National Management College – Perundurai
CA-Intermediate Batch: 2022-2023
Group: II Paper 6: Auditing and assurance
Maximum marks: 100 Time allowed: 3hrs
Division A is compulsory
In Division B, Questions No.1 is compulsory
Attempt any 4 questions out of the remaining 5 questions
Division A (30Marks) 15*2
RM & Associates have been appointed as Auditors of Tech blocks consulting Ltd. For the year 2021-22. CA R and CA M were the Engagement partners.
Para 2
The firm has freshly appointed 2 Article clerks who had no practical knowledge in the area of auditing. They had to work to tight hard-headed factual issues and were baffling to understand the various terms and their objectives in the field of Auditing.
Para 2
To make sure that the article clerk do not misplace or mis-handle the working papers, CA M also described the relevance of audit file and clarified that working papers are the property of auditor. Such audit file should be preserved for a period of seven years.
Para 3
CA R while scrutinizing Books of Accounts suspected some fictitious sales as a result of which he anticipated inflated Debtors. Management was reluctant to give the details. As CA R could not gather more evidence from the management, he sought to obtain details from the management, he sought to obtain details from the third party.
Para 4
On further perusal of Opening Balances, it is essential to perceive that Accounting policies have been consistently applied in the current period’s financial statements and whether any changes have been
Properly accounted for and disclosed. CA M assigned this duty to his article clerk. The Article clerk explained to CA M about how he had observed that accounting policies were not consistently applied in relation to opening balances in accordance with the financial reporting framework or a change is not properly accounted or not adequately disclosed.
Para 5
Subsequently, the auditors gathered from the management that there was a fire in the factory premises after the Balance Sheet date, as a result of which the company suffered loss of Inventories. It did not provided any conditions on the Balance sheet date. SA 560 deal with such type of transactions.
1.
The Auditor explained his Audit team the purpose of Audit Documentation. Which of the following is incorrect with respect to the purpose of Audit Documentation?
(a) It enables the conduct of quality control reviews and inspections in accordance with SQC-1. (b) It helps in preparation of Financial Statements. (c) It retains a record of matters of continuing significance to future audits. (d) It enables the conduct of external inspections in accordance with applicable legal, regulatory or other requirements.
- An auditor strictly ensured that the audit team should document/ assemble all the working papers in Audit file. The completion of assembling the Audit File is an administrative process and should be done In.
(a) It should be within 30 days from the date of Audit Report. (b) It should be within 60 days from the completion of Audit (c) It should not be more than 60 days after the date of Audit Report. (d) It should be before 90 days from the completion of Audit.
3.
With reference to Para 3 of Case Scenario, this is a case of obtaining External Confirmation by the Auditor. Which of the following is inappropriate with regard to external Confirmation?
(a) External Confirmations are restricted to Account balances only.
(b) It is also used in a case to obtain Audit evidence about the absence of certain conditions say, Side Agreement. (c) It can be also effective in obtaining Audit evidence about verification of Inventories held by third parties at bonded ware houses for processing or on consignment.
(d) External Confirmation is also functional in case of Investments held for safekeeping by third parties, or purchased from stockbrokers but not delivered at the Balance Sheet date.
- With reference to para 4, in such a situation CA M shall express a
(a) A Disclaimer Opinion
(b) A qualified opinion
(c) A qualified opinion or an adverse opinion in accordance with SA 70
(d) An unmodified opinion.
- Respect to subject matter mentioned in Para 5, what procedures should Auditor perform to identify such events?
Statement 1: Obtain an understanding of any procedures management has established as well as Inquiry with
Management and those charged with governance procedures for identification of such subsequent events.
Statement 2: Inspection of Minutes of the meeting of the entity’s owners, management and those charged with
Governance that have been held after the date of the financial Statements and inquiring about the matters Discussed at any such meetings for which minutes are not yet available.
Statement 3: The Auditor should not read the entity’s least subsequent interim financial statements; if any.
(a) Only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both Statements 1 and 2 are correct
(d) Only Statement 3 is correct
During the FY 2021-22, a partnership firm of Chartered Accountants by the name of MN and Associates was appointed as auditor of four companies namely H1 Limited, W2 Limited, Y3 Limited and Z4 Limited. MN and Associates consisted of two partners namely Mr. M and Mr. N. The management of each company namely H1 Limited, W2 Limited, Y3 Limited Limited, and Z4 Limited prepared the financial statements for each company.
