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INDEX

CHAPTER

01 NATURE OBJECTIVE AND SCOPE OF AUDIT 01

CHAPTER

02 AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME 13

CHAPTER

03 AUDIT DOCUMENTATION AND AUDIT EVIDENCE 17

CHAPTER

04 RISK ASSESSMENT AND INTERNAL CONTROL 30

CHAPTER

05 FRAUD AND RESPONSIBILITIES OF AUDITOR IN THIS REGARD 38

CHAPTER

06 AUDIT IN AUTOMATED ENVIRONMENT 43

CHAPTER

07 AUDIT DOCUMENTATION AND AUDIT EVIDENCE 46

CHAPTER

08 ANALYTICAL PROCEDURES 50

CHAPTER

09 AUDIT OF ITEMS OF FINANCIAL STATEMENTS 52

CHAPTER

10 COMPANY AUDIT 60

CHAPTER

11 AUDIT REPORT 79

CHAPTER

12 AUDIT OF BANKS 86

91
CHAPTER
AUDIT OF DIFFERENT TYPES OF ENTITIES
13

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 01. NATURE, OBJECTIVE AND SCOPE OF AUDIT

1. Discuss the types of audits required under law.

Ans: Statutory Audit; Voluntary audit

2. What is the importance of having the accounts audited by independent professional auditors?
OR
Advantages of independent audit.
OR
The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may
be easy to understand. Explain stating the advantages of independent audit.
OR
Having accounts audited by independent auditor, among other advantages, acts as a moral check on the
employees from committing fraud. Explain stating the advantages of independent audit
OR
RAG is proprietorship firm engaged in the manufacturing of textile and handloom products. It sells its
finished products both in the domestic as well as in the international market. The company is making
total turnover of Rs. 30 crores. It has also availed cash credit limit of Rs. 5 crores from Canara Bank. In
the year 2017-18, proprietor of the firm is worried about the financial position of the company and is
under the impression that since he is out of India, therefore firm might run into losses. He approaches a
CA about advantages of getting his accounts audited throughout the year so that he may not suffer due
to accounting weaknesses. Advise regarding advantages of getting accounts audited. (MAY 19 RTP)

Ans::
 It acts as a moral check on the employees from committing defalcations or embezzlement.
 audit reviews the existence and operations of various controls in the organizations and reports
weaknesses, inadequacies, etc., in them.
 can also help in the detection of wastages and losses
 safeguards the financial interest of persons who are not associated with the management of the entity
 Audit ascertains whether the necessary books of account and allied records have been properly kept
 Government may require audited and certified statement
 helpful in settling liability for taxes, negotiating loans and for determining the purchase consideration
for a business
 useful for settling trade disputes for higher wages or bonus as well as claims in respect of damage
suffered by property, by fi re or some other calamity.
 Audited accounts are of great help in the settlement of accounts at the time of admission or death of
partner.

3. "The person conducting audit should take care to ensure that financial statements would not mislead
anybody. Explain stating clearly the meaning of Auditing.”
OR
Explain clearly meaning of Auditing. How would you as an auditor perform the audit.
OR
“An audit is independent examination of financial information of any entity, whether profit oriented or
not, and irrespective of its size or legal form, when such an examination is conducted with a view to
expressing an opinion thereon.” Explain stating clearly how the person conducting this task should take
care to ensure that financial statements would not mislead anybody.

Page No. 1
 Ans: The person conducting this task should take care to ensure that financial statements would not mislead
anybody. This he can do honestly by satisfying himself that:
 none of the entries in the books of account has been omitted in the process of compilation and nothing
which is not in the books of account has found place in the statements;
 the accounts have been drawn up with reference to entries in the books of account
 ; the entries in the books of account are adequately supported by sufficient and appropriate evidence;
 statement amounts are properly classified, described and disclosed in conformity with accounting
standards;
 the information conveyed by the statements is clear and unambiguous
 the statement of accounts presents a true and fair picture of the operational results and of the assets
and liabilities.

4. "Statements" and "Guidance Notes" of ICAI- whether mandatory or recommendatory? Discuss

Ans:. Statement – Mandatory | Guidance Notes – Recommendatory

5. The objective of the IAASB is to serve the public interest by setting high quality auditing standards and
by facilitating the convergence of international and national standards, thereby enhancing the quality
and uniformity of practice throughout the world and strengthening public confidence in the global
auditing and assurance profession. Advise how this objective would be accomplished

Ans:. Establishing high quality auditing standards and guidance for financial statement audits; other types
of assurance services on both financial and non-financial matters; other related services; scope of services
addressed by the IAASB; advancing public understanding.

6. Standards collectively known as the Engagements Standards issued by AASB under the authority of the
council of ICAI – Discuss. OR State the Standards issued by AASB which are collectively known as
engagement standards

Ans: SA, SRE, SAE, SRS

7. Auditor is expected to be familiar with the overall economic environment in which his client is operating.
Discuss. (NOV 16 RTP)

Ans: From the auditing view point, the auditors are more concerned with Micro economics rather than with the
Macro economics.
The knowledge of Macroeconomics should include the nature of economic force that affect the firm,
relationship of price, productivity and the role of Government and Government regulations.
Auditor is expected to be familiar with the overall economic environment in which his client is operating.

8. The relationship between auditing and law is very close one. (NOV 19 MTP)

Ans: Validity, Business Laws, Tax Laws.

9. Discipline of statistics and mathematics has come quite close to auditing Explain. (MAY 16 RTP)

Ans: With the passage of time, test check procedures in auditing have become part of generally accepted
auditing procedures.
With the emergence of test check procedure, discipline of statistics has come quite close to auditing as the
auditor is also expected to have the knowledge of statistical sampling so as to arrive at meaningful conclusions.

Page No. 2
 The knowledge of mathematcs is also required on the part of auditor particularly at the time of verification of
inventories

10. SWM is proprietorship firm engaged in the manufacturing of different kind of yarns. It sells its finished
products both in the domestic as well as in the international market. The company is making total
turnover of Rs. 30 crores. It has also availed cash credit limit of Rs.. 3 crores from Dena Bank. In the year
2018-19. Proprietor of the firm is worried about the financial position of the company and is under the
impression that since he is out of India, therefore firm might not run well. He approaches an Internal
Auditor about as to what would be covered in Audit. Advise regarding principal aspects (any four) to be
covered in getting accounts audited. (MTP 19 )

Ans: Audit Planning, Internal Control evaluation, Examination of books of accounts, Vouching, Compliance
Verification, Asset / Liab. Verification , Overall Tests and Analytical Reviews, Financial Statements Scrutiny.

11. The discipline of behavioural science is closely linked with the subject of auditing. Discuss. (MAY 19 MTP)

Ans: required to interact with a lot of people in the organization, deal with human beings rather than financial
figures.
Basic elements in designing the internal control system is personnel
The knowledge of human behaviour is indeed very essential for an auditor so as to effectively discharge his
duties.

12. Briefly explain the self revealing errors with the help of some illustration.

Ans: : The existence of these errors becomes apparent during the course of accounts preparation

13. Continuous Audit – Advantages and disadvantages.(MTP MAY 16)

Ans: Advantages:
The attendance of the audit staff acts a moral check on the clientstaff. Because of the frequent attendance of
the auditor, the opportunities of committing frauds are reduced.
The client accounts are always kept up-to-date.
Errors are discovered earlier with the result that there is adequate time for making the necessary rectification.
Fraud, if perpetrated, is detected sooner with the result that size of the fraud is limited and also the chances of
recovering the amount lost are improved.
Since audit can be carried on throughout the year, there is more time for detailed checking of the accounts
when the audit is taken up at the close of the year.
If the audit of routine transactions is completed before the close of the year, the final accounts can be prepared
and reported upon much earlier.

Disadvantages:
A continuous audit may involve good deal of waste of time and effort if the size of the concern is small.
The examination of an item left incomplete on a visit for being undertaking on the next visit may be overlooked.
There is a danger that the records of transactions after they have been audited may be altered either innocently
or fraudulently.

