CA Intermediate September 2026 Suggested Answers Paper 5 Auditing and Ethics

FOR CA INTERMEDIATE EXAM PREPARATION

CA Intermediate 2026
Suggested Answers ·
Paper 5 Auditing and
Ethics
EXAM YEAR TYPE

CA Intermediate 2026 Suggested Answers
SUBJECT DATE

Paper 5 Auditing and Ethics September 2026

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 5: AUDITING AND ETHICS
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Case Scenario - I

a Co. is serving as the statutory auditor of C Travels Limited. The company g
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XYZ &
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aboth owned vehicles (20%) as well as vehicles obtained on rent (80%). Due to
in the business of plying buses for passenger travel. The fleet used comprises of

certain external conditions prevailing in the industry in the state, there was
exceptional fluctuation in the profit of the entity as compared to the past years.
CA Rajan, the engagement partner came across certain issues in the audit of
purchases and payables. Some of the main issues were that many of the vendor
contracts for the buses on rent had expired and further, there was no follow up

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and receipt of annual fitness certificates on buses obtained on rent. When

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CA Rajan contacted the CFO for these observations, the CFO stated that the issues
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which were raised by CA Rajan were in the nature of an investigation and not a
statutory audit.

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CA Rajan provided the same audit program, as followed in the previous year, to
the audit team. Piyush, an audit staff, pointed out that this program only
contained the verification steps in respect of hired vehicles and not the owned
vehicles which constituted 20% of the fleet. CA Rajan was reluctant to change the
audit program as he felt that the audit program should not be modified after the
commencement of the audit.
The engagement partner decided to choose profit before tax from continuing
operations as a benchmark, while determining the materiality for the financial

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statements as a whole.

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During the verification of the accounts receivables of the entity, the Audit team
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performed the audit procedures mentioned in the audit program. However, an

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important audit step which relates to the test of subsequent realizations (after
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year end) of receivable balances, to be performed was not present in the audit

ag program and was pointed out by a team member.
While verifying the capital and revenue reserves of the company, CA Rajan
observed that during the year

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: SEPTEMBER 2026

(a) The revenue reserve was utilized for Issuing bonus shares and to finance an
extension of the business.
(b) The realized capital reserve of the company was utilized for supplementing
divisible profits in lean years and writing down fictitious assets.
At the completion stage of the audit, CA Rajan requested the written
representation required under the Standards on Auditing. However, management
refused to provide any written representation letter regarding its responsibilities
for the preparation of the financial statements and the completeness of
information and transactions made available to the auditor by stating that all
books and records relevant for the audit had been provided and the responsibility
vests with the auditor thereafter.
Based on the above facts, answer the following questions: (1 to 6)
1. Is the CFO right in stating that auditor cannot review matters such as expired
contracts and annual fitness certificates?
(A) Yes, audit deals only with the numbers in the financial statements.
(B) Yes, the procedures followed by the auditor constitute an investigation.
(C) No, audit also involves an evaluation of internal controls and matters
such as these can impact the integrity of the financial statements.
(D) No, contract verification is an integral element of SA 220. (2 Marks)
2. Is the engagement partner correct in his decision of not revising the audit
program?
(A) Yes, the audit program was updated before the audit started and are not
allowed to be modified thereafter.
(B) Yes, the staff can still perform those steps without featuring in an audit
program and they can always send the same by an e-mail to the
engagement partner.
(C) No, audit procedures would differ for owned buses and hired buses and
should be provided for separately by revising the audit program.
(D) No, audit procedures would differ for owned buses and hired buses and
should be provided for separately in the audit program but such program
should be updated after informing the management as per SA 580.
(2 Marks)

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SUGGESTED ANSWERS AUDITING AND ETHICS

3. Which benchmark should be chosen by the engagement partner in the given
circumstances for deciding the materiality for the financial statements as a
whole?
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(A) Profit before tax (of the year under audit), from continuing operations.

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Exceptional increase and decrease in the profit are irrelevant.

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(B) Normalized profit before tax from continuing operations figure based on
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past results.

not the engagement partner.
(D) The engagement partner is legally bound to use gross income as a
benchmark for materiality for such businesses. (2 Marks)
4. Test of subsequent realization, after year end, of receivables, as an audit
procedure, impacts which financial statement assertions?
(A) Existence and Valuation.
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(B) Valuation and Cut off.
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(C) Cut off and Existence.

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(D) Classification and Existence. (2 Marks)
5. CA Rajan wants to know from you whether the utilisation of the capital and
revenue reserves is correct? What would you advise CA Rajan in this scenario?
(A) No, revenue reserve cannot be utilized to finance an extension of
business and capital reserve cannot be utilized for supplementing
divisible profits in lean years.
(B) No, revenue reserve cannot be utilized for issuing bonus shares and

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capital reserve cannot be utilized for supplementing divisible profits in

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lean years.
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s e assets.
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capital reserve cannot be utilized for writing down fictitious

gla (D) Yes, revenue reserve can be utilized for issuingabonus
a finance an extension of business further capital reserve can be utilized
for supplementing divisible profits in lean years and writing down
fictitious assets. (2 Marks)

