ADVANCED AUDITING AND PROFESSIONAL ETHICS

FULL SYLLABUS TEST

Question No. 1 is compulsory.

Attempt any five questions from the Rest.

Q-1 MULTIPLE CHOICE QUESTIONS

MCQ’s carrying 2 marks each

1. CA. Laxman was appointed as a statutory auditor of Ram and Raavan Ltd. The company has
provided the auditor photocopies of books of accounts and evidence for audit as the original
books of accounts and evidence are ceased by income tax department, in such a case, CA.
Laxman should give
a. Modified report
b. Disclaimer of opinion
c. Withdraw from engagement if permissible
d. Either a or b

2. The financial statement JKL Ltd. are not ready for approval by the shareholders in AGM as
auditor was unable to find the Trial Balance difference of Rs.30,00,000. The management of JKL
Ltd Is of the opinion that the auditor shall be held responsible for all the delay Can the
management do so?
a. Yes, as the responsibility of audit is of the auditor and hence is liable for the delay
b. No, The shareholder should approve the untallied financial statement and later on amend it

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c. No, the responsibility for preparation and presentation of Financial statement is that of
management and the audit of financial statements does not relieve management of its
responsibilities
d. Yes, but the responsibility lies between both management and the auditor.

3. Comment on the following situation – CA. Rahul was engaged by LMN Ltd. for auditing their
accounts. He sent his letter of engagement to the Board of Directors, which was accepted by
the company. In the course of audit of the company, the auditor was unable to obtain
appropriate sufficient audit evidence regarding payables. The client requested for a change in
the terms of engagement.
a. The auditor should not agree to a change in terms where there is no reasonable judgment for
doing so.
b. The request of the client for a change in the terms of engagement is just to avoid qualified /
adverse opinion.
c. It is not a justified reason for change in the terms of engagement.
d. All of the above.

4 The Balance sheet of Tube light and Bulbs Ltd. reflected a cash balance of Rs.10crores. The
company has taken a loan of Rs.3crores from the bank despite of the huge cash balance with
the company. As an auditor what conclusion can you draw looking at the situation?
(a) Report this matter to the Central Government u/s 143(12) as there is a possibility of fraud
(b) Obtain sufficient and appropriate audit evidence of existence of fraud
(c) Report the matter under CARO, 2016 under clause 3(x) u/s 143(11) without obtaining audit
evidence
(d) All of the above

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5. The article of Mr. Raavan a Chartered accountant detected an error of Rs.30 per interest
payment made by Ram Ltd., which recurred a number of times. The general manager of Ram
ltd. advised him not to pass any adjustment entry as individual errors where of small amount.
The company had 2, 00,000 deposit accounts and interest were paid quarterly. What step can
be considered by auditor?
a) Adjust the amount as aggregate of misstatement shall be taken
b) Agree with the general manager as individually the amount is very small
c) Give an adverse report
d) Withdraw the audit if possible
(2×5=10 marks)

MCQ’s carrying 1 mark each

6.If management refuses to correct some or all the material misstatement communicated by
the auditor, the auditor shall ________ for not making the corrections and shall take that
understanding into account when evaluating whether financial statement as a whole are free
from material misstatement.

a. Modify the report

b. Withdraw the assignment if permissible
c. Take legal advice
d. Obtain an understanding of management’s reasons

7. As per SA 505, if the management refuses to allow the auditor to send external confirmation,
the auditor shall
I) Identify the reasonableness of the reasons given by management

II) Ask reasons to the management

III) Perform alternate audit procedures to obtain sufficient and appropriate audit evidence

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IV) Identify the implications of the management refusal on audit risk assessment
Arrange the above statements in correct order
a) I, III,IV,II

b) I,II,III,IV
c) II,I,IV,III
d) None of the above

8. A trader is worried that in spite of substantial increase in sales compared to earlier year,
there is a considerable fall in gross profit after satisfying himself that sales and expenses are
correctly recorded and that the valuation of inventories in on consistent basis. He wants to
ensure that purchases have been truthfully recorded. What is the procedure to be followed by
you as an auditor?
a) Apply analytical procedures
b) Apply test of control
c) Apply detailed substantive procedures
d) All of the above

