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Mock Test Paper - Series II: December, 2024
Date of Paper: 13 th December, 2024
Time of Paper: 2 P.M. to 5 P.M.

INTERMEDIATE: GROUP – II
PAPER – 5: AUDITING AND ETHICS
SUGGESTED ANSWERS / HINTS
Part I - Multiple Choice Questions

1. (b)
2. (c)
3. (d)
4. (b)
5. (b)
6. (c)
7. (a)
8. (b)
9. (c)
10. (b)
11. (a)
12. (b)
13. (b)
14. (a)
15. (a)
Part II - Descriptive Answers
1. (a) SA 570, “Going Concern”, deals with the auditor’s responsibilities in the
audit of financial statements relating to going concern and the
implications for the auditor’s report.
If events or conditions have been identified that may cast significant
doubt on the entity’s ability to continue as a going concern, the auditor
shall obtain sufficient appropriate audit evidence to determine whether
or not 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 through performing additional audit procedures, including
consideration of mitigating factors. These procedures shall include:
(i) Where management has not yet performed an assessment of the
entity’s ability to continue as a going concern, requesting
management to make its assessment.
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(ii) Evaluating management’s plans for future actions in relation to its
going concern assessment, whether the outcome of these plans is
likely to improve the situation and whether management’s plans are
feasible in the circumstances.
(iii) Where the entity has prepared a cash flow forecast, and analysis
of the forecast is a significant factor in considering the future
outcome of events or conditions in the evaluation of management’s
plans for future actions:
(I) Evaluating the reliability of the underlying data generated to
prepare the forecast; and
(II) Determining whether there is adequate support for the
assumptions underlying the forecast.
(iv) Considering whether any additional facts or information have
become available since the date on which management made its
assessment.
(v) Requesting written representations from management and, where
appropriate, those charged with governance, regarding their plans
for future actions and the feasibility of these plans.
(b) As per SA 505, “External Confirmation”, If management refuses to allow
the auditor to send a confirmation request, the auditor shall:
(i) Inquire as to management’s reasons for the refusal, and seek audit
evidence as to their validity and reasonableness;
(ii) Evaluate the implications of management’s refusal on the auditor’s
assessment of the relevant risks of material misstatement,
including the risk of fraud, and on the nature, timing and extent of
other audit procedures; and
(iii) Perform alternative audit procedures designed to obtain relevant
and reliable audit evidence.
If the auditor concludes that management’s refusal to allow the auditor
to send a confirmation request is unreasonable, or the auditor is unable
to obtain relevant and reliable audit evidence from alternative audit
procedures, the auditor shall communicate with those charged with
governance in accordance with SA 260 “Communication with Those
Charged with Governance”.
The auditor also shall determine the implications for the audit and the
auditor’s opinion in accordance with SA 705 “Modifications to the
Opinion in the Independent Auditor’s Report”.
(c) As per SA 230, “Audit Documentation”, the auditor shall assemble the
audit documentation in an audit file and complete the administrative
process of assembling the final audit file on a timely basis after the date
of the auditor’s report.
♦ 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
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of the auditor’s report. 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.
♦ After the assembly of the final audit file has been completed, the
auditor shall not delete or discard audit documentation of any
nature before the end of its retention period.
In the given situation, the auditor CA Tanuj has issued the auditor's
report on 18th August 2024 for the financial year ended on 31st March
2024. However, he discarded some supporting schedules and corrected
cross-referencing errors of working papers during the final assembly of
the audit file by 10th October 2024 which is under prescribed time-limit
of 60 days from the issuance of auditors report. Further, no new audit
conclusions were drawn. Thus, CA Tanuj can make said changes to the
audit documentation during the final assembly process.
2. (a) As per SA 210, “Agreeing the Terms of Audit Engagements”, a request
from the entity for the auditor to change the terms of the audit
engagement may result from a change in circumstances affecting the
need for the service, a misunderstanding as to the nature of an audit as
originally requested or a restriction on the scope of the audit
engagement, whether imposed by management or caused by other
circumstances.
The auditor considers the justification given for the request, particularly
the implications of a restriction on the scope of the audit engagement.
A change in circumstances that affects the entity’s requirements or a
misunderstanding concerning the nature of the service originally
requested may be considered a reasonable basis for requesting a
change in the audit engagement.