14. Examination in Depth implies examination of a few selected transactions from the beginning to the end
through the entire flow of the transaction Explain (MAY 18 MTP)

Ans: It implies examination of a few selected transactions from the beginning to the end through the entire flow
of the transaction, i.e., from initiation to the completion of the transaction by receipt or payment of cash and
delivery or receipt of the goods.
This examination consists of studying the recording of transactions at the various stages through which they
have passed.
Page No. 3
 At each stage, relevant records and authorities are examined; it is also judged whether the person who has
exercised the authority in relation to the transactions is fit to do so in terms of the prescribed procedure

15. It has been suggested that actual operation of the internal control should be tested by the application of
procedural tests and examination in depth. Explain with the help of example in respect of the procedure
for sales. (MAY 20 RTP)

Ans: It has been suggested that actual operation of the internal control should be tested by the application of
procedural tests and examination in depth. Procedural tests simply mean testing of the compliance with the
procedures laid down by the management in respect of initiation, authorisation, recording and documentation
of transaction at each stage through which it flows.

16. All those personal qualities required to make a good person contribute to the making of a good auditor.
Explain stating the qualities of an Auditor. (MTP may 19)

Ans: Professional
Knowledge about the business practices
Knowledge of the required acts
Expert knowledge in accounting
Continuing awareness of latest developments
Expert knowledge in auditing
• Personal
Ethics
Integrity
Objectivity
Independence in decision making
Confidentiality

17. The auditor R of GR and Co., a firm of Chartered Accountants is conducting audit of B Industries Ltd. State
the specific points must be seen by the auditor to ensure true and fair view. (MAY 19 MTP)

Ans: What constitutes a ‘true and fair’ view is a matter of an auditor’s judgment in the particular circumstances
of a case.

18. The Companies Act, 2013 has enacted specific provisions to give concrete shape to concept of Auditor’s
Independence. Explain stating the relevant provisions.

Ans: The Companies Act, 2013, has enacted specific provisions to give concrete shape to this vital concept of
Auditor’s Independence:
The provisions disqualifying certain types of persons from undertaking audit of limited companies.
Provisions relating rotation of auditor/audit firm.
Other provisions on appointment, re-appointment and removal of auditors, are designed with sufficient
independence to carry out the audit in the larger interest of shareholders and other users.
Power to qualify his report is yet another weapon in the armoury of the auditor to protect his independence.
Provisions relating to ceiling on the number of audits that can be undertaken by a chartered accountant.

19. The auditor should be straightforward, honest and sincere in his approach to his professional work. He
must be fair and must not allow prejudice or bias to override his objectivity. He should maintain an
impartial attitude, and both be and appear to be free of any interest which might be regarded as being
incompatible with integrity and objectivity. Many different circumstances, or combination of
circumstances, may be relevant and accordingly it is impossible to define every situation that creates
threats to independence and specify the appropriate mitigating action that should be taken. In addition,
the nature of assurance engagements may differ, and consequently different threats may exist requiring

Page No. 4
 the application of different safeguards. Explain stating clearly the five types of threats as contained in
Code of Ethics for Professional Accountants, prepared by the International Federation of Accountants
(IFAC). (NOV 19 RTP)

Ans: The Code of Ethics for Professional Accountants prepared by the International Federation of
Accountants (IFAC) identifies five types of threats. These are:
Circumstances that may create self-interest threats
A financial interest in a client or jointly holding a financial interest with a client.
A loan to or from an assurance client or any of its directors or officers
Having a close business relationship with a client. Concern about the possibility of losing a client.
Potential employment with a client
Undue dependence on total fees from a client.
Contingent fees relating to an assurance engagement.

20. "Independence of mind and independence in appearance are interlinked perspectives of Independence
of auditors." Explain. (MAY 19)

Ans: Independence
Independence implies that the judgment of a person is not subordinate to the wishes or direction of another
person who might have engaged him.
The auditor should be independent of the entity subject to the audit.
There are two interlinked perspective of independence of auditors,
independence of mind and
independence in appearance.

21. The Chartered Accountant has a responsibility to remain independent by taking into account the context
in which they practice, the threats to independence and the safeguards available to eliminate the
threats. In the above context, explain the guiding principles. (MAY 20 MTP)

Ans: In the case of audit, the key fundamental principles are integrity, objectivity and professional skepticism,
which necessarily require the auditor to be independent.
For the public to have confidence in the quality of audit, it is essential that auditors should always be and
appears to be independent of the entities that they are auditing.

22. State any ten areas in which different accounting policies may be encountered. (MAY 16 RTP)

Ans: Method of depreciation, depletion and amortization

• Valuation of inventories
• Treatment of goodwill
• Valuation of investment
• Treatment of retirement benefits
• Valuation of fixed assets

23. What are the special considerations in an audit of a Limited Company? (NOV 18 RTP)

Ans: Initial Verification+ Board’s Duties+ Compliance with relevant provisions of the Companies Act, 2013
relating to share capital+ o Sections 139 to 146 of the Companies Act, 2013..

24. Accounting is a continuous process because the business never comes to halt. It is, therefore, necessary
that transactions of one period would be separated from those in the ensuing period so that the results
of the working of each period can be correctly ascertained. Explain. (NOV 18 RTP)

Ans: The auditor may examine a sample of documents, evidencing the movement of inventory into and out of
stores, including documents pertaining to period shortly before and after the cut-off date and check whether
Page No. 5
 inventories represented by those documents were included or excluded as appropriate during inventory taking
for perfect and correct presentation in the financial statements.

25. Describe set of instructions which an auditor has to give to his client before the start of actual audit.
(PM)

Ans: Names and addresses of managers and other officers should be kept ready.
Vouchers should be serially arranged.
The accounts should be totalled up and trial balance and final accounts to be kept ready.
Schedule of trade receivables and trade payables should be prepared.
Schedule of outstanding expenses, prepaid expenses and accrued income to be kept ready.
A list of bad and doubtful debts should be prepared.
Schedule of investments should be prepared.
Certified list of goods returned to be prepared.
Statement of permanent capital expenditure to be prepared.
Schedule of deferred revenue expenditures to be prepared

26. Write the steps that are taken for an audit to be carried out in a systematic and efficient manner.

Ans: Regularity
• Time records
• Colour codes
• Completeness
• Documentaion
• Audit stamp
• Confidentiality
• Review & reporting

27. In a system based audit, test checking approach provides a good base for the auditor to form his opinion
on the financial statements. Give your comments. (MAY 19 MTP)

Ans: System-based audit is done by evaluating the accounting system and internal control and ascertaining their
reliability through audit tests.

SA 200
1. “The purpose of an audit is to enhance the degree of confidence of intended users in the financial
statements. This is achieved by the expression of an opinion by the auditor on whether the financial
statements are prepared, in all material respects, in accordance with an applicable financial reporting
framework.”. Explain stating the objectives of audit as per SA 200. (MAY 20RTP)

Ans: As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting auditor financial statements,
the overall objectives of the auditor are:
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; and
To report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s
findings.

2. Applicable financial reporting framework (NOV 19)

Page No. 6
 Ans: The financial reporting framework adopted by management and, where appropriate, those charged with
governance in the preparation and presentation of the financial statements that is acceptable in view of the
nature of the entity and the objective of the financial statements, or that is required by law or regulation.
The applicable financial reporting framework often encompasses financial reporting standards established by
an authorised or recognised standards setting organisation, or legislative or regulatory requirements. In some
cases, the financial reporting framework may encompass both financial reporting standards established by an
authorised or recognised standards setting organisation and legislative or regulatory requirements.

3. Distinguish between absolute and reasonable assurance. Identify the type of assurance that is expected
in an audit of the financial statements, clearly outlining the reasons to justify your point of view.

Ans: Absolute assurance is the highest level of assurance an auditor can give, if he check each and every
transaction. Therefore, absolute assurance is the level of assurance that can only be given if the auditor does
not perform sampling testing. However, it is not possible to give absolute assurance because of time and cost
involved. Therefore, auditors give reasonable assurance.
Reasonable assurance is a high level of 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.

4. 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. Explain. (MAY 18 RTP)

Ans: Timeliness of Financial Reporting and the Balance between Benefit and Cost: 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. Appropriate planning assists in
making sufficient time and resources available for the conduct of the audit. Notwithstanding this, the relevance
of information, and thereby its value, tends to diminish over time, and there is a balance to be struck between
the reliability of information and its cost. There is an expectation by users of financial statements that the
auditor will form an opinion on the financial statements within a reasonable period of time and at a reasonable
cost, recognising that it is impracticable to address all information that may exist or to pursue every matter
exhaustively on the assumption that information is in error or fraudulent until proved otherwise.

