Test Paper 2- Chapter- Co Audit & SA 700

Time: 30 Mins 15 Marks

DESCRIPTIVE ANSWERS

Question 1
Answer:
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.
(5 Marks)
 Question 2
Answer:
QNO Sec 139--Appointment of First Auditor (Managing Director)- Old Course – (N15R, P17M, N17R)
286.000 BHASKAR CNO—CA.120 New Course-- (S17M)
Malta Pvt. Ltd., a newly incorporated company dated 01.07.2017 is engaged in the manufacturing business
of Cotton Shirts. On 30.07.2017, the Managing Director of Malta Pvt. Ltd. himself appointed CA.
Rajnath, his daughter’s husband, as the first auditor of the company.
You are required to –
1. State the provisions of the Companies Act, 2013 relating to appointment of first auditor.
2. Comment on the action of the Managing Director.
Answer Part I -- Relevant Sections & Laws
➢ Section 139(6) of the Companies Act 2013
Part II -- Requirements of Relevant Sections & Laws
➢ As per section 139(6), the first auditor of a company, other than a Government company, shall be
appointed by the Board of Directors within 30 days from the date of registration of the company.
In the case of failure of the Board to appoint the auditor, it shall inform the members of the
company.
The members of the company shall within 90 days at an extraordinary general meeting appoint the
auditor. Appointed auditor shall hold office till the conclusion of the first annual general meeting.
Part III – Case Discussion
➢ In the above case, Malta Pvt. Ltd., a newly incorporated company dated 01.07.2017 is engaged in
the manufacturing business of Cotton Shirts. On 30.07.2017, the Managing Director of Malta Pvt.
Ltd. Himself appointed CA. Rajnath, his daughter’s husband, as the first auditor of the company.
Apparently, there are two issues arising out of the situation given in the question, viz.,
1. first one relates to appointment of first auditor by the Managing Director; and
2. Second pertains to relation of such an auditor with the Managing Director.
Part IV – Conclusion
➢ First Issue- As per the facts given in the case, the appointment of CA Rajnath as first auditor by the
Managing Director of Malta Pvt. Ltd. by himself is in violation of section 139(6) of the Companies
Act, 2013, which authorizes the Board of Directors to appoint the first auditor of the company within
one month of registration of the company. Thus, the appointment of CA Rajnath is not valid.
➢ Second Issue - Under the circumstances, the second issue relating to relationship of auditor with
Managing Director becomes redundant.
(5 Marks)
Question 3
Answer:
QNO Sec 139--Appointment Government Company (IO)- Old Course – (M16E)
285.000 BHASKAR CNO—CA.120 New Course – (S17M)
M/s IO Ltd. is registered with Registrar of Companies on 1st of May 2014. The Company's 27% of paid up
share capital is held by Central Government; 28% by State Government and the remaining 45% by public.
The Board of Directors appointed RMG, Chartered Accountants as statutory auditors for the financial
year 2014-15 by passing a resolution at the Board Meeting held on 25th May, 2014. Comment whether
appointment is valid or not.
OR
The first auditor of M/s Healthy Wealthy Ltd., a Government company, was appointed by the Board of
Directors.
Answer Part I -- Relevant Section & Laws
▪ Section 139(7) of the Companies Act, 2013
▪ Section 2(45) of the Companies Act, 2013
 Part II -- Requirements of Relevant Section & Laws
➢ Section 139(7) of the Companies Act, 2013
According to section 139(7) of the Companies Act, 2013, the first auditor of a government company
shall be appointed by the Comptroller and Auditor-General of India within 60 days from the date of
registration of the company.
➢ Section 2(45) of the Companies Act, 2013
As per section 2(45) of the said Act, 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 company of such a Government
Company.
Part III – Case Discussion
➢ In the given case, 27% of paid-up share capital has been held by Central Government, 28% by State
Government and remaining 45% by Public i.e. total 55% of the paid-up share capital has been held
by Central Government and State Government which is more than 51% as prescribed in the
Companies Act, 2013
Part IV – Conclusion
➢ M/s IO Ltd. is a government company. Therefore, the appointment of RMG, Chartered Accountants
as first auditor by the Board of Directors of M/s IO Ltd. for the financial year 2014-15 is not valid as
the first auditor of a government company can be appointed by Comptroller and Auditor-General of
India.
If the CAG fails to make such appointment within 60 days, the Board of Directors shall appoint within
next 30 days.
(5 Marks)

Question 4
Answer:
QNO Sec 143--Inquiry Personal Reimbursement to Director Old Course – (M07E, P17M, N20E)
327.000 BHASKAR CNO—CA.300
In the audit of ABC Private Limited, auditor came across cases of payments to Directors, whereby,
expenses of a personal nature were reimbursed. As an auditor, how would you deal with the same?
Answer Part I -- Relevant Section & Laws
▪ Section 143(1)(e) of the Companies Act, 2013
Part II -- Requirements of Relevant Section & Laws
➢ All payments to Directors as remuneration or perquisites whether in the case of a public or private
company are required to be authorized both in accordance with the Companies Act and Articles of
Association of the company?
Articles may provide that such remuneration require sanction of the shareholders either by ordinary
or special resolution while in some cases it may require only approval of Directors.
If the terms of appointment of a Director include payment of expenses of a personal nature, then
such expenses can be incurred by the company; otherwise, no such expense can be incurred or
reimbursed by the company.
Part III – Case Discussion
➢ In the audit of ABC Private Limited, auditor came across cases of payments to Directors, whereby,
expenses of a personal nature were reimbursed.
Part IV – Conclusion
➢ In the instant case the auditor has to ensure that the above is complied with, without which, if such
expenses are paid, he has to disclose the fact in his report, as also in the accounts.
 In this regard attention is invited to section 143(1) (e) of the Companies Act, 2013 wherein auditor
has to inquire into whether personal expenses have been charged to revenue.
(5 Marks)