In contrast, a change may not be considered reasonable if it appears
that the change relates to information that is incorrect, incomplete or
otherwise unsatisfactory. An example might be where the auditor is
unable to obtain sufficient appropriate audit evidence regarding
receivables and the entity asks for the audit engagement to be changed
to a review engagement to avoid a qualified opinion or a disclaimer of
opinion.
Hence Deepa Ltd.’s request for the audit engagement to be changed to
a review engagement to avoid a qualified opinion or a disclaimer of
opinion is not reasonable.

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(b) CARO, 2020 shall apply to every company including a foreign company
as defined in clause (42) of section 2 of the Companies Act, 2013,
except:
(i) a banking company as defined in clause (c) of section 5 of the
Banking Regulation Act, 1949 (10 of 1949);
(ii) an insurance company as defined under the Insurance Act,1938 (4
of 1938);
(iii) a company licensed to operate under section 8 of the Companies
Act;
(iv) a One Person Company as defined in clause (62) of section 2 of
the Companies Act and a small company as defined in clause (85)
of section 2 of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding
company of a public company, having a paid up capital and
reserves and surplus not more than one crore rupees as on the
balance sheet date and which does not have total borrowings
exceeding one crore rupees from any bank or financial institution
at any point of time during the financial year and which does not
have a total revenue as disclosed in Scheduled III to the
Companies Act (including revenue from discontinuing operations)
exceeding ten crore rupees during the financial year as per the
financial statements.
(c) Benefits and need of Audit:
• Audited accounts provide high quality information. It gives
confidence to users that information on which they are relying is
qualitative and it is the outcome of an exercise carried out by
following Auditing Standards recognized globally.
• In case of companies, shareholders may or may not be involved in
daily affairs of the company. The financial statements are prepared
by management consisting of directors. As shareholders are owners
of the company, they need an independent mechanism so that
financial information is qualitative and reliable. Hence, their interest
is safeguarded by an audit.
• An audit acts as a moral check on employees from committing
frauds for the fear of being discovered by audit.
• Audited financial statements are helpful to government authorities
for determining tax liabilities.
• Audited financial statements can be relied upon by lenders, bankers
for making their credit decisions i.e. whether to lend or not to lend to
a particular entity.

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3. (a) Understanding the Risk Management Process: Management develops
controls and uses performance indicators to aid in managing key
business and financial risks. An effective risk management system in a
bank generally requires the following:
(i) Oversight and involvement in the control process by those charged
with governance: Those charged with governance (Board of
Directors/Managing Director) should approve written risk
management policies. The policies should be consistent with the
bank’s business objectives and strategies, capital strength,
management expertise, regulatory requirements and the types and
amounts of risk it regards as acceptable.
(ii) Identification, measurement and monitoring of risks: Risks that
could significantly impact the achievement of bank’s goals should
be identified, measured and monitored against pre-approved limits
and criteria.
(iii) Control activities: A bank should have appropriate controls to
mitigate its risks including effective segregation of duties
(particularly between front and back offices), accurate
measurement and reporting of positions, verification and approval
of transactions, reconciliation of positions and results, setting up
limits, reporting and approval of exceptions, physical security and
contingency planning.
(iv) Monitoring activities: Risk management models, methodologies
and assumptions used to measure and mitigate risk should be
regularly assessed and updated. This function may be conducted
by the independent risk management unit.
(v) Reliable information systems: Banks require reliable information
systems that provide adequate financial, operational and
compliance information on a timely and consistent basis. Those
charged with governance and management require risk
management information that is easily understood and that enables
them to assess the changing nature of the bank’s risk profile.
(b) Restrictions on share holdings: - According to section 5 of the Central
Act, in the case of a society where the liability of a member of the society
is limited, no member of a society other than a registered society can
hold such portion of the share capital of the society as would exceed a
maximum of twenty percent of the total number of shares or of the value
of shareholding to ₹ 1,000/-.
Restrictions on borrowings - Section 30 of the Central Act further puts
restriction on borrowings. According to this section, a registered society
shall accept loans and deposits from persons who are not members
subject to the restrictions and limits of the bye-laws of the society. The
auditor will have to examine the bye-laws in this respect.”
In the given situation, Mr. Dhairya, a member of the society, is holding
200 shares amounting to ₹ 2000 from the previous year. In view of the
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aforementioned restriction on shareholding by a member, Mr. Dhairya is
allowed to hold a maximum of 100 shares according to the Act.
