CA Final January 2026 Suggested Answers Paper 3 Advanced Auditing, Assurance and Professional Ethics

FOR CA FINAL EXAM PREPARATION

CA Final 2026
Suggested Answers ·
Paper 3 Advanced
Auditing, Assurance
and Professional
Ethics
EXAM YEAR TYPE

CA Final 2026 Suggested Answers
SUBJECT DATE

Paper 3 Advanced Auditing, Assurance and Professional Ethics January 2026

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 – Multiple Choice Questions

g la Case Scenario - I
Integrated a
aAT Solutions Ltd. (ATS) is a rapidly growing, unlisted tech company specializing
in providing cloud-based software services. The company was founded five years
ago by two visionary co-founders, Mr. RV (CEO) and Mr. AG (CTO), who also serve
as the key members of Those Charged with Governance (TCWG).
CA RM is the Engagement Partner for the audit of ATS for the financial year
ending March 31, 2025. Your firm, RM & Associates, has been the statutory

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auditors for the last three years.

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During the audit, your team encounters the following key issues and observations:

e m subscription services. A new policy was
s effective from April 1 , 2024, to recognize
• ATS earns revenue primarily through

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implemented in the current year,
g on an accelerated basis in the initial year,
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revenue from multi-year contracts
deviating from the previous practice of straight-line recognition over the
contract period. This change was not communicated to your firm beforehand
and resulted in a significant overstatement of current year revenue by
` 4 crores, which is both material and pervasive amount to the financial
statements. The company's previous policy was in line with applicable
accounting standards. When you raise this matter with the management,
they insist that the new policy better reflects the value derived from the initial

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customer onboarding efforts. The management refuses to revert to the
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c. o • ATS holds a small amount of physical inventory, consistingseofmspecialized
previous policy.

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server components. The physical verification was conducted by the
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company's internal team on March 31, 2025. However, the auditor was not
able to observe the stock count due to a last-minute travel restriction on the
audit team. Upon inquiry, the management provides a signed stock count
sheet and a video recording of the count. Your team performs alternative

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FINAL EXAMINATION: JANUARY 2026

procedures, including inspecting subsequent sales invoices and conducting a
review of the inventory movement records. The inventory balance is
` 24 lakhs, which is not material to the financial statements.
• Your team identified a significant transaction where ATS provided a loan of
` 20 crores to a subsidiary company, "ABC Solutions Pvt. Ltd.", which is a
related party. The transaction was approved by the board but was not
adequately disclosed in the draft financial statements. When confronted, the
management explained that since both the companies have common
ownership and control, they did not deem it necessary to disclose the
transaction, believing it was an internal matter.
• A former employee has filed a significant lawsuit against ATS, claiming
intellectual property theft. The claim amount is ` 6 crores, and the legal
counsel has advised the company that the outcome is highly uncertain, but
a potential liability cannot be ruled out. The management has provided a
contingent liability note in the draft financial statements, but it only
mentions the lawsuit without quantifying the potential financial impact or
detailing the nature of the claim, stating that they do not want to alarm
potential investors.
Your firm recently hired a new articled assistant, Mr. A, who is a close relative of
the CFO of ATS. Mr. A was initially assigned to the audit engagement. This
relationship was not disclosed by the audit firm, and the firm's quality control
procedures failed to identify this potential threat to independence. The
engagement partner, CA RM, only became aware of this fact during the final
review meeting. The audit fieldwork is complete. However, CA RM has applied the
appropriate safeguards.
Based on the above facts, answer the following Q. Nos. 1 to 6 by choosing the
most appropriate option:
1. Based on the auditor's observation regarding the new revenue recognition
policy, what type of audit opinion should CA RM issue on the financial
statements of ATS?
(A) Unmodified opinion, as the change is management's discretion.
(B) Qualified opinion, because the financial statements are materially
misstated due to the non-adherence to the previous accounting policy.

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ADVANCED AUDITING, ASSURANCE AND
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(C) Adverse opinion, because the material misstatement from the change in

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revenue recognition policy is pervasive.

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(D) Disclaimer of opinion, due to the management's refusal to correct the
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misstatement. (2 Marks)
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2. Considering

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most appropriate course of action for the auditor?
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ag (A) Issue a Qualified opinion as the inventory balance is not material, and
alternative procedures were performed.
(B) Issue a Disclaimer of opinion since the auditor could not observe the
physical count.
(C) Include the matter relating to inventory in Emphasis of Matter
paragraph.

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(D) Since the inventory is not material, the auditor should consider the audit

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to be complete without any modification to the opinion. (2 Marks)
3. In the context of the related party m
s e loan transaction with ABC Solutions Ltd.,

gla with respect to related party transaction.
what is the auditor's primary responsibility?
(A) To issue a Qualified aopinion
(B) To report the matter to the Serious Fraud Investigation Office (SFIO)
under Section 143(12) of the Companies Act, 2013.
(C) To assess if the non-disclosure constitutes a material misstatement and,
if so, to request management to disclose it.
(D) To issue an Unmodified opinion with an Emphasis of Matter paragraph

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to draw users' attention to the non-disclosure. (2 Marks)

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4. What should be the auditor's conclusion if the management refuses to

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disclose the pending litigation?

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(A) The auditor should include in Other Matter Paragraph regarding the

gla uncertainty of the pending litigation.

a (B) The auditor should issue a Disclaimer of opinion since the outcome is
uncertain.

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FINAL EXAMINATION: JANUARY 2026

(C) The auditor should include an Emphasis of Matter paragraph in the audit
report to highlight the uncertainty regarding the pending litigation.
(D) The auditor should express an Unmodified opinion as the management
has provided a note on the contingent liability. (2 Marks)
5. What is the most appropriate safeguard that CA RM should apply upon
discovering the relationship between the articled assistant and the CFO?
(A) The audit report should be qualified due to a lack of auditor
independence.
(B) The articled assistant should be immediately removed from the audit
team, and the work performed by him should be re-evaluated and
re-performed if necessary.
(C) The firm must resign from the engagement immediately as the
independence is impaired.
(D) The firm should inform TCWG of the situation, and an Unmodified
opinion can be issued if the work performed by the articled assistant is
not material. (2 Marks)
6. Which out of the following is not the auditor's responsibility concerning the
internal control system of ATS in respect of related party transaction?
(A) The auditor is required to report on the internal financial controls over
financial reporting (ICFR) as per the Companies Act, 2013.
(B) The auditor should report a material weakness in internal control related
to revenue recognition and related party transactions.
(C) The auditor should communicate the significant deficiencies in the
internal control system, to TCWG in writing.
(D) The auditor should report under clause (xiii) of CARO 2020. (2 Marks)
Integrated Case Scenario - II
LMN & Associates, Chartered Accountants, a leading firm in providing assurance
services, is in the course of finalizing various audit assignments. The audit team
has 5 audit assistants in addition to the engagement partners.
They are appointed as statutory auditors of DEF Finance Limited for the
F.Y. 2024-25. This is an Investment and Credit Company (ICC) incorporated in

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ADVANCED AUDITING, ASSURANCE AND
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March 2020. The company has total assets of ` 1,200 crores as on 31st March,
2024, with financial assets constituting 65% of total assets (netted off by
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intangible assets). The company's income from financial assets is 58% of its gross
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income. The company applied for RBI registration in April 2024 and currently has

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Net Owned Funds (NOF) of ` 8 crores. The company has been operating without
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RBI registration since inception.
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LMNla& Associates are also the statutory auditor for the F.Y. 2024-25 ofa
aSHgFinance Limited; a Non-Banking Finance company registered with RBI under
the Middle Layer category. The company is primarily engaged in providing loans
and advances to small and medium enterprises (SMEs) and individuals. During
the course of audit CA L, the engagement partner observed that the company has
classified a demand loan of ` 3.8 crores to RR Traders as NPA. This loan became
NPA on 1st September, 2023. The estimated realizable value of security is
` 2.2 crores and the company has made a provision of ` 1.6 crores (` 1.6 crores
= 100% of unsecured portion). He also observed that the company has invested
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in approved liquid assets worth ` 45 crores and held them in safe custody at its

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own premises.
During the audit process of the aboveecompanies,
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the engagement partners have

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signing of documents on behalf g
assigned the responsibility of various
of
to the audit assistants including
where need arises keeping in view the
clarifications issued by the Council as envisaged in the provisions of the Chartered
Accountants Act 1949. One of the audit assistants has signed the following
documents and conducted under mentioned jobs during audit of DEF Finance Ltd.:
(i) Issued the notes to accounts and cash flow statement ultimately finalized for
onward submission.
(ii) Asking for information or issue of questionnaire.

