CA Ravi Taori

CHAPTER 03 Audit Planning, Strategy & Execution

Test Your Understanding

TYU 1
Question Analysis:
1. Company Profile: The question discusses XWL Limited, a commodity futures trading company based in Surat.
2. Auditor's Role: CA P, based in Delhi, is the auditor of XWL Limited.
3. Audit Methodology: The audit was conducted entirely via email, with no physical visits to the company's office.
4. Working Papers: CA P's working p apers included checklists for test checking the cost of raw material and stores
and spares.
5. Business Understanding: The working papers lacked any evidence of understanding the company's business nature.
Answer Analysis:
1. SA 300: Reference to SA 300, its full name & its applicable in the given scenario.
2. Concept: (CNO-MRI.220) Risk response (Point 4 Final Control Risk Assessment is applicable)
3. Case Discussion: Discuss Point 3,4 & 5.
4. Conclusion: Auditor is not following SA 300 properly. Auditor is not doing effective planning, not understanding
business & its environment, not visiting Co premises even once, not documenting business understanding shows
inappropriate planning. Using Checklist of Raw material, stores etc in a future trading Co is again inappropriate.

TYU 2
Question Analysis:
1. Auditor: CA. Pradyuman.
2.Company: Listed company headquartered in NOIDA.
3. Planning: Made a list of various procedures for the audit.
4. Sampling Decision: Intends to decide the sample size during the execution of planned procedures.
Is the above approach proper?
Answer Analysis:
1. SA 300: Reference to SA 300, its full name & its applicable in the given scenario.
2. Concept: As per SA 300
Audit Plan: Should include the nature, timing, and extent of audit procedures.
Extent of Audit procedure: The extent of audit procedures encompasses decisions about sample sizes for audit procedures.
3. Case Discussion: Discuss Point 3 & 4.
4. Conclusion: Auditor is not following SA 300 properly. Deciding sample sizes during the execution is not proper.
Procedures should include considerations about sample sizes in advance.

TYU 3
Question Analysis:
1. Auditor: CA. Nikita.
2. Audit Entity: A leading society promoting internet awareness among disadvantaged sections. Registered under FCRA,
2010 for foreign contributions.
3. Change in Audit plan: Extensive procedures on verification of foreign contributions to prevent "round-tripping", this
was not there in original plan. Documenting only procedures performed and findings.
4. Planning Documentation: Doesn't see the need to document the planning process.
Does she require a refreshening of her knowledge?
Answer Analysis:
1. SA 300: Reference to SA 300, its full name & its applicable in the given scenario.
2. Concept: (CNO-APSE.240) Documenting the Audit Plan
3. Case Discussion: Discuss Point 4.
4. Conclusion: Not documenting the audit plan will lead to non-compliance with SA 300 and affect audit quality. Changes
to the audit plan, especially those related to foreign contributions verification, should be documented with reasons.

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TYU 4
Question Analysis:
1.Auditor: CA. Sourabh. Engagement partner conducting statutory audit for BBI Bank under SBT & Associates.
2.Bank's Structure: 1034 branches nationwide, audited by branch auditors. One large branch had errors in NPA
classification, not reported by the branch auditor.
3. Statutory Central Auditor’s Review: Errors weren't detected during the overall review of the bank's financial statements.
Soft copies of internal inspection and concurrent audit reports for the branch were reviewed but showed no irregularities.
Would the statutory auditor be liable? What precautions should be taken when expressing an opinion in such situations?
Answer Analysis:
1. SA 600: Reference to SA 600, its full name & its applicable in the given scenario.
2. Concept: CNO-SA600.120 Division of Responsibility
3. Case Discussion: Discuss Point 2 & 3.
4. Conclusion: Nothing indicated unreliability of the branch auditor's work to the statutory auditor. The statutory auditor
wouldn't be responsible for the branch auditor's work. The report should specify that 1034 branches were audited by
branch auditors.