Further, Aman Co-operative Society had accepted a loan from Mr.
Shivam, a non-member. Since, there are no restrictions regarding the
acceptance of loan received from non-member in the society’s bye-laws,
the loan received from Mr. Shivam is permissible.
(c) In establishing the overall audit strategy, the auditor shall:
(i) Identify the characteristics of the engagement that define its scope;
(ii) Ascertain the reporting objectives of the engagement to plan the
timing of the audit and the nature of the communications required;
(iii) Consider the factors that, in the auditor’s professional judgment,
are significant in directing the engagement team’s efforts;
(iv) Consider the results of preliminary engagement activities and,
where applicable, whether knowledge gained on other
engagements performed by the engagement partner for the entity
is relevant; and
(v) Ascertain the nature, timing and extent of resources necessary to
perform the engagement.
4. (a) Follow up for items that are obsolete, damaged, slow moving and
ascertain the possible realizable value of such items. Carefully examine
the valuation of obsolete and damaged inventory.
For the purpose, request the client to provide inventory ageing split and
follow up for any inventories which at time of observance of physical
counting were noted as being damaged or obsolete.
• Compare recorded costs with replacement costs.
• Examine vendor price lists to determine if recorded cost is less than
current prices.
• Calculate inventory turnover ratio. Obsolete inventory may be
revealed if ratio is significantly lower.
• In manufacturing environments, test overhead allocation rates and
ensure that only direct labour, direct material and overhead have
been included.
• Verify the correct application of lower-of- cost-or-net realizable
value principles.
(b) Relationship between audit strategy and audit plan:
• Audit strategy sets the broad overall approach to the audit whereas
audit plan addresses the various matters identified in the overall
audit strategy.
• Audit strategy determines scope, timing and direction of audit. Audit
plan describes how strategy is going to be implemented.

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• The audit plan is more detailed than the overall audit strategy that
includes the nature, timing and extent of audit procedures to be
performed by engagement team members. Planning for these audit
procedures takes place over the course of the audit as the audit
plan for the engagement develops.
• 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, taking into 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.
(c) 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. Factors
that may affect the identification of an appropriate benchmark include
the following:
• The elements of the financial statements like assets, liabilities,
equity, revenue, expenses.
• Whether there are items on which the attention of the users of the
particular 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, 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.
• The relative volatility of the benchmark.
5. (a) Attributes for verifying other expenses like Power and Fuel, Repair
etc.: An entity in addition to making purchases and incurring employee
benefit expenses, also incurs other expenditures like rent, power and
fuel, repairs and maintenance, insurance, travelling, miscellaneous
expenses etc., that are essential and incidental to running of business
operations.
While the auditor may choose to analyse the monthly trends for
expenses like rent, power and fuel, an auditor generally prefers to vouch
for other expenses to verify following attributes:
(i) Whether the expenditure pertained to current period under audit;
(ii) Whether the expenditure qualified as a revenue and not capital
expenditure;
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(iii) Whether the expenditure had a valid supporting document like
travel tickets, insurance policy, third party invoice etc.;
(iv) Whether the expenditure has been classified under the correct
expense head;
(v) Whether the expenditure was authorised as per the delegation of
authority matrix;
(vi) Whether the expenditure was in relation to the entity’s business and
not a personal expenditure.
(b) If the auditor assesses a risk of material misstatement regarding
litigation or claims that have been identified, or when audit procedures
performed indicate that other material litigation or claims may exist, the
auditor shall, in addition to the procedures required by other SAs, seek
direct communication with the entity’s external legal counsel. The auditor
shall do so through a letter of inquiry requesting the entity’s external legal
counsel to communicate directly with the auditor.
If law, regulation or the respective legal professional body prohibits the
entity’s external legal counsel from communicating directly with the
auditor, the auditor shall perform alternative audit procedures.
If it is considered unlikely that the entity’s external legal counsel will
respond appropriately to a letter of general inquiry, for example if the
professional body to which the external legal counsel belongs prohibits
response to such a letter, the auditor may seek direct communication
through a letter of specific inquiry. For this purpose, a letter of specific
inquiry includes:
(i) A list of litigation and claims;
(ii) Where available, management’s assessment of the outcome of
each of the identified litigation and claims and its estimate of the
financial implications, including costs involved; and
(iii) A request that the entity’s external legal counsel confirm the
reasonableness of management’s assessments and provide the
auditor with further information if the list is considered by the
entity’s external legal counsel to be incomplete or incorrect.