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: SEPTEMBER 2026

6. CA Rajan considered the implications of management's refusal to provide the
required written representations in the Auditor's report to be issued to the
shareholders of the company. With reference to SA 580, state the correct
option that CA Rajan should exercise :
(A) Disclaim an opinion on the financial statements because management
has refused to provide required written representations.
(B) Express an Adverse opinion on the financial statements because
management has refused to provide required written representations.
(C) Express an Unmodified opinion on the financial statements if other
sufficient appropriate audit evidence is available.
(D) Express a Qualified opinion on the financial statements because
management has refused to provide required written representations.
(2 Marks)
Case Scenario - II
ABC & Co is a reputed firm of Chartered Accountants. During the year, the firm
was appointed as the statutory auditor of S Food Limited.
CA Amit, the engagement partner, commenced the audit by obtaining an
understanding of the entity's internal control system. Based on his evaluation, he
concluded that the relevant internal controls were operating efficiently.
Accordingly, he assessed the control risk at a lower level and designed the nature,
timing, and extent of further audit procedures.
While performing audit procedures, CA Amit and his team identified several
misstatements. Management agreed to correct some of them, whereas others
remained uncorrected at the conclusion of the audit.
CA Amit also discussed with the audit team the objectives of audit documentation
as prescribed under SA 230 and use of management assertions in an audit.
During the course of the audit, the management of the company also informed
the auditors that the company proposed to establish a new manufacturing facility
and had approached a financial institution for long-term finance. Since the
financial institution required prospective financial statements for loan appraisal,
the management requested ABC & Co. to examine the financial forecasts and
issue an appropriate report.

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SUGGESTED ANSWERS AUDITING AND ETHICS

Simultaneously, CA Bhim a partner of ABC & Co., was leading the audit of
J Co-operative Society. The audit included verification of receivables including
overdues and disclosure requirements on the receivable balances of the society.
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Based on the above facts, answer the following questions: (7 to 12)

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As part of understanding of the entity's internal control system CA Amit
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assessed the control risk at a lower level. The decision of CA Amit is -
a Correct, because there exists an inverse relationship between thea
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(B) Correct, because control risk represents the risk that the auditor's
procedures will fail to detect a material misstatement that exists in the
financial statements.
(C) Incorrect, because control risk is the susceptibility of an assertion to a
misstatement that could be material, before consideration of any related
controls.
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(D) Incorrect, because there exists a direct relationship between the

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efficiency of internal control of an entity and control risk. (2 Marks)

appropriate option as per SAla
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8. As regards, the corrected and uncorrected

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450.
(A) The auditor should obtain management representation on corrected
misstatements.
(B) The auditor should obtain written representation from the management
that they believe that the effect of uncorrected misstatements are
immaterial, individually and in aggregate to the financial statements as
a whole.
(C) The auditor should obtain written representation from the management
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a whole.

las (D) The auditor should obtain management representation on value of
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ag corrected and uncorrected material misstatement when in excess of 5%
of the turnover. (2 Marks)

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: SEPTEMBER 2026

9. The documentation maintained by the auditor primarily supports which of
the following objectives as per SA 230?
I. A sufficient and appropriate record of the basis for the auditor's report.
II. Evidence that audit was planned and performed in accordance with SAs.
III. Substitute for accounting records maintained by management which is
not provided to the auditor.
IV. Documentation of client's internal control system.
Options:
(A) I and II only
(B) I, II and IV only
(C) II, III and IV only
(D) I, III and IV only (2 Marks)
10. Which of the following Standards issued by ICAI are relevant for ABC & Co.,
if the engagement is undertaken for examination of the prospective financial
statement of S Food Limited?
(A) Standards on Auditing
(B) Standards on Review Engagements
(C) Standards on Assurance Engagements
(D) Standards on Related Services (2 Marks)
11. How CA Bhim should classify the overdue debts in ageing schedule in respect
of the co-operative society?
(A) Overdue debts for a period from five months to six years and more than
six years.
(B) Overdue debts for a period from three months to six months, six months
to five years and more than five years.
(C) Overdue debts for a period from six months to two years and more than
two years.
(D) Overdue debts for a period from six months to five years and more than
five years. (2 Marks)

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SUGGESTED ANSWERS AUDITING AND ETHICS

12. CA Amit was educating his audit team about management assertions in an
audit. He makes the following statements:

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Statement 1: Occurrence and Valuation are assertions relating to Balance
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sheet captions.

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Statement 2: Measurement and Completeness are assertions relating to
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Income statement captions.

lStatement 3: Measurement and Existence are assertions relating to Incomea
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Statement 4: Existence and Rights & Obligations are assertions relating to
Balance sheet captions.
Which of these are correct?
(A) Only 1 & 2 are correct.
(B) Only 1 & 3 are correct.
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(C) Only 2 & 4 are correct.

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(D) Only 3 & 4 are correct. (2 Marks)

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13. CA D, one of the partners of DEF & Co., along with his audit team commenced

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the audit of LMN Bank for the year ending 31.03.2026. Advances which
constituted a high risk and high materiality area, was handled by CA D himself.
The other areas were distributed amongst the various team members.
One of the team members, Ms. Naina was assigned the job of verifying the
interest expenses of Bank. Which of the following points noted by Ms. Naina
are incorrect while verifying calculation of interest?
(i) Interest has been accurately provided on all deposits upto the date of
maturity of the deposit irrespective of the financial year.
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(ii) Interest rates are in accordance with the bank's internal regulations, the
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RBI directives and agreements with the respective deposit holder.

