CA Final November 2024 Suggested Answers Paper 3 Advanced Auditing, Assurance and Professional Ethics

FOR CA FINAL EXAM PREPARATION

CA Final 2024
Suggested Answers ·
Paper 3 Advanced
Auditing, Assurance
and Professional
Ethics
EXAM YEAR TYPE

CA Final 2024 Suggested Answers
SUBJECT DATE

Paper 3 Advanced Auditing, Assurance and Professional Ethics November 2024

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 3 : ADVANCED AUDITING,
ASSURANCE AND PROFESSIONAL ETHICS
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PART I: MCQs
a DEF & Associates have been appointed as the statutory auditor of JKLa
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a Ltd., a PSU engaged in generation of electricity from solar power. The
Committee on Public undertakings with a view to examining PSU's physical
and financial performer is examining the reports and accounts of public
undertaking and also audit findings of the C & AG. Following are some of
the functions of specialised committees:
(i) to examine the statement of accounts of autonomous and semi-
autonomous bodies, the audit of which is conducted by the Comptroller

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& Auditor General either under the directions of the President or by a
Statute of Parliament;

e m what economies, improvements in
organization, efficiency orsadministrative reform, consistent with the
(ii) to examine the estimates to report

policy underlying the g la may be effected;
a estimates
(iii) to examine the autonomy and efficiency of public undertakings and to
see whether they are being managed in accordance with sound business
principles and prudent commercial practices;
(iv) to examine public enterprises through comprehensive appraisal or
evaluation of performance of the undertaking. It involves a thorough
examination, including evaluation of the policies, programmes and

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financial working of the undertaking.

m From the above functions, which are the functions of Committee on Public
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a C. (i) & (ii)
D. (iii) & (iv) (2 Marks)

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SUGGESTED ANSWER FINAL EXAMINATION: NOVEMBER 2024

2. KALI Ltd. is India's one of the largest FMCG Company with 50-year heritage
in the country. In terms of compliance of reporting under Business
Responsibility and Sustainability Report (BRSR), for the F.Y. 2023-24, CEO &
MD of the company reports that "At KALI Ltd. our BRSR adheres to the nine
principles of the SEBI framework on sustainability reporting, informing
stakeholders of our sustainability endeavours." While giving principle wise
performance the following core elements associated with the respective
principle need to be covered in the report:
(i) Entities, when in the business of providing essential goods and services
(e.g. Utilities), should enable universal access, including to those whose
services have been discontinued for any reason, in a non-discriminatory
and responsible manner.
(ii) Entities should inform the customers on the safe and responsible ways
of usage, reuse, recycling, and disposal of their products, and ways to
eliminate over consumption.
(iii) The entities should transparently and accurately disclose all kinds of
adverse impacts to the user, planet, society, on the biodiversity from their
products.
(iv) The entities are responsible to educate and make aware their consumers
and clients about their rights.
From the above information, identify which core elements are related to
Principle-9?
A (i) & (iv)
B (i), (ii) & (iii)
C. (i), (iii) & (iv)
D. (ii), (iii) & (iv) (2 Marks)
3. For conducting the statutory audit for the financial year 2024-25, CA P has
been appointed by SEA Ltd., which is on the verge of becoming sick unit and
has accumulated losses but the said losses are not equal to or exceeding its
entire net worth as per last audited accounts for the year 2023-24. The
audited accounts for the year 2021-22, 2022-23 were showing liability for
payment of undisputed audit fees payable to predecessor auditors but were
settled completely during last F.Y. 2023-24.

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In terms of Council General guidelines, 2008, Chapter 7, read with relevant
proviso of the said guideline, which of the following statement is correct in
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respect of the aforesaid scenario?
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CA P shall be deemed to be guilty of professional misconduct as he has
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accepted the appointment as auditor of SEA Ltd. which had not paid
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l a s undisputed audit fee for the year 2021-22 and 2022-23 of predecessor
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ag B. CA P would not be held guilty of professional misconduct as he has
auditor, though settled in F.Y. 2023-24.

accepted the appointment as auditor of SEA Ltd. which is on the verge of
becoming sick unit but whose accumulated losses are not equal to or
exceeding its entire net worth as per last audited accounts for the year
2023-2024.
C. CA P would not be held guilty of professional misconduct as he has
accepted the appointment as auditor of SEA Ltd., which is not a sick unit,

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whose accumulated losses are not equal to or exceeding its entire net

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worth as per last audited accounts for the year 2023-24 and there are

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no unpaid undisputed audit fees of predecessor auditors.

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D. CA P shall be deemed to be guilty of professional misconduct as he has

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accepted the appointment as auditor of SEA Ltd. which is on the verge of
becoming sick unit and it had not paid undisputed audit fee of
predecessor auditor though settled in subsequent year. (2 Marks)
Integrated Case scenario - I
Tom Ltd. is in to the business of manufacturing and distributing of Toys for the
past 25 years. Since inception, the company is having its own in-house dedicated
internal audit department, having team of competent & qualified chartered

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accountants, headed by the Chief Internal Auditor, who with systematic and

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disciplined approach monitors various Internal Controls laid down at all levels of
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the functional areas. M/s Deva & Co., Chartered Accountants, have been newly

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appointed as the statutory auditors of the company for the F.Y. 2024-25.
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testing of the operating effectiveness of controls and ina respect of substantive
• M/s Deva & Co. want to use the work of the internal audit function

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extensive scope of statutory audit, M/s Deva & Co. want to take direct assistance
of internal auditors in the areas of Physical verification of fixed assets, inventory

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SUGGESTED ANSWER FINAL EXAMINATION: NOVEMBER 2024

verification and Goodwill impairment assessment. Accordingly, M/s Deva & Co.
are in the process of determining in which areas and to what extent internal
auditors can be used and in which areas statutory auditors shall not use internal
auditors to provide direct assistance to perform procedures.
• M/s Deva & Co. during the course of identifying and assessing the risks of
material misstatement through understanding the entity and its environment
and during the course of performing the audit procedures finds that the
company is holding significant bank accounts and having branch operations in
tax-haven jurisdictions for which there appears to be no clear business
justification. Also, there were significant related party transactions which do not
appear to be in the normal course of business.
• The audit report of Tom Ltd. for the last F.Y. 2023-24, audited by predecessor
auditor, contained a qualification regarding non provision of doubtful debts. In
F.Y. 2024-25 also, the company does not want to make provision for doubtful
debts. The statutory auditors, M/s Deva & Co., in their auditor's report on the
current period's financial statements want to report the same.
• Pursuant to the reporting requirements under CARO, 2020 in respect of the
company's regularity in depositing undisputed arrears of outstanding statutory
dues to the appropriate authorities, M/s Deva & Co. are considering to take a
view on the following issue observed during the audit of Tom Ltd.
The company in view of voluminous pay roll data consistently follows the method
of making lump sum deposit of estimated amount of ESI collections and adjust
the excess or deficit against next following months' deposit and the difference of
the said amount always remains insignificant.
Based on the above facts, answer the following Questions (Q.Nos.4 to 7):
4. M/s Deva & Co., in their auditor's report on the current period's financial
statements wants to report that Tom Ltd. does not want to make provision
for doubtful debts in F.Y. 2024-25. Identify the correct action to be resorted
out of the following:
A. As per SA 710, can modify their report for previous year's figures of
financial statements since the auditor's report on the prior period, as
previously issued, included a qualified opinion.