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(iii) Acknowledging and carrying routine correspondence with clients.

c. o (iv) Issued non-financial report expressing professional authentication.
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econducting a
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l related controls,
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CA N, the engagement partner of MT Industries Limited, while

l a comprehensive review of the audit trail functionality and
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ag observed that multiple employees use common User IDs for processing routine
transactions to improve efficiency. Changes made to the audit trail configurations
in the past are not formally documented or authorized through a defined
approval process.

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FINAL EXAMINATION: JANUARY 2026

During the course of audit of Global Reach Ltd., an Indian parent company,
CA L prepares the consolidated financial statements for the year ended
31st March, 2025. In his opinion the following informations given in the notes to
the separate financial statement need not be included in the consolidated
financial statement under IND
(i) Source from which bonus shares are issued (e.g., capitalization of profits or
reserves or from securities premium account).
(ii) Disclosure required under Micro, Small and Medium Enterprises Development
Act, 2006
(iii) Disclosure of all utilized monies out of the issue indicating the form in which
utilized funds have been invested.
(iv) Earnings in foreign exchange classified as export of goods not calculated on
F.O.B. basis.
Based on the above facts, answer the following Q. Nos 7 to 12 by choosing the
right option:
7. What is the minimum NOF requirement that DEF Finance Limited must
achieve by 31st March, 2027?
(A) 2 crores
(B) 7 crores
(C) 10 crores

(D) 8 crores (2 Marks)
8. For the loan of ` 3.8 crores to RR Traders, what should be the correct asset
classification and minimum total provisioning required for F.Y. 2024-25?
(A) Sub-standard Asset with provision of ` 1.98 crores
(B) Doubtful Asset with provision of ` 2.26 crores.
(C) Doubtful Asset with provision of ` 2.04 crores

(D) Loss Asset with provision of ` 3.8 crores (2Marks)

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9. During the audit of DEF Finance Ltd., which actions of the audit assistant

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regarding signing of documents and conducting of jobs should be approved

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by the engagement partner as correct?
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(A) (i) & (ii)
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(B) (ii)
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a (D) (i) & (iv) (2 Marks)
10. Which of the following are most specific IT controls for MT Industries Limited
to implement and operate to demonstrate that the audit trail feature is
functional, operated and not disabled?
(i) Controls to ensure that User IDs are assigned to each individual
employee and that User IDs are not shared among multiple users.

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(ii) Controls to ensure that the audit trail data is encrypted using advanced
cryptographic algorithms.

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(iii) Controls to ensure that changes

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are authorized and logs of
a all audit trail reports are printed and physically
(iv) Controls to ensure that
stored in fire-proof cabinets.
Choose the correct option from below:
(A) (i) & (ii)
(B) (ii) & (iii)

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(C) (i) & (iii)

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.c o (2 Marks)

c. o 11. Which of the following information given in the notes stoem the separate

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financial statement need not be included in Global Reach Ltd.'s consolidated

la financial statements under IND AS 110?
a g
ag (A) (i) & (ii)
(B) (ii) & (iii)

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FINAL EXAMINATION: JANUARY 2026

(C) (iii) & (iv)
(D) (i) & (iv) (2 Marks)
12. What should be CA L's observation regarding the custody arrangement of
investment made in approved liquid assets held by SH Finance Limited?
(A) The arrangement is acceptable as approved liquid assets can be held in
company's own custody.
(B) The company should lodge in safe custody these liquid assets with a
designated scheduled commercial bank as required by the NBFC
Acceptance of Public Deposits Directions and also should obtain
certificate from RBI to that effect.
(C) Safe custody arrangement is not relevant for audit purposes.
(D) Approved liquid assets need not be lodged with banks as they are risk-
free assets. (2 Marks)
13. Mr. Verma, the CTO of a mid-sized technology firm, has received an urgent
alert from his network monitoring dashboard: the company's customer portal
is responding extremely slowly and, within minutes, becomes completely
inaccessible. The alert appears to originate from the firm's own IT systems
and even displays familiar company branding and language in the
notification. Concerned about a potential server malfunction, Mr. Verma
contacts the operations team but they report no hardware failures or
software errors. Meanwhile, customers flood the support line, complaining
that they cannot log in or place orders. Real-time charts on the dashboard
show an enormous surge of traffic far beyond normal usage patterns.
Based on the above scenario, which type of cyber-attack is faced by the firm?
(A) IoT-Based Attack
(B) Spoofing Attack
(C) Denial-of-Service Attack
(D) Identity-Based Attack (2 Marks)
14. ABC Manufacturing Ltd. operates a large factory employing 1,200 workers.
Over the past year, management has introduced new shift schedules to meet
rising demand. However, production targets have pushed some line

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supervisors to require employees to work extended hours, routinely exceeding

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12-hour shifts with only 15-minute breaks. Several workers have complained

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of chronic fatigue, frequent musculoskeletal injuries and lack of time for rest
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or family commitments. A small group attempted to form a workers'

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committee to discuss these issues, but were told by management that any
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"collective gathering" would hamper productivity and could lead to
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disciplinary action.

social impact assessment and whether the company policies are aligned with
Corporate Social Responsibility (CSR) guidelines.
Based on the above scenario, which principle is not being adhered to by the
Company?
(A) Principle 5-Respect and Promote Human Rights

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(B) Principle 8-Promote inclusive growth and equitable development

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(C) Principle 3-Promote well-being of all Employees including those in the

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Value Chain.

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(D) Principle 4-Respect for stakeholders' Interests and Responsiveness.
a (2 Marks)
15. CA H, with an experience of 3 years in practice, has recently joined as a
partner with JP & Associates, Chartered Accountants. He is making efforts to
increase his professional income by taking up various assignments. Some of
the areas where he has engaged himself are as under:
(i) He is a part time faculty for the Live Virtual Classes run under the aegis
of the Institute for CA Students.
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(ii) He is also a lecturer of Management Accounting in one Private University

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in his locality.

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(iii) He is providing tutorship to Class XII Commerce students of

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Good Edu Public School run by G H Educational Society. a
a (iv) He is providing consultation for recovery of loans and advances portfolio
of MM Bank Limited.

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FINAL EXAMINATION: JANUARY 2026

The senior partner of his firm is of the view that all these assignments which
CA H has taken up require specific and prior approval of the Council and that
CA H will be deemed to be guilty of professional misconduct as he has not
taken such approval.
Based on the above, which amongst the four activities require specific and
prior approval of the Council?
(A) (i) & (ii)
(B) (ii) & (iii)
(C) (iii) & (iv)
(D) (ii) & (iv) (2 Marks)
Answer Key

MCQ No. Correct Option
1. (C)
2. (D)
3. (A/C)
4. (C)
5. (B)
6. (D)
7. (C)
8. (C)
9. (B)
10. (C)
11. (A)
12. (B)
13. (C)
14. (C)
15. (B)

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Part II – Descriptive Questions

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Question No.1 is compulsory.

