these 3 months along with interest @ 5% p.a.

▪ Clause (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949
▪ Regulation 48 of the Chartered Accountant’s Regulations, 1988
➢ Clause (1) of Part II of the Second Schedule
A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional
misconduct if he contravenes any of the provisions of this Act or the regulations made there under
or any guidelines issued by the Council.
Case 1
➢ In the given case, CA. X has failed to make the payments of stipend to articled assistant every
month in accordance with Regulation 48.
➢ The fact that the articled assistant will be compensated with extra sum in the form of interest on
late payment is not relevant and the plea that cycle of professional receipts from clients is
seasonal is not acceptable. Therefore, CA. X is guilty of professional misconduct under Clause (1) of
Part II of the Second Schedule to the Chartered Accountants Act, 1949 as he has contravened
Regulation 48 by not making the payment every month.
Second Schedule, Part II, Cl,3 Included name of Old Course-- (N07E, N08R, M11R, N13R, M16E, N16M,
QNO
CA in empanelment without his knowledge P17M, N18R, M18M, M20R)
770.000
Bhaskar CNO – PE.1120 New Course-- (M18M, M20R)
AB & Co., a firm of Chartered Accountants, included the name of P as a partner while filing an application
for empanelment as auditor for Public Sector bank branches. It was subsequently noticed that on
the date of application, P was not a partner with AB & Co
▪ As per Clause (3) of Part II of Second Schedule to the Chartered Accountants Act, 1949
➢ A Chartered Accountant whether in practice or not is guilty of professional misconduct if he
includes in any information, statement, return or form to be submitted to the Institute, Council or
any of its committees, Directors (Discipline), Board of Discipline, Disciplinary Committee, Quality
Review Board or the Appellate Authority any particulars knowing them to be false.
➢ In the instant case A B & Co. included another Chartered Accountant name as partner in his firm, in
his application for empanelment as Auditor of branches of Public Sector Banks submitted to the
Institute. In fact, such a member was not a partner of the said firm on the date of application.
➢ He will be held guilty of professional misconduct.
Author’s Note
It’s a misconduct of second schedule part II clause 3 because empanelment for branch audits is
done by ICAI not individual banks. Application was made to ICAI. If false information is given in tender ,
empanelment to other parties then first schedule part III clause 3 would have been applicable.
QNO Multiple Cases Old Course-- (N21R)

770.500 UNIQUE New Course-- (N21R)
The Director (Discipline) of the ICAI received information of alleged misconduct against Mr. Jayprakash,
the proprietor of JP & Associates, as follows:-
(i) Audit of a college was accepted by JP & Associates in which Mr. Jayprakash is working as a part-time
lecturer and also, he had not taken permission of the ICAI for working as a part-time lecturer in the
college.
(ii) An event relating to Corporate Social Responsibility was sponsored by JP & Associates, whereby in
the sponsorship banner, name of Mr. Jayprakash as ‘CA Jayprakash, Proprietor, JP C Associates’ was
mentioned.
On the basis of above information and along with certain evidence against Mr. Jayprakash, he was found