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B. As per SA 710, can modify their report for current year's figures of
financial statements but need not refer to the previous year's
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modification.
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As per SA 710, will have to modify their report for both current and
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previous year's figures of financial statements since the auditor's report
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lD.a As per SA 710, cannot modify their report but need to refer to the earliera
on the prior period, as previously issued, included a qualified opinion.
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ag year's modification. (2 Marks)
5. M/s Deva & Co. assigned the following procedures to internal auditors to
provide direct assistance.
(i) that relate to higher assessed risks of material misstatement where the
judgment required in performing the relevant audit procedures or
evaluating the audit evidence gathered is more than limited.

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(ii) that relate to work with which the internal auditors have been involved

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and which will not be reported to management or those charged with

em auditor makes in accordance with
governance by the internal audit function.
(iii) that relate to decisions thesstatutory

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From the above, identifyathe appropriate procedure(s) that can be assigned
SA.

to internal auditors:
A. (i), (ii), (iii)
B. (ii) only
C. (ii) & (iii)

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D. (iii) only (2 Marks)

m 6. Issue identified by Deva & Co., with regard to holding significant bank
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significant related party transactions is a fraud risk factor. What is the

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A. The risk factor creates a rationalization for the a
condition created by that fraud risk factor and what fraud does it result in?

ag fraud and results in a
misstatement due to fraudulent financial reporting.
B. The risk factor creates an incentive /pressure for the fraud and results in
a misstatement due to misappropriation of assets.
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SUGGESTED ANSWER FINAL EXAMINATION: NOVEMBER 2024

C. The risk factor creates a perceived opportunity for the fraud and results
in a misstatement due to fraudulent financial reporting.
D. The risk factor creates a perceived opportunity for the fraud and results
in a misstatement due to misappropriation of assets (2 Marks)
7. Out of the following which view of M/s Deva & Co. is the correct one for
complying the reporting requirement under CARO, 2020 as regards lump-
sum deposit of estimated ESI collections and its adjustment against next
months’ deposit leaving the insignificant difference of ESI amount?
A. the company consistently follows the method of payment in respect of
ESI collections and the difference between the total dues and lump sum
deposit is not significant, as per materiality concept, it need not be
considered that dues have not been regularly deposited and hence not
to be reported.
B. depositing of ESI collections and the arrears of ESI dues cannot be
considered as statutory dues under CARO, 2020 and hence not to be
reported.
C. lumpsum deposit of estimated ESI amount and adjusting excess/deficit
against following months' deposit shall be considered as dues payable
and hence to be reported under CARO, 2020.
D. even though the difference between the total dues of ESI and lump sum
deposit is not significant, as per materiality concept, it shall be
considered that dues have not been regularly deposited and hence to be
reported under CARO, 2020. (2 Marks)
Integrated Case Scenario - II
XYZ & Associates LLP, is a firm of Chartered Accountants, consisting of 12
partners has been allotted Central statutory audit of Maha Bank Limited, a
scheduled commercial bank.
(i) During the course of audit, you, as the Engagement partner, have been asked
by the GM to calculate CRAR. For this purpose, you have referred to the
Master circular on "Prudential Guidelines on Capital Adequacy and Market
Discipline - New Capital Adequacy Framework (NCAF)", which provides the
guidelines to be followed by banks for capital adequacy.
You are informed that the basic approach of capital adequacy framework is
that a bank should have sufficient capital to provide as table resource to
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absorb any losses arising from the risks in its business. You have observed
that Capital is divided into tiers according to the characteristics/qualities of
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each qualifying instrument. For supervisory purposes capital is split into two
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categories: Tier I and Tier II, representing different instruments quality as

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capital.. s e
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l1.a Tier I capital of Share capital ` 200 Crore, and disclosed Reserves ` 20a
You have calculated Eligible total capital funds comprising -

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2. Tier II capital of Other Reserves ` 30 Crore, and subordinated debt ` 20
Crore.
The Risk weighted assets constitute ` 25 Crore, while Off-balance sheet items
are ` 5 Crore.
(ii) As a part of the scope, the audit firm has been asked to find out the correct
position of Demand and Time liabilities of Maha Bank.
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DTL balance as on 30th September 2024 was ` 50,000 Crore which included
the following-
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(i) Paid up capital a 27,000
(ii) Reserves 1,650
(iii) Credit balance in Profit & Loss account 1,210
(iv) Loan taken from RBI 575
(v) Refinance taken from EXIM bank and NHB 480

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(vi) Part amounts of recoveries from the borrowers in

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respect of debts considered bad and doubtful of recovery

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gla a facilities
(ix) Margins held and kept in sundry deposits for funded 80
a (iii) During the FY 2024-25, XYZ & Associates LLP is appointed as Statutory
auditors of APP Ltd., an NBFC, which was set up under the Companies Act,
2013 and got itself registered as non-banking financial company (NBFC) with

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SUGGESTED ANSWER FINAL EXAMINATION: NOVEMBER 2024

the Reserve Bank of India, fulfilling the required criteria. During the financial
year ending 31st March 2025, the company commenced operations on a
massive scale. You are informed that RBI has revised different facets of
existing NBFC Classification and regulation like Capital requirements,
Government standards, Prudential regulations, etc. based on four layers that
are defined based on their size, activity and perceived riskiness.
During the FY 2024-25 APP Ltd. has accepted deposits of ` 900 Crore, while
its asset size is ` 990 Crore. It has also undertaken following activities -
(i) Standalone Primary Dealers (SPDs)
(ii) Infrastructure Debt Fund
(iii) Housing Finance
(iv) Infrastructure Finance
The auditors are about to begin audit of APP Ltd. for which your audit team
has been asked to prepare audit checklist.
(iv) XYZ & Associates LLP has been appointed as auditors of Heavy Electricals
Corporation, a Public Sector Undertaking (PSU) during the FY 2024-25 by
C & AG. It has been intimated about the intention of taking up planned
performance audit with the scope and extent of audit including the
constitution of audit team and the tentative time schedule, well before the
commencement of Audit. The Engagement partner has asked the audit team
to prepare an Audit Design Matrix (ADM) as it is a structured and highly
focused approach for designing a performance audit study. The audit team
has been informed that ADM should be prepared on the basis of information
and knowledge obtained during the planning stage. Further, it is desirable to
prepare ADM for each of the audit objectives.
On the basis of above details, you are required to answer the following
questions. (Q. Nos. 8 to 11):
8. Keeping in view of the information in para (iii), Identify under which layer
APP Ltd. will be categorised -
A. Top Layer
B. Upper Layer
C. Middle Layer

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D. Base Layer (2 Marks)
9. Based on facts given in para (i), you are required to arrive at the correct
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percentage of Capital Risk Adequacy Ratio for the Maha Bank Limited
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A. 9%
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B.
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10. Based on facts given in para (ii), you are required to Compute Demand and
Time Liabilities (DTL) balance as on 30th September 2024.
A. ` 18,000 crore
B ` 19,360 crore

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C. ` 18,790 crore
D. ` 18,880 crore
c. o (2 Marks)

e min para (iv), in the case of Performance
audit of PSU, which one of thesfollowing is not part of Audit Design Matrix
11. Keeping in view of the information

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(ADM)
A. Audit programme
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B. Evidence
C. Audit Questions
D Data collection and Analysis Method (2 Marks)
Integrated Case Scenario - III