TYU 5
Question Analysis:
1. Auditor: CA. Keshavraj.
2. Audit Entity: Listed company “Live with Nature Limited”. Producing environment-friendly niche products for new-born
babies.
3. Internal Audit: A functional internal audit department exists. On perusal of internal audit reports, he finds that not
only verification of inventories was attended by internal auditor at regular intervals during the year, workings were also
made in respect of inventory valuation as at year end.
4. Inventory Counting: Auditor attended year-end inventory count with no adverse findings.
5. Analysis of Inventory Reports: Inventories held for a long period before sale, not addressed in internal audit reports.
Should CA. Keshavraj rely on the internal auditor's inventory valuation work?
Answer Analysis:
1. SA 610: Reference to SA 610, its full name & its applicable in the given scenario.
2. Concept: CNO-SA610.100 Step 2: - Determining the Nature and Extent of work of the Internal audit function that can
be used. (Which work Internal Auditor Can be Used?)
3. Case Discussion: Discuss Point 5.
4. Conclusion: Risk of inventory obsolescence due to changing customer preferences for niche baby products. This carries
a high risk of material misstatement and requires more judgment from the statutory auditor. The statutory auditor should
perform direct procedures in line with SA 610. The statutory auditor should directly compare net realizable value with
costs, verify provisions, and recompute provisions for obsolete stocks.

Illustration

Illustration 1
Question Analysis:
1. Chartered Accountant (CA): CA. Amboj, practicing chartered accountant.
2. Role: Appointed as an internal auditor of Textile Ltd. Conducted physical verification of inventory at year-end. Handed
over to CA. Kishore, the statutory auditor.
3.Query: Can CA. Kishore rely on the report?
Answer Analysis:
1. SA 610: Reference to SA 610, its full name & its applicable in the given scenario.
2. Concept: CNO-SA610.080 Evaluating whether work of the internal audit function can be used for purposes of the audit
3. Case Discussion: Discuss Point 2.
4. Conclusion: Consider the above factors while reviewing the physical verification report. Ascertain scope, coverage, and
method of verification. Test check items, observe procedures performed by internal auditors. If satisfied with verification,

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can rely on the report. If verification is not in order, decide otherwise. The final responsibility to express opinion on the
financial statement remains with the statutory auditor.

Illustration 2
Question Analysis:
1. Auditor: Ram.
2. Requirement: Reports from experts for audit evidence.
3. Query: Types of reports/opinions obtainable and extent of reliance.
Answer Analysis:
1. SA 620: Reference to SA 620, its full name & its applicable in the given scenario.
2. Concept: (CNO-SA620.040) The Auditor’s Responsibility & Objective for The Audit Opinion (Areas of Expertise)
(CNO-SA620.140) Step 5: - Evaluating the Adequacy of The Auditor’s Expert’s Work (Just Include Topic Headings Given)
3. Case Discussion: Discuss Point 2.
4. Conclusion: Above are the areas where experts reports can be useful. Follow above steps before relying on report.

Theoretical Questions

Theoretical Que 1
Question Analysis:
1. Audit Entity: Z Ltd.
2. Observation: Material financial statement assertions based on management's estimates.
3. Auditor's Challenge: How to minimize the risk of material misstatements due to these estimates?
Answer Analysis:
1. SA 540: Reference to SA 540, its full name & its applicable in the given scenario.
2. Concept: CNO-SA540.120 Step 1: - Risk assessment procedures and related activities for accounting estimates & How
management makes the accounting estimates (Don’t include details of identification process)
3. Case Discussion: Discuss Point 2.
4. Conclusion: Auditor can follow above Risk assessment procedures so that he gets sufficient understanding to identify &
assess RMM. This will help auditor in minimising risk.

Theoretical Que 2
Question Analysis:
1. Company: KRP Ltd. Joint auditors - Mr. X, Mr. Y, and Mr. Z.
Scenario:
2. Appointment: All three were appointed at the annual general meeting for the financial year 2022-23.
3. Valuation Issue: For the company's gratuity scheme valuation, each auditor wanted to consult their known Actuaries.
Major differences found in the actuarial reports. Mr. X agreed with Mr. Y's actuary report, but Mr. Z did not.
4. Contention: Mr. X believes Mr. Y's actuary report should be considered due to majority agreement.
5. Faulty Report: What is the responsibility of the auditors if Mr. Y's actuary report is later found to be faulty?
Answer Analysis:
1. SA 620 & SA 299: Reference to SA 620 & SA 299, its full name & its applicable in the given scenario.
2. Concept:
(CNO-SA620.140) Step 5: - Evaluating the Adequacy of The Auditor’s Expert’s Work (Just Include Topic Headings Given)
(CNO-SA299.120) Audit Conclusion and Reporting & (CNO-SA299.100) Separate Responsibilities (Include Relevant
concepts in 1-2 lines)
3. Case Discussion: Discuss Point 3,4 & 5.
4. Conclusion: Joint Auditors should evaluate work of expert as per SA 620. They can give separate reports, they are
responsible for work they have done as per SA 299.
Mr. X & Mr. Y: Both are responsible for gross negligence for using the faulty report without adequate examination.
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Mr. Z: Not liable due to his separate opinion.