guilty and so he was reprimanded and a fine of ₹ 1 lakh was imposed by an order passed against him
dated 12th July, 2020.
Against the said order, Mr. Jayprakash preferred an appeal with the Appellate Authority on 17th August,
2020 by submitting a statement of appeal along with the application form of appeal. During such
appellate proceedings, it was discovered that the said statement of appeal contained some facts
which were false to which Mr. Jayprakash admitted it to be false and apologized for it.
(a) Mr. Jayprakash has violated which of the provisions of the Chartered Accountants Act, 1949?
(b) Before which authority, the matter of Mr. Jayprakash would have been placed and what maximum
punishment could have been imposed on him by the said authority in accordance with the Chartered
Accountant Act, 1949?
Answer Mr. Jayprakash has violated following provisions of the Chartered Accountants Act, 1949:
(i) As per Clause (4) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he
expresses his opinion on financial statements of any business or enterprise in which he, his firm, or a
partner in his firm has a substantial interest.
In this connection, as per the decision of the Council of the ICAI, a Chartered Accountant should not
by himself or in his firm name accept the audit of a college, if he is working as a part-time lecturer in
the college.
Thus, by accepting audit of a college in which he is working as a part -time lecturer, Mr. Jayprakash
has violated the restriction imposed under Clause (4) of Part I of the Second Schedule to the
(ii) As per Clause (11) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
engages in any business or occupation other than the profession of chartered accountant unless
Members of the Institute in practice may engage in a part-time or full-time tutorship under any
educational institution other than the coaching organization of the Institute, after obtaining the
specific and prior approval of the Council in each case.
Mr. Jayprakash had not taken permission of the ICAI for working as a part -time lecturer in the
college and so has violated the restriction imposed under Clause (11) of Part I of the First Schedule to
the Chartered Accountants Act, 1949.
As per Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
solicits clients or professional work either directly or indirectly by circular, advertisement, personal
communication or interview or by any other means.
In this connection, members sponsoring activities relating to Corporate Social Responsibility may
mention their individual name with the prefix “CA”. However, mentioning a firm’s name or CA Logo is
not permitted.
An event relating to Corporate Social Responsibility was sponsored by JP & Associates, whereby in
the sponsorship banner, name of Mr. Jayprakash as ‘CA Jayprakash, Proprietor ,JPC Associates’ was
mentioned. Thus, firm’s name was mentioned which is not allowed and thus, Mr. Jayprakash has
violated the restriction imposed under Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949.
(iv)As per Clause (3) of Part II of the Second Schedule to the Chartered Accountants Act, 1949, a
member of the ICAI shall be deemed to be guilty of professional misconduct, if he includes in any
information, statement, return or form to be submitted to the Institute, Council or any of its
Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board
or the Appellate Authority, any particulars knowing them to be false.
Mr. Jayprakash in the statement of appeal submitted with the Appellate Authority mentioned some

facts knowing them to be false and thus, he has violated the restriction imposed under Clause (3) of
Part II of the Second Schedule to the Chartered Accountants Act, 1949.
(b) As Mr. Jayprakash has been alleged of misconduct falling in First as well as Second Schedule, so
the matter would be placed before the Disciplinary Committee. The maximum punishment which
could have been imposed on him by the said authority would be:-
(i) reprimanding the member.
(ii) removing name of the member permanently or for any duration, it thinks fit.
(iii) imposing fine upto ` 5,00,000.
QNO NETWORK GUIDELINES & ROTATION New Course—(N22M)

AJ & Associates and PK & Co., chartered accountant firms have joined the Network firm A to Z &
Affiliates registered with Institute. AJ & Associates was statutory auditor of B Ltd. for last 10 years. Due
to rotation of auditor as per section 139 (2) of Companies Act, 2013, B Ltd. retires AJ & Associates and
appoints PK & Co., as auditor for the year 2020-21. Comment as per Chartered Accountant Act, 1949 -
Guidelines for Networking.
Answer As per Council General Guidelines, 2008, Chapter XV, Guidelines for Networking, once the relationship of
network arises, it will be necessary for such a network to comply with all applicable ethical requirements
prescribed by the Institute from time to time in general and the following requirements in particular in
those cases where rotation of firms is prescribed by any regulatory authority, no member firm of the
network can accept appointment as an auditor in place of any member firm of the network which is
retiring.
In the given situation, AJ & Associates was statutory auditor of B Ltd. For last 10 years and due to rotation
of auditor as per section 139(2) of the Companies Act, 2013 B Ltd., retires AJ & Associates and appoints PK
& Co. as auditor for the year 2020-21.
It may be considered that AJ & Associates and PK & Co., chartered accountant firms have joined the
network firm namely A to Z & Affiliates registered with Institute. In view of above Guidelines for
Networking PK & Co., is disqualified for appointment as an auditor of B Ltd.