5. There are practical and legal limitations on the auditor’s ability to obtain audit evidence. Explain with
examples.
OR (MAY 20 RTP)
The process of auditing is such that it suffers from certain limitations Discuss

Ans: The Nature of Financial Reporting

Judgement Based
Range of Interpretations
Estimates are most affected because of above
• The Nature of Audit Procedures
Intentional or Unintentional Misinformation
Sophisticatedly Designed Frauds
No powers of Investigation
Sampling & Persuasive Evidence
• Balance between Benefit and Cost
Delay reduces value of information
Expectations of Users
Difficulty, Time, or Cost not Valid basis to Omit Audit Procedures

Page No. 7
6. In case of certain subject matters, limitations on the auditor’s ability to detect material misstatements
are particularly significant. Explain such assertions or subject matters. (MAY 20 RTP)

Ans:
• Fraud
• related party relationships and transactions
• non-compliance with laws and regulations
• going concern

7. “Professional judgment is essential to the proper conduct of an audit.” Discuss. (NOV 18)

Ans: Materiality and audit risk.

The nature, timing, and extent of audit procedures used to meet the requirements of the SAs and gather audit
evidence.
Evaluating whether sufficient appropriate audit evidence has been obtained, and whether more needs to be
done to achieve the objectives of the SAs and thereby, the overall objectives of the auditor.
The evaluation of management’s judgments in applying the entity’s applicable financial reporting framework.
The drawing of conclusions based on the audit evidence obtained, for example, assessing the reasonableness of
the estimates made by management in preparing the financial statements.

8. The auditor shall comply with relevant ethical requirements, including those pertaining to
independence, relating to financial statement audit engagements. Relevant ethical requirements
ordinarily comprise the Code of Ethics for Professional Accountants (IESBA Code) related to an audit of
financial statements. The Code establishes the fundamental principles of professional ethics relevant to
the auditor when conducting an audit of financial statements. Explain (MAY 20 MTP)

Ans: In the case of an audit engagement it is in the public interest and, therefore, required by the Code of Ethics,
that the auditor be independent of the entity subject to the audit.
The Code describes independence as comprising both independence of mind and independence in appearance.
The auditor’s independence from the entity safeguards the auditor’s ability to form an audit Overall Objectives
of the Independent Auditor opinion without being affected by influences that might compromise that opinion.
Independence enhances the auditor’s ability to act with integrity, to be objective and to maintain an attitude of
professional skepticism.

9. “Integrity’” and “Objectivity” are among the fundamental principles of professional ethics relevant to an
auditor enshrined in IESBA code. Distinguish between the two

Ans:. integrity requires auditor to be involved in fair dealing and truthfulness with client and not be associated
with materially false or misleading statements, reports, returns or communications. However, objectivity
requires auditor not to compromise professional judgment because of bias, conflict of interest or undue
influence of others.

10. In order to achieve the objectives of the accountancy profession, professional accountants have to
observe a number of prerequisites or fundamental principles Explain. (NOV 19 MTP)

Ans: :
• Integrity
• Objectivity
• Professional Competence
• Integrity
• Professional Behaviour
• Confidentiality
• Technical Standards

Page No. 8
11. Mr. Fat, auditor of Thin Ltd., has his office and residence in the building owned by Thin Ltd. Mr. Fat has
been given 10% concession in rent by the company as compared to other tenants. (PM)

Ans: Mr. Fat, auditor of Thin Ltd., has his office and residence in the building owned by Thin Ltd. Mr. Fat has
been given 10% concession in rent by the company as compared to other tenants. Thus in the instant case unless
and until there is direct proof, giving 10% concession in rent does not affect independence of the auditor in
expressing his opinion on the audit of Thin Ltd.

12. The auditor is responsible for maintaining an attitude of professional skepticism throughout the audit.
Do you agree with the statement?
Or
The auditor shall plan and perform an audit with professional skepticism recognizing that circumstances
may exist that cause the financial statement to be materially misstated. Discuss any four examples of
professional skepticism

Ans:. Professional scepticism: questioning mind, being alert to conditions possible misstatement due to error or
fraud, and a critical assessment of audit evidence.

SA 210
1. The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other
suitable form of written agreement. Explain stating its contents.
OR
State the purpose of a ‘Letter of Engagement’

Ans: Important Contents of Letter of Engagement: 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

2. Explain preconditions for an audit as per SA 210. Discuss how would an auditor proceed to establish the
presence of pre-conditions for an audit

Ans: (a) Determine whether the financial reporting framework is acceptable; and (b) Obtain the agreement of
management that it acknowledges and understands its responsibility: (i) For the preparation of the financial
statements in accordance with the applicable financial reporting framework; (ii) For the internal control as
management considers necessary; and (iii) To provide the auditor with: - Access to all information such as
records, documentation and other matters; - Additional information that the auditor may request from
management for the purpose of the audit; and - Unrestricted access to persons within the entity from whom
the auditor determines it necessary to obtain audit evidence

3. “The auditor should not agree to a change of engagement where there is no reasonable justification for
doing so.” Discuss.
OR
As an auditor, how would you consider the acceptance of a change in audit engagement?

Page No. 9
 OR
An auditor who before the completion of the engagement is requested to change the engagement to
one which provides a lower level of assurance should consider the appropriateness of doing so. Discuss

Ans: Consider the reasons for Change in engagement ; if justified – continue, if not - withdraw

4. “It is not mandatory to send a new engagement letter in recurring audit, but sometimes it becomes
mandatory to send new letter”. Explain those situations where new engagement letter is to be sent.
(MAY 19 MTP)

Ans: A change in legal or regulatory requirements.

A change in the financial reporting framework
A significant change in nature or size of the entity’s business.
A significant change in ownership.
A recent change of senior management
Any indication that the entity misunderstands the objective and scope of the audit
Any revised or special terms of the audit engagement.
A change in other reporting requirements.

5. Y, is the auditor of X Pvt. Ltd. In which there are four shareholders only, who are also the Directors of
the company. On account of bad trade and for reducing the expenses in all directions, the directors asked
Y to accept a reduced fee and for that he has been offered not to carry out such full audit as he has done
in the past. Y accepted the suggestions of the directors. (PM)

Ans: His duties may not necessarily commensurate with his remuneration. Y, therefore, should not accept the
suggestions of the directors regarding the scope of the work to be done. Even if Y acceptsthe suggestions of the
directorsregarding the scope of work to be done, it would not reduce his responsibility as an auditor under the
law. Under the circumstances, Y is violating the provisions of the Companies Act, 2013.

6. X, a Chartered Accountant was engaged by PQR & Co. 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
receivables. The client requested for a change in the terms of engagement. (PM)

Ans: Change in Terms of Engagement: According to SA 210 “Agreeing the Terms of Audit Engagements”, an
auditor who is required to change the engagement which requires lower level of assurance before the
completion of engagement should consider the appropriateness of doing so. But when the terms of engagement
are changed, both the auditor and the client should agree on the new terms. However, the auditor should not
agree to a change in terms where there is no reasonable justification for doing so.

SA 220
1. Quality control for audit work at firm level. (NOV 17 MTP)

Ans:
• Leadership Responsibilities for Quality on Audits
• Assignment of Engagement Teams
• Relevant Ethical Requirements
• Monitoring
• Engagement Performance
• Acceptance and Continuance of Client Relationships

Page No. 10
2. The engagement partner shall take the responsibility for the overall quality on each audit engagement
to which that partner is assigned. Discuss with reference to SA 220 "Quality Control for an audit of
financial statement".

Ans: As per SA 220 “Quality Control for an Audit of Financial Statements”, the engagement partner shall take
responsibility for the overall quality on each audit engagement to which that partner is assigned. The importance
to audit quality of:
 The fact that quality is essential in performing audit engagements.
 Performing work that complies with professional standards and regulatory and legal requirements;
 Complying with the firm’s quality control policies and procedures as applicable;
 Issuing auditor’s reports that are appropriate in the circumstances; and
 The engagement team’s ability to raise concerns without fear of reprisals; and
 The fact that quality is essential in performing audit engagements.

3. The firm’s system of quality control should include policies and procedures addressing each and every
element of system of quality control. State those elements. (NOV 19 MTP)

Ans: The firm’s system of quality control should include policies and procedures addressing each of the following
elements:
Leadership responsibilities for quality within the firm.
Human resources.
Ethical requirements.
Acceptance and continuance of client relationships and specific engagements.
Engagement performance.
Monitoring.