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M/s HVM & Co. is a firm of Chartered Accountants based in Chennai. CA M,
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CA V and CA H are the partners of the firm. The firm is engaged in various

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assignments including Audits and its engagement partners who were handling

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their respective assignments for the financial year 2023-24 dealt with the
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following issues raised during and after the course of their respective audits.

ag M/s HVM & Co. are appointed as statutory auditors of AST Ltd. for the financial
year 2023-24. CA V, the engagement partner while conducting audit of AST Ltd.
was encountered with significant difficulties. He observed that there are not only
inordinate delays by the management but lack of willingness by the authorised

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SUGGESTED ANSWER FINAL EXAMINATION: NOVEMBER 2024

personnel of the company in providing the required information necessary to
perform audit procedures in making the assessment of AST Ltd.'s ability to
continue as a going concern in view of material uncertainty related to it. CA V
wants to communicate this and other circumstances as additional information in
his report with those charged with the governance.
Financial statements of VED Ltd. for the year ended on 31st March 2024 were
signed by CA H, the engagement partner on 15th May 2024. The AGM was
decided to be held during the month of August 2024. On 17th May 2024 the
company had received a communication from the Central Government that an
amount of ` 8500 crore on account of incentives in respect of F.Y. 2021-22 which
was kept in abeyance would be released to the company by 15th June 2024.
Accordingly, the Board of Directors of the company agreed to amend the accounts
and gave approval to include this amount in the financial statements of the
company for the Financial Year ended on 31st March, 2024 and requested CA H
to consider this matter.
During the course of audit of SIM Limited there arose doubts as to the reliability
of written representation regarding the existence and value of certain
Machineries. The management gave a certificate to prove the existence and value
of Machinery as appearing in the books of account. The certificate from the
Registered valuer shows a value which is inconsistent with the written
representation of management.
HT institute of professional studies is a reputed educational institution providing
various courses in the field of commerce and arts. The management of the
institution is inclined towards imparting quality education to the students,
therefore most of the faculties engaged by them are qualified professionals.
CA M of M/s HVM & Co. is an alumnus of the institution, and he has joined as a
visiting faculty for teaching financial management and accounting subject. The
management of the HT institute of professional studios is highly satisfied with his
teaching skills and level of knowledge he possesses. Due to his capabilities, the
management offers CA M to take up the assignment of statutory audit of their
institute for the financial year 2023-24.
Based on the above facts, answer the following Questions (Q. Nos. 12 to
15):
12. Since there arose a doubt on the management representation and
considering the responsibilities of M/s HVM & Co. to obtain written
representations from management as per relevant Standard on Auditing,

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select the incorrect option from the following:

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A. Although written representations provide necessary audit evidence, they

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do not provide sufficient appropriate audit evidence on their own about
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any of the matters with which they deal.
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B. The fact that management has provided reliable written representations

l a obtains about the fulfilment of management's responsibilities, or abouta
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C. In the case of identified inconsistencies between one or more written
representations and audit evidence obtained from another source, the
auditor may consider whether the risk assessment remains appropriate
and, if not, revise the risk assessment and determine the nature, timing
and extent of further audit procedures to respond to the assessed risks.

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D. The auditor may have identified significant issues relating to the

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competence, integrity, ethical values or diligence of management, or

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about its commitment to or enforcement of these, but concluded that the

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written representations are nevertheless reliable. In such a case, this

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significant matter is documented in accordance with SA 230. (2 Marks)
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13. CA V, engagement partner, in the course of audit of AST Ltd. wants to
communicate as he considers necessary to include additional information in
the auditor's report in accordance with SA 260. Following are the
circumstances for which communication with those charged with governance
is required.
Help CA V in getting identified incorrect circumstance from the below
mentioned circumstances.

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A. when the auditor has concluded that there is an uncorrected material
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misstatement of the other information in accordance with SA 720.

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em paragraph or Other Matter paragraph in accordance a
B. when the auditor considers it necessary to include an Emphasis

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gla required to do so by other SAs. a
a C. when a material uncertainty related to going concern is reported in
accordance with SA 570.

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SUGGESTED ANSWER FINAL EXAMINATION: NOVEMBER 2024

D. when there are no key audit matters to be communicated in accordance
with SA 701. (2 Marks)
14. In view of the Board of Directors of the VED Ltd. agreeing to include an
amount of ` 8500 crore on account of incentives in respect of F.Y. 2021-22
in the financial statements of the company for the Financial Year ended on
31 March, 2024 by amending the accounts, CA H shall consider the following
procedures. Identify the incorrect procedure from the following:
A. Carry out the audit procedures necessary in the circumstances on the
amendment.
B. Extend those audit procedures to the date of new auditor's report which
were designed to obtain sufficient appropriate audit evidence that all
events occurring between the date of the financial statements and the
date of the auditor's report that require adjustment of, or disclosure in,
the financial statements have been identified.
C. Provide a new auditor's report on the amended financial statements. The
new auditor's report shall not be dated earlier than the date of approval
of the amended financial statements.
D. Modify the opinion as required by SA 705 and then provide the auditor's
report. (2 Marks)
15. In response to the management offer, guide CA M, whether to take up the
assignment of statutory audit of HT institute of professional studies for the
financial year 2023-24.
Select the correct option in terms of professional code of conduct.
A CA M can accept the assignment as his role as a visiting faculty will not
interfere with the statutory audit functions.
B. CA M cannot accept the assignment as it violates clause (4) of Part I of
the Second schedule to the Chartered Accountants Act, 1949.
C. CA M can accept the statutory assignment as he does not have any
substantial interest in the HT Institute of professional studies.
D. CA M cannot accept the assignment as it violates clause (11) of Part I of
the First schedule to the Chartered Accountants Act, 1949. (2 Marks)

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Answers Key

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1. D
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2. B
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3. C

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a5.g B
4. C

6. C

7. A

8. C

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9. No correct option

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10. D

11. A
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12. B a g
13. D

14. D

15. B

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SUGGESTED ANSWER FINAL EXAMINATION: NOVEMBER 2024

PART II: Descriptive Question
Question No. 1 is compulsory.
Answer any four out of remaining five.
Question 1
(a) STA and Associates, Chartered Accountants, is an upcoming firm and its good
professional services are hired by diverse clients for assurance services. With
a standing of seven years in practice, the firm has clients in various industries
like health care, education, hospitality, manufacturing and many more. With
the increasing assignments, changes in regulatory compliances and
appointment of new personnel, the senior partner CA T is concerned with the
proper functioning of the system of Quality control within the firm. He wants
to ensure that policies and procedures relating to the system of quality
control of the firm are complied with properly. CA T suggests that a proper
monitoring of quality control will be the right approach. Discuss the factors
that are to be considered by CA T for monitoring the quality control of
engagements to ensure that they comply with SQC. (5 Marks)
(b) TEA Ltd., a public company is exclusively dealing in blending, processing,
packing and selling of various brands of Tea. During the year 2023-24, it had
availed credit facilities from Kuber Bank Ltd. The bank had sanctioned a
working capital cash credit facility on 21st April, 2023, for a limit of ` 4.50
crore and Letter of Credit facility for a limit of ` 2.50 crores aggregating to
`7 crore on the basis of the hypothecation of stocks and book debts of the
company against which utilisation of the limits by TEA Ltd. during the year
in the case of cash credit facility was ` 3.90 crore and of Letter of credit was
` 1.05 crore aggregating to ` 4.95 crore. During the year under review, the
company had faced sluggish market conditions for its various brands of teas
due to its inability to cater to the requirements of its customers' expectations.
It faced severe cash crunch and found it difficult to manage working capital
stress. In order that the bank does not reduce its drawing power of working
capital limit, the management decided to peg up the values of the stock
statements it submitted to bank by a hike of 15% during the quarters ended
June 2023, September 2023 and December 2023. When an engagement
partner leading the audit team happened to review the stock statements
submitted to the bank, it was noticed that the stock figures declared were not
in agreement with book figures and had been hiked as above. The matter

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was taken up with CFO of the company who contended that auditors need
not examine and compare the quarterly statements with the books of
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accounts as the utilisation of working capital limits is less than the specified
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sanctioned limit as on 31st March 2024 and hence this case is beyond the

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scope of reporting under CARO, 2020. Is the contention of CFO correct?