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(iii) Interest on savings accounts are in accordance with the rules framed by

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the bank/RBI in this behalf. a
a (iv) No Interest should be provided on inter-branch balances since the
accounts are consolidated at the head office.
(A) (i) and (iv)

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: SEPTEMBER 2026

(B) (ii) and (iii)
(C) (ii) and (iv)
(D) only (i) (2 Marks)
14. Before accepting the engagement of SAM Ltd., the Engagement partner
decided to evaluate the integrity of the prospective client in accordance with
the firm's quality control policies relating to the acceptance and continuance
of client relationships and specific engagements. Which of the following
statements are correct while evaluating the Integrity of client as per SQC 1?
(i) The nature of the client's operations, including its business practices, is
a matter considered for determining client's integrity.
(ii) Information concerning the client's attitude towards aggressive
interpretation of accounting standards is not relevant for determining
the client's integrity.
(iii) The reasons for non-reappointment of the previous firm need not be
considered, for determining client's integrity.
(iv) Whether the client is aggressively concerned with maintaining the firm's
fees as low as possible is a relevant factor for determining client's
integrity.
Options:
(A) Only (i), (ii) and (iv)
(B) Only (i) and (iv)
(C) Only (i), (iii) and (iv)
(D) Only (iii) and (iv) (2 Marks)
15. While conducting the Expenditure audit of a Government entity, the audit
team carried out the following procedures:
(i) Examined whether expenditure incurred by the entity was in accordance
with the applicable laws, regulations and administrative instructions;
(ii) Verified whether expenditure had been incurred for the purpose for
which the grant and appropriation had been provided; and
(iii) Evaluated whether the schemes were being implemented economically
and were achieving the intended results.

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SUGGESTED ANSWERS AUDITING AND ETHICS

With reference to the above three procedures performed by the audit team,
the basic standards applicable to (i), (ii) and (iii) respectively are,

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(A) Audit against Rules and Orders, Audit against Provision of Funds,
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Performance Audit

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(B) Audit against Rules and Orders, Audit of Sanction, Performance Audit
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(C) Audit of Sanction, Audit against Rules and Orders, Performance Audit
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(2 Marks)
Answer Key

MCQ No. Correct Option
1. (C)
2. (C)

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3. (B)
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4. (A)
5. No Correct
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Option
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7. (A)
8. (B)
9. (A)
10. (C)
11. (D)
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12. (C)
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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: SEPTEMBER 2026

Part II Descriptive Questions
Question No.1 is compulsory.
Attempt any four questions from the remaining five questions.
Question 1
(a) M Private Limited appointed a Chartered Accountant firm to conduct the
statutory audit for the year ended 31/03/26. During the course of audit, after
significant audit procedures had been performed, the auditor identified
serious inconsistencies in inventory records and requested additional
supporting documents from management. A week later, management
informed the auditor that due to "time constraints" and "cost considerations,"
the company no longer wanted a statutory audit and instead requested the
auditor to change the audit engagement to a review engagement.
Analyse, what the auditor should consider before agreeing to change the
audit engagement to an engagement providing lower level of assurance in
accordance with SA 210 (Agreeing the terms of Audit Engagements)?
(5 Marks)
(b) During the statutory audit of Peace Ltd., the engagement partner decided to
use the direct assistance of the internal audit function. Accordingly, the
internal auditors were asked to evaluate the reasonableness of
management's assumptions used in estimating the provision for pending
legal claims, as this was expected to reduce the time required to complete
the audit. The external auditor was also of the view that obtaining only
management's written approval before assigning such work would be
sufficient. With reference to SA 610 (Using the work of Internal Auditor) in
the given situation -
(i) Analyse the circumstances in which the external auditor shall not use
internal auditors to provide direct assistance in performing audit
procedures. (3 Marks)
(ii) State the written agreements that the external auditor is required to
obtain from entity and internal auditor before using internal auditors to
provide direct assistance for the purpose of audit. (2 Marks)
(c) During the audit of ZAB Ltd., the auditor Mr. A, did not identify any material
uncertainty relating to the entity's ability to continue as a going concern and

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SUGGESTED ANSWERS AUDITING AND ETHICS

accordingly the auditor's report did not include any reference to such
uncertainty. With reference to SA 570, state the auditor's responsibilities
relating to going concern in the audit of financial statements. (2 Marks)
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In another audit of XYZ Limited, Mr. A identified a material uncertainty

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relating to going concern which was not disclosed in the financial statements.

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Guide the auditor as to what should be done in such circumstances as per

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SA 570? (2 Marks)
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aAnswer
(a) In the given case, the auditor, before agreeing to change the audit
engagement should consider the following:
(i) As per SA 210 “Agreeing the Terms of Audit Engagements”, if, prior to
completing the audit engagement, the auditor is requested to change
the audit engagement to an engagement that conveys a lower level of
assurance, the auditor shall determine whether there is reasonable

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justification for doing so.

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(ii) Before agreeing to change an audit engagement to a review or a

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related service, an auditor who was engaged to perform an audit in

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accordance with SAs may also need to assess any legal or contractual
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implications of the change.
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(iii) If the auditor concludes that there is reasonable justification to change
the audit engagement to a review or a related service, the audit work
performed to the date of change may be relevant to the changed
engagement.
(iv) However, the work required to be performed and the report to be
issued would be those appropriate to the revised engagement.

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(v) In order to avoid confusing the reader, the report on the related service
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would not include reference to:
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(a) The original audit engagement or
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to an engagement to undertake agreed- upon procedures and
thus reference to the procedures performed is a normal part of the
report.

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: SEPTEMBER 2026

(vi) If the terms of the audit engagement are changed, the auditor and
management shall agree on and record the new terms of the
engagement in an engagement letter or other suitable form of written
agreement.
(b) (i) As per SA 610 “Using the Work of Internal Auditors”, the external
auditor shall not use internal auditors to provide direct assistance to
perform procedures that:
(a) Involve making significant judgments in the audit;
(b) Relate to higher assessed risks of material misstatement where the
judgement required in performing the relevant audit procedures
or evaluating the audit evidence gathered is more than limited;
(c) Relate to work with which the internal auditors have been involved
and which has already been, or will be, reported to management
or those charged with governance by the internal audit function;
or
(d) Relate to decisions the external auditor makes in accordance with
this SA regarding the internal audit function and the use of its work
or direct assistance.
In the given situation, evaluating the reasonableness of management’s
assumptions used in estimating the provision for pending legal claims
involves making significant judgments in the audit. Therefore, the
external auditor shall not use the internal auditors to provide direct
assistance for this work.
(ii) Prior to using internal auditors to provide direct assistance for
purposes of the audit, the external auditor shall:
(a) Obtain written agreement from an authorized representative of
the entity that the internal auditors will be allowed to follow the
external auditor’s instructions, and that the entity will not
intervene in the work the internal auditor performs for the external
auditor; and
(b) Obtain written agreement from the internal auditors that they will
keep confidential specific matters as instructed by the external
auditor and inform the external auditor of any threat to their
objectivity.