4. Through its policies and procedures, the firm seeks to establish consistency in the quality of engagement
performance. This is often accomplished through written or electronic manuals, software tools or other
forms of standardized documentation, and industry or subject matter-specific guidance materials.
Explain the matters to be addressed in this context

Ans: How engagement teams are briefed on the engagement to obtain an understanding; supervision, staff
training and coaching; Methods of reviewing the work performed; Appropriate documentation of the work;
Processes to keep all policies and procedures current.

5. The firm should establish policies and procedures designed to provide it with reasonable assurance that
the policies and procedures relating to the system of quality control are relevant, adequate, operating
effectively and complied with in practice. Such policies and procedures should include an ongoing
consideration and evaluation of the firm’s system of quality control, including a periodic inspection of a
selection of completed engagements. Explain in the above context the purpose of monitoring
compliance with quality control policies and procedures

Ans:; firm should establish policies and procedures ; Adherence to professional standards; quality control
System; firm’s quality control; Follow-up by appropriate firm

6. CA Raj, an engagement partner wants to take decision, regarding acceptance and continuance of an audit
engagement Which informations, he should obtain before accepting an engagement? (NOV 19 RTP)

Ans: Client
The integrity of the principal owners, key management and those charged with governance of the entity;
Auditor
Whether the engagement team is competent to perform the audit engagement and has the necessary
capabilities, including time and resources;

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 Whether the firm and the engagement team can comply with relevant ethical requirements; and
Significant matters
Significant matters that have arisen during the current or previous audit engagement, and
their implications for continuing the relationship.

7. M/s Sureshchandra & 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 Sureshchandra & 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 Sureshchandra
& Co., therefore, signed the accounts of SC Ltd., without reviewing the work performed by CA. Suresh.
Required State with reasons whether CA. Chandra is right in expressing an opinion on financial
statements the audit of which is performed by another auditor. (SM)

Ans: 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.
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.could not be signed by him due to his unfortunate death. Later
on, CA. Chandra signed the report relying on the work performed by CA. Suresh. 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.

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 AUDIT STRATEGY, AUDIT PLANNING AND
02. AUDIT PROGRAMME

SA 300
1. Elucidate the matters to be considered by an auditor in developing his overall plan for the expected
scope and conduct of audit.

Ans:. Governing Documents; Audit process related; Other people & Staff; Report.

2. In establishing overall audit strategy, the auditor shall ascertain the reporting objectives of the
engagement to plan the timing of the audit and the nature of the communications required. Elucidate
those cases by which auditor can ascertain the reporting objectives of the engagement.

Ans:
 The entity’s timetable for reporting, such as at interim and final stages.
 The organization of meetings with management and those charged with governance to discuss the
nature, timing and extent of the audit work.
 The discussion with management and those charged with governance regarding the expected type and
timing of reports to be issued and other communications, both written and oral, including the auditor’s
report, management letters and communications to those charged with governance.
 The discussion with management regarding the expected communications on the status of audit work
throughout the engagement

3. "Overall audit strategy sets the scope, timing and direction of the audit, and guides the development of
the more detailed audit plan. The process of establishing the overall audit strategy assists the auditor to
determine such matters as for example - the resources to deploy for specific audit areas, such as the use
of appropriately experienced team members for high risk areas or the involvement of experts on
complex matters. Explain the other three such matters." OR Describe how the process of establishing
the overall audit strategy assists the auditor in marshalling his human resources.

Ans:.
Amount of resources; resources to deploy for specific audit areas; When these resources are to be deployed,;
managed, directed and supervised,

4. The audit working papers constitute the link between the auditor’s report and the client’s records.
Explain clearly stating the definition and purpose of audit documentation. (MAY 19 RTP)

Ans: The record of audit procedures performed, Relevant audit evidence obtained, Conclusions the auditor
reached.

5. Once the overall audit strategy has been established, an audit plan can be developed to address the
various matters identified in the overall audit strategy Explain

Ans: Once the overall audit strategy has been established, anaudit plan can be developed to addressthevarious
matters identified in the overall audit strategy, taking in to account the need to achieve the audit objectives
through the efficient use of the auditor’s resources. The establishment of the overall audit strategy and the
detailed audit plan are not necessarily discrete or sequential processes but are closely inter-related since
changes in one may result in consequential changes to the other

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6. As a result of unexpected events, changes in conditions, or the audit evidence obtained from the results
of audit procedures, the auditor may need to modify the overall audit strategy and audit plan. Explain

Ans: update and change the overall audit strategy; changes in conditions, unexpected events, or the audit
evidence obtained

7. "The auditor shall plan the nature, timing and extent of direction and supervision of engagement team
members and the review of their work. Explain the factors due to which above varies"

Ans: size and complexity of the entity; The area of the audit; The assessed risks of material misstatement

8. W, the auditor of SKM Ltd asks its finance and audit head to prepare audit strategy for conducting audit
of SKM Ltd. W also insist him to draw detailed audit procedures also. On the request of auditor W,
complete audit strategy as well as audit procedures are prepared by finance head of the company.
Subsequently, auditor realizes that effectiveness of the audit is compromised, and it was his
responsibility to prepare the overall audit strategy (SM)

Ans: The engagement partner and other key members of the engagement team shall be involved in planning
the audit. The involvement of the engagement partner and other key members of the engagement team in
planning the audit draws on their experience thereby enhancing the effectiveness and efficiency of the planning
process. Hence in the above case approach of W was wrong and he should have prepared overall audit strategy
and detailed audit procedures.

9. Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins
shortly after (or in connection with) the completion of the previous audit and continues until the
completion of the current audit engagement. Discuss stating clearly the broad points you would be
covering in framing plan to conduct audit in an efficient and effective manner. (MAY 20 RTP)

Ans: Planning includes the need to consider such matters as:

o The analytical procedures to be applied as risk assessment procedures.
o The determination of materiality.
o The performance of other risk assessment procedures.
o Obtaining a general understanding of the legal and regulatory framework applicable to
the entity and how the entity is complying with that framework.
o The involvement of expert

10. “The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely
manner. Plans should be based on knowledge of the client’s business” Discuss stating clearly the broad
points you would be covering in framing plan to conduct audit in an efficient and effective manner. (NOV
19 MTP)

Ans: Plans should be further developed and revised as necessary during the course of the audit. SA-300,
“Planning an Audit of Financial Statements” further expounds this principle. According to it, planning is not a
discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in
connection with) the completion of the previous audit and continues until the completion of the current audit
engagement. The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the
audit, and that guides the development of the audit plan.

11. Once the overall audit strategy has been established, an audit plan can be developed to address the
various matters identified in the overall audit strategy Explain. (MAY 19 MTP)

Ans: Once the overall auditstrategy has been established, an audit plan can be developed to address the various
mattersidentified in the overall auditstrategy, taking into account the need to achieve the audit objectives

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 through the efficient use of the auditor’s resources. The establishment of the overall audit strategy and the
detailed audit plan are not necessarily discrete or sequential processes but are closely inter-related since
changes in one may result in consequential changes to the other.

12. As a result of unexpected events, changes in conditions, or the audit evidence obtained from the results
of audit procedures, the auditor may need to modify the overall audit strategy and audit plan. Explain.
(NOV 19 RTP)

Ans: The auditor shall update and change the overall audit strategy and the audit plan as necessary during the
course of the audit.  As a result of , changes in conditions, unexpected events, or the audit evidence obtained
from the results of audit procedures, the auditor may need to modify the overall audit strategy and audit plan
and thereby the resulting planned nature, timing and extent of further audit procedures, based on the revised
consideration of assessed risks. This may be the case when information comes to the auditor’s attention that
differs significantly from the information available when the auditor planned the audit procedures

SA 320
1. Whether misstatements of lesser amounts than 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? Explain with examples

Ans:
 Whether law, regulations or the applicable financial reporting framework affect users’ expectations
regarding the measurement or disclosure of certain items. Example Related party transactions, and the
remuneration of management and those charged with governance.
 The key disclosures in relation to the industry in which the entity operates. Example Research and
development costs for a pharmaceutical company.