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Analyse the issue and discuss the reporting responsibilities of the auditor.
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l a (5 Marks)a
a(c)g Best Textiles Ltd. makes an investment in Prime Textiles Ltd. with a view to
expand its business, capture more market share and to earn higher returns.
While forming an agreement for the same, Best Textiles Ltd. puts a clause in
the contract that Prime Textiles Ltd. will get its financial statements reviewed
on a quarterly basis for a period of 2 years from the commencement of the
contract i.e. 01-04-2023. To comply with the provisions of the contract the
management of Prime Textiles Ltd. appoints CA Sumit to conduct the

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quarterly review of financial statements for the first quarter of the financial

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year 2023-24. Discuss from the practitioner's point of view, the preconditions

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for accepting a review engagement in accordance with the relevant SRE.

l a s (4 Marks)
Answer
a g
(a) Factors considered for Monitoring Quality Control Engagements: As
per SQC 1, “Quality Control for Firms that Perform Audits and Reviews of
Historical Financial Information, and Other Assurance and Related Services
Engagements,” factors to be considered by CA T for monitoring the quality
control of engagements to ensure that they comply with SQC:
• Deciding whether the quality control system of the firm has been

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appropriately designed and effectively implemented.

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• Examining whether new developments in the professional standards,

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legal, and regulatory requirements have been reflected in the quality

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control policies.
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gla a of monitoring
• Conducting monitoring by entrusting responsibility
a process to a partner or other persons with sufficient and appropriate
experience and authority in the firm.

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• Dealing with complaints and allegations against the firm or any
employees of it of noncompliance with professional standards or
appropriate regulatory requirements by a person within or outside the
firm.
• Taking appropriate remedial actions against the personnel who did not
conform to quality control policies.
• Taking action when deficiencies in the design or operation of the firm’s
quality control policies and procedures, or non-compliance with the
firm’s system of quality control are identified.
(b) Reporting Responsibility of the auditor as per para 3(ii)(b) of
CARO, 2020: As per para 3(ii) (b) of CARO, 2020, the auditor is required
to report whether during any point of time of the year, the company
has been sanctioned working capital limits in excess of five crore
rupees, in aggregate, from banks or financial institutions on the basis
of security of current assets; whether the quarterly returns or
statements filed by the company with such banks or financial
institutions are in agreement with the books of account of the
Company, if not, give details.
The above clause requires the auditor to comment on whether during
any point of time of the year, the company has been sanctioned
working capital limits in excess of ` 5 crores in aggregate. Tea Ltd. has
been sanctioned a working capital cash credit facilities for a limit of
` 4.50 crore and for Letter of Credit facility for a limit of ` 2.50 crores
aggregating working capital facilities/limit of ` 7 crores which is
apparently in excess of ` 5 crores. based on the security of current
assets i.e. Hypothecation of stocks and book debts of the company.
In addition, the auditor is required to ensure that whether the quarterly
returns filed by the Tea Ltd. company with Kuber Bank Ltd. are in
agreement with the book of accounts of the company.
In the instant situation, management of Tea Ltd. submitted its Stock
Statement by a hike of 15% during the quarter ended June 2023,
September 2023 and December 2023, to peg up the values of the stock
due to fear of reduction in the drawing power of working capital limit.
The auditor noticed that the stock figures declared by Tea Ltd. were
not in agreement with the book figures and had been hiked as above.

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Thus, the contention of CFO is not correct regarding applicability of
CARO, 2020 as the working capital is more than specified sanctioned
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limit as on 31st March, 2024. Hence the auditor is required to report
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the same in accordance with Clause (ii) (b) of Paragraph 3 of CARO,

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2020.
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a s e
(c) Preconditions for Accepting Review Engagement As per SRE: As per
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SRE 2400, Engagement to Review Historical Financial Statements, the
preconditions for accepting a review engagement are:
(1) Determine whether the financial reporting framework applied in the
preparation of the financial statements is acceptable including, in the
case of special purpose financial statements, obtaining an
understanding of the purpose for which the financial statements are
prepared and of the intended users, and;
(2) Obtain the agreement of management that it acknowledges and
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understands its responsibilities:

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(i) For the preparation of the financial statements in accordance with

l a s
the applicable financial reporting framework, including, where

agcontrol as management determines is necessary
relevant, their fair presentation.
(ii) For such internal
to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error; and
To provide the practitioner with: -
(a) Access to all information of which management is aware that is
relevant to the preparation of the financial statements, such as
records, documentation and other matters;

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(b) Additional information that the practitioner may request from

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management for the purpose of the review; and
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(c) Unrestricted access to persons within the entity from

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practitioner determines it necessary to obtain evidence.
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Question 2
(a) PN and Associates are appointed as the Statutory Auditors of The Iron
Company Ltd. The Central Government holds 65% of the paid-up share
capital in this company. The appointment letter of the company gave a very

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limited time to PN and Associates for accepting the audit. CA N, the
engagement partner communicated with the previous auditor but due to lack
of time he had to give acceptance for the audit assignment before receiving
reply from the previous auditor. Hence CA N gave a conditional acceptance
of the appointment and commenced the audit. Discuss with reference to the
Chartered Accountants Act, 1949 and the schedules thereunder, whether CA
N has complied with same. (5 Marks)
(b) UV Limited is a large multinational company with a global outreach. Due to
the voluminous business, it has an in-house internal audit function to
monitor the day-to-day operations of the company. LK and associates,
Chartered Accountants have been engaged to conduct the statutory audit for
the financial year 2023-24. Since the company has large scale operations
and there is a limited time to perform statutory audit, CA L, the engagement
partner decides to take direct assistance from the internal auditors for certain
areas of audit. CA L assigns the audit documentation part to one of his audit
assistants and instructs him to do the requisite documentation of working
papers. Further, he tells his audit assistant not to document the working
papers prepared by the internal auditors who directly assisted them, as it
does not form part of statutory audit.
Is CA L right in excluding the working papers prepared by internal auditor
from the audit documentation? Guide him as to the matters to be included
in the Audit Documentation in this scenario. (5 Marks)
(c) TP Limited is a medium-sized company involved in manufacturing and
retailing of home appliances to cater to the daily needs of a wide range of
consumers. The company has in place proper cyber security policies,
procedures and framework. Regular assessment of the same is also carried
out by the management. The company faced a cyber attack incident of email
phishing scam which resulted in inappropriate disbursals to various
individuals posing as vendors arid caused a substantial financial loss. This
incident highlighted the need for strong and updated internal controls to
mitigate the cyber risks. As the statutory auditor of the company, how will
you evaluate the controls around the vendor setup and modifications.
(4 Marks)