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SUGGESTED ANSWERS AUDITING AND ETHICS

(c) As per SA 570 “Going Concern”, in case of ZAB Ltd.,
(i) the auditor’s responsibilities are to obtain sufficient appropriate audit
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evidence regarding and conclude on the appropriateness of
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management’s use of the going concern basis of accounting in the

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preparation of the financial statements and

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(ii) to conclude, based on the audit evidence obtained, whether a material
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uncertainty exists about the entity’s ability to continue as a going
concern.
These responsibilities exist even if the financial reporting framework used
in the preparation of the financial statements does not include an explicit
requirement for management to make a specific assessment of the entity’s
ability to continue as a going concern.
In case of XYZ Ltd., if adequate disclosure about the material uncertainty is
not made in the financial statements, the auditor shall:

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(a) Express a qualified opinion or adverse opinion, as appropriate, in

em Opinion section of the auditor’s
accordance with SA 705.

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(b) In the Basis for Qualified (Adverse)

doubt on the entity’sa g
report, state that a material
ability to
exists that may cast significant
continue as a going concern and that
the financial statements do not adequately disclose this matter.
Question 2
(a) M/s K & Associates, Chartered Accountants were the statutory auditors of N
Industries Ltd. for the financial year 2025-26. Before the financial statements
were issued, the auditor became aware of a subsequent event involving a
major fire accident, which, in his opinion, required amendment of the
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financial statements. However, the management refused to make the
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necessary amendments. With reference to SA 560 explain the auditor's

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responsibilities where:

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(i) The auditor's report has not yet been provided to the entity; (1 Mark)

gla (ii) The auditor's report has already been provided to a
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the entity. (2 Marks)
(iii) Also explain the meaning of "Date the financial statements are issued".
(2 Marks)

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: SEPTEMBER 2026

(b) V & Associates, Chartered Accountants, were conducting the statutory audit
of ED Electronics Ltd. During the audit of revenue transactions, the auditor
verified customer orders, sales invoices, proof of despatches, receipt of funds
and customer confirmations to ensure that Sufficient and Appropriate audit
evidence had been collected on which the audit opinion would be based.
The engagement partner directed the audit team that all details of the audit
procedures performed and evidences obtained should be properly recorded
in the audit file so that another experienced auditor could understand the
work performed and relevance and reliability of audit evidence could be
maintained.
(i) You are required to explain what is meant by Relevance and Reliability
of the audit evidence? (2 Marks)
(ii) State the matters to be contained in the audit documentation that would
be sufficient to enable an experienced auditor, having no previous
connection with the audit, to understand the audit. (3 Marks)
(c) During the audit of M Power Ltd. the engagement partner came to know that
one member of the audit team had a close business relationship with a senior
executive of the client company. The engagement partner immediately
discussed the matter with senior officials of the audit firm and reviewed the
firm's independence policies.
What is meant by "Independence" in an audit engagement? (1 Mark)
State the responsibilities of the engagement partner regarding compliance
with independence requirements in the above case and how the audit partner
should deal with the matter? (3 Marks)
Answer
(a) As per SA 560 on “Subsequent Events”, When management does not
amend the financial statements in circumstances where the auditor
believes they need to be amended, then:
(i) If the auditor’s report has not yet been provided to the entity, the
auditor shall modify the opinion as required by SA 705 and then
provide the auditor’s report.
(ii) If the auditor’s report has already been provided to the entity, the
auditor shall notify management and, unless all of those charged with
governance are involved in managing the entity, those charged with

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SUGGESTED ANSWERS AUDITING AND ETHICS

governance, not to issue the financial statements to third parties
before the necessary amendments have been made. If the financial
statements are nevertheless subsequently issued without the necessary
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amendments, the auditor shall take appropriate action, to seek to
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prevent reliance on the auditor’s report.
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(iii) Meaning of “Date the financial statements are issued”: It reflects

g la made available to third parties. The date the financial statements area
a issued generally depends on the regulatory environment of the entity.
In some circumstances, the date the financial statements are issued
may be the date that they are filed with a regulatory authority.
Since audited financial statements cannot be issued without an
auditor’s report, the date that the audited financial statements are
issued must not only be at or later than the date of the auditor’s report,
but must also be at or later than the date the auditor’s report is
provided to the entity.
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m. the purpose of the audit procedure
(b) (i) As per SA 500, “Audit Evidence”, relevance deals with the logical
connection with, or bearingeupon,

l a sthe assertion under consideration. The
g to be used as audit evidence may be affected
and, where appropriate,
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relevance of information
by the direction of testing.
The reliability of information to be used as audit evidence, and
therefore of the audit evidence itself, is influenced by its source and its
nature, and the circumstances under which it is obtained, including the
controls over its preparation and maintenance where relevant.
(ii) As per SA 230, “Audit Documentation”, the auditor shall prepare audit

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documentation that is sufficient to enable an experienced auditor,

m having no previous connection with the audit, to understand:

c. o (a) The nature, timing and extent of the audit proceduresm
s e performed.
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(b) The results of the audit procedures performed

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evidence obtained and a
a (c) Significant matters arising during the audit and the conclusions
reached thereon and significant professional judgements made in
reaching those conclusions.