 Whether attention is focused on a particular aspect of the entity’s business that is separately disclosed
in the financial statements. Example A newly acquired business

2. Discuss the concept of materiality in the context of the preparation and presentation of financial
statements.

Ans: According to SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, financial reporting frameworks often discuss the concept of materiality
in the context of the preparation and presentation of financial statements. Although financial reporting
frameworks may discuss materiality in different terms, they generally explain that: Misstatements, including
omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected
to influence the economic decisions of users taken on the basis of the financial statements

3. Determining materiality involves the exercise of professional judgment. A percentage is often applied to
a chosen benchmark as a starting point in determining materiality for the financial statements as a
whole. Discuss stating the factors that may affect the identification of an appropriate benchmark. (MAY
19 MTP)

Ans: Factors that may affect the identification of an appropriate benchmark include the following:
The elements of the financial statements (for example, assets, liabilities, equity, revenue, expenses);
Whether there are items on which the attention of the users of the entity’s financial statements tends to be
focused (for example, for the purpose of evaluating financial performance users may tend to focus on profit,
revenue or net assets);
The nature of the entity, where the entity is at in its life cycle, and the industry and economic environment in
which the entity operates;

Page No. 15
 The entity’s ownership structure and the way it is financed (for example, if an entity is financed solely by debt
rather than equity, users may put more emphasis on assets, and claims on them, than on the entity’s earnings);
and
The relative volatility of the benchmark.

4. Explain the Relationship between materiality and audit risk. (NOV 17 RTP)

Ans: Inverse Relationship There is an inverse relationship between Materiality an

5. Materiality for the financial statements as a whole may need to be revised as a result of a change in
circumstances that occurred during the audit. Explain with the help of example.

Ans: change in circumstances; New information; A change in the auditor’s understanding of the entity

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 03. AUDIT DOCUMENTATION AND AUDIT EVIDENCE

SA 230
1. R.K. & Company are the auditors of PQR Company Ltd. The Managing Director of the Company demands
copies of the working papers from the auditors. Are the auditors bound to oblige the Managing Director?
(PM)

Ans: management of M/s Health Zone can’t insist upon the auditorto handover the working papers of the
previous year.

2. What are audit working papers and why should they be carefully preserved by the Auditor?

Ans: Working papers are the property of the auditor and he may, at his discretion, make portions of or extracts
from his working papers to his client. The auditor should adopt reasonable procedures for safe custody and
confidentiality of his working papers. Working papers should be retained, long enough, for a period of time
sufficient to meet the needs of his practice and satisfy any legal or professional requirement of record retention.
SQC 1 requires firms to establish policies and procedures for the retention of engagement documentation. The
retention period for audit engagements ordinarily is no shorter than seven years from the date of the auditor's
report, or, if later, the date of the group auditor's report.

3. The working papers of the branch auditor are also the property of the Principal Auditor and the
Management of the Company, so they have right to access them. State the relevant SA and comment.

Ans: As per SA 230 “Audit Documentation”, working papers are the property of the auditor. He may at his
discretion, make available portions or extracts from his working paper to his client. The auditor should adopt
reasonable procedures for custody and confidentiality of his working papers. An auditor is not required to
provide the clients or other auditors’ access to his working papers.

4. State the factors affecting form, content and extent of working papers.

Ans: Size & Complexity; Risk of material misstatement; Methodology and tolls; Significance of Audit evidence
obtained; Nature & extent of expectations; need to document conclusion

5. Clarification on the Auditor's rights where clients and other Auditors seek access to their audit working
papers.

Ans: 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. SA 230 on “Audit Documentation” provides that, unless otherwise specified by
law or regulation, audit documentation is the property of the auditor. He may at his discretion, make portions
of, or extracts from, audit documentation available to clients, provided such disclosure does not undermine the
validity of the work performed, or, in the case of assurance engagements, the independence of the auditor or
of his personnel.

6. What are audit working papers? Discuss various contents of Permanent Audit File and Current File. (PM)

Ans: 1. Permanent Audit file: It includes-

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 (i) Information concerning the legal and organisational structure of the entity. In the case of a company, this
includes the Memorandum and Articles of Association. In the case of a statutory corporation, this includes the
Act and Regulations under which the corporation functions.
(ii) Extracts or copies of important legal documents, agreements and minutes relevant to the audit.
(iii) A record of the study and evaluation of the internal controls related to the accounting system. This might
be in the form of narrative descriptions, questionnaires or flow charts, or some combination thereof.
(iv) Copies of audited financial statements for previous years.
(v) Analysis of significant ratios and trends.
(vi) Copies of management letters issued by the auditor, if any.
(vii) Record of communication with the retiring auditor, if any, before acceptance of the appointment as auditor.
(viii) Notes regarding significant accounting policies.
(ix) Significant audit observations of earlier years.
2. Current Audit file: The current file normally includes-
(i) Correspondence relating to acceptance of annual reappointment.
(ii) Extracts of important matters in the minutes of Board Meetings and General Meetings, as are relevant to the
audit.
(iii) Evidence of the planning process of the audit and audit programme.
(iv) Analysis of transactions and balances.
(v) A record of the nature, timing and extent of auditing procedures performed and the results of such
procedures.
(vi) Evidence that the work performed by assistants was supervised and reviewed.
(vii) Copies of communications with other auditors, experts and other third parties.

7. State the factors affecting form, content and extent of working papers. (MAY 19 MTP)

Ans: :
• size and complexity
• significance of the audit evidence
• audit methodology
• audit procedures
• risks of material misstatement

8. Briefly explain the policies and procedures of assembling the final audit file on a timely basis after the
date of auditor's report under SQC-1. (NOV 19)

Ans: The completion of the assembly of the final audit file after the date of the auditor’s report is an
administrative process that does not involve the performance of new audit procedures or the drawing of new
conclusions. Changes may, however, be made to the audit documentation during the final assembly process if
they are administrative in nature. SQC 1 requires firms to establish policies and procedures for the timely
completion of the assembly of audit files. An appropriate time limit within which to complete the assembly of
the final audit file is ordinarily not more than 60 days after the date of the auditor’s report.

9. "Completion Memorandum" is helpful as part of the audit documentation. Explain (MAY 20 MTP)

Ans: The auditor “may” consider it helpful to prepare and retain as part of the audit documentation a summary
(sometimes known as a completion memorandum) that describes the significant matters identified during the
audit and how they were addressed, or
that includes cross- references to other relevant supporting audit documentation that provides such
information.

10. Though legally auditor may exercise right of Lien in case of companies, it is mostly impracticable for legal
and practicable constraints. Do you agree? Or Write a short note on Auditor’s Lien. Or CA David was the
auditor of Wood-pack Lid, for the year 2018-19. The company has failed to pay the dues of CA David;
hence he is contemplating on retaining the books & documents of the company that are in his

Page No. 18
 possession. Is the action of CA David valid? If yes, what are the conditions that should be looked into
before retaining the books and documents of the client?

Ans: : it seems to be correct that though legally, auditor may exercise right of lien in cases of companies, it is
mostly impracticable for legal and practicable constraints.

11. Audit documentation provides evidence that the audit complies with SAs. However, it is neither
necessary nor practicable for the auditor to document every matter considered. Further, it is
unnecessary for the auditor to document separately compliance with matters for which compliance is
demonstrated by documents included within the audit file. Explain giving examples

Ans: existence of an adequately documented audit plan; existence of a signed engagement letter; auditor’s
report containing an appropriately;

12. Judging the significance of a matter requires an objective analysis of the facts and circumstances.
Documentation of the professional judgments made, where significant, serves to explain the auditor’s
conclusions and to reinforce the quality of the judgment. Explain with the help of examples. (MAY 19
RTP)

Ans: Examples of Professional Judgement:

Some examples of circumstances in which it is appropriate to prepare audit documentation relating to the use
of professional judgment include, where the matters and judgments are significant:
 Subjective -The basis for the auditor’s conclusion on the reasonableness of areas of subjective judgments (for
example, the reasonableness of significant accounting estimates). (SA 540)
 Authenticity -The basis for the auditor’s conclusions about the authenticity of a document when further
investigation (such as making appropriate use of an expert or of confirmation procedures) is undertaken in
response to conditions identified during the audit that caused the auditor to believe that the document may
not be authentic. (SA 240)
 Factors -The rationale for the auditor’s conclusion when a requirement provides that the auditor ‘shall
consider’ certain information or factors, and that consideration is significant in the context of the particular
engagement

SA 330
1. Discuss the matters the auditor may consider in determining the extent of tests of controls. OR When
more persuasive audit evidence is needed regarding the effectiveness of a control, it may be appropriate
to increase the extent of testing of the control as well as the degree of reliance on controls. Discuss the
matters the auditor may consider in determining the extent of test of controls

Ans: Frequency; Length of time; Expected rate of deviation; relevance & reliability; Test of other controls

2. The auditor shall design and perform tests of controls to obtain sufficient appropriate audit evidence as
to the operating effectiveness of relevant controls . (MAY 16 MTP)

Ans: The auditor shall design and perform tests of controls to obtain sufficient appropriate audit evidence as to
the operating effectiveness of relevant controls when-
 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
 Substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level.