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Answer
(a) As per Clause (8) of Part I of First Schedule to the Chartered Accountants
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Act, 1949, a Chartered Accountant in practice is deemed to be guilty of
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professional misconduct if he accepts a position as auditor previously held
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by another chartered accountant or a certified auditor who has been issued
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l a s
certificate under the Restricted Certificate Rules, 1932 without first
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ag Although the mandatory requirement of communication with previous
communicating with him in writing.

auditor being Chartered Accountant applies, in uniform manner, to audits
of both government and Non-Government entities, yet in the case of audit
of government Companies/ banks or their branches, if the appointment is
made well in time to enable the obligation cast under this clause to be
fulfilled, such obligation must be complied with before accepting the audit.
However, in case the time schedule given for the assignment is such that
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there is no time to wait for the reply from the outgoing auditor, the

.
incoming auditor may give a conditional acceptance of the appointment

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and commence the work which needs to be attended to immediately after

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he has sent the communication to the previous auditor in accordance with
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this clause. In his acceptance letter, he should make clear to the client that
his acceptance of appointment is subject to professional objections, if any,
from the previous auditors and that he will decide about his final
acceptance after taking into account the information received from the
previous auditor.
In the given case, PN and Associates are appointed as the Statutory
Auditors of The Iron Company Ltd. which is a government company as

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Central Government holds 65% of the paid-up share capital of the company

co
and CA N has given a conditional acceptance of the appointment and
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commenced the audit. In view of above, it can be concluded that CA N has

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complied with the provisions of the Chartered Accountants Act, 1949 and

l a se
las the Schedules thereunder.
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(b) As per SA 610, Using the Work of an Internal Auditor,aif the external auditor
ag uses internal auditors to provide direct assistance on the audit, the external
auditor shall include in the audit documentation:

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(i) The evaluation of the existence and significance of threats to the
objectivity of the internal auditors, and the level of competence of the
internal auditors used to provide direct assistance.
(ii) The basis for the decision regarding the nature and extent of the work
performed by the internal auditors.
(iii) Who reviewed the work performed and the date and extent of that
review in accordance with SA 230 Audit Documentation.
(iv) The written agreements obtained from an authorized representative of
the entity and the internal auditors; and
(v) The working papers prepared by the internal auditors who provided
direct assistance on the audit engagement.
In the given situation, CA L the engagement partner decided to take direct
assistance from the internal auditor for certain areas of audit and he
assigned his audit assistant to do the requisite documentation of working
papers. However, he instructed them not to document the working papers
prepared by the internal auditors who directly assisted them as those
documents do not form part of statutory audit.
In view of the above, the auditor is required to document the working
papers prepared by the internal auditor in case of direct assistance, thus,
contention of CA. L in excluding the working papers prepared by internal
auditor from the audit documentation is not correct.
(c) Evaluation of the controls around the vendor setup and modifications:
Certain cyber schemes exist in which changes to bank account or other
critical vendor information are requested through email phishing scams by
individuals purporting to be authorized vendor personnel.
Entities have inappropriately dispersed funds to these individuals and
therefore inappropriately reduced the liability owed to the actual vendor,
resulting in an impact to the financial statements (i.e., loss of cash and
related expense)
• Who is responsible for making changes to vendor master data? Is the
process centralized or decentralized?

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• Are other communication channels, such as email, used to request
changes to vendor master data? (If yes, consider if multi-factor
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authentication is enabled for email).
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What systems and technologies are used to initiate, authorize and
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eAre authentication protocols defined to verify modifications to vendor gla
process requests related to changes to vendor master data?

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g master data (e.g., call back procedures, multi-factor authentication)?
•

aQuestion 3
(a) The Director (Discipline) of The Institute of Chartered Accountants of India
had received the matters in respect of cases of alleged misconduct against
CA H, the proprietor of M/s HA & Co, Chartered Accountants and was found
guilty of professional misconduct under Clause (4) of Part I of the Second
Schedule of the Chartered Accountants Act, 1949 and Clause (11) of Part I of

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the First Schedule of the Chartered Accountants Act, and penalty was

c o
Against the said order, CA H preferred.an appeal with the Appellate Authority
imposed by an order passed against him dated 15 th June, 2024.

s em the statement of appeal along with
aDuring such appellate proceedings, it was
on 5 August, 2024 by submitting
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th

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discovered that the saidastatement of appeal contained some facts which
application form of appeal.

were false to which CA H admitted it to be false and apologized for it.
Based on the above stated scenario of the matters placed before The Director
(Discipline) of ICAI against CA H, you are required to answer the following:
(i) Comment on violation of provisions of the Chartered Accountants Act,
1949 and its schedules thereto by CA H.

m
(ii) Before which authority, the matters of CA H would have been placed and

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what maximum punishment could have been imposed on him by the
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said authority in accordance with the Chartered Accountants Act, 1949?

m s e the order
s e within the time limit prescribed under the said Act? l a
(iii) Has CA H filed an appeal with the Appellate authority against

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(5 Marks)

ag (b) MK Electronics Limited is a listed company with eight subsidiaries spread
across various states. The financial statements of MK Electronics Ltd. are
audited by CA Amar, the principal auditor. CA Amar relies on the work of
other auditors for auditing the financial statements of subsidiaries. You are

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required to:
(i) Explain the procedures that CA Amar will perform to obtain sufficient
appropriate audit evidence to ensure that the work of other auditors is
adequate for his purpose.
(ii) Explain how he will document the working papers with respect to the
subsidiaries audited by other auditors. What matters need to be
documented if the other auditor's report is modified? (5 Marks)
(c) CEP Ltd., a manufacturing company, has a diverse range of suppliers for raw
materials and components. Several new suppliers have been added during
the past year. It is the responsibility of the Accounts payable department for
managing the Suppliers' Ledger, processing invoices and making payments.
The management of CEP Ltd. has experienced unexpected financial
discrepancies, and they suspect fraudulent activities within the Suppliers'
Ledger. The management assigns CA K to conduct a detailed investigation to
identify any potential fraud that might have occurred. Discuss the ways in
which frauds can be committed through Suppliers' Ledger. Explain the
procedures that CA K will adopt to investigate the potential fraud.(4 Marks)
Answer
(a) (i) As per Clause (3) of Part II of the Second Schedule to the Chartered
Accountants Act, 1949, a member of the Institute, whether in practice
or not, shall be deemed to be guilty of professional misconduct if he
includes in any information, statement, return or form to be submitted
to the Institute, Council or any of its committees, Director (Discipline),
Board of Discipline, Disciplinary Committee, Quality Review Board or
the Appellate Authority any particulars knowing them to be false.
In the instant case, CA H preferred an appeal with the Appellate
Authority on 05th August,2024 by submitting the statement of appeal
along with application form for the same. However, it was discovered
that the said statement of appeal contained some facts which were
false, and CA H admitted it to be false.
Therefore, CA H would be held guilty of professional misconduct under
Clause (3) of Part II of the Second Schedule to the Chartered
Accountants Act, 1949.