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Candidates are required to answer any four questions from the remaining five

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questions.
m Working notes should form part of the answer.
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Question
a(a) DEF Apparels Ltd. is a manufacturing company with its business having a
global outreach. The company appoints CA Y as the statutory auditor for the
F.Y. 2024-25. During the audit, CA Y encountered the following issues:
(1) The company has a large manufacturing facility with Fixed Assets of the
value of ` 250 crores, which constitutes 60% of the total assets. The
facility was significantly damaged in flash floods during the year.
Management refused to allow an independent valuer to assess the
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damage, claiming internal estimates are sufficient. The company has not
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made any provision for impairment despite visible damage to machinery

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and buildings. Insurance claims are pending with disputes regarding
coverage.
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g into multiple transactions with related parties
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(2) The company has entered
totalling ` 120 crores during the year. However, the management has
refused to provide complete documentation regarding these
transactions, citing confidentiality agreements. The audit team was
denied access to board meeting minutes discussing these transactions
and could not verify the commercial rationale or arm's length nature of
these deals.

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In view of the observations made, what kind of opinion should CA Y give in

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the Audit Report? Justify your answer citing the above scenarios. On the basis
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of opinion decided by CA Y, you are required to draft the Opinion and Basis

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of Opinion paragraph to be given in the Independent Auditor’s Report.
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ag (b) AXO Automobiles Limited, a leading manufacturer of electric vehicles,
appoints WYZ & Co. Chartered Accountants as the statutory auditors for the
financial year ended March 31, 2025. CA W, the engagement partner, during
the course of audit identifies the following misstatements:

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FINAL EXAMINATION: JANUARY 2026

- An amount of ` 4 lakhs of rent income has not been recorded due to
oversight.

- An expense of ` 6 lakhs pertaining to F.Y. 2023-24 has been charged to
Profit and Loss Account in F.Y. 2024-25.
- In a sample testing of warranty provisions, projected misstatement in the
population is ` 10 lakhs.
CA W is of the opinion that the above misstatements need to be rectified to
portray the correct financial results of the company. The management of AXO
Automobiles Ltd. refused to make the necessary corrections on the contention
that these amounts were not material in relation to the company's turnover
of ` 250 crores.
With reference to the relevant Standards on Auditing analyze the
circumstances faced by CA W and guide him how he should evaluate the
effect of these misstatements which are not corrected by the management.
What communication requirements are applicable for the auditor in this
situation? (5 Marks)
(c) XYZ & Co., a mid-sized audit firm, has recently expanded its operations and
taken on several large clients. To manage the growing workload, the firm's
CEO has delegated operational responsibilities for the firm's quality control
system to two senior partners. However, certain concerns have been raised:
(1) One of the partners, though commercially successful in bringing in new
clients, has limited experience in audit quality oversight.
(2) The firm's new incentive system heavily rewards partners and staff based
on revenue generation and client acquisition, with little emphasis on
audit quality or compliance with professional standards.
(3) Due to rapid expansion, the firm has allocated most of its resources
towards marketing and client development.
The aforesaid concerns reflect on which element of quality control within the
firm as per SQC1? What are the considerations one should exercise to achieve
quality in all the engagements that the firm performs? (4 Marks)

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Answer
(a) In the present case, CA Y, the statutory auditor of DEF Apparels Ltd. for the
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financial year 2024–25, is unable to obtain sufficient and appropriate audit
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evidence in respect of following matters that are material and pervasive to
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eThe company’s fixed assets amounting to ` 250 crores constitute about gla
the financial statements:

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60% of the total assets and were significantly damaged due to flash
floods during the year. However, management refused to permit an
independent valuation of the damaged assets and relied solely on
internal estimates. Despite visible damage to machinery and buildings
and pending insurance claims with disputes regarding coverage, the
company has not made any provision for impairment loss. Due to this
management-imposed limitation, the auditor is unable to assess the
impairment, if any, and consequently cannot ascertain the carrying
value of fixed assets.
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The company entered into related party transactions aggregating to

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` 120 crores during the year. Management refused to provide complete

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documentation relating to these transactions and denied access to
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board meeting minutes citing confidentiality agreements. As a result,
the audit team was unable to verify the commercial rationale, arm’s
length nature, completeness, and adequacy of disclosure of such
related party transactions. The auditor was therefore unable to obtain
sufficient appropriate audit evidence in respect of these transactions.
In the above two circumstances the auditor is unable to obtain sufficient
appropriate audit evidence on which to base the opinion, and the possible
effects on the financial statements of undetected misstatements, if any,
could be both material and pervasive as per SA 705.
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Thus, CA Y should give a Disclaimer of Opinion.

s e and Basis
em for Disclaimer of Opinion paragraph is as under: l a
The relevant extract of the Disclaimer of Opinion Paragraph

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ag Disclaimer of Opinion
We were engaged to audit the financial statements of DEF Apparels
Ltd. (“the entity”), which comprise the balance sheet as at

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FINAL EXAMINATION: JANUARY 2026

March 31, 2025, the statement of Profit and Loss, [the statement of
changes in equity (where applicable)] and statement of cash flows for
the year then ended, and notes to the financial statements, including a
summary of significant accounting policies.
We do not express an opinion on the accompanying financial
statements of DEF Apparels Ltd. because of the significance of the
matters described in the Basis for Disclaimer of Opinion section of our
report, we have not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion on these financial
statements.
Basis for Disclaimer of Opinion
The Company’s manufacturing facility, carrying a value of ` 250 crores
(representing 60% of total assets), sustained significant physical
damage due to flash floods during the year. The management has
neither allowed an independent valuation nor recorded any
impairment provision. In the absence of a formal assessment and given
the pending insurance disputes, we were unable to determine the
extent of the required write-down and its consequential impact on the
financial statements.
We were unable to verify the completeness, commercial rationale, and
arm’s length nature of related party transactions totalling ` 120 crores.
Management refused to provide supporting documentation and
denied us access to the minutes of the meetings of the Board of
Directors citing confidentiality agreements. Consequently, we were
unable to verify the commercial rationale, arm’s length nature, and
completeness of disclosures of these related party transactions.
(b) SA 450 “Evaluation of Misstatements Identified During the Audit”, deals
with the auditor’s responsibility to evaluate the effect of identified
misstatements on the audit and of uncorrected misstatements, if any, on
the financial statements.
In the given situation, the auditor CA W should categorize the identified
misstatements to evaluate their nature and impact in case of rent income
of 4 lakhs not recorded due to oversight, expenses of 6 lakhs pertaining to
F.Y. 2023-24 charged to Profit & Loss Account in F.Y. 2024-25, and for
projected misstatement in the population sample test of warranty

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provisions of 10 lakhs. However, after insisting for rectification to reflect
the correct financial results of the company, Management of AXO
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Automobiles Ltd. refused to make necessary corrections. Therefore, CA W
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shall evaluate the effect of these misstatements which are not corrected by

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management in following manner:
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Prior to evaluating the effect of uncorrected misstatements, the auditor
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shall reassess materiality determined in accordance with SA 320 to confirm
whether it remains appropriate in the context of the entity’s actual financial
results.
The auditor shall determine whether uncorrected misstatements are
material, individually or in aggregate. In making this determination, the
auditor shall consider:
• The size and nature of the misstatements, both in relation to particular
classes of transactions, account balances or disclosures and the financial
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statements as a whole, and the particular circumstances of their
occurrence; and

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a account balances or disclosures, and the
• The effect of uncorrected misstatements
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related to prior periods on the

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relevant classes of transactions,
a
financial statements as a whole.
Communication: The auditor shall communicate with those charged with
governance, in accordance with SA 260, uncorrected misstatements and the
effect that they, individually or in aggregate, may have on the opinion in
the auditor’s report, unless prohibited by law or regulation. The auditor’s
communication shall identify material uncorrected misstatements
individually. The auditor shall request that uncorrected misstatements be

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corrected.