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(c) “Independence” means that the judgement of a person is not
subordinate to the wishes or direction of another person who might
have engaged him, or to his own self-interest.
It is not possible to define “independence” precisely. Independence is a
condition of mind as well as personal character and should not be confused
with the superficial and visible standards of independence which are
sometimes imposed by law. These legal standards may be relaxed or
strengthened but the quality of independence remains unaltered.
Observance of “Independence” in all engagements is the basic
requirement. The firm should establish policies and procedures designed
to provide it with reasonable assurance that the firm, its personnel and
(including experts contracted by the firm and network firm personnel)
maintain independence.
The engagement partner shall form a conclusion on compliance with
independence requirements that apply to the audit engagement. In doing
so, the engagement partner shall: -
(i) Obtain relevant information from the firm to identify and evaluate
circumstances and relationships that create threats to independence.
(ii) Identify and evaluate information on identified breaches, if any, of the
firm’s independence policies and procedures to determine whether
they create a threat to independence for the audit engagement and
(iii) Identify and evaluate circumstances and relationships that create
threats to independence, and to take appropriate action to eliminate
such threats or reduce them to an acceptable level by applying
safeguards, or, if considered appropriate, to withdraw from the audit
engagement, where withdrawal is permitted by law or regulation.
(iv) There should exist a mechanism in the firm by which engagement
partners provide the firm with relevant information about client
engagements and personnel of firm promptly notify firm of
circumstances and relationships that create a threat to independence.
All breaches of independence should be promptly notified to firm for
appropriate action. Its objective is to ensure that independence
requirements are satisfied.

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Conclusion: In the present case, the engagement partner should evaluate
the threat and apply safeguards by eliminating the concerned member
from the engagement team and assigning another independent member
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to the assignment.
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Question 3
.co s e m
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(a) While finalizing the audit report of PQR Garments Limited for the year ended
a g
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31/03/2026, the auditor obtained management representations that no
funds had been advanced, loaned, invested or received through
intermediaries for the benefit of any ultimate beneficiaries, except as
disclosed in the notes to accounts. The auditor performed appropriate audit
procedures and found no material misstatement in these representations.
Discuss the other matters (excluding the above) on which the auditor is
required to report under Section 143(3)(j) of the Companies Act, 2013 read
with Rule 11 of the Companies (Audit and Auditors) Rules, 2014. (5 Marks)

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(b) Self interest threat, Self review threat and Advocacy threat are some of the
threats to the independence of an auditor. There are other threats as well.
m to continue forever as an auditor of a
eexplain
s
(i) If the same audit firm is allowed

l a
listed company, identify and the threat caused in this situation.

ag (1 Mark)
(ii) What are the safeguards that the Companies Act, 2013 provides for in
this regard? (1 Mark)
(iii) What are the general situations when this threat occurs? (3 Marks)
(c) Your audit team had come across the following issues during the audit of
STU Ltd. for the financial year 2025-26:

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(i) The company in which STU Ltd. holds equity investments declared a

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dividend of 15% at its General Meeting held on 4th September, 2025.
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Guide the audit team regarding the recognition criteria for the Dividend

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income. (2 Marks)

las (ii) During the year, a search conducted by the Income-tax authorities
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ag resulted in the detection of income that was not previously recorded in the
books of account. State the additional information required to be disclosed
in the financial statements in respect of undisclosed income in accordance
with the Schedule III of the Companies Act, 2013. (2 Marks)

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Answer
(a) The auditor is required to report the following matters, excluding the
matter relating to funds advanced, loaned, invested or received through
intermediaries as stated in the question, under section 143(3)(j) of the
Companies Act, 2013 read with Rule 11 of Companies (Audit and Auditors)
Rules, 2014:
(i) whether the company has disclosed the impact, if any, of pending
litigations on its financial position in its financial statement;
(ii) whether the company has made provision, as required under any law
or accounting standards, for material foreseeable losses, if any, on long
term contracts including derivative contracts;
(iii) whether there has been any delay in transferring amounts, required to
be transferred, to the Investor Education and Protection Fund by the
company.
(iv) whether the dividend declared or paid during the year by the company
is in compliance with section 123 of the Companies Act, 2013.
(v) whether the company has used such accounting software for
maintaining its books of account which has a feature of recording audit
trail (edit log) facility and the same has been operated throughout the
year for all transactions recorded in the software and the audit trail
feature has not been tampered with and the audit trail has been
preserved by the company as per the statutory requirements for record
retention.
(b) (i) If same audit firm is allowed to continue forever as an auditor of a
listed company, the given situation is classified as Familiarity threat.
Familiarity threats are self-evident, and occur when auditors form
relationships with the client where they end up being too sympathetic
to the client’s interests.
(ii) Provisions in the Companies Act, 2013 regarding rotation of auditors
mainly address these very familiarity threats. Such provisions prescribe
that auditor is rotated after a certain number of years so that auditors
do not become too familiar with their clients.