PART - 4 COUNCIL GUIDELINES
Author’s Note
Common for answers related to Council Guidelines 2008
Clause (1) of Part II of Second Schedule is not mentioned by the institute in any of the answers related to Council
Guidelines 2008. Module also maintains the institute’s view.
However, if the students want to include additional reference, they can also mention the clause below:
“As per Clause (1) of Part II of Second Schedule, a member of the institute will be held guilty of professional
misconduct if he contravenes any of the provisions of this act or regulations made thereunder or any guidelines
issued by the council”
QNO Minimum Fees Old Course-- (N05E, M09R, M09E, N15E, P17M, M19M)
774.000 Bhaskar CNO – PE.1160 New Course-- (M19M)
M/s LMN, a firm of Chartered Accountants having 5 partners accepts an audit assignment of a newly
formed private limited company for audit fees of ` 5,000.
▪ Council General Guidelines 2008 - Minimum Audit Fee in respect of Audit
▪ (Repealed Now)
➢ This chapter of Council General Guidelines 2008is repealed from 8th June 2011. So, there is no
minimum or maximum audit fees.
Recommendatory fees are generally given every year at the end in Guidance Note on Tax
Audit. However, such prescribed minimum audit fee is recommendatory, not mandatory in
nature.
➢ M/s LMN, a firm of Chartered Accountants have 5 partners and have accepted an audit assignment
of a newly formed private limited company for audit fees of Rs 5,000.
➢ So as per the above acceptance of audit assignment by M/s LMN, a firm of Chartered Accountants
for audit fees of Rs 5,000 is not violation of any provisions.
No of partner in the firm for determination of fees is of no relevance as the relevant Chapter XII
of Council General Guidelines 2008 which talks about the minimum audit fee in respect of Audit
has been repealed.
Therefore M/s LMN will not be held liable for guilty of misconduct.
Not Maintaining Books of Accounts (Not Old Course-- (M05E, N05E, M16R, N16R, P17M, N18E)
QNO
Exceeding 44AA Limit) New Course—(S17M, M18R, N19E)
776.000
L, a chartered accountant did not maintain books of account for his professional earnings on the
ground that his income is less than the limits prescribed u/s 44AA of the Income Tax Act, 1961.
OR
L, a chartered accountant did not maintain books of account for his professional earnings on the ground
that his income is less than the limits prescribed u/s 44AA of the Income Tax Act, 1961. (P17M)
OR
CA. Elegant is in practice for two years and runs his proprietorship firm in the name of “Elegant & Co.”.
He maintains notes in his mobile in which he writes the fees received from various clients. Based on his
record, he prepares and files his income tax return.
OR
Write a short note on Record of Audit Assignments (as required by ICAI regulations)
OR
Mr. X, a Chartered Accountant in Practice filed his income tax return for the Assessment Year 2018-
19under section 44ADA of the Income Tax Act, 1961, declaring his income on presumptive basis. In
a disciplinary proceeding against him for an alleged misuse of funds of his clients, it was asked that he
should submit his books of accounts for the financial year ended on 31/03/2018. Mr. X refused to
submit books of accounts on the ground that he had not maintained any books and even for
income tax purposes, he submitted his Return of Income on a presumptive basis. Is he right in putting
such a defence? Analyze the issues in the light of Professional Code, if any
▪ Council General Guidelines 2008- Specified number of audit assignments
▪ Council General Guidelines 2008- Maintenance of books of accounts
➢ Chapter VIII of Council General Guidelines 2008 - Specified number of audit assignments
The Council of the Institute of Chartered Accountants of India specified that a Chartered
Accountants in practice as well as a firm in practice shall maintain a record of the audit
assignments accepted as laid out in guidelines issued by the Council of the ICAI under Part II of
Second Schedule to the Chartered Accountants Act, 1949 in respect of ceiling on audits containing
following particulars:
• Name of Company Audit/ Assignment.
• Regn. No.
• Date of appointment with Registrar of Companies.
• Date of acceptance.
• Date on which Form ADT-1 as per the provisions and rules made under Companies Act,
2013.
➢ Chapter V of the Council General Guidelines, 2008 - Maintenance of books of accounts
A member of the Institute in practice or the firm of Chartered Accountants of which he is a
partner, shall maintain and keep in respect of his/its professional practice, proper books of
accounts including the following-
(i) a Cash Book
(ii) a Ledger
➢ In the given case, L, a chartered accountant did not maintain books of account for his professional
earnings on the ground that his income is less than the limits prescribed u/s 44AA of the Income
Tax Act, 1961.
➢ Hence, Mr. L is guilty of professional misconduct.
OTHERS (P.E)
QNO KYC – Applicability New Course-- (S21M)
Mr. F, a Chartered Accountant, gave advisory services to PQR Pvt. Ltd. Further, he gave them GST
consultancy, compilation engagement for historical financial information and helped in ERP set
up. Later, the company turned out to be a part of a group of companies involved in money laundering.
Mr. F was asked to provide details of the companies. Mr. F refused on the grounds that he gave only
consultancy services to the company and wasn’t supposed to keep any information about the company.
Is Mr. F right as per the guidelines issued by the ICAI?
▪ As per KYC Norms of Council of ICAI
➢ The financial services industry globally is required to obtain information of their clients and comply
with Know Your Client Norms (KYC norms). Keeping in mind the highest standards of Chartered
Accountancy profession in India, the Council of ICAI issued such norms to be observed by the