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Further, the auditor shall also communicate with those charged with
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governance the effect of uncorrected misstatements related to prior

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periods on the relevant classes of transactions, account balances or

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disclosures, and the financial statements as a whole.

ag (c) SQC 1, “Quality Control for Firms that Perform Audits and Reviews of
Historical Financial Information, and Other Assurance and Related Services
Engagements,” requires firms to establish policies and procedures
designed to promote an internal culture based on the recognition that

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quality is essential in performing engagements. Such policies and
procedures should require the firm’s chief executive officer or the firm’s
managing partners to assume ultimate responsibility for the firm’s system
of quality control. The example set by firm’s leadership encourages an inner
culture that recognizes high quality audit work.
It has been laid down clearly that the firm’s business strategy is subject to
the overriding requirement for the firm to achieve quality in all the
engagements that the firm performs. Essentially, it implies that audit quality
is paramount in all engagements. It is non-negotiable.
In the given situation, XYZ & Co., a mid-sized audit firm, has recently
undergone rapid expansion and taken several large clients. In order to
manage the increased workload, the firm’s CEO has delegated operational
responsibilities for the firm’s system of quality control to two senior
partners. However, concerns have emerged regarding the competence of
the personnel entrusted with quality oversight, the firm’s incentive
structure being heavily revenue-oriented, and the disproportionate
allocation of resources towards marketing activities. These issues raise
questions about the firm’s commitment to audit quality and compliance
with professional standards and primarily reflect weaknesses in the
“Leadership responsibilities for quality within the firm” element of quality
control as per SQC 1.
Overall, such a situation reflects lack of proper establishment of quality
control framework at top of the firm. Following considerations should be
taken into account while upholding quality of firm: -
(i) The firm assigns its management responsibilities so that commercial
considerations do not override the quality of work performed.
(ii) The firm’s policies and procedures addressing performance evaluation,
compensation, and promotion (including incentive systems) with
regard to its personnel are designed to demonstrate the firm’s
overriding commitment to quality and
(iii) The firm devotes sufficient resources for the development,
documentation and support of its quality control policies and
procedures.

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Question 2
(a) MNP Manufacturing Ltd., a listed company with a turnover of ` 2,500 crores,
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appointed three joint auditors: CA Anil & Associates, CA Raman & Co. and
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CA Reena & Associates to undertake the statutory audit of the company. The
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joint auditors divided the work amongst themselves in accordance with
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SA 299. CA Anil & Associates were responsible for fixed assets and related
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depreciation, CA Raman & Co. took the area of cash, bank and investments
and CA Reena & Associates handled inventory and receivables.
At the Annual General Meeting held on 30th September 2025, the company
decided not to reappoint CA Reena & Associates due to disagreements over
certain audit observations regarding valuation of inventory. The shareholders
passed a special resolution appointing CA Neha & Associates in place of
CA Reena & Associates, while retaining the other two joint auditors CA Anil
& Associates and CA Raman & Co.

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CA Neha accepted the appointment immediately upon receiving the
.
company's appointment letter and a certificate regarding compliance of

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provisions of the Companies Act, 2013. However, she later discovered that

l a
the company had not sent any special notice to the shareholders regarding
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her appointment as required under the Companies Act, 2013. She also found
that CA Reena & Associates had not been given an opportunity to make
representations to the shareholders regarding her non-reappointment.
Analyze the professional conduct of CA Neha in light of the provisions of the
Chartered Accountants Act, 1949 and Schedules thereto. (5 Marks)
(b) You have been appointed as internal auditor of a Company manufacturing
and trading in Chemicals. You have asked your team to review the internal

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controls and get the first hand information of each department and their

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heads and note their respective roles in the company's procurement and
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inventory processes.

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Your team has observed that-
la se
las (i)
a
The Head of Purchase department, a relative of the promoter, has for g
ag several years been in-charge of purchasing and sanctioning payments,
without allowing anybody to question him.

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FINAL EXAMINATION: JANUARY 2026

(ii) There has been no rotation of duties for several years of most of the
employees, in particular, the Chief Accountant who has a good rapport
with majority customers.
(iii) The Storekeeper also has not kept adequate stock records since he joined
the company without carrying out physical verification of the assets.
Analyse the specific violations of the principles of an adequate internal check
system. Evaluate how these control deficiencies, individually and collectively,
increase the inherent and control risk for the entity. (5 Marks)
(c) M/s RSP & Associates, a firm of Chartered Accountants, has been engaged to
conduct a review of the financial statements of AR Pvt. Ltd. for the quarter
ended 30th September 2025.
During the review, the engagement partner, CA R, explained to the audit
team that unlike a full-scope audit, a review primarily relies on inquiries and
analytical procedures to obtain limited assurance about whether the
financial statements are prepared in accordance with the applicable financial
reporting framework.
Explain how performing analytical procedures assists the practitioner in a
review of financial statements. (4 Marks)
Answer
(a) As per Clause (8) of Part I of First Schedule to the Chartered Accountants
Act, 1949, a CA in practice is deemed to be guilty of professional
misconduct if he accepts a position as auditor previously held by another
chartered accountant or a certified auditor who has been issued certificate
under the Restricted Certificate Rules, 1932 without first communicating
with him in writing.
Further, as per Clause (9) of Part I of First Schedule to the Chartered
Accountants Act, 1949, a CA in practice is deemed to be guilty of
professional misconduct if he accepts an appointment as auditor of a
company without first ascertaining from it whether the requirements of
Section 225 of the Companies Act, 1956 (1 of 1956), or sections 139 to 141
of the Companies Act, 2013 or any other law pertaining to appointment of
auditors for the time being in force, in respect of such appointment have
been duly complied with.

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Under this clause it is obligatory on the incoming auditor to ascertain from
the Company that the appropriate procedure in the matter of his
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appointment has been duly complied with so that no shareholder or
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retiring auditor may, at a later date, challenge the validity of such

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appointment.
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For the purpose of ascertaining whether the Company has complied with
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the provisions of Section 140 of the Companies Act the incoming auditor
should verify the records of the Company that whether a member of the
Company has given special notice of the resolution as required under
Section 140 (4) of the Companies Act, 2013 and to ensure that whether this
special notice has been sent to all the members, of the Company as
required under the Companies Act, 2013.
In the given case, CA Neha accepted the audit appointment immediately
on receipt of the company’s appointment letter and certificate of

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compliance, without first ensuring that proper professional communication

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had been made with the outgoing auditor, CA Reena & Associates, who

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was not reappointed due to disagreements over certain audit observations.
s
laof Part I of First Schedule to the Chartered
Therefore, CA Neha will be held guilty of professional misconduct under
the Clause (8) and Clauseg(9)
Accountants Act, 1949, a if she accepts the appointment without
communicating with previous auditor as well as for not verifying the
compliance of statutory requirements.
(b) Based on the observations made by the internal audit team, the following
violations of the principles of an adequate internal check system are
identified:

m
(i) The Head of the Purchase Department, being a relative of the

m
promoter, has been entrusted with both purchasing and sanctioning of
.co
c. o m
payments for several years without allowing anybody to question him.

em
This violates the fundamental principle that no single person should
la se
las have complete control over any important aspect of business
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operations and that every employee’s actions should come under the
a review of another person. It also breaches the principle relating to
distribution of financial and administrative powers and their periodic
review.

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FINAL EXAMINATION: JANUARY 2026

(ii) There has been no rotation of duties for several years of most of the
employees, in particular, the Chief Accountant, who has a good rapport
with major customers. This violates the principle that staff duties
should be rotated from time to time so that employees do not perform
the same function for a considerable length of time.
(iii) The Storekeeper has failed to maintain proper stock records and no
physical verification of assets has been carried out since his
appointment. This violates the principle that that those with physical
custody of assets should not have access to accounting records. It also
violates the principle that there should exist an accounting control in
respect of each class of assets, in addition there should be periodical
inspection so as to establish their physical condition.
Impact of Control Deficiencies on Inherent and Control Risk:
Increased Inherent Risk: The nature of the procurement and inventory
functions makes them inherently susceptible to fraud such as fictitious
purchases, overbilling, or theft of stock. The lack of proper controls means
that these inherent risks are not mitigated.
Increased Control Risk: Non-rotation of accounting staff increases the risk
of collusion and manipulation of receivables, while absence of stock
records and physical verification exposes the company to theft, pilferage,
and incorrect inventory valuation. The identified deficiencies demonstrate
that the company's internal control system is not operating effectively. This
leads to a high control risk in the procurement and inventory cycles.
(c) As per SRE 2400, “Engagements to Review Historical Financial
Statements”, In a review of financial statements, performing analytical
procedures assists the practitioner in:
(i) Obtaining or updating the practitioner’s understanding of the entity
and its environment, including to be able to identify areas where
material misstatements are likely to arise in the financial statements.
(ii) Identifying inconsistencies or variances from expected trends, values
or norms in the financial statements such as the level of congruence of
the financial statements with key data, including key performance
indicators.