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(ii) In case where CA H was found guilty of professional misconduct
under Clause (4) of Part I of the Second Schedule and Clause 11 of
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Part I of the First Schedule of the Chartered Accountants Act, 1949:
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the matter would have been placed before Disciplinary Committee as

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it’s allied to both the Schedule because as per the Chartered
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a s e
Accountant Act, 1949 if the matter is allied to the Second Schedule or
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l Both it is referred to the Disciplinary Committee. The maximum
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ag punishment that the Disciplinary Committee could have imposed
would be:
(i) Reprimand the member
(ii) Remove the name of the member from the Register permanently
or for such period as it may think fit.
(iii) Impose such a fine which may extend to rupees five lakhs.
(iii) Timeline for Filing an Appeal: Any member aggrieved by an order of
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the Board of Discipline or the Disciplinary Committee can prefer an
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appeal within 90 days. In the given case, CA. H has preferred an appeal

s
with the appellate authority on 5th August,2024 against the order

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passed on 15th June 2024. From 15th June to 5th August, 90 days’

a
timeline has not been lapsed. Thus, it can be said that CA H has filed
an appeal within the time limit prescribed under the said Act.
(b) (i) The principal auditor CA. Amar should perform procedures to obtain
sufficient appropriate audit evidence that the work of the other auditor
is adequate for the principal auditor's purposes. When using the work
of another auditor, CA. Amar the principal auditor should ordinarily
perform the procedures given below:
(1) advise the other auditor regarding use of his (other auditor) work
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and report and make sufficient arrangements for co-ordination at
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c. o the planning stage of the audit. The principal auditor would inform
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the other auditor of matters such as areas requiring special

las consideration, procedures for the identification of inter-
a g
ag component transactions that may require disclosure and the time-
table for completion of audit;

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(2) advise the other auditor of the significant accounting, auditing and
reporting requirements and obtain representation as to
compliance with them.
(ii) CA Amar should document in his working papers, the components
whose financial information audited by other auditors. CA Amar should
also document the procedures performed and the conclusions
reached. For example, the auditor would document the results of
discussions with the other auditor and review of the written summary
of the other auditor's procedures.
Where the other auditor’s report is other than unmodified, the
principal auditor should also document how he has dealt with the
qualifications or adverse remarks contained in the other auditor’s
report in framing his own report.
(c) Ways in which fraud can be committed through suppliers’ ledger
are-
(i) Adjusting fictitious or duplicate invoices as purchases in the
accounts of suppliers and subsequently misappropriating the
amounts when payments are made to the suppliers in respect of
these invoices.
(ii) Suppressing the credit notes issued by suppliers and withdrawing
the corresponding amounts not claimed by them.
(iii) Withdrawing amounts unclaimed by suppliers, for one reason or
another by showing that the same has been paid to them.
(iv) Accepting purchase invoices at prices considerably higher than
their market prices and collecting the excess amount paid in cash,
from the suppliers.
CA K will ensure that the following procedures are adopted to
investigate potential fraud:
• that the Purchase Journal should be vouched by reference to
entries in the Goods Inward Book and the suppliers’ invoices to
confirm that amounts credited to the accounts of suppliers were
in respect of goods, which were duly received, and the suppliers’
accounts had been credited correctly.

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• All the suppliers should be requested to furnish statements of their
accounts to see whether or not any balance is outstanding or due
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so as to confirm that allowances and rebates given by them have
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been correctly adjusted and were duly authorized by the

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s e
s e• Examine the system of internal control in relation to purchase gla
la orders issued and identify possibilities of collusion with suppliers.a
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aQuestion
(a) M/s JPP & Associates have been appointed as auditors of ABC Ltd., an ISO
certified listed Indian multinational Jewellery Company having headquarters
at Mumbai for F.Y. 2024-25. The company has more than 100 showrooms in
India and 60 showrooms across the globe. During the course of audit, from
the matters communicated with those charged with governance the auditors
determined certain matters as most significant in the audit of the financial
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statements of the current period which are related to the company's offence

.
of money laundering against which Enforcement Directorate has enforced

s em
the stringent provisions of the Prevention of Money Laundering Act (PMLA).

l a
Public disclosure of this specific matter by the auditor is not precluded by
g
a
authorities under PMLA since the same may not prejudice investigation which
has already been officially completed and settled on 30th September 2024.
What would be the considerations of M/s JPP & Associates in determining
the matter requiring significant attention in performing the audit? State the
introductory language that JPP & Associates would use while communicating
such matter in their audit report as per relevant Standard on Auditing.
(5 Marks)
(b) CA Rajni is appointed as the statutory auditor of STS Ltd. for the financial
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year 2023-24 for auditing complete set of financial statements. The company
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has also assigned the audit of Property, Plant and Equipment to CA Rajni as

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a separate engagement for the financial year 2023-24. While drafting the

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audit report of complete set of financial statements, CA Rajni decides to give

gla a
an adverse opinion based on the audit observations noted during the course

a of audit. At the same time, she is also finalizing the audit report of the
separate engagement where she wants to give an unmodified opinion.

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Comment with reference to the relevant Standard on Auditing regarding the
opinion to be given by CA Rajni in audit report of separate engagement of
audit of Property, Plant and Equipment. (5 Marks)
(c) ESG disclosure and reporting is mandatory for top 1000 listed companies in
form of Business Responsibility and Sustainability Reports (BRSR). As
reporting of sustainability information becomes the trend being observed
globally, the demand for independent assurance of sustainability information
is anticipated to grow as entities around the globe look to enhance the
integrity of their sustainability reporting. In developing the understanding of
an entity, the auditor should include the consideration of climate - related
risks and how these risks may be relevant to the audits. Many investors and
stakeholders are seeking information from auditor's report about how
climate-related risks are addressed in the audit.
In the context of the above, describe the role of auditor in an audit of financial
statements of the company. (4 Marks)
Answer
(a) Communicating Key Audit Matters in the Independent Auditor’s Report:
As per SA 701, “Communicating Key Audit Matters in the Independent
Auditor’s Report”, the auditor shall determine, from the matters communicated
with those charged with governance, those matters that required significant
auditor attention in performing the audit. In making this determination, M/s
JPP & Associates shall take into account the following:
(i) Areas of higher assessed risk of material misstatement, or significant
risks identified in accordance with SA 315
(ii) Significant auditor judgments relating to areas in the financial
statements that involved significant management judgment, including
accounting estimates that have been identified as having high
estimation uncertainty.
(iii) The effect on the audit of significant events or transactions that
occurred during the period.
In view of the above, the matter related to the company's offence of money
laundering against which Enforcement Directorate has enforced the stringent
provisions of the Prevention of Money Laundering Act (PMLA) is a key audit
matter, and the same shall be communicated in the auditor's report KAM.