(c) Familiarity threats: Familiarity threats are self-evident and occur when
auditors form relationships with the client where they end up being too
sympathetic to the client’s interests. This can occur in many ways
including:
(i) close relative of the audit team working in a senior position in the
client company;
(ii) former partner of the audit firm being a director or senior employee
of the client;
(iii) long association between specific auditors and their specific client
counterparts; and

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(iv) acceptance of significant gifts or hospitality from the client
company, its directors or employees.
Provisions in Companies Act, 2013 regarding rotation of auditors mainly
address these very familiarity threats. Such provisions prescribe that
auditor is rotated after a certain number of years so that auditors do not
become too familiar with their clients.
6. (a) Matters the auditor may consider in determining the extent of test
of controls include the following:
• The frequency of the performance of the control by the entity during
the period.
• The length of time during the audit period that the auditor is relying
on the operating effectiveness of the control.
• The expected rate of deviation from a control.
• The relevance and reliability of the audit evidence to be obtained
regarding the operating effectiveness of the control at the assertion
level.
• The extent to which audit evidence is obtained from tests of other
controls related to the assertion.
(b) Joint Audit of Financial Statements: As per SA 299, “Joint Audit of
Financial Statements”, all the joint auditors shall be jointly and severally
responsible for:
(i) the audit work which is not divided among the joint auditors and is
carried out by all joint auditors;
(ii) decisions taken by all the joint auditors under audit planning in
respect of common audit areas;
(iii) matters which are brought to the notice of the joint auditors by any
one of them and there is an agreement among the joint auditors on
such matters;
(iv) examining that the financial statements of the entity comply with
the requirements of the relevant statutes;
(v) presentation and disclosure of the financial statements as required
by the applicable financial reporting framework;
(vi) ensuring that the audit report complies with the requirements of the
relevant statutes, applicable Standards on Auditing and other
relevant pronouncements issued by ICAI.
(c) As per SA 580, “Written Representations”, the date of the written
representations shall be as near as practicable to, but not after, the date
of the auditor’s report on the financial statements. The written
representations shall be for all financial statements and period(s)
referred to in the auditor’s report.
Furthermore, because the auditor is concerned with events occurring up
to the date of the auditor’s report that may require adjustment to or
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disclosure in the financial statements, the written representations are
dated as near as practicable to, but not after, the date of the auditor’s
report on the financial statements.
The written representations are for all periods referred to in the auditor’s
report because management needs to reaffirm that the written
representations it previously made with respect to the prior periods
remain appropriate.
Situations may arise where current management were not present during
all periods referred to in the auditor’s report. Such persons may assert
that they are not in a position to provide some or all of the written
representations because they were not in place during the period. This
fact, however, does not diminish such persons’ responsibilities for the
financial statements as a whole. Accordingly, the requirement for the
auditor to request from them written representations that cover the whole
of the relevant period(s) still applies. In view of above, management is
required to provide the written representation for all the periods even
when current management were not present during all periods referred
to in the auditor’s report.
OR
(c) As per SA 315, “Identifying and Assessing the Risk of Material
Misstatement through Understanding the Entity and its Environment”,
the auditor shall obtain an understanding of the relevant industry,
regulatory and other external factors including the applicable financial
reporting framework. Relevant industry factors include industry
conditions such as the competitive environment, supplier and customer
relationships, and technological developments.
♦ Examples of matters the auditor may consider include market and
competition, whether entity is engaged in seasonal activities,
product technology relating to the entity’s products. The industry in
which the entity operates may give rise to specific risks of material
misstatement arising from the nature of the business or the degree
of regulation.
♦ Relevant regulatory factors include the regulatory environment.
The regulatory environment includes, among other matters, the
applicable financial reporting framework and the legal and political
environment.
♦ Examples of matters the auditor may consider include accounting
principles and industry specific practices, regulatory framework for
a regulated industry, legislation and regulation that significantly
affect the entity’s operations, including direct supervisory activities,
taxation, government policies currently affecting the conduct of the
entity’s business, environmental requirements affecting the
industry and the entity’s business.
♦ Examples of other external factors affecting the entity that the
auditor may consider include the general economic conditions,
interest rates and availability of financing, and inflation etc.
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