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(iii) Providing corroborative evidence in relation to other inquiries or
analytical procedures already performed.
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(iv) Serving as additional procedures when the practitioner becomes aware
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of matters that cause the practitioner to believe that the financial
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statements may be materially misstated.
la
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Question 3
a g
a(a)g The Comptroller and Auditor General of India (C&AG) appointed M/s. VR &
Associates, a firm of Chartered Accountants, to conduct the audit of Sunshine
Ltd., a Public Sector Undertaking (PSU) under the Government of India and
intimated to the auditors about the following concerns in respect of the PSU.
Sunshine Ltd. proposed to set up a solar panel manufacturing project in North
Gujarat with an estimated cost of ` 5,750 crores, which included
` 2,000 crores earmarked for Research and Development (R&D). While all

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approvals, documentation, and statutory requirements were duly complied

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with, the C&AG expressed concern that the proposed R&D expenditure

em
appeared wasteful and lacking justification on the tests of public interest, as

a s
several established companies were already engaged in similar activities in
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that region.
a
Identify the type of audit that the C&AG expects M/s. VR & Associates to
conduct in this context. Also, explain the principles of this audit. (5 Marks)
(b) CA Amit, the auditor of KRT Pvt. Ltd, also undertakes statutory compliances
related to Income Tax, GST and MCA for the client. For carrying out the
compliances within the time limits KRT Pvt. Ltd. transfers ` 3,00,000 to
CA Amit with an email that clearly earmarks the utilization of the said amount:

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(1) ` 1,20,000 is paid as an advance towards professional fees for ongoing

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audit and taxation work.
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(2) ` 1,80,000 is to be utilized to make statutory payments of TDS, .GST, MCA
c. o s em
em la regular savings
filings and DIN renewals falling due within 1 month.

las CA Amit receives the above amount of ` 3,00,000 inghis
a
ag account.
From the amount of ` 1,80,000, he deposits ` 50,000 towards TDS payable
and ` 60,000 against GST liability on the due dates that fall within 1 month
from the date of receiving the money from the client.
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FINAL EXAMINATION: JANUARY 2026

The balance ` 70,000 pertaining to MCA filings and DIN renewals was
deposited after 3 months due to portal issues. In between, CA Amit paid his
office rent of ` 40,000 from this amount and deposited it back in that account
within 2 weeks.
Analyse the actions of CA Amit and comment with reference to the Chartered
Accountants Act, 1949 and Schedules thereto. (5 Marks)
(c) Everfresh Beverages Limited has recently implemented Robotic Process
Automation (RPA) across various business processes to enhance operational
efficiency and reduce manual errors. The company has deployed RPA bots in
key areas, namely, invoice processing, payroll generation and purchase order
processing. This has resulted in significant time saving and improved
accuracy in routine processes.
As the statutory auditor of Everfresh Beverages Limited, discuss the key audit
implications and the common risks associated with RPA. (4 Marks)
Answer
(a) The type of audit that the Comptroller and Auditor General of India (C&AG)
expect M/s. VR & Associates to conduct in this context is Propriety Audit
since C&AG expressed concern that the proposed R&D expenditure of
`2,000 crores appeared wasteful and lacking justification on the test of
public interest. Propriety audit stands for verification of transactions on the
tests of public interest, commonly accepted customs and standards of
conduct.
Propriety requires transactions, and more particularly expenditure, to
conform to certain general principles. The following principles should be
applied by M/s. VR & Associates:
(i) that the expenditure is not prima facie more than the occasion
demands and that every official exercises the same degree of vigilance
in respect of expenditure as a person of ordinary prudence would
exercise in respect of his own money;
(ii) that the authority exercises its power of sanctioning expenditure to
pass an order which will not directly or indirectly accrue to its own
advantage;
(iii) that funds are not utilised for the benefit of a particular person or
group of persons and

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(iv) that, apart from the agreed remuneration or reward, no other avenue
is kept open to indirectly benefit the management personnel,
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employees and others.
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(b) As per Clause (10) of Part I of Second Schedule to the Chartered
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Accountants Act, 1949, a Chartered Accountant in practice shall be deemed
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to be guilty of professional misconduct, if he fails to keep moneys of his
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client other than fees or remuneration or money meant to be expended in
a separate banking account or to use such moneys for purposes for which
they are intended within a reasonable time.
In the course of his engagement as a professional accountant, a member
may be entrusted with money belonging to his client. If he should receive
such funds, it would be his duty to deposit them in a separate banking
account, and to utilize such funds only in accordance with the instructions
of the client or for the purposes intended by the client.

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In this connection the Council has considered some practical difficulties of
.
the members and the following suggestions have been made to remove
these difficulties:
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(i)
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An advance received by a Chartered Accountant against services to be
a
rendered does not fall under Clause (10) of Part I of the Second
Schedule.
(ii) Moneys received for expenses to be incurred, for example, payment of
prescribed statutory fees, purchase of stamp paper etc., which are
intended to be spent within a reasonably short time need not be put
in a separate bank account. For this purpose, the expression;
“reasonably short time”, would depend upon the circumstances of each

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case.

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(iii) Moneys received for expenses to be incurred which are not intended
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to be spent within a reasonably short time as aforesaid, should be put

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in a separate bank account immediately.

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In the given situation, CA Amit receives ` 3,00,000 from KRT Pvt. Ltd. in his

ag regular savings account. An analysis of CA Amit's actions with reference to
the above provisions are as under: -

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FINAL EXAMINATION: JANUARY 2026

- ` 1,20,000 received as advance towards professional fees is correctly
kept in savings account by CA Amit.
- ` 70,000 which was not paid within one month for MCA filings and DIN
renewals should have been transferred to a separate bank account as
the payment was delayed for more than a reasonably short time.
- ` 40,000 which was utilized for payment of office rent of CA Amit and
later on replaced, is against the instructions of the client.
In view of above, CA Amit is guilty of professional misconduct under Clause
(10) of Part I of the Second Schedule to the Chartered Accountants Act for
not keeping the amount of ` 70,000 in a separate bank account and for
utilizing an amount of ` 40,000 which was not in accordance with the
instructions of the client.
(c) RPA - Key Audit Implications:
- It is of utmost importance for auditors to understand RPA processes,
which include data extraction, aggregation, sanitization and cleansing.
Unless auditors understand these processes, they will not be in a
position to initiate an audit.
- A comprehensive assurance process might demand review of the
source code.
- To perform substantive testing, auditors must have an understanding
of the tools used to develop and maintain RPA. This will be helpful
when auditors review logs, configuration controls, privileged access
controls and the like. General IT controls are applicable as always.
Common Risks of RPA:
Operational and execution risks: Robots are deployed without proper
operating model. Buying the wrong tool, making wrong assumptions,
taking shortcuts, and jeopardizing security and compliance. Assigning
proper responsibilities, training and clearly stating about changing roles
also can help you reduce operational risk to a great extent.
Change management risks: Not following the change management
implementation lifecycle, improper and incomplete testing (not covering
all scenarios) leads to inaccurate results.