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(iii) Familiarity threat can occur in many ways including:
close relative of the audit team working in a senior position in the
m


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client company
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former partner of the audit firm being a director or senior employee
e


m
e long association between specific auditors and their specific client gla
of the client
s
s
la counterparts and a
ag  acceptance of significant gifts or hospitality from the client company,
its directors or employees.
(c) (i) Dividends are recognised in the statement of profit and loss only when:
• the entity’s right to receive payment of the dividend is established;
• it is probable that the economic benefits associated with the dividend
will flow to the entity; and

o m
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. to be disclosed in the financial
• the amount of the dividend can be measured reliably.

e m
(ii) The additional information required

l a s
statements in respect of undisclosed income in accordance with the

a g
Schedule III of the Companies Act, 2013:
The Company shall give details of any transaction not recorded in the
books of accounts that has been surrendered or disclosed as income
during the year in the tax assessments under the Income Tax Act, 1961
(such as, search or survey or any other relevant provisions of the
Income Tax Act, 1961), unless there is immunity for disclosure under
any scheme and also shall state whether the previously unrecorded
income and related assets have been properly recorded in the books
of account during the year.
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c. o (a) M/s Sanjay & Associates were appointed as the statutory m
Question 4

m s e auditors of
s e g l a reported a
la
B Cosmetics Ltd. for the financial year 2025-2026. The Company
turnover of approximately ` 250 crores with a very a
g
large number of sales
a transactions.
Based on the assessed audit risk, the auditor decided to verify the sales
transactions on a test check basis. During the engagement quality review, it

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: SEPTEMBER 2026

was observed that only a limited number of sales transactions had been
selected for verification despite significant variations in the monthly sales
pattern.
With reference to SA 200, identify and explain the type of audit risk involved
in the above case. (2 Marks)
Identify and explain the specific component of such risk applicable to the fact.
(2 Marks)
State how the auditor can reduce such audit risk? (1 Mark)
(b) Seth Traders maintains cash balances at its head office, branch office and
petty cash department. It also provides imprest cash advances to certain
employees for routine expenses. During the audit, the auditor noticed that a
separate cash books and rough cash records were maintained at different
locations. The auditor decided to independently verify the existence and
completeness of cash balances maintained by the entity.
State the audit procedures that the auditor should perform to verify the
existence and completeness of cash and cash equivalent balances as at the
period end. (Assume no bank transactions are involved.) (5 Marks)
(c) Aroma Appliances Ltd. is engaged in the manufacturing of household kitchen
equipment such as coffee machines and blenders. During the statutory audit
for FY 2025-26, the auditor, CA P, observed that the company had not
disclosed in the notes to accounts a pending case filed by a consumer
claiming ` 50 lakhs as damages for an allegedly defective coffee maker. This
amount is material in relation to the financial statements of the Company.
When CA P questioned the omission, the company's management argued
that since the matter relates to a possible future outcome and not to the
current year's transactions, such matters are not part of the auditor's
responsibility.
(i) Explain with reason whether above matter falls within the scope of an
audit?
(ii) Further, state and explain the important points in relation to the scope
of an audit of financial statements. (4 Marks)

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Answer
(a) As per SA 200 “Overall Objectives of the Independent Auditor and the
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Conduct of an Audit in Accordance with Standards on Auditing”, this risk is
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classified as detection risk.

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SA 200 defines detection risk as the risk that the procedures performed by
e la s
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the auditor to reduce audit risk to an acceptably low level will not detect a
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misstatement that exists and that could be material, either individually or
when aggregated with other misstatements.
In the given case, the auditor selected only a limited number of sales
transactions for verification despite significant variations in the monthly
sales pattern. Such a sample may not be representative of the population
from which it was chosen.
Therefore, the specific component of Detection Risk in the given case is
Sampling Risk.

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Sampling risk is the risk that the auditor’s conclusion based on a sample
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may be different from the conclusion if the entire population were

s
subjected to the same audit procedure. It simply means that the sample

l a
was not representative of the population from which it was chosen.
g by increasing area of checking, testing larger
a
Detection risk may be reduced
samples and by including competent and experienced persons in the
engagement team.
(b) Audit procedures that the auditor should perform to verify the Existence
and completeness of cash and cash equivalent balances as at the period-
end:
(1) Special care is necessary in regard to verification of cash balances.
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Unless they are checked by surprise, there can be no certainty that the
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cash produced for inspection was in fact held by the custodian. For this
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reason, the cash should be checked not only on the last day of the year,

s em but also checked again sometime after the close of the year without
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giving notice of the auditor’s visit either to the entity or to his staff.

ag (2) If there are more than one cash balances, e.g., when there is a cashier,
a petty cashier, a branch cashier and, in addition, there are imprest
balances with employees, all of them should be checked

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: SEPTEMBER 2026

simultaneously, as far as practicable so that the shortage in one
balance is not made good by transfer of amount from the others.
(3) It is desirable for the cashier to be present while cash is being counted
and he should be made to sign the statement prepared containing
details of the cash balance counted along with denomination of cash.
If he is absent at the time the cash is being verified, he may hold the
auditor responsible for the shortage, if any, in cash.
(4) If there is any rough Cash Book or details of daily balance are
separately kept, the auditor should test entries from the rough Cash
Book with those in the Cash Book to prove that entries in the Cash
Book are correct.
(5) If the auditor finds any slip, chit or I.O.U.s in respect of temporary
advances paid to the employees included as part of the cash balance,
he should check whether those are approved by an authorized official
and recorded in the appropriate accounts.
(6) The auditor should also perform a cash sensitivity analysis by compiling
a summary of total cash receipts and payments each month and
analyzing the trends to see if there have been variations in any specific
month and request brief descriptions from the management.
(c) (i) Yes, the above matter falls within the scope of audit of financial
statements.
In the given case, pending lawsuit represents a contingent liability
requiring proper disclosure in the notes to accounts. Ensuring such
disclosure of financial information is well within the scope of an audit.
(ii) The following points are included in scope of audit of financial
statements:
(1) Coverage of all aspects of entity: Audit of financial statements
should be organized adequately to cover all aspects of the entity
relevant to the financial statements being audited.
(2) Reliability and sufficiency of financial information: The auditor
should be reasonably satisfied that information contained in
underlying accounting records and other source data (like bills,
vouchers, documents etc.) is reliable and sufficient basis for
preparation of financial statements.