9. From a sample of shipping reports selected from the shipping log for the period April 1 to
September 30, starting with report number 12345 and selecting every 125th report. Which type
of sampling is this?
a) Random sampling
b) Systematic sampling
c) Block sampling
d) Haphazard selection

10. The auditor shall obtain ______ from the management that they have appropriately
accounted for related party transaction and made appropriate disclosure of such relationship
and transaction in accordance with the requirements of the framework.

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a) Absolute assurance
b) Reasonable assurance
c) Written representation
d) Audit evidence

11. ABC company Ltd. Files a law suit against Unlucky Company for Rs.5crores. The attorney of
Unlucky company Ltd. feels that the suit is without merit, so Unlucky Ltd. Merely discloses the
existence of the law suit in the notes accompanying its financial statements. As an auditor of
Unlucky Ltd. How will you deal with the situation?
a) Auditor shall evaluate the source on which basis of opinion was formed
b) Ask the management to make provision as per AS 29
c) Disclaim the opinion
d) Both a and b

12. The financial statements of the components of ABC Company Limited, viz., PQR Company
Limited and XYZ Company Pvt Limited, whose financial information/ financial statements have
been included in the financial statements of ABC Company have been audited by another
auditor/ auditors. Which Standard on Auditing shall govern this scenario?
a) SA 600

b) SA 299

c) SA 610

d) SA 620

13. The auditor in the interest of the users while explaining the nature of the reservation, can
describe the _______, in the audit report by obtaining prior consent of the expert.
a) Work of the expert with his name
b) Assumption used by the expert

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c) Qualification of the expert
d) Audit documentation

14 The purpose of SRE 2400 is to develop and offer guidance on the professional
responsibilities of a practitioner’s when he/she is not being the auditor of the entity, assumes
_______ to reviewing the financial statement.
a) Responsibility
b) Duty
c) Engagement
d) Accounting

15 Before agreeing to accept or continue an engagement, the service auditor should,

_________
a) Determine the capabilities and competence of service auditor to perform the engagement
b) The scope of engagement and the service organization’s description of its system will be
useful to the user entities and their auditor
c) Criteria used to prepare the description of service organization’s description of its system will
be suitable and available to user entities and their auditor
d) All of the above

16. Rahul purchases goods of Rs 7,00,000 on credit. Subsequently he gets appointed as an

auditor of ABC Ltd . However, before getting appointed as auditor he pays off all his dues.
Which of the following statement is correct?
a) Rahul is disqualified to be appointed as auditor in the company.

b) Rahul is disqualified to be appointed as auditor in the company, subsidiary, holding, associate

and subsidiary of holding.

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c) Rahul is disqualified to be appointed as auditor in the company, subsidiary, holding, associate
and subsidiary of holding and associate.

d) He can be appointed as the auditor in all of them.

17 SN pvt ltd is a manufacturer of jewellery. A senior employee of the company informed you
that company does not disclose the purity of gold used on the jewellery. What reporting
requirement as per CARO 2016.
a) Clause x

b) Clause xii

c) Clause iii

d) Clause xv

18 Mr. Aquib was found guilty of professional misconduct under clause 2 part 2 of II schedule.
To which which authority his case will be referred as per sec 21 of the CA Act, 1949.
a) Board of Discipline.

b) Disciplinary Committee.

c) Council of ICAI.

d) Regional Council of the region.