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RPA Strategy Risk: Setting wrong expectations, improper KPIs, and
unrealistic business goals creates an environment of uncertainty.
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Management should discuss, and analyze the complete working
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characteristics, potential, and limitations of RPA before drafting a robotic

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process automation.
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Question 4e g la
(a)g CA Rohan is the engagement partner for the audit of Horizon Ltd.'s completea
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a set of financial statements for the year ended March 31, 2025. During the
audit, he identified a material misstatement concerning the valuation of a
specific class of inventory. As a result, CA Rohan concluded that it was
necessary to express a qualified opinion on the complete set of financial
statements.
Subsequently, Horizon Ltd. prepared summary financial statements derived
from these audited financial statements and requested CA Rohan to issue a
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report on them. After performing the required procedures, CA Rohan is
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satisfied that the summary financial statements are consistent, in all material

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respects, with the audited financial statements, in accordance with the

g
applied criteria.
(i) a
Based on the requirements of relevant SA, advise CA Rohan on the
specific additional disclosures he must include in auditor's report on the
summary financial statements, considering the qualified opinion on the
audited financial statements.
(ii) In the above case, if the auditor's report on the audited financial
statements contains an adverse report, then which additional elements
are required to be disclosed in the auditor's report on the summary
financial statement?
o m
(5 Marks)

m (b) M/s. Arora & Taneja, a firm of Chartered Accountants with four m c
. has
c. o
partners,
recently been recognized for its strong commitment toe professional
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development and community service. During the F.Y. 2024-25,

ag
instances came to light during a peer review:
(1) Support to ICAI Programme Organizing Unit (PoU):
The firm contributed funds to the "Financial Reporting Update Seminar"
organized by one Program Organising Unit of the ICAI. The event had

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FINAL EXAMINATION: JANUARY 2026

prior approval from the CPE Directorate, and the firm's name was
included among the sponsors in the official ICAI circular and event
signage.
(2) CSR Activity by Partner:
One of the partners, CA Anjali Taneja, personally financed a Clean Water
Drive under her company's CSR initiative. The posters and banners
displayed the following:
"An initiative supported by CA Anjali Taneja (Partner, Arora & Taneja)"
[Firm's logo was displayed at the bottom corner of the banner]
Analyse the professional and ethical implications of the above situations
in light of the ICAI Code of Ethics. (5 Marks)
(c) Global Techno Systems Limited is among the top 1000 listed companies in
the country. The company is preparing and presenting its Integrated Report
in line with the internationally recognized Integrated Reporting Framework.
The company continues to align its BRSR disclosures with its Integrated
Report to demonstrate how it creates value over the short, medium, and long
term through effective use of the six capitals.
Following further information is provided in respect of the above company:
(i) The company has implemented a structured leadership development
programme for its employees across all divisions. This initiative focuses
on enhancing professional skills, innovation capabilities, and ethical
decision-making, resulting in improved employee engagement and
alignment with the organization's long-term strategy.
(ii) The company has commissioned a new, fully automated production line
equipped with modern machinery and smart control systems. This has
significantly improved production efficiency, reduced wastage, and
enhanced product quality, leading to overall improvement in operational
performance.
Discussing the above information, identify and explain which of the
capitals of Integrated Reporting are being referred to at (i) and (ii)
respectively. (4 Marks)

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Answer
(a) (i) As per SA 810 “Engagements to Report on Summary Financial
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Statements”, if the auditor is satisfied that the summary financial
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statements are consistent, in all material respects, with or are a fair
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summary of the audited financial statements, in accordance with the
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applied criteria, the auditor’s report on the summary financial
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statements shall
• State that the auditor’s report on the audited financial statements
includes a qualified opinion.
• Describe the basis for the qualified opinion on the audited
financial statements and the effect thereof, if any, on the summary
financial statements
(ii) If the auditor's report on the audited financial statements contains an

m
adverse opinion, the auditor’s report on the summary financial

c o
. on the audited financial statements
statements shall, in addition to the elements:

m
e or disclaimer of opinion;
• State that the auditor’s report
s
lfora that adverse opinion; and
contains an adverse opinion

a
• Describe the basisg
• State that, as a result of the adverse opinion on the audited
financial statements, it is inappropriate to express an opinion on
the summary financial statements.
(b) Clause (6) of Part I of the First Schedule to the Chartered Accountants Act,
1949 refers to professional misconduct of a member in practice if he solicits
client or professional work either directly or indirectly, by circular,
advertisement, or personal communication or interview or by any other
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c. o
c. o There are some forms of soliciting work which the council hasmprohibited,
s e
s em which includes Sponsoring Activities:
• Member in practice or a Firm of Charteredag
l a
gla Accountants is not
a permitted to sponsor an event. However, such member or Firm may
sponsor an event conducted by a Programme Organizing Unit (PoU) of
the ICAI, provided such event has the prior approval of Continuing
Professional Education (CPE) Directorate of the ICAI.
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FINAL EXAMINATION: JANUARY 2026

• Members sponsoring activities relating to Corporate Social
Responsibility may mention their individual name with the prefix “CA”.
However, the mention of Firm name or CA Logo is not permitted.
(1) In the given situation, M/s. Arora & Taneja, a firm of Chartered
Accountants, contributed funds to the "Financial Reporting Update
Seminar" organized by one Program Organising Unit of the ICAI with
prior approval from the CPE Directorate. Therefore, M/s Arora & Taneja
shall not be held guilty of professional misconduct under Clause (6) of
Part I of the First Schedule to the Chartered Accountants Act, 1949
since member or firm may sponsor an event conducted by a
Programme Organizing Unit (PoU) of the ICAI with the prior approval
of Continuing Professional Education (CPE) Directorate.
(2) In the given situation, CA Anjali Taneja, a partner of firm who personally
financed a clean water drive under her company’s CSR initiative,
displayed the name, designation and Firm Logo in the posters and
banners at the bottom corner of the banner. Therefore, she will be held
guilty of professional misconduct under Clause (6) of Part I of the First
Schedule to the Chartered Accountants Act, 1949 as members
sponsoring activities relating to CSR may mention their individual
name with the prefix “CA” but mention of Firm name or CA Logo is not
permitted.
(c) Capitals of Integrated Reporting
(i) The capital referred to here is Human Capital.
People's skills and experience, their capacity, and motivations to
innovate, including their:
• Alignment with and support of the organization's governance
framework & ethical values such as its recognition of human rights.
• Ability to understand and implement an organization's strategy.
• Loyalties and motivations for improving processes, goods, and
services, including their ability to lead and to collaborate.
(ii) The capital referred to here is Manufactured Capital.
• Seen as human-created, production-oriented equipment and tools.

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• Available to the organization for use in the production of goods

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or the provision of services, including buildings, equipment,

c. o
infrastructure (such as roads, ports, bridges & waste, and water

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treatment plants).
Question 5 . e
m been appointed as the statutory auditor of KYM Pvt. Ltd. for the las
ehave
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(a) You s a g
ag ` 2 Cr; total borrowings of ` 9 Cr; total revenue ` 9 Cr. (excluding revenue of
F.Y. 2024-25. The company has a Paid-up capital and Reserves & Surplus of

` 2 Cr. from discontinuing operations) during F.Y. 2024-25.
You are required to state additional matters specified, as may be applicable,
besides the report u/s 143 of the Companies Act, 2013 with regard to the
following aspects:
(i) The company has incurred cash losses of ` 50 Lakh during F.Y. 2024-25

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and ` 75 Lakh during F.Y. 2023-24 with negative working capital. The

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suppliers have reduced credit period while some customers have delayed
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payments beyond the credit period. A few customers have been declared
insolvent.