MN and Associates was required to form an opinion whether the financial statements of four companies Namely H1 Limited, W2 Limited, Y3 Limited and Z4 Limited were prepared according to the applicable financial Reporting framework. The audit teams of the respective companies checked the financial statements of all four Companies from the point of view of accounting policies, accounting estimates and information provided in the financial statements. Audit work of H1 Limited and Y3 Limited was conducted by Mr. M and Audit work of W2 Limited and Z4 Limited was conducted by Mr. N.
With respect to the financial statements of H1 Limited, Mr. M obtained sufficient and appropriate audit Evidence to conclude that misstatements were material but not pervasive. As far as W2 Limited was concerned, Mr. N was unable to obtain sufficient and appropriate audit evidence to Form an opinion. Mr. N also concluded that misstatements that were not detected may possibly affect the financial statements of W2 Limited and that effect may be material as well as pervasive.
For Y3 Limited, Mr. M concluded that its financial statements were prepared according to the applicable financial reporting framework.
For Z4 Limited, Mr. N obtained sufficient and appropriate audit evidence to conclude that misstatements were Material as well as pervasive to the financial statements of Z4 Limited.
- The a audit teams of all the companies checked the financial statements of all four companies from the point of view of accounting policies, accounting estimates etc. The accounting policies so adopted by the companies should be:
(a) Consistent and Appropriate.
(b) Inconsistent and Appropriate
(c) Consistent and Inappropriate
(d) Inconsistent and Inappropriate
- What kind of opinion should Mr. M give with respect to financial statements of H1 Limited for the FY 2021-22?
(a) Adverse Opinion.
(b) Qualified Opinion.
(c) Disclaimer of Opinion.
(d) Unmodified Opinion.
8.With respect to the audit of the financial statements of W2 Limited for the FY 2021-22, what kind of opinion should Mr. N give?
(a) Disclaimer of Opinion
(B) Adverse Opinion
(c) Qualified Opinion.
(d) Unmodified Opinion.
- Based on the conclusions drawn by Mr. M with respect to the financial statements of Y3 Limited, which of the following kind of audit opinion should be given by Mr. M?
(a) Disclaimer of Opinion. (b) Adverse Opinion.
(c) Qualified Opinion.
(d) Unmodified Opinion.
- As the auditor of Z4 Limited, which of the following kind of opinion should Mr. N give with respect to the financial statements of the FY 2021-22?
(a) Qualified Opinion. (b) Unmodified Opinion (c) Adverse Opinion. (d) Disclaimer of Opinion.
R & Z Associates have been appointed as the Statutory Auditors of ABC Ltd. For the financial year 2022-22. R & Z Associates is a partnership firm of CA. R and CA. Z based at Mumbai. Just after two months of appointment of the firm as statutory auditors of ABC Ltd, CA C joined R & z Associates since 1990. In 1995, all the 3 partners of E&F Associates were convicted by a Court of an offence involving fraud. They were remanded in judicial custody only for 1 month.
Further, the partners of the firm were debating among themselves about the content of Certificate to be dispensed by them in case of their Appointment as Auditors. Eventually they braved out their discussion by referring Rule 4 of the Companies (Audit & Auditors) Rules 2014.
R & Z Associates were also the statutory Auditors of Black sugar Pvt. Ltd. Its paid-up capital was ₹ 30 crores. They had availed a cash credit loan of ₹ 65 crores but were not utilizing it. However, since past 2 years they have utilizing the loan fullest to its sanctioned limit. Further, the auditors were contemplating as to whether the provisions related to rotation of auditors will be applicable in case of Black Sugar Pvt. Ltd.
ABC Ltd. Wanted to remove R & Z Associates as their Auditors as the latter one urged higher fee seeing substantial increase in the amount of work. So, the Management posted a letter to the auditors from their official company e-mail communicating the same .
Nevertheless, R & Z Associates opposed their removal as auditors from ABC Ltd. Hence, the company with no alternative appealed to Tribunal to seek consent.
- Sec 141 of the Companies Act 2013 deals with eligibility, qualifications and disqualification of Auditor. After the appointment of CA C in the Firm R & Z Associates, can the firm still continue to be the Auditor of the firm?
(a) No, all the partners of R & Z Associates are disqualified for appointment as Auditors.
(b) Yes, CA R and CA Z can continue the Audit, only CA C is disqualified from appointment.
(c) Yes, R & Z Associates with all its 3 partners CA R, CA Z and CA C can be appointed as the Auditors of the Company.
(d) None of the above is correct.