members of the profession who are in practice.
➢ In the given case of PQR Pvt. Ltd., a Corporate Entity, Mr. F should have kept following
information:
o General Information
• Name and Address of the Entity
• Business Description
• Name of the Parent Company in case of Subsidiary
• Copy of last Audited Financial Statement
o Engagement Information
• Type of Engagement
o Regulatory Information
• Company PAN No.
• Company Identification No.
• Directors’ Names & Addresses
• Directors’ Identification No.
Author’s Notes
KYC is applicable only to attest function. Here Attest function covers Compilation Engagement, Audits &
Review. For only Consultancy work KYC is not required.

QNO Treatment of various matters in financial Old Course-- (N20M)
786.800 statement. New Course—(N20M)
Answer As an Auditor give your comments for the following disclosures made by a Company which adopted Ind
AS for compilation of Financial Statements:
(i) In the Balance Sheet, the sub-head inventories contained an item "goods in transit “against which a
consolidated amount consisting of aggregate of the cost of raw materials in transit and loose tools which
are billed on company, but delivery not been made to the company had been specified.
(ii) Provision for doubtful debts of trade debtors was grouped under, "Provisions" undercurrent
liabilities.
(iii) Sale proceeds of scrap incidental to manufacture were included in "Other Income".
➢ Goods in Transits:
As per Division II of Schedule III of the Companies Act, 2013, cost of raw material in transit shall be
disclosed as sub-head of raw material and loose tools billed on the company would be shown as
separate sub-head of Loose tools under heading of Inventories i.e. part of Current Asset. Thus,
disclosure of consolidated amount aggregating the cost of raw material in transit and loose tools is
not correct.
➢ Provision for Doubtful Debts of Trade Debtors was grouped in “Provisions” under current
liabilities:
The term ‘doubtful debts’ is an adjustment to the carrying amounts of assets, hence no provision is
created separately for it as per Ind-AS 37 “Provisions, Contingent Liabilities and Contingent
Assets”. Thus, provision should be shown as deduction from gross value of (net) trade receivable.
➢ Sale Proceeds of Scrap incidental to manufacture were included in “Other Income”:
Asper Ind-AS 2 “Inventories”, sale proceeds of scrap incidental to manufacture should be deducted
from the cost of the main product. Thus, presentation of sale proceeds of scrap as other income is
not correct. Alternatively, sale of manufacturing scrap arising from operations for a manufacturing
company could be treated as other operating revenue since the same arises on account of the
company’s main operating activity.
QNO AS 29/ IND AS 37--Law Suit Old Course-- (M14E, P17M)