3. Why Test of Controls are performed? Also explain what it includes (MAY 19)

Page No. 19
 Ans: Tests of control may include:  Inspection of documents supporting transactions and other events to gain
audit evidence that internal controls have operated properly, for example, verifying that a transaction has been
authorised.  Inquiries about, and observation of, internal controls which leave no audit trail, for example,
determining who actually performs each function and not merely who is supposed to perform it.  Re-
performance of internal controls, for example, reconciliation of bank accounts, to ensure they were correctly
performed by the entity.  Testing of internal control operating on specific computerised applications or over
the overall information technology function, for example, access or program change controls.

4. Discuss the various points which auditor needs to consider in determining whether it is appropriate to
use audit evidence about operating effectiveness of controls obtained in previous audit, and if so, the
length of the time period that may elapsed before retesting

Ans: Internal Control; Manual or automated; General IT controls; Personel changes; Changing circumstance;
Material misstatement

5. XYZ & Associates, Chartered Accountants, while evaluating the operating effectiveness of internal
controls, detects deviation from controls. In such a situation, state the specific inquiries to be made by
an auditor to understand these matters and their potential consequences. (MAY 19 RTP)

Ans: When deviations from controls upon which the auditor intends to rely are detected, the auditor shall make
specific inquiries to understand these matters and their potential consequences, and shall determine whether:
The tests of controls that have been performed provide an appropriate basis for reliance on the controls;
(Sample rate of deviation was 8% and tolerable rate is also 10%, so it is appropriate basis to rely on controls, if
sample rate of deviation would have been higher than 10% then it would not be reliable control) Additional
tests of controls are necessary; or (If junior officers’ signature is obtained in 20% bills, check whether rate and
quality was appropriate in such bills) (c)The potential risks of misstatement need to be addressed using
substantive procedures. (If controls are not reliable auditor will have to work on substantive procedures)

6. It has been suggested that actual operation of the internal control should be tested by the application of
procedural tests and examination in depth. Explain with the help of example in respect of the procedure
for sales.

Ans:
 Before acceptance of any order the position of inventory of the relevant article should be known to
ascertain whether the order can be executed in time.
 An advice under the authorisation of the sales manager should be sent to the party placing the order,
internal reference number, and the acceptance of the order. This advice should be prepared on a
standardised form and copy thereof should be forwarded to inventory section to enable it to prepare
for the execution of the order in time.
 The credit period allowed to the party should be the normal credit period. For any special credit period
a special authorisation of the sales manager would be necessary.
 The rate at which the order has been accepted and other terms about trAns:port, insurance, etc., should
be clearly specified.
 Before deciding upon the credit period, a reference should be made to the credit section to know the
creditworthiness of the party and particularly whether the party has honoured its commitments in the
past.

7. While carrying out the statutory audit of a large entity, what are the substantive procedures to be
performed to assess the risk of material misstatement? (NOV 19)

Ans: Substantive analytical procedures are generally more applicable to large volumes of transactions that tend
to be predictable over time. The application of planned analytical procedures is based on the expectation that

Page No. 20
 relationships among data exist and continue in the absence of known conditions to the contrary. However, the
suitability of a particular analytical procedure will depend upon the auditor’s assessment of how effective it will
be in detecting a misstatement that, individually or when aggregated with other misstatements, may cause the
financial statements to be materially misstated.

SA 500
1. Comment on the following in relation to SA: - Information regarding the competence, capability and
objectivity of the management’s expert may come from a variety of sources.

Ans: knowledge of that expert’s qualifications; published papers or books written by that expert. personal
experience with previous work of that expert; discussions with that expert; discussions with others who are
familiar with that expert’s work;

2. Auditing is a logical process. An auditor is called upon to assess the actualities of the situation, review
the statements of account and give an expert opinion about the truth and fairness of such accounts. This
he cannot do unless he has examined the financial statements objectively. He needs evidence to obtain
information for arriving at his judgment. Discuss explaining clearly the detailed meaning of audit
evidence.

Ans: Auditing is a logical process. An auditor is called upon to assess the actualities of the situation, review the
statements of account and give an expert opinion about the truth and fairness of such accounts. This he cannot
do unless he has examined the financial statements objectively. Objective examination connotes critical
examination and scrutiny of the accounting statements of the undertaking with a view to assessing how far the
statements present the actual state of affairs in the correct context and whether they give a true and fair view
about the financial results and state of affairs. An opinion founded on a rather reckless and negligent
examination and evaluation may expose the auditor to legal action with consequential loss of professional
standing and prestige . He needs evidence to obtain information for arriving at his judgment.

3. What are the various audit procedures to obtain audit evidence? Mention the same in brief.

Ans: Inspection; Inquiry; Re-performance; External confirnmation; Observation; re-calculation; Analytical

procedures; Written representaions

4. While conducting audit of a bank, you find that the bank has advanced loan for purchase of machinery
on the basis of valuation report prepared by a civil engineer. Will you approve the action taken by bank?
Justify the Ans:wer. (NOV 19 RTP)

Ans: Using the Work of Management’s Expert:

The Auditor while considering advances granted by bank for purchase of machinery has to consider valuation
report given by civil engineer to the bank.
SA 500 “Audit Evidence” clearly states that when information to be used as audit evidence has been prepared
using the work of a management’s expert, the auditor shall, to the extent necessary, having regard to the
significance of that expert’s work for the auditor’s purposes,
Evaluate the competence, capabilities and objectivity of that expert;
Obtain an understanding of the work of that expert; and
Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.
If auditor finds that civil engineer cannot be considered expert for valuation of machinery, he should insist on
other analytical procedures to confirm value of machinery.
Even after this, if he is not satisfied, he should give qualified opinion.

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5. The nature and timing of the audit procedures to be used may be affected by the fact that some of the
accounting data and other information may be available only in electronic form or only at certain points
or periods in time. Explain with the help of examples

Ans: : Certain electronic information may not be retrievable after a specified period of time, for example, if files
are changed and if backup files do not exist. Accordingly, the auditor may find it necessary as a result of an
entity’s data retention policies to request retention of some information for the auditor’s review or to perform
audit procedures at a time when the information is available.

SA 501
1. How would an auditor proceed to obtain sufficient appropriate audit evidence regarding the existence
and condition of inventory? Also state reporting requirements for the same in the case of a company.
OR Write a short note on Physical attendance by auditor during inventory taking. OR While vouching,
Aman auditor of Vee Ltd, found that some goods are lying with third party from a long period, Advise
Aman how will he vouch/verify them.

Ans: When inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory by Attendance of physical inventory and Performing
Audit procedures

2. Comment on the Responsibility for properly determining the quantity and value of inventories rests with
the management of the entity. (PM)

Ans: responsibility of the management is not reduced even where the auditor attends any physical count of
inventories in order to obtain audit evidence. The entities usually maintain detailed inventory records in the
form of Stores/Inventory ledgers showing in respect of each major item the receipts, issues and balances. The
extent of examination of these records by an auditor with reference to the relevant basic documents

3. TRM Ltd. is a company engaged in manufacture of beauty products. It has hair care segment, skin care
segment and kids’ beauty products. The auditor wants to obtain sufficient appropriate audit evidence
regarding the presentation and disclosure of segment information in accordance with the applicable
financial reporting framework. Suggest the audit procedures in the given case.

Ans: 1. Obtaining an understanding of the methods used by management in determining segment information.
Further, (i) Evaluating whether such methods are likely to result in disclosure in accordance with the applicable
financial reporting framework; and (ii) Where appropriate, testing the application of such methods; and 2.
Performing analytical procedures or other audit procedures appropriate in the circumstances

4. SK Ltd. has fully computerised its accounting operations. The inventory records are maintained up to
date with timely entries passed for all receipts and issues. The company has hired a professional security
agency, which monitors and implements a close vigilance over the operations of the company. As such,
the company had dispensed with the practice of taking inventory of their inventories at the year-end as
in their opinion the exercise is redundant, time consuming and intrusion to normal functioning of the
operations. (PM)

Ans: an auditor should insist on the company to do physical verification of inventory. Verification must be done
at least yearly, if not more frequently within a year. Dispensing with physical verification altogether is
unacceptable. It is not enough that the company had installed good control procedures.