19 The purpose of _________ is to assist the purchaser or the investor in finding out all the
reasonably can about the business he is acquiring or investing in prior to completion of the
transaction including its critical success factors as well as its strength and weaknesses.
a) Investigation
b) Due Diligence
c) Audit
d) Assessment

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20 Statutory auditors of entities having net worth of over 5 crore and annual turnover of more
than 50 crore during period under review. Peer review is required to be conducted
a) Once in 3 years
b) Once in 4 years
c) Once in 5 years
d) Not applicable

21 For matters to be included in Audit Report in case of Non Banking Financial Companies not
accepting or holding Public Deposits, which of the matters is not included:
a) Whether half yearly return on Prudential Norms as per RBI direction furnished
b) Whether Capital Adequacy Ratio is disclosed in return submitted to Bank
c) Whether NBFC Prudential Norms are being complied on Income recognition and asset
classification
d) Whether Company has accepted any public deposits during relevant year

22. Compliance Audit is the independent assessment of whether subject matter is in

compliance with the applicable authorities identified in criteria. It is concerned with
a) Propriety and Financial Audit
b) Financial and Regularity Audit
c) Regularity and Propriety Audit
d) Performance and Comprehensive Audit

23 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, the audit report has to be given in Form No.
_____

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a) 3CA
b) 3CB
c) 3CD
d) Not required to report

24. Non performing investment (NPI), similar to a non-performing advance (NPA), is one
where- Interest/ installment (including maturity proceeds) is due and remains unpaid for more
than _____ days.
a) 45
b) 90
c) 60
d) 30

25. In CIS environment, the risk of Material financial statement assertions being erroneously
stated could not arise from the deficiencies in which of the following?
a) Physical CIS security
b) System Software Support
c) Program Development and Maintenance
d) Processing and Storage of data

(1×20=20 marks)

Q-2 (a) 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. Comment with reference to the Chartered Accountant Act, 1949.

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 (4 marks)

(b) Cole Limited is engage in trading of building materials. Major products are cement, marble
and timber

Total sales for year ended December 31, 20×8 amounted to Rs. 12 million, around 5,500 sales
invoices were issued during year

Your risk assessment procedures reflect that the design of controls is appropriate. However, the
management has informed you that some unrecorded cement sales are suspected

Discuss matters that would you consider in applying analytical procedures as substantive tests,

to detect material misstatement in sales revenues.

(4 marks)

(c) A CA firm M/s GST & Associates, has sent a letter to the Goods and Service Tax Council
stating that the firm has 2 partners who specialize in the law of Goods and Service Tax and
asked the said Council to include their name in the panel, whenever formed, for providing
advisory and audit services for Goods and Service Tax. Comment with reference to the
Chartered Accountants Act, 1949.

(4 marks)

(d) Why obtaining an understanding of internal controls and evaluating the design of controls
and determining whether these have been implemented, is not sufficient to serve as testing
operating effectiveness of controls

(2 marks)

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Q-3 (a) As an auditor of DEF Ltd., you notice certain differences in the figures between the
books of account and the 'Offer document' for the proposed issue of securities. The company
explains that the same is due to certain adjustments as per the SEBI (Disclosure and Investor
Protection) Guidelines. What are such disclosures and adjustments to be incorporated in the
financial statements included in the 'Offer document'?

(6 marks)

(b) You are the Manager on the audit of Gold Power Limited (GPL), a gas transmission and
distribution company, for the year ending 31 October 2011. On the company’s request, your
firm has agreed to complete the audit by 20 November 2011.

In order to meet the audit deadline, you are considering various measures which include
sending requests for negative confirmations related to balances due on 31 August 2011. On 31
August 2011, total debtors aggregated Rs. 45 million. 50% of the amount is due from 15
major debtors, whereas the total number of debtors is 2,450.Moreover, GPL’s management is
not allowing you to send a request for confirmation of balance to SSO Ltd., which is among one
of the 15 major debtors, because of certain ongoing legal disputes. Your previous experience
with the client and the results of initial risk assessment procedures suggest that the risk of
material misstatement is low.

Required

(a) Discuss whether it would be appropriate to use the negative confirmations procedure in the
above situation.
(b) What audit procedures should be performed at the year end, if requests for confirmation of
balances are sent on 31 August 2011?
(c) List the procedures that should be adopted due to management’s refusal to send a request
for confirmation of balance to SSO Ltd.

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 (6 marks)

(c) 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 31 st March, 2017, how would
you deal with the above?