799.000 New Course--(S17M, S21M)
ABC Company files a law suit against Unlucky Company for Rs 5 crores The Attorney of Unlucky Company
feels that the suit is without merit, so Unlucky Company merely discloses the existence of the law suit in
the notes accompanying its financial statements As an auditor of Unlucky Company, how will you deal
with the situation?
Answer Existence of Contingent Liability: As per IND AS 37/AS 29 "Provisions, Contingent liabilities and
Contingent Assets", a contingent liability is a possible obligation that arises from past events and
whose existence will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity.
Further, future events that may affect the amount required to settle an obligation should be
reflected in the amount of a provision where there is sufficient objective evidence that the event will
occur.
As per SA 570 “Going Concern”, there are certain examples of events or conditions that, individually
or collectively, may cast significant doubt about the going concern assumption. Pending legal or
regulatory proceedings against the entity that may, if successful, result in claims that the entity is
unlikely to be able to satisfy is one of the example of such event.
When the auditor concludes that the use of the going concern assumption is appropriate in the
circumstances but a material uncertainty exists, the auditor shall determine whether the financial
statements adequately describe the principal events or conditions that may cast significant doubt on
the entity’s ability to continue as a going concern and management’s plans to deal w ith these events
or conditions; and disclose clearly that there is a material uncertainty related to events or conditions
that may cast significant doubt on the entity’s ability to continue as a going concern and, therefore,
that it may be unable to realize its assets and discharge its liabilities in the normal course of business.
In the instant case, ABC Company has filed a law suit against Unlucky Company for ` 5 crores. Though,
the attorney of Unlucky Company feels that the suit is without merit so the company merely
discloses the existence of law suit in the notes accompanying its financial statements. But the auditor
may evaluate the source data on which basis the opinion is formed. If the auditor finds the
uncertainty, he may request the management to adjust the sum of ` 5 crore by making provision for
expenses as per IND AS 37/AS 29. If the management does not accept the request the auditor should
qualify the audit report.
QNO AS 15--(Leave Encashment as and When Paid) Old Course—(M13E, M16E, P17M
801.000 New Course – (S17M, N18M, S21M)
Z Ltd changed its employee remuneration policy from 1st of April 2019 to S provide for 12% contribution
to provident fund on leave encashment also. As per the leave encashment policy the employees can
either utilize or encash it. As at 31st March 20 the company obtained an actuarial valuation for leave
encashment liability. However, it did not provide for 12% PF contribution on it. The auditor of the
company wants it to be provided but the management replied that as and when the employees availed
leave encashment, the provident fund contribution was made. The company further contends that this is
the correct treatment as it is not sure whether the employees will avail leave encashment or utilize it.
Comment in view of relevant IND-AS.
As per Para 13 of Ind AS-19 on “Employee Benefits”, notified under the Companies (Indian Accounting
Standards) Rules, 2015, as amended from time to time, an entity shall recognize the expected cost of short-
term employee benefits in the form of paid absences, when the employees render service that increase
their entitlement to future paid absences.
Since the company obtained actuarial valuation for leave encashment, it is obvious that the paid absences
are accumulating in nature. An enterprise should measure the expected cost of accumulating paid
absences as the additional amount that the enterprise expects to pay as a result of the unused entitlement
that has accumulated at the balance sheet date.
Here, Z Ltd. will accumulate the amount of leave encashment benefits as it is the liability of the company to
provide 12% PF on amount of leave encashment. Hence, the contention of the auditor is correct that full
provision should be provided by the company
QNO Sch III--GI ( Current Assets & Liabilities) Old Course-( M15E, P17M
804.000 New Course – (S17M, S21M)
MG Pvt. Ltd. seeks your advice while preparing the financial statements i.e. the general instructions to
be followed while preparing Balance Sheet under Companies Act, 2013 in respect of current assets and
liabilities.
General Instructions for Preparation of Balance Sheet:
(i) General Instruction in respect of Current Assets: An asset shall be classified as current when it satisfies
any of the following criteria-
(1) it is expected to be realized in, or is intended for sale or consumption in, the company’s normal
operating cycle;
(2) it is held primarily for the purpose of being traded;
(3) it is expected to be realized within twelve months after the reporting date; or
(4) it is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability
for at least twelve months after the reporting date.
(ii) General Instruction in respect of Current Liabilities: A liability shall be classified as current when it
satisfies any of the following criteria-
(1) it is expected to be settled in the company’s normal operating cycle;
(2) it is held primarily for the purpose of being traded;
(3) it is due to be settled within twelve months after the reporting date; or
(4) the company does not have an unconditional right to defer settlement of the liability for at least

twelve months after the reporting date. Terms of a liability that could, at the option of the
counterparty, result in its settlement by the issue of equity instruments do not affect its classification.
QNO Sch III—Presentation Old Course-(M20R, M13E, M15R, P17M)