5. ABC Ltd is engaged in manufacturing of different type of yarns. On going through its financial statements
for the past years, it is observed that inventory is material to the financial statements. You as an auditor

Page No. 22
 of the company wanted to obtain sufficient appropriate audit evidence regarding the existence and
condition of the inventory as appearing in the financial statements. Discuss, how would you proceed as
an auditor.(MAY 20 MTP)

Ans: When inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory by:
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 procedures Observe the performance
of management’s count procedures;
Inspect the inventory; and
Perform test counts; and
Performing audit procedures over the entity’s final inventory records to determine whether they accurately
reflect actual inventory count results.

6. Briefly mention the matters that are relevant in planning attendance at physical inventory counting
(MAY 20 RTP)

Ans: The locations at which inventory is held05

Nature of inventory.
Stages of completion of work in progress related)
The risks of material misstatement related to inventory.
The nature of the internal control related to inventory.
Whether the entity maintains a perpetual inventory system.
Whether adequate procedures are expected to be established and proper instructions issued for physical
inventory counting.
The timing of physical inventory counting.
Whether the assistance of an auditor’s expert is needed.

7. Pride India Ltd is a manufacturer of various FMCG (fast moving consumable goods) range of products.
The company is having several cases of litigation pending in courts. The auditor wanted to identify
litigation and claims resulting to risk of material misstatements. Suggest the auditor with reference to
SAs.

Ans: Inquiry of management and, where applicable, others within the entity, including in-house legal counsel;
Reviewing minutes of meetings of those charged with governance and
Correspondence between the entity and its external legal counsel; and
Reviewing legal expense accounts.

8. 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. Explain.

Ans: 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.
Appropriate planning assists in making sufficient time and resources available for the conduct of the audit.
Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over time, and there
is a balance to be struck between the reliability of information and its cost. There is an expectation by users of
financial statements that the auditor will form an opinion on the financial statements within a reasonable period
of time and at a reasonable cost, recognising that it is impracticable to address all information that may exist or
to pursue every matter exhaustively on the assumption that information is in error or fraudulent until proved
otherwise.

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9. Give your comments and observations on the following: Balance confirmations from trade
receivables/trade payables can only be obtained for balances standing in their accounts at the year-
end.(PM)

Ans: it is not necessary that balances of trade receivables/ trade payables should necessarily be verified only at
the end of the year only. In fact, in order to incorporate an element of surprise, the auditor may consider
different confirmation dates periodically, i.e., December 31 as a cut-off date in one year and June 30 in another
year and so on. Therefore, the statement that balance confirmation from trade receivables/trade payables can
only be obtained for balances standing in their accounts at the year-end is not correct.

SA 505
1. External confirmation procedures frequently are relevant when addressing assertions associated with
account balances and their elements, but need not be restricted to these items. Explain.

Ans: Property title deeds held by third parties | Investments purchased but delivery not taken | Stock held by
third parties | Debtor balances | Bank Balance and other information from bankers | Bank loans | Creditor
balances | Transactions & related details | Terms of agreement or transactions with third parties.

2. "Define the following :

(i) Positive confirmation request
(ii) Negative confirmation request
(iii) Non-response
(iv) Exception (MAY 20 RTP)

Ans: Positive confirmation request – A request that the confirming party respond directly to the auditor
indicating whether the confirming party agrees or disagrees with the information in the request or providing
the requested information.
Negative confirmation request – A request that the confirming party respond directly to the auditor only if the
confirming party disagrees with the information provided in the request.
Non-response – A failure of the confirming party to respond, or fully respond, to a positive confirmation
request, or a confirmation request returned undelivered.
Exception – A response that indicates a difference between information requested to be confirmed, or
contained in the entity’s records, and information provided by the confirming party.

3. What are the factors that are to be considered while designing a confirmation request?

Ans:
The assertions being addressed.
Specific identified risks of material misstatement, including fraud risks.
The layout and presentation of the confirmation request.
Prior experience on the audit or similar engagements.
The method of communication.
Management’s authorization to the confirming parties to respond to the auditor. Confirming parties may only
be willing to respond to a confirmation request containing management’s authorization.
The ability of the confirming party to provide the requested information

4. CA Rohit is appointed as an auditor of Grace Ltd., he wants to design a suitable Confirmation request
letter for a few debtors of Grace Ltd. As a senior auditor of the firm, explain to him with reference to SA
505 "External Confirmation" all the conditions that should be present to use Negative Confirmation
requests as the sole substantive audit procedure to address an assessed risk of material misstatement
at the assertion level

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 Ans: The auditor has assessed the risk of material misstatement as low and has obtained sufficient appropriate
audit evidence regarding the operating effectiveness of controls relevant to the assertion;  The population of
items subject to negative confirmation procedures comprises a large number of small, homogeneous, account
balances, transactions or conditions;  A very low exception rate is expected; and  The auditor is not aware of
circumstances or conditions that would cause recipients of negative confirmation requests to disregard such
requests

5. Reliability of external confirmations

Ans: The reliability of information to be used as audit evidence, and therefore of the audit evidence itself, is
influenced by its source and its nature, and the circumstances under which it is obtained, including the controls
over its preparation and maintenance where relevant.

SA 510
1. M/s Pankaj & Associates, Chartered Accountants, have been appointed as an auditor of ABC Limited. CA
Pankaj did not apply any audit procedures regarding opening balances. He argued that since financial
statements were audited by the predecessor auditor therefore he is not required to verify them. Is CA
Pankaj correct in his approach?

Ans: it is quite clear that CA Pankaj is not correct in his approach and therefore would be required to follow the
initial audit engagement and also apply audit procedures regarding opening balances.

2. Discuss the objective of Auditor with respect to Opening balances – in conducting an initial audit
engagement.

Ans: In 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.

3. Routine checks cannot be depended upon to disclose all the mistakes or manipulation that may exist in
accounts, certain other procedures also have to be applied like trend and ratio analysis. Analyse and
Explain stating clearly the meaning of analytical procedures.

Ans: Since routine checks cannot be depended upon to disclose all the mistakes or manipulation that may exist
in accounts, certain other procedures also have to be applied like trend and ratio analysis in addition to
reasonable tests. These collectively are known as overall tests. With the passage of tests, analytical procedures
have acquired lot of significance as substantive audit procedure. SA-520 on Analytical Procedures discusses the
application of analytical procedures during an audit.

4. Explain the commonly used technique in the comparison of current data with the prior period balance
or with a trend in two or more prior period balances.

Ans: Trend Analysis (Data Comparisons with previous year)

Ratio Analysis (Ratio Comparisons with other firms, like Inter firm analysis)
Structural modelling (Correlation, Regression to construct equation and then use it to Predict Current Year)
Reasonableness Tests (Comparison with expected Data, Like Predictive Analysis)

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 SA 550
1. Mr. D is a director of X Ltd. and Y Ltd. On 30th June, 2015, Mr. D resigned from directorship of Y Ltd. X
Ltd. sold goods to Y Ltd., during the entire year at the same price and conditions as to any other customer.
X Ltd. discloses only the sales for the first quarter ending 30th June, 2015 as related party transactions.

Ans: As per SA 550 ‘Related Parties’, in examining the identified related party transactions, the auditor should
obtain sufficient appropriate audit evidence as to whether these transactions have been properly recorded and
disclosed. As per paragraph 23 of AS 18 ‘Related Party Disclosures’, transactions of X Ltd. for the first quarter
with Y Ltd. upto 30th June, 2014 only are required to be disclosed as related party transactions. The transactions
for the period in which related party relationship did not exist need not to be disclosed as related party
transactions. As X Ltd. has correctly identified and disclosed the related party transactions, the auditor need not
take any further action.