- Rule 4 of the Companies (Audit & Auditors) Rules 2014, states the subject matter to be included in the Certificate to be provided by the Auditors of the Company. Which one of them is INCORRECT out of the following?
(a) Individual or the firm is not disqualified for appointment under the Act, the Chartered Accountant Act 1949 and the rules or regulations made there under
(b) The Auditors are bound by the Ethical guidelines and will act in accordance with those ethical guidelines.
(c) The proposed appointment is as per the term provided under the Act and the proposed appointment is within the limits laid down by or under the Authority of the Act.
(d) The list of proceedings against the auditor or audit firm or any partner or of the audit firm pending with respect to professional matters of conduct as disclosed is true and correct.
- The, Auditors were sitting on the fence and discussing that whether provisions relating to Rotation of Auditor in case of Black Sugar Pvt. Ltd., would apply to them or not? What is your viewpoint in this regard?
(a) Yes, provisions for Rotation of Auditors shall be applicable to them.
(b) No, as provisions for Rotation of Auditors is applicable only to Listed Companies.
(c) No, provisions of Rotation are not applicable as the paid-up capital is below the thresh hold limit.
(d) The clause of public borrowings is applicable only to the public Companies. Hence it is not applicable in this case.
- The company is removing the Auditors before expiry of their term. In consonance with the provisions laid down in Companies Act 2013, what should be the correct course of action for the removal?
- i) The Company can remove the Auditors by passing a special resolution. ii) The Company can remove the Auditors by passing a special resolution and after obtaining the previous approval of the Central Government. iii) The Company shall remove the Auditor only after giving a reasonable opportunity of being heard. iv) The Company can remove the Auditor by passing an ordinary resolution and inform the Registrar within 30 days.
From the above – mentioned cases, which is the correct one?
(a) Option I is correct.
(b) Option ii is correct.
(c) Both option ii & iii is correct.
(d) Option iv is correct.
- The Management of the Company approached the Tribunal to remove the Auditors. The Tribunal may order or direct the Company to change the Auditor.
(a) By itself.
(b) On application by the Central Government
(c) On application by any concerned person. (d) All of the above
Divisions-B (70 Marks)
- No. 1
State with reasons (in short) whether the following statement is correct or incorrect:7*2
- The external control of municipal expenditure is exercised by the Central Government through the appointment of auditors to examine municipal accounts.
- The Comptroller and Auditor General does not have any authority to audit the accounts of stores and inventory kept in any office or department of the Union or of a State..
- In the computerized environment, the auditor need not be familiar with latest applicable RBI guidelines that have bearing on the classification/ provisions and income recognition.
- Any amount due to the bank under any credit facility is ‘overdue ‘ If it is not paid within 90 days of becoming due.
- Instead of modifying an opinion in accordance with SA 705, the statutory auditor can use Key Audit Matter paragraph in the audit report with an unmodified opinion.
- Tangible assets are depreciated when the asset is actually put to active use.
- Increase in authorized capital of the company requires special resolution to be passed at the general meeting.
Each question consisting 14 Marks (7+7)
Q.No.2
(a) The auditor A of ABC & Co. – firm of auditors is conducting the audit of XYZ Ltd and while performing testing of additions wanted to Verify that all PPE (Property Plant Equipment) purchase invoices are in the name of the entity he is auditing. For all additions to land, building in particular, the auditor desires to have concrete evidence about ownership. The auditor is worried about whether the entity has valid legal ownership rights over the PPE claimed to be held by the entity and recorded in the financial statements. Advise the auditor.
(b) Write the audit Procedure for verification of existence of Trade Receivables.
Q.No.3
(a) Discuss the following:
(i) In Joint Audit, “Each Joint Auditor is responsible only for the work allocated to him”. (ii) Discuss the purposes of cost audit. What are the legal provisions regarding applicability of cost audit?
Q.No.4
(a) Discuss the factors affecting the decision of the auditor regarding which type of modified opinion is appropriate.
(b) Define Emphasis of Matter Paragraph and how it should be disclosed in the Independent Auditor’s Report?
Q.No.5
(a) Explain the audit approach you would follow to check the Operating Expenses of a Bank.
(b) Explain the correct of branch audit.
Q.No.6
(a) You have been appointed as an auditor of an NGO briefly state the points on which you would concentrate while planning the audit of such an organization?
(b) As an auditor, which would be your areas of consideration while auditing the element of ROOM SALES during the audit of a 5-Star Hotel.