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The introductory language that M/s JPP & Associates would use while
communicating matters in this section of the auditor’s report shall state
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that:
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(i)
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Key audit matters are those matters that, in the auditor’s professional
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judgment, were of most significance in the audit of the financial
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a s statements [of the current period]; and.
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(ii) These matters were addressed in the context of the audit of thea
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ag financial statements as a whole, and in forming the auditor’s opinion
thereon, and the auditor does not provide a separate opinion on these
matters.
(b) Audit Report of Separate Engagement of Audit of PPE: As per SA 805,
“Special Considerations—Audits of Single Financial Statements and Specific
Elements, Accounts or Items of a Financial Statement”, if the auditor
undertakes an engagement to report on a single financial statement or on
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a specific element of a financial statement in conjunction with an

.
engagement to audit the entity’s complete set of financial statements, the

s em
auditor shall express a separate opinion for each engagement. If the auditor

l a
concludes that it is necessary to express an adverse opinion or disclaim an
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opinion on the entity’s complete set of financial statements as a whole but,
in the context of a separate audit of a specific element that is included in
those financial statements, the auditor nevertheless considers it
appropriate to express an unmodified opinion on that element, the auditor
shall only do so if:
(i) The auditor is not prohibited by law or regulation from doing so;
(ii) That opinion is expressed in an auditor’s report that is not published

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together with the auditor’s report containing the adverse opinion or

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disclaimer of opinion; and
c o
. entity’s
c. o em
(iii) The specific element does not constitute a major portion of the
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complete set of financial statements.
s In the given situation, CA Rajni is statutory auditorgof l STS Ltd. for the
gla a statements and has
a financial year 2023-24 for the complete set of financial
also assigned the audit of PPE as a separate engagement for the same
financial year. Considering the same, it can be concluded that CA Rajni can
give separate opinion on separate engagement i.e. adverse opinion for

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statutory audit and unmodified opinion for separate engagement provided
the above conditions are satisfied.
(c) Role of Auditor - Consideration of climate-related risks in an audit of
financial statements:
• The role of the auditor is to obtain reasonable assurance about
whether the financial statements as a whole are free from material
misstatement, to report whether the financial statements are prepared
and presented fairly, in all material respects, in accordance with the
applicable financial reporting framework.
• The auditor should include the consideration of climate-related risks
and how these risks may be relevant to the audits.
• The auditor’s reports must follow the requirements of applicable
auditing standards.
• The auditor’s report provides information about auditor’s
responsibilities and an understanding of the matters of most
significance in an audit and how they were addressed.
• The auditor in his audit report may include Emphasis of Matter
paragraph to draw attention to disclosures that are of fundamental
importance to users’ understanding of the financial statements.
• The auditor should determine whether the entity has appropriately
disclosed relevant climate-related information in the financial
statements in accordance with the applicable FRF.
• The auditor should read the other information for consistency with
information disclosed in the financial statements and information that
may be publicly communicated to stakeholders outside the financial
statements as required under ISA 720 and SA 720, The Auditor’s
Responsibilities Relating to Other Information.
Question 5
(a) PQR Ltd. is engaged in the business of construction and real estate having
various projects across the states. M/s ST & Co., Chartered Accountants have
been appointed as statutory auditors. CA T, an engagement partner, who
leads engagement team, during preliminary verification, identified a few
agreements entered by PQR Ltd. for the provision of services to some parties

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under terms and conditions that are outside PQR Ltd.'s normal course of
business, suggestive of the indications about existence of related party
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transactions that management has not previously disclosed to the auditor.
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Highlight the aspects that M/s ST & Co., shall consider on identification of

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previously undisclosed related party transactions with reference to the
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relevant standard on auditing. (5 Marks)
g l a
a Pharma Limited, a company dealing in research and development anda
(b) lPQ
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a manufacture of pharmaceuticals is coming up with an Initial Public Offer
(IPO). PQ Pharma Ltd. has prepared the prospective financial statements for
the next 3 years and included the same in the prospectus as part of its IPO.
The prospective financial information includes projected balance sheets,
statement of profit and loss and cash flow statements, which are prepared on
the basis of several key assumptions like favourable government regulations,
planned research and development of more effective medicines at reasonable
prices, etc.
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The company approaches CA Z to provide assurance on the prospective

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financial information and to assess the presentation and disclosure of the

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prospective financial information included in the IPO. List out the aspects
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that must be considered for making such assessment. (5 Marks)
a
(c) CA Gosh, newly qualified Chartered Accountant, joins a reputed CA firm as
a partner. He is full of confidence about his qualification and feels he
possesses complete knowledge of his profession for the future assignments.
The senior partner of the firm calls a meeting to brief the new partner and
other newly appointed audit assistants in his firm regarding the ethics that
need to be kept in mind while carrying out assurance and non-assurance
services. One of the areas he touches upon is the professional competence

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and due care that a Chartered Accountant needs to possess all the time.

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Enumerate the matters envisaged in subsection 113 of Revised Code of Ethics

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that needs to be complied with by a professional accountant with respect to

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Professional Competence and Due Care.
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(4 Marks)
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las Answer
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ag (a) As per SA 550, "Related Parties," M/s ST & Co. should take the following
steps upon identifying previously undisclosed related party transactions:
 Verify whether the circumstances substantiate the existence of such
transactions.
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SUGGESTED ANSWER FINAL EXAMINATION: NOVEMBER 2024

 Ensure timely communication of the relevant information to all
members of the engagement team.
 Confirm that appropriate substantive audit procedures have been
conducted.
 Inquire why the entity's controls failed to identify or disclose the
related party relationships or transactions.
 Carry out substantive audit procedures specifically for these newly
identified related parties or significant related party transactions.
 Reassess risks associated with other related parties.
 Request management to identify all transactions involving the newly
identified related parties.
 If it appears that management intentionally did not disclose such
transactions, evaluate the implications for the audit.
(b) When assessing the presentation and disclosure of the prospective financial
information and the underlying assumptions, in addition to the specific
requirements of any relevant statutes, regulations as well as the relevant
professional pronouncements, it needs to be considered whether: -
(i) the presentation of prospective financial information is informative and
not misleading
(ii) the accounting policies are clearly disclosed in the notes to the
prospective financial information
(iii) the assumptions are adequately disclosed in the notes to the
prospective financial information. It needs to be clear whether
assumptions represent management’s best-estimates or are
hypothetical and, when assumptions are made in areas that are
material and are subject to a high degree of uncertainty, this
uncertainty and the resulting sensitivity of results needs to be
adequately disclosed
(iv) the date as of which the prospective financial information was
prepared is disclosed. Management needs to confirm that the
assumptions are appropriate as of this date, even though the
underlying information may have been accumulated over a period of
time

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(v) the basis of establishing points in a range is clearly indicated and the
range is not selected in a biased or misleading manner when results
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shown in the prospective financial information are expressed in terms

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of a range and
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m in the most recent historical financial statements, whether las e
edisclosed
(vi) if there is any change in the accounting policy of the entity from that

l a s reason for the change and the effect of such change on the prospectiveag
ag financial information has been adequately disclosed.
(c) Professional Competence and Due Care – Subsection 113
1. A professional accountant shall comply with the principle of
professional competence and due care, which requires an accountant
to:
(a) Attain and maintain professional knowledge and skill at the level

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required to ensure that a client or employing organization receives

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competent professional service, based on current technical and

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professional standards and relevant legislation; and

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(b) act diligently in accordance

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a employing organizations with professional
professional standards.
2. Serving clients and
competence requires the exercise of sound judgment in applying
professional knowledge and skill when undertaking professional
activities.
3. Maintaining professional competence requires a continuing awareness
and an understanding of relevant technical, professional and business
developments.
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4. Continuing professional development enables a professional
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accountant to develop and maintain the capabilities to perform

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competently within the professional environment.
la se
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Diligence encompasses the responsibility to act in accordance with the

ag requirements of an assignment, carefully, thoroughly and on a timely
basis.
6. In complying with the principle of professional competence and due
care, a professional accountant shall take reasonable steps to ensure