805.000 New Course--(S17M, M18M, M20R, S21M)
The Balance Sheet of G Ltd. as at 31st March, 20 is as under. Comment on the presentation
in terms of Division I and Division II of Schedule III.
Heading Note 31st March, 20 31st March, 19
No.
Equity & Liabilities
Share Capital 1 XXX XXX
Reserves & Surplus 2 0 0
Employee stock option outstanding 3 XXX XXX
Share application money refundable 4 XXX XXX
Non-Current Liabilities XXX XXX
Deferred tax liability (Arising from 5 XXX XXX
Indian Income Tax)
Current Liabilities
Trade Payables 6 XXX XXX
Total XXXX XXXX
Assets
Non-Current Assets
Fixed Assets-Tangible 7 XXX XXX
CWIP (including capital advances) 8 XXX XXX
Current Assets
Trade Receivables 9 XXX XXX
Deferred Tax Asset (Arising from 10 XXX XXX
Indian Income Tax)
Debit balance of Statement of Profit XXX XXX
and Loss
Total XXX XXX
(a) Following Errors are noticed in presentation as per Division I of Schedule III:
(i) Share Capital and Reserve & Surplus are to be reflected under the heading “Shareholders’ funds”, which
is not shown while preparing the balance sheet.
Although it is a part of Equity and Liabilities, yet it must be shown under head “shareholders’ funds”. The
heading “Shareholders’ funds” is missing in the balance sheet given in the question.
(ii)Reserve & Surplus is showing zero balance, which is not correct in the given case. Debit balance of
statement of Profit & Loss should be shown as a negative figure under the head ‘Surplus’. The balance of
‘Reserves and Surplus’, after adjusting negative balance of surplus shall be shown under the head ‘Reserves
and Surplus’ even if the resulting figure is in the negative.
(iii)Schedule III requires that Employee Stock Option outstanding should be disclosed under the heading
“Reserves and Surplus”.
(i) Share application money refundable shall be shown under the sub-heading “Other Current Liabilities”.
As this is refundable and not pending for allotment, hence it is not a part of equity.
(v) Deferred Tax Liability has been correctly shown under Non-Current Liabilities. But Deferred tax assets
and deferred tax liabilities, both, cannot be shown in balance sheet because only the net balance of
Deferred Tax Liability or Asset is to be shown if the enterprise has a legally enforceable right to set off
assets against liabilities representing current tax; and it relates to the same governing tax laws.
(vi) Under the main heading of Non-Current Assets, Property, Plant and Equipment are further classified as
under:
(a) Tangible assets
(b) Intangible assets
(c) Capital work in Progress
(d) Intangible assets under development.
Keeping in view the above, the CWIP shall be shown under Property, Plant and Equipment as Capital
Work in Progress. The amount of Capital advances included in CWIP shall be disclosed under the sub-
heading “Long term loans and advances” under the heading Non-Current Assets.
Subsequent to the notification of Ministry of Corporate Affairs dated October 11, 2018 under Section
467(1) of the Companies Act, 2013, the words “Fixed assets” shall be substituted with the words
“Property, Plant and Equipment”.
(e) Deferred Tax Asset shall be shown under Non-Current Asset. It should be the net balance of
Deferred Tax Asset after adjusting the balance of deferred tax liability if the enterprise has a legally
enforceable right to set off assets against liabilities representing current tax; and it relates to the same
governing tax laws.
(f) Subsequent to the notification of Ministry of Corporate Affairs dated October 11, 2018 under
Section 467(1) of the Companies Act, 2013,
Trade Payables should be disclosed as follows:-

(A) total outstanding dues of micro enterprises and small enterprises; and
(B) total outstanding dues of creditors other than micro enterprises and small enterprises.”
QNO Sch III-- Multiple Small Cases (MP Ltd) Old Course-(N18E)
808.000 New Course--(S21M, N21M)
The financial statements of Prabhu Ltd. as on March 31, 2020 are to be prepared under Division Il of
Schedule III to the Companies Act, 2013. Comment on the disclosure compliances for Prabhu Ltd. from
the following information in the financial statements which are required to be drawn up in compliance
with Ind AS.
(i) Property, Plant and Equipment include ` 2.50 crore for a boiler-plant under construction.
(ii) Cash and cash equivalents include ` 1.25 crore deposited with a nationalized bank on 31st March,
2020 for 18 months. It is shown under current assets.
(iii) Non-current assets include under caption "Biological assets other than bearer Plants" a sum of 1.50
crore being cost of cultivation for bringing to yield level, the cashew nut trees whose yield period,
according to estimate shall not be less than 10 years.
(i) Disclosure of Boiler Plant under Construction: Boiler plant under construction should be shown under
the heading ‘Capital Work in Progress’ instead of Property Plan and Equipment. Thus, inclusion of value of
boiler plant under construction in Property Plan and Equipment is not in order.
(ii) Disclosure of Cash and Cash Equivalents deposited with Nationalised Bank: Bank deposits with more
than 12 months maturity shall be disclosed under 'Other financial assets'. Therefore, disclosure of deposits
rupees 1.25 crores in a nationalised bank for 18 months as Cash and Cash Equivalents is not in order as per
Division II of Schedule III.
(iii) Disclosure of Cost of Cultivation for bringing to yield level the Cashew nut trees: Cost of 1.5 crore
rupees for Cultivation for bringing to yield level, the cashew nut trees whose yield period is more than one
period will form part of ‘Bearer Plant’. Hence it will not be considered as ‘Biological Assets other than
bearer plant’. Therefore, it should be shown under the heading ‘Property Plant and Equipment’ as Bearer
Plant as per Division II of Schedule III.
QNO Sch III-- Contingent Liability and Dividend Old Course_(M20M)

