CA Final May 2025 Suggested Answers Paper 3 Advanced Auditing, Assurance and Professional Ethics

FOR CA FINAL EXAM PREPARATION

CA Final 2025
Suggested Answers ·
Paper 3 Advanced
Auditing, Assurance
and Professional
Ethics
EXAM YEAR TYPE

CA Final 2025 Suggested Answers
SUBJECT DATE

Paper 3 Advanced Auditing, Assurance and Professional Ethics May 2025

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
a DG & Co. is a firm of Chartered Accountants, consisting of two partners,a
1. lM/s
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a CA D and CA G. The firm operates its main office in Delhi and has established
branch offices in Gurgaon, and Shimla. M/s DG & Co. had applied for
exemption with respect to the Shimla Office, due to its hill area location.
The permission was granted to them allowing a temporary office in
Chandigarh during winter months. The temporary office in Chandigarh
displayed its name board year-round and used the address on firm stationery.
The firm is concerned with the compliance of provisions of Section 27 of the
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Chartered Accountants Act, 1949. Exemption has been given to members

em condition(s) from the following:
practicing in hill areas.

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labe allowed to open temporary offices in
You are required to identify the correct
(i) M/s DG & Co. should g
a period not exceeding 3 months in a year.
Chandigarh for a limited
(ii) Shimla office should be closed during winter months and all
correspondence should be made at the Chandigarh office only.
(iii) The name board of the firm in the Chandigarh office should not be
displayed at times other than the period such office is permitted to
function.

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(iv) Chandigarh office should not be mentioned in the letterheads, visiting
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cards or any other documents as a place of business of the member/firm.

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a office from a
(v) Before commencement of every winter it shall be obligatory
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to inform the Institute that it is opening the Chandigarh
a expiry of the period
ag particular date and after the office is closed at the
of permission, an intimation to that effect should also be sent to the
office of the Institute by registered post.
(A) (i), (ii), (iii), (iv)

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(B) (i), (iii), (iv), (v)
(C) (i), (ii), (iv)
(D) (ii), (iii), (iv), (v) (2 Marks)
2. Secure Bank Ltd., a mid-sized financial institution, prides itself on offering
secure digital banking services to its customers. Recently, the bank became a
target of a sophisticated malware attack that exposed multiple vulnerabilities
in its IT systems.
(I) Incident 1: An employee of Secure Bank received an email from what
appeared to be a reputable software vendor, offering a "free system
optimization tool". Believing it to be legitimate, the employee
downloaded and installed the tool. However, it was a cyber-attack,
disguised to appear as harmless software. Once installed, it created a
backdoor that allowed attackers to access the bank's internal network.
(II) Incident 2: The attackers leveraged to target employees' smartphones.
This malware was introduced through phishing SMS (smishing), which
prompted employees to click on malicious links. The malware exploited
outdated operating systems on the devices to extract sensitive corporate
information.
(III) Incident 3: The attackers executed a malware on the bank's systems by
exploiting legitimate tools such as PowerShell and Windows
Management Instrumentation (WMI), the attackers initiated a series of
commands to explore and manipulate the bank's network.
(IV) Incident 4: A critical server was encrypted by a cyber-attack, disrupting
operations for three days. This encrypted all critical financial data,
rendering the system inoperable. Investigations revealed that the attack
originated from a phishing email sent to an employee. The email
contained a link that exploited an unpatched vulnerability in the server.
From the above which of the cyber-attack incident that Secure Bank Ltd.
became victim of, is described as "Ransomware?"
(A) Incident 4
(B) Incident 3

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(C) Incident 2
(D) Incident 1 (2 Marks)
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Uranus Pvt. Ltd., a partially-owned subsidiary of Saturn Ltd., a manufacturing
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company, has been operating as an unlisted company in India. The

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company's shareholders, including non-voting members, have been informed

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in writing about the company's decision not to present consolidated financial
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statements. None of the members have objected, and the company holds
proof of delivery for these communications.
Saturn Ltd., the ultimate holding company of Uranus Pvt. Ltd., files its
consolidated financial statements with the Registrar in compliance with the
applicable Accounting Standards. Saturn Ltd. is listed on the National Stock
Exchange (NSE) and adheres to Ind AS for its reporting requirements.
Pluto Ltd., is another subsidiary of Saturn Ltd. manages funds from various
investors, with a stated business objective of earning returns through capital

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appreciation and investment income. It evaluates its investments on a fair

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value basis, reporting these changes through profit or loss. Pluto Ltd. holds

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75% shares of Neptune Ltd. and 60% shares of Eris Ltd.