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(ii) The company has been continuously in profits since inception. Because
of the losses incurred during the last two F.Y.s, the management
suspected certain financial irregularities. Subsequently, a fraud was
discovered through proper mechanism and was being addressed by the
management on certain complaints filed with them. You have been
informed of such a case.
(iii) The company has been awarded certain projects during F.Y. 2023-24 of
Metrolines, Monorail and Coastal Roads for which the company had
borrowed funds ` 4 Cr. from Bank. Metrolines and Monorail were
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ongoing projects but the Coastal Road project was yet to commence

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to-date and the amount unspent is ` 4 Cr. sanctioned for this project.
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(iv) In the case of ongoing projects of Metrolines and Monorail,
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unspent amount of ` 2 Cr. as on 31-03-2025.

ag Is there any reporting responsibility cast on you regarding the above matters
of KYM Pvt. Ltd. under CARO 2020 for F.Y. 2024-25? If no, where and how
the above matters would be dealt with in your audit report for F.Y. 2024-25?
(5 Marks)

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FINAL EXAMINATION: JANUARY 2026

(b) As the senior audit manager for "Alpha Tech Ltd.", a listed technology
company with significant debt financing, you are planning the audit for the
financial year ending March 31, 2025. Your previous two audits resulted in
an unmodified opinion. However, the company has recently been in the
media spotlight due to allegations of manipulating share prices and not
disclosing all related party transactions. The company is under intense
pressure from external stakeholders to meet aggressive earnings targets.
During your preliminary risk assessment, you identify that:
• A significant portion of the senior management's compensation is tied
to achieving unrealistic profitability targets.
• The company's financial results show rapid, unusual profitability
compared to its competitors.
• A number of significant, complex, and unusual transactions occurred
very close to the year-end.
• You also notice that there has been a high turnover of senior
management and legal counsel in the past year.
Based on the above facts and with reference to relevant SA, you are required
to identify and explain the specific fraud risk factors present in the scenario
that suggest a heightened risk of material misstatement due to fraudulent
financial reporting. (5 Marks)
(c) A practicing Chartered Accountant, Mr. P, is approached by a prominent
retail chain to conduct "Mystery Audits" at their stores. The goal of the audit
is to evaluate compliance with internal policies and service standards. Mr. P
accepts the assignment and structures his professional fees to be contingent
upon the number of operational lapses and non-compliances he identifies,
with a higher fee for more significant findings.
Discuss whether Mr. P is guilty of professional misconduct under the
Chartered Accountants Act, 1949, with specific reference to the relevant
schedules. (4 Marks)
Answer
(a) CARO 2020 is an additional reporting requirement applicable to all
companies unless specifically exempted. In the given case, KYM Pvt. Ltd. is
a private limited company and is not a banking company, insurance

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company, Section 8 company, One Person Company or a small company.
Further, although its paid-up capital and reserves are 2 crore, its total
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borrowings are ` 9 crore, which exceeds the exemption limit of ` 1 crore
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prescribed for private companies. Accordingly, KYM Pvt. Ltd. does not fall

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under the exempted category, and therefore, CARO 2020 is applicable to
s e
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the company for the F.Y. 2024-25.
g l a
l(i)a In the given situation, Company has incurred cash losses of ` 50 lakha
ag during F.Y. 2024-25 AND ` 75 lakh with negative working capital. The
auditor is required to report under Clause (xvii) of Paragraph 3 of
CARO, 2020, that whether the company has incurred cash losses in the
financial year and in the immediately preceding financial year, if so,
state the amount of cash losses.
(ii) In respect of the fraud discovered by the management, the auditor is
required to report under Clause (xi) (c) of Paragraph 3 of CARO, 2020,

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which requires the auditor to state whether the auditor has considered

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whistle-blower complaints, if any, received during the year by the

em loans of ` 4 crores for the Metrolines,
company;
(iii) KYM Pvt Ltd has obtainedsterm
Monorail and Coastal g la from the Bank in the year 2023-24. Coastal
Road project has notacommenced as on 31-03-2025 and hence the loan
Roads

remains unutilised. Under Clause 3(ix)(c) of CARO, 2020, the auditor is
required to report on the application of term loans which requires the
auditor to state whether term loans were applied for the purpose for
which the loans were obtained; if not, the amount of loan so diverted
and the purpose for which it is used may be reported; Mere non-
utilisation due to non-commencement of the project does not
constitute diversion or misuse of funds. Accordingly, no adverse
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reporting or qualification is required, though an explanatory statement
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c. o is to be included in the CARO report indicating non-utilisation of the
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term loan. Subject to adequate disclosure in the notes, the audit

las opinion remains unmodified.
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(iv) With regard to the Metrolines and Monoraila projects, which are
ag ongoing in nature, the existence of an unspent amount of ` 2 crores as
on 31-03-2025 represents normal timing differences in the execution
of long-term infrastructure projects. Under Clause 3(ix)(c) of

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FINAL EXAMINATION: JANUARY 2026

CARO, 2020, the auditor is required to report on the application of term
loans for their intended purposes. Where term loans are not fully
utilised due to the stage of execution of the project, an explanatory
remark is required in the CARO report. Since the funds are intended to
be applied for the stated purpose and there is no diversion, misuse or
default, no adverse reporting under CARO, 2020 is warranted.
The auditor is also required to evaluate the entity’s ability to continue as a
going concern as per SA 570 and express the opinion in his report
accordingly.
(b) As per SA 240 “The Auditor’s Responsibilities Relating to Fraud in an Audit
of Financial Statements”, fraud risk factors are events or conditions that
indicate an incentive or pressure to commit fraud or provide an opportunity
to commit fraud.
Specific Fraud Risk Factors Present in Alpha Tech Ltd.:
Incentives/Pressures:
• A significant portion of the senior management's compensation is
tied to achieving unrealistic profitability targets: Financial stability
or profitability is threatened by economic, industry, or entity operating
conditions, such as rapid growth or unusual profitability especially
compared to that of other companies in the same industry.
• The company's financial results show rapid, unusual profitability
compared to its competitors: Financial stability or profitability is
threatened by economic, industry, or entity operating conditions, such
as high degree of competition or market saturation, accompanied by
declining margins.
Opportunities:
• A number of significant, complex, and unusual transactions
occurred very close to the year-end: The nature of the industry or the
entity’s operations provides opportunities to engage in fraudulent financial
reporting that can arise from the Significant, unusual, or highly complex
transactions, especially those close to period end that pose difficult
“substance over form” questions.

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• High turnover of senior management and legal counsel in the past

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year: High turnover of senior management and legal counsel creates

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low morale among senior management.
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(c) According to Clause (10) of Part I of First Schedule to the Chartered
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Accountants Act, 1949, a Chartered Accountant in practice shall be deemed
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to be guilty of professional misconduct if he charges or offers to charge,
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accepts or offers to accept in respect of any professional employment fees
which are based on a percentage of profits or which are contingent upon
the findings, or results of such employment, except as permitted under any
regulations made under this Act.
Further, as per Recent Decisions of Ethical Standards Board, it is permissible
for a member in practice to accept the assignment of Mystery Audit.
In the given case, Mr. P, a practicing Chartered Accountant, has accepted
the assignment of Mystery Audit and structured his professional fees to be
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contingent upon the number of operational lapses and non-compliance he
.
identifies, with higher fee for more significant findings. While acceptance

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of the Mystery Audit assignment per se is permissible, the fee arrangement

l a
being contingent upon the findings is not allowed.
gbe held guilty of professional misconduct under
Accordingly, Mr. P would a
Clause (10) of Part I of the First Schedule to the Chartered Accountants Act,
1949 for charging fees which are contingent upon the findings.
Question 6
(a) M/s. AKP & Co., Chartered Accountants, have been engaged by Tech Systems
Ltd. (TSL), a listed company engaged in cloud computing solutions and
enterprise software services, to conduct a Due Diligence Review in connection
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with its proposed acquisition of a 70% stake in Code Technologies Pvt. Ltd.

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(CTPL), a fast-growing start-up specializing in artificial intelligence (AI) and

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data analytics.

s em The management of TSL believes that CTPL's proprietary Alamodels and client
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portfolio could provide significant strategic advantage,gbut its finance and
gla a
a legal teams have expressed concerns regarding revenue projections,
compliance with data protection laws, cybersecurity regulations, and
corporate filings.