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SUGGESTED ANSWER FINAL EXAMINATION: NOVEMBER 2024

that those working in a professional capacity under the accountant’s
authority have appropriate training and supervision.
Where appropriate, a professional accountant shall make clients, the
employing organization, or other users of the accountant’s professional
services or activities, aware of the limitations inherent in the services or
activities.
Question 6
(a) CA M is appointed as the Statutory auditor of Fincorp Limited for the financial
year 2023-24. This company is an NBFC covered under Non-Banking
Financial Company - Systemically Important Non-Deposit-taking company.
To comply with the RBI Prudential Norms for asset classification, Fincorp
Limited has made the following provisioning in respect of loans, advances
and other credit facilities as on 31st March, 2024:

Particulars Balance outstanding as Provision for
on 31st March, 2024 the Financial
year 2023-24
Standard Assets ` 200 crores NIL
Sub-standard Assets ` 15 crores (Fully secured) ` 1.50 crores
Doubtful Assets (one to ` 8 crores (Fully secured) ` 2.00 crores
three years)
Loss Assets ` 2 crores ` 2.00 crores
Total Provision for NPA ` 5.50 crores

CA M is of the opinion that the company has not done the provisioning
correctly. Is the opinion of CA M correct? In this context, explain the
provisioning requirements applicable to this NBFC and comment on the
provision for NPA made by the company. (5 Marks)
(b) ATP Limited, a large manufacturing company, is planning to invest funds in
RS Ltd. with a future vision of taking over the company at a later stage. On
studying the financial statements of RS Ltd, the investing company wants to
get detailed status regarding the Accounts receivable and Inventory
appearing in the Balance Sheet. ATP Limited approached you to perform
agreed upon procedures for the two elements of financial statement of RS
Ltd. and submit a detailed report for the same. As the engagement partner,

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you are responsible for drafting the engagement letter. Enumerate the key
matters that need to be agreed to form a clear understanding regarding
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agreed upon procedures and the conditions of the engagement. What
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matters will you include in the engagement letter addressed to the

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management of ATP Ltd? (5 Marks)
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(c) CA F is the Chief Financial Officer of ABC General Insurance Limited. Being
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in insurance business, the company gets majority of its clients through their
agency contracts. CA F has the practice of releasing the commission
payments on the condition that he gets 20% of the commission amount from
the agent. Comment with reference to the Chartered Accountants Act, 1949
and schedules thereto. (4 Marks)
Or
(c) The Government of India launched a rural development scheme to undertake
projects aimed at improving infrastructure, healthcare and education in the

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rural areas. To execute the projects the Central Government provided funds

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to the state government. The Comptroller and Auditor General of India wants

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to ensure that the funds provided to the State Governments have been

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utilized for the identified purposes and that public interest has not been

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harmed. You are appointed by C & AG to conduct the propriety audit and
report on the funds utilized by the state government for building hospitals,
school buildings and roads and submit a report on the wastefulness in public
administration and cases of improper, avoidable and infructuous
expenditures, if any, has been done. What functions as an auditor will be
performed by you?
Answer
(a) Provisioning Requirements: The provisioning requirement in respect of
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loans, advances and other credit facilities including bills purchased and
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discounted shall be as under:

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Categories of Non-Performing Assets:
la required (%) se Provision
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g Standard Assets: Every NBFC (covered under a
a Non-
Banking Financial Company - Systemically Important
0.40%

Non-Deposit taking Company and Deposit taking
Company (Reserve Bank) Directions, 2016) shall make

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SUGGESTED ANSWER FINAL EXAMINATION: NOVEMBER 2024

provisions for standard assets at 0.40 per cent by the
end of March 2018 and thereafter, of the outstanding,
which shall not be reckoned for arriving at net NPAs.
Substandard Assets 10%
Doubtful Assets (upto 1 to 3 Years) 30%

Loss Assets 100%

In the given situation, CA M is appointed as Statutory Auditor of Fincorp
Limited, an NBFC covered under NBFC (covered under Non-Banking
Financial Company - Systemically Important Non-Deposit taking Company
and Deposit taking Company (Reserve Bank) Directions, 2016) for the
financial year 2023-24. The Fincorp Limited has made the following
provisioning in respect of loans, advances and other credit facilities as under:

Categories of Balance Provision Provision Provision
Non-Performing outstanding as required required made by
Assets: on 31st March, (%) (in `) the Co.
2024
Standard Assets ` 200 crores 0.40% ` 80 lakhs NIL

Substandard ` 15 crores 10% ` 1.5 crores ` 1.5 crores
Assets

Doubtful Assets ` 8 crores 30% ` 2.4 crores ` 2 crores
(upto 1 to 3
Years)
Loss Assets ` 2 crores 100% ` 2 crores ` 2 crores
Total Provision for NPA ` 6.7 crores ` 5.5 crores

From the above, it can be concluded that provisioning for Substandard
Assets and Loss Assets is in accordance with the prescribed RBI Prudential
Norms whereas in case of Standard Assets and Doubtful Assets it is not as
per provisioning norms. Thus, CA M is correct in his opinion that the
company has not done the provisioning correctly.
(b) As per SRS 4400 “Engagements to Perform Agreed-upon Procedures
regarding Financial Information”, matter to be agreed and would be
included in the engagement letter are given as under:

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A. Matters to be agreed include the following:
(a) Nature of the engagement including the fact that the procedures
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performed will not constitute an audit or a review and that
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accordingly no assurance will be expressed.
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(b) Stated purpose for the engagement.

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a (d) Nature, timing and extent of the specific procedures to be applied.
(e) Limitations on distribution of the report of factual findings. When
such limitation would be in conflict with the legal requirements, if
any, the auditor would not accept the engagement.
B. Matters that would be included in the engagement letter include:

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• A listing of the procedures to be performed as agreed upon
between the parties.
c o
. of the report of factual findings
would be restricted tose
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• A statement that the distribution

laperformed.
the specified parties who have agreed to

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a of Part II of First Schedule of the Chartered
the procedures to be
(c) According to Clause (2)
Accountant Act, 1949, a member of the Institute (other than a member in
practice) shall be guilty of professional misconduct, if he being an
employee of any company, firm or person accepts or agrees to accept any
part of fee, profits or gains from a lawyer, a chartered accountant or broker
engaged by such company, firm or person or agent or customer of such
company, firm or person by way of commission or gratification.

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The objective is that when a member is in employment, he must maintain
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high level of ethics and should not accept any other amount from anyone
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for which he is not entitled from employer under contractual agreement of

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g la
gla In the present case, CA F is the Chief Financial Officer of ABC General
a
a Insurance Limited. He releases the commission payments on the condition
that he gets 20% of the commission amount from agent as majority of the
clients are through their agency only.

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Therefore, CA F is guilty of professional misconduct by virtue of Clause (2)
of Part II of First Schedule of the Chartered Accountant Act, 1949.
Or
(c) Function of Auditor in case of Propriety Audit: The functions of Auditor
in the context of Propriety Audit may be specified as under as to:
• see that all expenditure incurred are properly planned.
• see that the size and channels of expenditure are rightful and expected
to give maximum results.
• appraise whether those expenditure are likely to give optimum result.
• see that any substitute plan of action can bring about an improvement
on current operation and as well as return from capital expenditure.
• examine the actions and decisions of the management to see that they
are conductive to public interests and that they meet the standards of
conduct.

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