Theoretical Que 3
Question Analysis:
1. Auditor: A & Co. Entity: Great Airways Ltd.
2. Query: As the audit partner, what factors should be considered when developing the overall audit plan?
Answer Analysis:
1.SA 300: Reference to SA 300, its full name & its applicable in the given scenario.
2.Concept: CNO-APSE.180 Overall Audit Strategy
3.Case Discussion: Discuss Point 2.
4.Conclusion: Auditor should draft overall Audit strategy for above points.
Note: Overall audit plan & Overall Audit strategy both are same. Overall Audit strategy is latest as per SA 300 &
regularly asked in exams. Students are advised to focus on overall audit strategy & give answer as per that.

Theoretical Que 4
Question Analysis:
1. Role: Auditor of a garment manufacturing company.
2. Tenure: Last five years.
3. Observation: The company has added a new venture of online shopping during the current year.
4. Query: What factors should be considered when formulating the audit strategy for the company?
Answer Analysis:
1. SA 300: Reference to SA 300, its full name & its applicable in the given scenario.
2. Concept: CNO-APSE.180 Overall Audit Strategy
Specific Factors for Online Shopping:
Due to the new online shopping venture, the auditor should understand the information system and related business
processes. This includes:
1A. Understand significant class of transactions: Understand the classes of transactions significant to the financial
statements.
1B. Understand business & accounting Procedures: Grasp the procedures, both IT and manual, for initiating, recording,
processing, correcting, transferring to the general ledger, and reporting transactions.
1C. Understand specific accounts & Accounting Records: Understand the related accounting records and specific
accounts used for transactions, including corrections and ledger transfers.
2. Understand system to capture Events & conditions: Determine how the system captures events and conditions
significant to the financial statements other than transactions.
3. Understand Journal Entry Controls: Understand controls around journal entries, especially non-standard entries for
non-recurring or unusual transactions.
3. Case Discussion: Discuss Point 3 & 4.
4. Conclusion: Auditor should draft overall Audit strategy as per above points.

Theoretical Que 5
Question Analysis:
1. Company: FMP Ltd, a listed company.
Scenario:
2. Engagement Partner (EP): Completed reviews and ensured compliance with independence requirements. Believes
independence assessment is solely his responsibility.
3. Engagement Quality Control Reviewer (EQCR): Reviewed engagement files but not the independence assessment
documentation. Objects to EP's view and refuses to sign off.
4. Query: What is the correct approach as per SA 220?
Answer Analysis:
1. SA 220: Reference to SA 220, its full name & its applicable in the given scenario.
2. Concept:
(CNO-SA 220.080) Relevant Ethical Requirements (They have further elaborated these points as given below)

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(CNO-SA 220.160) Engagement Quality Control Review (Take only that point where in case of listed company
independence should be evaluated by reviewer.)

Engagement Partner's Responsibility (SA 220):

Independence Compliance: EP should conclude on compliance with independence requirements for the audit
engagement. This involves:
Obtain relevant data: Obtain relevant data from the firm and network firms to identify and evaluate threats to
independence.
Evaluate Breaches: Evaluate any identified breaches of the firm's independence policies to determine if they pose a threat
to the audit engagement.
Take Action: Take appropriate action to eliminate or reduce threats. This could involve applying safeguards, or even
withdrawing from the audit engagement if necessary. Any inability to resolve should be reported to the firm.

3. Case Discussion: Discuss Point 2 & 3.

4. Conclusion: Both have their respective responsibilities. The EP's belief is incorrect. The independence assessment
documentation should also be reviewed by the EQCR.