2. The nature of related party relationships and transactions may, in some circumstances, give rise to higher
risks of material misstatement of the financial statements than transactions with unrelated parties.
Explain with the help of at least three examples

Ans: Not conducted at normal market prices - Goods purchased at double the market price; complex related
party relationships & structures - Indian Co pays Technical Consultancy Fees -- USA Sub pays Management
Consultancy ; no appropriate employees - Delhi based Company indirectly holds controlling stake in Australian
company through its subsidiaries in Mumbai and Chennai

3. The auditor has a responsibility to perform audit procedures to identify, assess and respond to the risks
of material misstatement arising from the entity’s failure to appropriately account for related party
relationships, transactions or balances. During the audit, the auditor should maintain alertness for
related party information while reviewing records and documents. He may inspect the records or
documents that may provide information about related party relationships and transactions. Explain in
detail with examples

Ans: 1. Entity income tax returns. 2. Information supplied by the entity to regulatory authorities. 3. Shareholder
registers to identify the entity’s principal shareholders. 4. Statements of conflicts of interest from management
and those charged with governance. 5. Records of the entity’s investments and those of its pension plAns:. 6.
Contracts and agreements with key management or those charged with governance. 7. Significant contracts and
agreements not in the entity’s ordinary course of business. 8. Specific invoices and correspondence from the
entity’s professional advisors. 9. Life insurance policies acquired by the entity. 10. Significant contracts re-
negotiated by the entity during the period. 11. Internal auditors’ reports

4. There are specific accounting and disclosure requirements for related party relationships, transactions
and balances to enable users of the financial statements to understand their nature and effects on the
financial statements. Analyse and explain stating the responsibility of auditor in this regard

Ans: The auditor needs to obtain an understanding of the entity’s related party relationships and transactions
sufficient to be able to conclude whether the financial statements, insofar as they are affected by those
relationships and transactions: Achieve a true and fair presentation; or Are not misleading (for compliance
frameworks).

SA 560
1. Explain the meaning of the term subsequent events as used in the SA 560

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 Ans: SA 560 on “Subsequent Events” defines the term “subsequent events” as events occurring between the
date of the financial statements and the date of the auditor’s report, and facts that become known to the auditor
after the date of the auditor’s report., “subsequent events” also refer to significant events which occurred upto
the date of report of the auditor of that component. Thus, subsequent events are those events which occur
after the date of the balance sheet till the audit report is signed by the auditor.

2. "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. Explain the auditor’s obligation in the above situation."

Ans: 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:
 Discuss the matter with management and, where appropriate, those charged with governance.
 Determine whether the financial statements need amendment and, if so
Inquire how management intends to address the matter in the financial statements.

3. SA 560, “Subsequent Events” deals with the auditor’s responsibilities relating to subsequent events in
an audit of financial statements. Financial statements may be affected by certain events that occur after
the date of the financial statements. Many financial reporting frameworks specifically refer to such
events. Explain those events and also define subsequent events

Ans: Subsequent events refer to events occurring between the date of the financial statements and the
date of the auditor’s report, and facts that become known to the auditor after the date of the auditor’s
report

4. Indicate briefly the procedures to identify subsequent events requiring adjustment of or disclosure in
the financial statements. OR The auditors should consider the effect of subsequent events on the
financial statement and on auditor’s report– Comment according to SA 560

Ans: The auditor shall request management and, where appropriate, those charged with governance, to
provide a written representation in accordance with SA 580, “Written Representations” that all events
occurring subsequent to the date of the financial statements and for which the applicable financial
reporting framework requires adjustment or disclosure have been adjusted or disclosed

SA 570
1. When the use of the going concern basis of accounting is appropriate, assets and liabilities are recorded
on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal
course of business. Explain stating also the objective of the auditor regarding going concern.

Ans: The objectives of the auditor are: To conclude, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern; and To obtain sufficient appropriate audit evidence about the appropriateness of
management’s use of the going concern assumption in the preparation and presentation of the financial
statements; To determine the implications for the auditor’s report.

Page No. 27
2. TT Ltd. has suffered recurring losses due to steep fall in production and has negative net worth. Its
production head, an expert, has also left the company. Reply of the management is inadequate to these
developments and there is no sound action plan to mitigate these situations. Comment.

Ans: In the instant case, TT ltd. has suffered continuous losses and having negative net worth also. Besides, its
production head have also left the company resulting in steep fall in production. Thus, there are clear indications
that there is danger to entity’s ability to continue in future. Considering the fact that there is no sound plan of
action from the management to mitigate these factors and to put the company back on the recovery, the going
concern assumption does not hold appropriate. Therefore, the auditor should ask the management for its
adequate disclosure in the financial statement and include the same in his report.  However, if the management
fails to make adequate disclosure, the auditor should express a qualified or adverse opinion. If the result of the
inappropriate assumption used in the preparation of financial statements is so material and pervasive as to
make the financial statements misleading, the auditor should express an adverse opinion.

3. Management's assessment of the entity's ability to continue as a going concern involves making a
judgement about inherently uncertain future outcomes of events or conditions. What are relevant
factors to that judgement?

Ans: The degree of uncertainty associated with the outcome of an event or condition increases significantly the
further into the future an event or condition or the outcome occurs. For that reason, most financial reporting
frameworks that require an explicit management assessment specify the period for which management is
required to take into account all available information.  The size and complexity of the entity, the nature and
condition of its business and the degree to which it is affected by external factors affect the judgment regarding
the outcome of events or conditions.  Any judgment about the future is based on information available at the
time at which the judgment is made. Subsequent events may result in outcomes that are inconsistent with
judgments that were reasonable at the time they were made

4. When performing risk assessment procedures as required by SA 315, the auditor shall consider whether
events or conditions exist that may cast significant doubt on the entity’s ability to continue as a going
concern. In so doing, the auditor has determined that management of XYZ Ltd has already performed a
preliminary assessment of the entity’s ability to continue as a going concern. Explain how would auditor
of XYZ Ltd proceed in the above case. Also explain how would the auditor proceed if such an assessment
has not yet been performed by the management.

Ans: (i) If such an assessment has been performed, the auditor shall discuss the assessment with management
and determine whether management has identified events or conditions that, individually or collectively, may
cast significant doubt on the entity’s ability to continue as a going concern and, if so, management’s plans to
address them; or (ii) If such an assessment has not yet been performed, the auditor shall discuss with
management the basis for the intended use of the going concern basis of accounting, and inquire of
management whether events or conditions exist that, individually or collectively, may cast significant doubt on
the entity’s ability to continue as a going concern.

5. While doing audit of ABC Pvt Ltd, on the basis of sufficient and appropriate evidence, auditor comes to
a conclusion that use of the Going Concern Basis of Accounting is appropriate, but a material uncertainty
exists. Discuss the implications for auditor’s report if: (a) Adequate Disclosure of a Material Uncertainty
is Made in the Financial Statements (b) Adequate Disclosure of a Material Uncertainty is Not Made in
the Financial Statements

Ans: Adequate Disclosure of a Material Uncertainty is Made in the Financial Statements; Adequate
Disclosure of a Material Uncertainty is Not Made in the Financial Statements

Page No. 28
 SA 580
1. The management of Ankita Limited suggested for quick completion of the statutory audit that it would
give its representation about the receivables in terms of their recoverability. The management also
acknowledged to the auditors that the management would give their representation after scrutinizing
all accounts diligently and they own responsibility for any errors in these respects. It wanted auditors to
complete the audit checking all other important areas except receivables. The auditor certified the
account clearly indicating in his report the fact of reliance he placed on representation of the
management. Comment.

Ans: According to SA 580 “Written Representations”, the management representation cannot substitute other
audit evidence that the auditor could reasonably expect to be available to the auditor. The audit evidences
available for checking receivables- say, invoices, debt acknowledgement documents, receipts, statement of
accounts, confirmations etc., are available evidences which auditor is duty bound to verify. In the given case,
the management of Ankita Limited wants the auditor to carry out audit on all areas except on area of
receivables. The management of the company also committed to give representation and further owned
responsibility for any errors in these respects. However, just because management had owned responsibility for
the correctness of its evaluation of receivables, the auditor cannot shirk his responsibility. This is negligence on
his part if he relies on the management representation without assessing the corroborative available evidences.
There cannot be any restriction on scope of audit in case of statutory audit

2. Briefly explain Management Representation.

Ans: Not a substitute of regular audit procedure Although written representations provide necessary audit
evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters
with which they deal. Furthermore, the fact that management has provided reliable written
representations does not affect the nature or extent of other audit evidence that the auditor obtains about
the fulfilment of management’s responsibilities, or about specific assertions. It makes it absolutely clear
that written representations cannot be a substitute for other evidence that the auditor could expect to be
reasonably available.

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