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(3) Proper disclosure of financial information: The auditor should
also decide whether relevant information is properly disclosed in
the financial statements. He should also keep in mind applicable
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statutory requirements in this regard.
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(4) Expression of an opinion on financial statements: The objective
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em of audit is to obtain reasonable assurance about whether the
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misstatement, whether due to fraud or error, thereby enabling the
auditor to express an opinion.
Question 5
(a) M/s V & Co. were the statutory auditors of A Components Ltd. During the
audit, the partner CA Verma observed that the company has entered into
certain related party transactions involving no exchange of consideration.
Considering the nature of such transactions, the engagement partner decided

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to obtain an understanding of the entity's related party relationships and

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transactions through inquiries of the management and by evaluating the

emParties), explain the inquiries and risk
control established by the management.
s
lthea partner CA Verma should perform to obtain
With reference to SA 550 (Related

an understanding of the a
assessment procedures thatg
entity's related party relationships and transactions.
(5 Marks)
(b) Tannish & Co., Chartered Accountants are statutory auditors of H Resorts Ltd.
which has a Club and attached Hotel. In this regard, specify the audit
procedures to be performed to obtain sufficient and appropriate audit
evidence in respect of following items in the financial statements:

m
(i) Irrecoverable Member dues in the case of club. (1 Mark)

m (iii) Room sales & Hall bookings of the Hotel. c. o
c. o
(ii) Margins earned in the case of club. (1 Mark)
m
em l aLimited for the se (3 Marks)
las (c) M/s D & Associates are the statutory auditors of H
g
a during the year
ag FY 2025-26. The previous statutory auditors had resigned
due to some personal reasons. Subsequent to their resignation, M/s D &
Associates were appointed as statutory auditors. The Company was required
to conduct an internal audit and hence had an internal audit system. Further,

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: SEPTEMBER 2026

during the audit, CA David, the engagement partner, observed that the
Company had incurred cash losses in the financial year. How should the
above matters be reported in CARO 2020 by M/s D & Associates? (4 Marks)
Answer
(a) As per SA 550 “Related Parties”, the auditor shall inquire of management
regarding:
(i) The identity of the entity’s related parties, including changes from the
prior period;
(ii) The nature of the relationships between the entity and these related
parties; and
(iii) Whether the entity entered into any transactions with these related
parties during the period and, if so, the type and purpose of the
transactions.
The auditor shall inquire of management and others within the entity, and
perform other risk assessment procedures considered appropriate, to
obtain an understanding of the controls, if any, that management has
established to-
(i) Identify, account for, and disclose related party relationships and
transactions in accordance with the applicable financial reporting
framework;
(ii) Authorise and approve significant transactions and arrangements with
related parties; and
(iii) Authorise and approve significant transactions and arrangements
outside the normal course of business.
(b) Audit procedures to be performed to obtain sufficient and appropriate
audit evidence in respect of:
(i) Irrecoverable Member Dues in the case of club: See the Register of
Members to ascertain the Member’s dues which are in arrear and
enquire whether necessary steps have been taken for their recovery;
the amount considered irrecoverable should be mentioned in the Audit
Report.

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(ii) Margins earned in the case of club: Vouch purchases of foodstuffs,
cigars, wines, etc., and test their sale price so as to confirm that the
normal rates of gross profit have been earned on their sales. The
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inventory of unsold provisions and stores, at the end of year, should be
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verified physically and its valuation checked.
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m for room sales is normally posted to guest bills by the las
echarge
s
(iii) Room Sales & Hall Bookings: Vouching for room charges - The

l a receptionist/front office or in the case of large hotels by the nighta
g
ag auditor. The source of these entries is invariably the guest register and
audit tests should be carried out to ensure that the correct numbers of
guests are charged for the correct period. Any difference between the
charged rates used on the guests’ bills and the standard room rate
should be investigated to ensure that they have been properly
authorised.
Verification of Occupancy Records - In many hotels, the housekeeper
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prepares a daily report of the rooms which were occupied the previous

.
night and the number of beds kept in each room. This report tends not

s em
to be permanently retained and the auditor should ensure that a

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sufficient number of reports are available for him to test both with the
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guest register and with the individual guest’s bill. The auditor should
ensure that proper valuation of occupancy-in-progress at the balance
sheet date is made and included in the accounts.
Hall booking - The auditor should ensure that proper records are
maintained for booking of halls and other premises for special parties
and recovered on the basis of the tariff.
(c) Relevant clauses for reporting in the given case are: As per clause (xviii)
of Para 3 of CARO, 2020, the auditor is required to report on:
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Whether there has been any resignation of the statutory auditors during
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objections or concerns raised by the outgoing auditors;

las a g
In the given situation, since the previous statutory auditors had resigned

ag during the year, D and Associates should report whether they have taken
into consideration the issues, objections or concerns raised by the outgoing
auditors.

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: SEPTEMBER 2026

As per clause (xiv) of Para 3 of CARO, 2020, the auditor is required to
report on:
(a) whether the company has an internal audit system commensurate with
the size and nature of its business;
(b) whether the reports of the Internal Auditors for the period under audit
were considered by the statutory auditor;
Accordingly, D and Associates should report whether the internal audit
system of H Limited is commensurate with the size and nature of its
business and whether the reports of the Internal Auditors for the period
under audit were considered by them.
As per clause (xvii) of Para 3 of CARO, 2020, the auditor is require to
report on: 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;
Accordingly, D and Associates should report the amount of cash losses
incurred by H Limited during the financial year and the immediately
preceding financial year, if any.
Question 6
(a) While conducting the statutory audit of advances of XYZ bank, CA P noted
that a borrower had been sanctioned a cash credit limit of ` 12 crores. Based
on the latest stock statement, the drawing power was ` 9 crores, whereas the
outstanding balance in the account was ` 10 crores. The borrower's funded
exposure was ` 10 crores. The account was under a consortium arrangement
in which XYZ Bank was not the lead bank.
The branch manager contended that the account was regular since the
outstanding balance was within the sanctioned limit. He further stated that,
since XYZ Bank was not the lead bank, there was no requirement to review
the stock audit report.
In the above context:
(i) Briefly explain the concepts of Sanctioned Limit and Drawing Power and
comment on the branch manager's view that the account is regular.
(3 Marks)