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During a regulatory review, issues arose regarding the applicability of

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Consolidated Financial Statement (CFS) requirements and the exemptions
provided under the Companies Act, 2013, and Ind AS 110.
Which of the following statements is most appropriate regarding the
applicability of Consolidated Financial Statements (CFS) requirements and
the exemptions provided under the Companies Act, 2013, and Ind AS 110.
(A) Uranus Pvt. Ltd. must prepare consolidated financial statements as it is
a subsidiary of a listed company that files its consolidated statements.

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(B) Pluto Ltd. must present consolidated financial statements for all entities
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it controls as it measures its subsidiaries at fair value through profit or

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loss.

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(C) Saturn Ltd. must consolidate all entities it controls, excepting Pluto Ltd.

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a to Pluto Ltd.
(D) Saturn Ltd. must consolidate all entities it controls, including Uranus Pvt.
Ltd., Pluto Ltd. and its subsidiaries. (2 Marks)

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Integrated Case Scenario - I
M/s FILE & Co. is a firm of Chartered Accountants consisting of 12 partners based
at Mumbai. The audit firm is engaged in the audit of DEAF Ltd. for the financial
year 2024-2025 for which CA L is the engagement partner.
During the course of the audit of DEAF Ltd., the following misstatements were
identified:
I. A calculation error in the depreciation schedule amounting to ` 1 lakh.
II. Management's estimate regarding inventory valuation seemed aggressive,
leading to an overstatement of ` 5 lakhs, which the auditor deemed
unreasonable.
III. A sample audit revealed an error in sales invoices amounting to ` 60,000 and
the population of similar invoices totalled ` 1 crore. The auditor's best
estimate of misstatement in population identified in the samples to the entire
population is ` 6 lakhs.
CA L has determined a threshold of ` 75,000 as the amount below which
misstatements would be considered clearly trivial.
Further:
(i) The auditor communicated with those charged with governance regarding
uncorrected misstatements and their effect and requested to them that
uncorrected misstatements be corrected.
(ii) The management corrected the inventory valuation issue but did not correct
the depreciation error or the error in sales invoices amounting to
` 60,000, considering the immateriality.
(iii) After evaluating the effect of identified misstatements on the audit and of
uncorrected misstatements, if any, on the financial statements, CA L is
concerned on the documentation aspect with reference to the relevant
Standard on Auditing.
M/s FILE & Co. is also the statutory auditors of Purple Pvt. Ltd., a manufacturing
company, which has been severely impacted by economic downturns and
operational inefficiencies. The company's cash flow statements reveal recurring
negative cash flows, and its interim financial statements show a significant
decline in profitability. Additionally, Purple Pvt. Ltd. has defaulted on loan
covenants, and on-going litigation poses a risk of substantial financial liabilities.

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Management has stated their plans to mitigate these challenges by restructuring
debt, securing additional funding from related parties, and reducing operational
costs. However, no formal documentation supporting these plans has been
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M/s FILE & Co. have identified the events and conditions in the case of Purple Pvt.
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Ltd. which cast significant doubt on the entity's ability to continue as a Going
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Concern, and auditor needs to obtain sufficient appropriate audit evidence to
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determine whether or not material uncertainty exists and gather evidence
including of mitigating factors.
M/s FILE & Co. is planning to perform the following additional procedures:
(i) As long as management provides a representation letter stating their plans
to address financing difficulties the auditor is not bound by the terms of
breached loan agreements.
(ii) Confirm the existence, legality, and enforceability of arrangements to provide

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or maintain financial support, both from related/third parties and the

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assessment of the financial ability of such parties to provide the promised

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support as immaterial.

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(iii) Evaluate the assumptions underlying

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forecasts, considering historical
(iv) Considering whether existing
since the date of management's initial assessment that could impact the
going concern conclusion.
(v) Review minutes of meetings of shareholders, those charged with governance,
and relevant committees for references to financial difficulties, plans for
mitigating actions, or discussions on securing additional funding.