Theoretical Que 6
Question Analysis:
Company Profile:
AKJ Ltd. Small-sized, 30 years old. Manufacturing of pipes. Plant in Dehradun, corporate office in Delhi.
Scenario:
Auditor Appointment: Recently appointed a new firm of Chartered Accountants as statutory auditors.
Engagement Letter: Auditors want an engagement letter, but the management believes it's not required since the audit is
mandated by law.
Auditor's Stance: Shared a format of the engagement letter for management's reference.
Management's Query: Wants to understand, as per SA 210, what should be included in the agreed audit engagement letter.
Answer Analysis:
1. SA 210: Reference to SA 210, its full name & its applicable in the given scenario.
2. Concept:
Mandatory & Written Form: - Mandatory to agree terms of audit engagement with TCWG or Mgt. It shall be in
written form preferably before commencing work
Mandatory Clauses
• Objective & scope of audit (1 Point)
• Mgt Related (2 point)
o Responsibilities of Management
o Identification of applicable FRF
• Auditor Related (2 point)
o Responsibilities of Auditor
o Reference to expected form & content of audit report.
3. Case Discussion: Discuss scenario.
4. Conclusion: EL is mandatory, It should be in writing. It should cover above points.

Theoretical Que 7
Question Analysis:
1. Company Profile: Private company. Business: Real estate.
Scenario:
2. Auditor's Request: Information to review the outcome of accounting estimates from prior period financial statements
and their re-estimation for the current period.
3. Management's Response: Refused the request, arguing that the auditor shouldn't review prior period information.
Answer Analysis:
1. SA 540: Reference to SA 540, its full name & its applicable in the given scenario.
2. Concept:

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➢ Mandatory to review outcome of estimates and re-estimation.

➢ Benefits (BEER): -
• Whether Mgt is biased
• Effectiveness of estimation process
• Degree of estimation uncertainty involved.
• Audit evidence for re-estimation
Not with objective to find out misstatements in prior period.
3. Case Discussion: Discuss Point 2 & 3.
4. Conclusion: Management’s point of view is inappropriate.

Theoretical Que 8
Question Analysis:
1. Company Profile: X Ltd. Net Worth: INR 1300 crores.
2. Ind AS: Ind AS became applicable due to net worth.
3. Derivative Contracts: Options, forward contracts, interest rate swaps, etc. Fair valued through an external third party.
4. Audit Scenario: Involved an auditor’s expert for auditing the valuation of derivatives. Auditor and auditor’s expert were
new to each other but developed a good bond.
5. No Formal Agreement: None between the auditor and the auditor’s expert.
Answer Analysis:
1. SA 620: Reference to SA 620, its full name & its applicable in the given scenario.
2. Concept: The auditor shall agree, in writing all important matters with the auditor's expert
Factors which may lead to more detailed agreement as compared to normally required
(Shortcut - Nuclear DEAL is Complex)
N- Not previously used work of this expert
D- Different roles and responsibility as compared to normal.
E- Extent of expert's work is more and its significant.
A- Expert have Access to sensitive and confidential information.
L- Multi-jurisdictional Legal and regulatory requirement.
C- Work is highly Complex.
3. Case Discussion: Discuss Point 4 & 5.
4. Conclusion: Auditor should have signed a formal agreement with the auditor’s expert due to the complexity and new
relationship.

Theoretical Que 9
Question Analysis:
Entity Profile: Cineplex. Delhi. Business: Movie theatre complex.
Revenue Streams:
Ticket Sales: Over the counter and online booking.
Ancillary Businesses: Cafe, shops, pubs, etc.
Advertisements: Hoardings, banners, slides, short films, both within and outside the premises.
Parking: Facility in the basement.
Audit Requirement:
Auditor: Your firm.
Task: Draw an audit programme for revenue and expenditure.
Answer Analysis:
Preliminary Review:
Documents: Review Memorandum of Association and Articles of Association.
Business Legitimacy: Ensure the object clause permits the entity for this business.
Ticket Sales:
Control System: Verify the system ensuring accurate accounting of ticket sales.
Online Booking: Check the system for online bookings and money realization.
Reconciliation: Ensure reconciliation of collections with available seats.
Ancillary Businesses:

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Internal Control: Verify the control system for income from cafe, shops, pubs, etc.
Advertisements:
Control System: Verify control for income from advertisements like hoardings, banners, etc.
Parking Revenue:
Collection System: Verify the collection system for vehicle parking.
Payments:
Distributors: Verify the payment system to distributors and adjustment against advances.
Employee Compensation: Check payment of salaries and statutory compliance.
Maintenance: Verify payments for building maintenance.
Insurance: Verify insurance premium payments and coverage.

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