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(ii) State whether stock audit is required in the given case and comment on
the branch manager's view that there is no requirement to review the
stock audit report. (2 Marks)
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(b) During the audit of S Manufacturing Ltd., the auditor observed that the

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company had effective communication and enforcement of integrity and

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ethical values. The company also followed structured human resources

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policies relating to recruitment, training, performance appraisal and
a g
ag Apart from the above two elements, state and briefly explain the other
promotion.

elements of control environment that may be relevant while obtaining an
understanding of the control environment in accordance with SA 315.
(5 Marks)
(c) List the factors to be taken into consideration by auditor for establishing an
audit strategy in the course of performing an audit engagement.

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OR

m . of Software Solutions Limited for the
e already completed the checking of the
(c) CA N is verifying the intangible assets
year ended 31/03/2026. He has
s
lathefordeletions
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additions to intangible assets
under the process of checking
verifying its "completeness". He is now
of intangible assets. You are the
team leader and CA N requests your guidance for the verification of the
deletions of intangible assets. Which verification steps would you suggest to
CA N? (4 Marks)
Answer
(a) (i) The Sanctioned limit is the total exposure that a bank can take on a
particular client for facilities like cash credit, overdraft, export packing
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credit, non-funded exposures etc. On the other hand, Drawing Power
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refers to the amount calculated based on primary security less margin

em
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as on a particular date.

s em l a
ag and financial
Drawing Power generally addressed as “DP” is an important concept

gla for Cash Credit (CC) facility availed from banks

a institutions. Drawing power is the limit up to which a firm or company
can withdraw from the working capital limit sanctioned.

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: SEPTEMBER 2026

In the given situation, branch manager’s view is not correct as the
outstanding balance of ` 10 crores was exceeding Drawing Power of
` 9 crores. The fact that the outstanding balance was within the
sanctioned limit of ` 12 crores does not make the account regular.
(ii) The stock audit should be carried out by the bank for all accounts
having funded exposure of more than ` 5 crores. Auditors can also
advise for stock audit in other cases if the situation warrants the same.
Branches should obtain the stock audit reports from lead bank in the
cases where the Bank is not leader of the consortium of working
capital. The report submitted by the stock auditors should be reviewed
during the course of the audit and special focus should be given to the
comments made by the stock auditors on valuation of security and
calculation of drawing power.
In the given situation, the borrower’s funded exposure was ` 10 crores.
Therefore, stock audit is required.
Further, since XYZ Bank is not the leader of the consortium, the branch
should obtain the stock audit report from the lead bank and the report
should be reviewed during the course of the audit.
Hence, the branch manager’s view that there is no requirement to
review the stock audit report is not correct.
(b) Elements of the Control Environment: Apart from Communication and
enforcement of integrity and ethical values and Human resource policies and
practices, other elements of the control environment that may be relevant
when obtaining an understanding of the control environment include the
following:

(i) Commitment to competence: Matters such as management’s
consideration of the competence levels for particular jobs and how
those levels translate into requisite skills and knowledge.
(ii) Participation by those charged with governance: It includes
attributes of those charged with governance such as their
independence from management, their experience and stature, the
extent of their involvement and the information they receive and the
scrutiny of activities.

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(iii) Management’s philosophy and operating style: Management’s
philosophy and operating style encompass a broad range of
characteristics. For example, management’s attitudes and actions
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towards financial reporting - what approach is taken by management
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in selecting accounting policies, approach in developing accounting
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estimates etc. Matters such as approach of management to taking and
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processing and accounting function and personnel reflects upon
management’s philosophy and operating style.
(iv) Organisational structure: The framework within which an entity’s
activities for achieving its objectives are planned, executed, controlled,
and reviewed. Establishing a relevant organisational structure includes
considering key areas of authority and responsibility and appropriate
lines of reporting. The appropriateness of an entity’s organisational
structure depends, in part, on its size and the nature of its activities.

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(v) Assignment of authority and responsibility: Matters such as how

.
authority and responsibility for operating activities are assigned and

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how reporting relationships and authorisation hierarchies are
established.
l a
(c) Factors to be taken into gconsideration by auditor for establishing audit
a
strategy in the course of performing an audit engagement:
(i) Identify the characteristics of the engagement that define its scope
(ii) Ascertain the reporting objectives of the engagement to plan the
timing of the audit and the nature of the communications required.
(iii) Consider the factors that, in the auditor’s professional judgment, are
significant in directing the engagement team’s efforts
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(iv) Consider the results of preliminary engagement activities and, where
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c. o applicable, whether knowledge gained on other engagements
se
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performed by the engagement partner for the entity is relevant.

las (v) Ascertain the nature, timing and extent of resources necessary to
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ag perform the engagement.

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: SEPTEMBER 2026

OR
(c) Steps for verification of the deletions of intangible assets are as
follows:
 Understand from the management the reason and rationale for deletion
and the manner of disposal.
 Obtain the management approval and disposal note authoring disposal
of the asset from its active use.
 Verify the process followed for sale of discarded asset, example inviting
competitive quotes, tenders and the basis of calculation of sales proceeds.
 Verify that the management has accurately recorded the deletion of
intangible asset (original cost and accumulated amortization up to the
date of disposal) and the resultant gain/ loss on disposal in the entity’s
books of account.

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