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(vi) If management has not yet performed an assessment, the entity is treated as

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not a going concern and issue a modified audit opinion without further

c. o M/s FILE & Co. the statutory auditors of Crypto Ltd., a non-listed public
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evidence.

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s e carrying out manufacturing activity, have been identified for l
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gl a a covered under
their quality review

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based upon risk based approach. However, Crypto Ltd. is neither
Rule 3 of NFRA Rules, 2018 nor referred to QRB by NFRA. The Quality Review
Board (QRB) is entrusted with conducting a quality review of M/s FILE & Co.'s
audit services. During the review, QRB identifies non-compliance with Standards

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on Auditing (SAs) in areas related to engagement documentation and
independence. Meanwhile, NFRA receives a whistle blower complaint regarding
audit irregularities in Glitch Ltd., a listed company, audited by FILE & Co.
M/s FILE & Co. was charged with failure to identify related parties and
transactions with them. Glitch Ltd. has made 95% of sales to a related party which
was not identified as such in the annual report of the company. NFRA initiates an
investigation under Section 132(4) of the Companies Act, 2013.
Based on the above facts, answer the following questions (Q. Nos. 4 to 7):
4. Which of the following options is correct regarding the classification and
treatment of the identified misstatements of DEAF Ltd. under relevant
Standard on Auditing?
(A) The ` 1 lakh error in depreciation schedule qualifies as a judgemental
misstatement. Management's estimate regarding inventory, leading to
an overstatement of ` 5 lakhs, which the auditor deemed unreasonable
does not qualify as a misstatement.
A sample audit revealed an error in sales invoices amounting to ` 60,000
is a factual misstatement.
(B) The ` 1 lakh error in the depreciation schedule is a judgemental
misstatement.
The inventory valuation overstatement of ` 5 lakhs is a factual
misstatement.
The invoice-related error does not qualify as a misstatement as the
individual error is below the trivial threshold.
(C) The ` 1 lakh error in the depreciation schedule is a factual misstatement.
The inventory valuation overstatement of ` 5 lakhs is a projected
misstatement.
The auditor's best estimate of misstatement of population is a
judgemental misstatement.
(D) The ` 1 lakh error in the depreciation schedule is a factual misstatement.
The inventory valuation overstatement of ` 5 lakhs is a judgmental
misstatement.
The auditor's best estimate of misstatement of ` 6 lakhs to entire
population is a projected misstatement. (2 Marks)
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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

5. Which of the following actions is not required as part of the auditor's
documentation for the identified misstatements of DEAF Ltd.?

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(A) Justifications for not communicating identified misstatements to those

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charged with governance.
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(B) Recording
ewhich
the predetermined threshold of ` 75,000 as the amount below
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l Listing all identified misstatements, including the inventorya
ag misstatement, even if corrected by management.
(C)

(D) The auditor's conclusion as to whether uncorrected misstatements are
material, individually or in aggregate, and the basis for that conclusion.
(2 Marks)
6. Based on the listed additional procedures, which of the following are the
inappropriate actions for the auditor to take decision on Going Concern in

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the case of Purple Pvt. Ltd.?
(A) (i), (ii), (iii), (iv)
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(B) (i), (ii), (iv), (vi)

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(C) (ii), (iii), (iv), (vi)
(D) (iii), (iv), (v), (vi) (2 Marks)
7. Which of the following statements is most appropriate in the context of the
roles of QRB and NFRA?
(A) QRB is empowered to review the quality of audit services for both
Crypto Ltd. and Glitch Ltd. since it oversees all entities audited by ICAI
members.

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(B) NFRA cannot investigate Glitch Ltd. as it falls under QRB's jurisdiction
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due to the audit being performed by ICAI members.
(C) QRB can review the quality of audit services of Crypto s
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Ltd.;

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ag (D) NFRA and QRB have overlapping jurisdiction for
either body can independently investigate Glitch Ltd. (2 Marks)