(2 marks)

Q-4 (a) As an auditor, how would you deal with the following: The statutory auditor of the
Holding Company demands for the working papers of the auditors of the subsidiary company,
of which you are the auditor

(3marks)

(b) Mr. Q is the proprietor of a very profitable business dealing in specialty 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

(6 marks)

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(c) The auditor of XY & Co. Ltd. has intimated the management that certain misstatements
identified during the course of audit need to be corrected. As an auditor, discuss the impact of
such misstatements in case the management does not carry out the said corrections.

(5 marks)

Q-5 (a) 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.

(4 Marks)

(b) In order to check and prevent the diversion of funds in case of non-corporate borrowers,
the lending bank sometimes obtains special report from the auditor on quarterly basis.
Describe the details to be given in special report in respect of –

(i) Operating data

(ii)Inventory

(iii)Information in respect of other items

(6 Marks)

(c) The Central Government is of the view that there are certain interested members and
companies who are financially interested in the success or failure of the company or who have
been able to control or to materially influence the policy of the company.

Hence the Central Government wants to investigate the ownership of the company.

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Describe the scope and extent of investigation by an Investigator/ Chartered Accountant on
behalf of Central Government under Companies Act, 2013.

(4 Marks)

Q-6 (a) A Chartered Accountant is liable for disciplinary action under section 21 of CA Act,
1949, if he is found guilty of any professional or other misconduct.

Explain the meaning of other misconduct with the help of two illustrative examples.

(4 marks)

(b) You are the manager in charge on the audit financial statements of Gora Private Limited.
During the course of audit you noticed certain conditions which created significant doubts
about the validity of the going concern assumptions.

You have discussed the issue with the client which further revealed that the management has
developed certain plans to cope with the situation but on the basis of your assessment of their
plans, you concluded that the going concern assumption is no more appropriate.

Required
(a) Advise the client as to what should be done in the circumstances.

(b) What procedures would you perform if the management to your proposals?

(c) If the management does not agree, draft appropriate modifications for inclusion in the audit
report. (You may assume necessary details)

(4 marks)

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(c) Mr. Z accepted the statutory audit of a sick unit-NCT Limited for the year ending 31-3-
2015. During course of audit it was noticed by the statutory auditor that company’s net worth
was negative for year ended 31-3-2014 and there was also a liability of tax audit fees of Rs
35000 in favour of the previous auditor. Comment

(2 marks)

(d) What are the fundamental principles as per code of ethics of ICAI? What are the threats
involved while complying with the fundamental principles?

(4 marks)

Q-7 (a) An auditor observed a fraud committed by an employee of the company. State the
manner and timing of reporting of the fraud by the auditor.

(4 Marks)

(b) CA Adroit was indebted to in fructuous (P) Limited for a sum of Rs 6, 00,000 as on April, 1
2015. However, CA Adroit having come to know that he might be appointed as auditor of
the company, he squared up the amount on July 10, 2015. Later on, he was appointed as
auditor of the company for the year ended March 31, 2016 at the Annual General Meeting
held on July 16, 2015. Subsequently, one of the shareholders complains that the
appointment of CA adroit as an auditor is invalid because he incurred disqualification under
section 141 of the Companies Act, 2013. Comment

(4 Marks)

(c) The auditor of Mould Limited made an adverse statement in his certificate as the Audit
Committee of the company did not meet four times a year. Discuss few circumstances which

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require an adverse or qualified statement in the auditor’s certificate in respect of
compliance of the requirements of Corporate Government.

(4 Marks)

(d) Your audit firm has been appointed to conduct a full scope of the financial statements
covering a period of three months of smith Audit Limited. smith Limited needs the audit report
for obtaining a bank loan. While verifying certain account heads you identify certain problems
for which you are not provided satisfactory replies by the client. At the same time smith limited
approaches you to change the scope of the assignment from a full scope audit to a review
assignment. They give you the reason that they have misunderstood the scope of
assignment earlier. What course of action would you adopt in this situation?

(2 marks)

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