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FINAL EXAMINATION: JANUARY 2026

You are the senior audit manager at M/s. AKP & Co. and are responsible for
planning and conducting the due diligence engagement. The audit staff is
new to this kind of work. You are required to explain the steps involved in
conducting due diligence to the audit team. (5 Marks)
(b) SDI Bank Ltd. is finalizing its financial statements for the year ended
31st March, 2025. PAM & Associates, Chartered Accountants are appointed
statutory auditors of SDI Bank Ltd. for the financial year 2024-25. CA M is
the engagement partner for conducting the audit.
During the course of audit, the audit team seeks guidance of CA M, the
engagement partner for the following observations made while conducting
the audit of investments:
(i) The bank holds ` 450 crores in government securities, ` 250 crores in
debentures, ` 95 crores in shares and ` 75 crores in bonds. During the
audit, it is noticed that the investment team comprising of 4 staff
members, is responsible for all investment functions.
(ii) There are 5 Bank Receipts (BRs) with other banks totalling ` 35 crores at
the year end. Out of these 3 BRs have been outstanding for more than 8
months.
(iii) The audit team observes during the course of audit that during the year
the Bank has re-classified ` 80 crores of investments from AFS (available
for sale) to HTM (held to maturity) on the basis of a resolution passed by
Asset Liability Committee, but without explicit approval from the
Board of Directors.
Outline the audit procedures that CA M, the engagement partner will advise
the audit team to be undertaken to address each of these observations.
(5 Marks)
(c) RBR Infrastructure Pvt. Ltd. is bidding for a long-term government project
involving construction of smart highways. As part of the bidding documents,
the company is required to present Prospective Financial Information (PFI)
for the next five years to demonstrate its financial viability. CA J has been
engaged to examine the Prospective Financial Information. While examining
the PFI, CA J observes that the Management has assumed zero increase in
construction material costs over five years, even though industry reports
predict a steady 6-8% annual increase due to inflation. Further, the company

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has based its revenue projections on the assumption that it will win two
additional large contracts, even though bids are yet to be submitted.
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Elaborate on the duties of CA J while examining the Prospective Financial
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Information. (4 Marks)

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OR

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(c) PMP Industries Ltd. is a listed manufacturing company. CA F is the statutory
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auditor for the F.Y. 2024-25. During the course of audit CA F and his audit
team made the following observations:
• Fictitious sales of ` 20 crores through fake invoices
• Missing inventory worth ` 8 crores with forged records
On communicating the observations with the Management and those
charged with governance they refused to take corrective action. Instead of
making the corrections, the Managing Director threatened legal action if

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disclosures are made in the Audit Report. The Board of Directors is divided,

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with promoter directors supporting the Managing Director and others
agreeing to the auditor's contention.
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Since the fraud is material to the financial statements, CA F finds it difficult

a
to continue the audit engagement due to these exceptional circumstances.
State with reference to the relevant Standard on Auditing the course of action
CA F will take. (4 Marks)
Answer
(a) Steps involved in conducting the due diligence:
(i) Start with an open mind. Do not assume that anything wrong will be
found and look for it. What needs to be done is to identify trouble

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spots and ask for explanations.
m (ii) Get the best team of people. If you do not have a group .of people
c. o inside your firm that can do the task (e.g. lack of staff, e
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m of people
em gla that you can
lack

las who know the new business because you are acquiring
an unrelated area, etc.), there are due diligenceaexperts
a business in

ag hire. When hiring such professionals, look for their experience record
in the industry.

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FINAL EXAMINATION: JANUARY 2026

(iii) Get help in all areas like finance, tax accounting, legal, marketing,
technology, and any others relevant to the assignment so that you get
a 360-degree view of the acquisition candidate.
(iv) Talk to customers, suppliers, business partners, and employees are
great resources.
(v) Take a risk management approach. So, while you want to do your
research, you also want to make sure that you do not antagonise the
team of people of the target company by bogging them down with
loads of questions.
(vi) Prepare a comprehensive report detailing the compliances and
substantive risks/issues.
(b) CA M, the engagement partner, will advise the audit team to undertake the
following audit procedures to address the given observations:
(i) Concentration of Investment Functions with Four Staff Members
• Review the investment policy of the bank to ascertain that the
policy conforms, in all material respects, to the RBI’s guidelines as
well as to any statutory provisions applicable to the bank.
• Check the segregation of duties within the bank staff in terms of
executing trades, settlement and monitoring of such trades, and
accounting of the same (generally termed as front office, middle
office and back-office functions’ segregation).
• Assess whether the concentration of all investment functions with
a limited number of staff members indicates a weakness in internal
controls, necessitating increased audit attention.
(ii) Outstanding Bank Receipts (BRs) for More Than Eight Months:
• In respect of BRs issued by other banks and on hand with the bank
at the year-end, the auditor should examine confirmations of
counterparty banks about such BRs.
• Where any BRs have been outstanding for an unduly extended
period, the auditor should obtain written explanation from the
management for the reasons thereof.

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• The auditor should examine the reconciliation of BRs issued by the
bank.
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BRs should not be issued in respect of transactions in government
c. o
. c securities for which SGL facility is available.
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eapproval l a s
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(iii) Re-classification of Investments from AFS to HTM without explicit

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ag • Examine that entire investment portfolio of bank is classified under
three categories i.e.HTM, HFT and AFS and shifting of securities is
as per regulatory norms and laid down policy.
• Examine whether the shifting of the investments from ‘available
for sale’ to ‘held to maturity’ is duly approved by the Board of
Directors of the bank.
• Examine whether the investments have been properly classified

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into the three categories at the time of acquisition based on such

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intention as evidenced by the decision of the competent authority

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such as the Board of directors, Asset Liability Committee (ALCO)
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or Investment Committee.

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a
(c) As per SAE 3400 “The Examination of Prospective Financial Information”, in
an engagement to examine prospective financial information, CA J, the
auditor should obtain sufficient appropriate evidence as to whether:
(i) management’s best-estimate assumptions on which the prospective
financial information is based are not unreasonable and, in the case of
hypothetical assumptions, such assumptions are consistent with the
purpose of the information;

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(ii) the prospective financial information is properly prepared on the basis

m of the assumptions;
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s a clear
(iii) the prospective financial information is properly presented

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material assumptions are adequately disclosed, including

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indication as to whether they are best-estimate

a
hypothetical assumptions; and
(iv) the prospective financial information is prepared on a consistent basis
with historical financial statements, using appropriate accounting
principles.
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FINAL EXAMINATION: JANUARY 2026

While examining prospective financial information, principles laid down in
other Standards on Auditing should be applied to the extent practicable.
OR
(c) As per SA 240 “The Auditor’s Responsibilities Relating to Fraud in an Audit
of Financial Statements” if, as a result of a misstatement resulting from
fraud or suspected fraud, the auditor encounters exceptional circumstances
that bring into question the auditor’s ability to continue performing the
audit, the auditor shall:
(I) Determine the professional and legal responsibilities applicable in the
circumstances, including whether there is a requirement for the auditor
to report to the person or persons who made the audit appointment
or, in some cases, to regulatory authorities;
(II) Consider whether it is appropriate to withdraw from the engagement,
where withdrawal from the engagement is legally permitted; and
(III) If the auditor withdraws:
(i) Discuss with the appropriate level of management and those
charged with governance, the auditor’s withdrawal from the
engagement and the reasons for the withdrawal and
(ii) Determine whether there is a professional or legal requirement to
report to the person or persons who made the audit appointment or,
in some cases, to regulatory authorities, the auditor’s withdrawal
from the engagement and the reasons for the withdrawal.
In the given case, CA F has identified material misstatements arising
from fraud, namely fictitious sales of ` 20 crores and missing inventory
of ` 8 crores supported by forged records. Despite due communication,
both management and those charged with governance have refused
to take corrective action, and the Managing Director has further
attempted to intimidate the auditor by threatening legal action. These
circumstances clearly constitute exceptional circumstances that cast
serious doubt on the auditor’s ability to continue the audit
engagement with integrity and independence. Accordingly, CA F
should take the abovementioned actions in compliance with
SA 240 under the given circumstances.

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