810.000 New Course--(N18R, M20M)
Comment on the following with reference to Schedule III to the Companies Act, 2013:
(i) A company has disclosed performance guarantee and counter guarantees as Contingent
Liabilities.
(ii) A company has clubbed all other expenses under the head ‘Other Expenses” on the basis of
1 percent of total revenue or Rs.5,000 whichever is higher.
(iii) A company has shown Deferred Tax Liability under Non-Current Liabilities and Deferred tax
assets under Non-Current Asset in balance sheet.
(i) A contingent liability in respect of guarantees arises when a company issues guarantees to another
person on behalf of a third party e.g. when it undertakes to guarantee the loan given to a subsidiary or
to another company or gives a guarantee that another company will perform its contractual
obligations.
However, where a company undertakes to perform its own obligations, and for this purpose issues,
what is called a "guarantee", it does not represent a contingent liability and it is misleading to show
such items as contingent liabilities in the Balance sheet. For various reasons, it is customary for
guarantees to be issued by Bankers e.g. for payment of insurance premia, deferred payments to
foreign suppliers, letters of credit, etc. For this purpose, the company issues a "counter-guarantee" to
its Bankers. Such "counter-guarantee" is not really a guarantee at all, but is an undertaking to perform
what is in any event the obligation of the company, namely, to pay the insurance premia when
demanded or to make deferred payments when due. Hence, such performance guarantees and
counter -guarantees should not be disclosed as contingent liabilities.
(ii) All other expenses not classified under other heads will be classified under "Other Expenses". For this
purpose, any item of expenditure which exceeds one percent of the revenue from operations or Rs.
1,00,000 whichever is higher, needs to be disclosed separately. The given treatment in the scenario is
not in order.
(iii) Deferred Tax Liability should be shown under Non-Current Liabilities. Deferred Tax Asset shall be
shown under Non-Current Asset. But Deferred tax assets and deferred tax liabilities, both, cannot be
shown in balance sheet because only the net balance of Deferred Tax Liability or Asset is to be shown.
Thus, DTA and DTL shown separately in the balance sheet by the company is not correct.

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Part 1 -- SA Introduction

Part 2 -- SA 200 Series

www.auditguru.in PARAM 1.1 | P a g e

QNO Mandatory matters in engagement letter Old Course - (M19R, M19M,N20R)

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Independence--Responsibility of Partner and EQCR in listed Old Course - (M19R,N19M)

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Answer Part I -- Relevant Standards & Laws

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If the auditor withdraws:

QNO Error in Valuation of Inventory Old Course - (N11R, N13R, P17M)

www.auditguru.in PARAM 1.9 | P a g e

➢ Ability to Continue as Auditor- Resulting from fraud or expected fraud – encounters

No Documentary or Other Evidence Old Course - (N13E, N16R, P17M,M20M)

www.auditguru.in PARAM 1.10 | P a g e

Answer Part I -- Relevant Standards & Laws

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(i) Significant delays by management, the unavailability of entity personnel, or an unwillingness by

QNO Communication to Shareholders Vs TCWG Old Course - (N14E, P17M, M17R)

www.auditguru.in PARAM 1.14 | P a g e

1 Work divided. 1 Work not divided.

5 Presentation and disclosure Req of the F.S .

Ensuring that audit report complies with statutes, the app.

➢ Difference of Opinion Among Joint Auditors:

J.A shall Discuss and

4a JA is not bound by views of the majority regarding opinion or

Common audit report In case of disagreement in opinion or any matters to be covered

Audit report by other J.As (Combined) shall make a reference to

4d Such reference shall be made under the heading Other Matter

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➢ Factors affecting retesting on controls: -

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SA 402 / SAE 3402

SA 402 SAE 3402

CFO Finalise & puts

Clerk prepares Jignesh uploads it and

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QNO Sub Service Organisation Old Course – (M15E, P17M)

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External Confirmation (Use of Negative Confirmation Old Course – (M14E, P17M)

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Answer Part I -- Relevant Standards & Laws

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QNO Analytical Procedures (Investigating Inconsistencies) New Course – (N18E)

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