Question 5
Answer:
QNO True & Fair View New Course- (N22M)
111.080 Unique
“What constitutes a ‘true and fair view’ is the matter of an auditor’s judgement in particular circumstances
of a case.” Do you agree? Enlist the requirements you as an auditor will observe to ensure true and fair
view."
Answer Significance of True and Fair: SA 700 “Forming an Opinion and Reporting on Financial Statements”, requires
the auditor to form an opinion on the financial statements based on an evaluation of the conclusions drawn
from the audit evidence obtained; and express clearly that opinion through a written report that also
describes the basis for the opinion. The auditor is required to express his opinion on the financial
statements that it gives a true and fair view in conformity with the accounting principles generally accepted
in India (a) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 20XX; (b)
in the case of the Statement of Profit and Loss, of the profit/ loss for the year ended on that date; and (c)
in the case of the Cash Flow Statement, of the cash flows for the year ended on that date.

In the context of audit of a company, the accounts of a company shall be deemed as not disclosing a true
and fair view, if they do not disclose any matters which are required to be disclosed by virtue of provisions
of Schedule III to that Act, or by virtue of a notification or an order of the Central Government modifying
the disclosure requirements. Therefore, the auditor will have to see that the accounts are drawn up in
conformity with the provisions of Schedule III of the Companies Act, 2013 and whether they contain all the
matters required to be disclosed therein. In case of companies which are governed by special Acts, the
auditor should see whether the disclosure requirements of the governing Act are complied with.

It must be noted that the disclosure requirements laid down by the law are the minimum requirements. If
certain information is vital for presenting a true and fair view, the accounts should disclose it even though
there may not be a specific legal provision to do so. Thus, what constitutes a ‘true and fair’ view is the
matter of an auditor’s judgment in the particular circumstances of a case. In more specific terms, to ensure
true and fair view, an auditor has to see:

(i) that the assets are neither undervalued or overvalued, according to the applicable accounting
principles,
(ii) no material asset is omitted;
(iii) the charge, if any, on assets are disclosed;
(iv) material liabilities should not be omitted;
(v) the statement of profit and loss discloses all the matters required to be disclosed by Part II of
Schedule III
(vi) the balance sheet has been prepared in accordance with Part I of Schedule III;
(vii) accounting policies have been followed consistently; and
(viii) all unusual, exceptional or non-recurring items have been disclosed separately.
(5 Marks)
 Question 6

Qualitative Aspects of Accounting Practices Old Course—(M20R)

QNO
Bhaskar CNO - SA700.160 New Course--(M18M/N18M/M19M/M20R/
700.17
S20M/S21M/M23R)
The auditor evaluated, in respect of T Ltd., whether the financial statements are prepared in accordance
with the requirements of the applicable financial reporting framework.
Auditor’s evaluation included consideration of the qualitative aspects of the entity’s accounting practices,
including indicators of possible bias in management’s judgments.
Advise the qualitative aspects of the entity’s accounting practices.
OR
In considering the qualitative aspects of the entity’s accounting practices, the auditor may become aware
of possible bias in management’s judgments. The auditor may conclude that lack of neutrality together with
uncorrected misstatements causes the financial statements to be materially misstated. Explain and analyse
the indicators of lack of neutrality with examples, wherever required.
Answer The auditor shall evaluate whether the financial statements are prepared, in all material respects, in
accordance with the requirements of the applicable financial reporting framework. This evaluation shall
include consideration of the qualitative aspects of the entity’s accounting practices, including indicators of
possible bias in management’s judgments.
Management makes a number of judgments about the amounts and disclosures in the financial statements.
Qualitative Aspects explained in SA 260 and it includes Management Bias
SA 260 (Revised) contains a discussion of the qualitative aspects of accounting practices in considering the
qualitative aspects of the entity’s accounting practices, the auditor may become aware of possible bias in
management’s judgments. The auditor may conclude that the cumulative effect of a lack of neutrality,
together with the effect of uncorrected misstatements, causes the financial statements as a whole to be
materially misstated.
Indicators of Lack of Neutrality
Indicators of a lack of neutrality that may affect the auditor’s evaluation of whether the financial
statements as a whole are materially misstated include the following:
The selective correction of misstatements brought to management’s attention during the audit.
(E.g., correcting misstatements with the effect of increasing reported earnings, but not)
correcting misstatements that have the effect of decreasing reported earnings).
Possible management bias in the making of accounting estimates.
SA 540 explains Management Bias
SA 540 addresses possible management bias in making accounting estimates. Indicators of possible
management bias do not constitute misstatements for purposes of drawing conclusions on the reasonableness
of individual accounting estimates. They may, however, affect the auditor’s evaluation of whether the financial
statements as a whole are free from material misstatement.
(5 Marks)