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Integrated Case Scenario - II
M/s TAG & Associates, a Chartered Accountant firm was appointed by Comptroller
and Auditor General to conduct performance audit of Wind power Ltd., a public
sector undertaking of Government of India for the financial year 2024-25. Wind
power Ltd. is engaged in generation of wind power with setting up of wind power
plants at distinct locations in the country. The audit is assigned with the objective
and systematic examination of evidence for the purpose of providing an
independent assessment of the performance of organization, program, activity, or
function in order to provide information to improve public accountability and
facilitate decision-making by parties with responsibility to oversee or initiate
corrective action.
The audit firm is concerned with Planning for Performance Audit.
The audit manager Mr. G suggested the following procedures in the following
sequence of steps for conduct of Performance audit:
(1) Understanding the entity/programme
(2) Defining the objectives and the scope of audit
(3) Deciding audit approach
(4) Developing audit questions
(5) Determining audit criteria
(6) Establishing time table and resources
(7) Preparing Audit Design Matrix
(8) Assessing audit team skills and whether outside expertise required
(9) Intimation of Audit programme to audit entities
Further, in the course of performance audit of Wind power Ltd., the engagement
partner CA JP entrusted the audit work to four team members namely Mr. P,
Mr. Q, Mr. R, Mr. S. The audit team is initially concentrated in deciding audit
approach. CA JP suggested that there is no uniform audit approach prescribed
that can be applicable to all types of subjects of performance audits. CA JP asked
his team members to suggest a method for conducting the Performance audit.
 Mr. P suggested a method which involves a descriptive analysis of an entity,
scheme or a programme.

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 Mr. Q suggested a method which involves examination of available data
relating to financials like earnings, revenue, or data relating to programme
implementation like details of beneficiaries etc.
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Mr. R suggested a method which involves collecting information from
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members of a population to assess the interrelation of events and conditions.
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Mr. S suggested a method which involves review of the systems in place for
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aCAgJP analysed the methods suggested by each team member.
planning, conducting, checking, and monitoring the activity.

M/s TAG & Associates were appointed as statutory auditors of Indore Main branch
of a public sector bank for the financial year 2024-25. Advances generally constitute
a major part of the assets of the branch. There are substantial number of borrowers
to whom variety of advances are granted. Hence, they felt that audit of advances
requires major attention. M/s TAG & Associates are primarily concerned with
obtaining evidence about the following while carrying out audit of advances:

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Amounts due to the bank are appropriately supported by loan documents.
. is appropriate and properly applied
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and recoverability of advances iserecognized in their valuation.
 The stated basis of valuation of advances

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 Advances are disclosed, gclassified
a and practices and relevant statutory and
recognized accounting policies
regulatory requirements.
 Appropriate provisions towards advances are made as per RBI norms,
accounting standards and generally accepted accounting practices.
Audit approach of advances should encompass designing appropriate audit
procedures to obtain audit evidence in all these areas.

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The engagement partner, CA R assigned the focus areas in advances to the

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c. o Mr. X was assigned to focus on evaluation of internal controlseonm.advances.
members of audit team as follows:

s em Mr. Y was assigned to focus on substantive audit procedures
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l a Mr. Z was assigned to focus on recoverability of advances.
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ag Further during the course of audit, it was observed that in the case of Kiran Ltd.,
a trading company which has availed a cash credit facility of ` 10 crore from
Indore Main branch, the drawing power was not arrived at by bank.

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ADVANCED AUDITING, ASSURANCE AND
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PROFESSIONAL ETHICS

As of 31st March 2025, the following details are provided regarding its stock,
receivables (with ageing analysis), and creditors for calculating the Drawing
Power (DP):
Particulars Amount Remarks
(` in lakhs)
Total Stock 900 Includes damaged stock of
` 60 lakhs.
Total Receivables (Debtors) 800 Ageing details provided below.
Creditors for Stock 140 Related to stock financed by
creditors.
Margin on Stock 25% As per bank sanction terms.
Margin on Receivables 40% As per bank sanction terms.
Sanctioned Cash Credit Limit 1000

Debtors' Ageing Analysis:
Age Bucket Amount (` in lakhs)
0 - 30 days 250
31 - 60 days 200
61 - 90 days 250
> 90 days (Overdue) 100
Total Receivables 800

On the basis of the above details, you are required to answer the following
questions (Q. Nos. 8 to 11):
8. CA JP, the engagement partner is satisfied with the procedures suggested by
audit manager but he is not convinced with the sequence of steps while
planning the performance audit of Wind power Ltd. He seeks your advice in
suggesting the correct sequence after rearranging them. You are required to
select the correct option from the following:
(A) Step 1, 2, 6, 4, 5, 3, 7, 8, 9
(B) Step 1, 2, 4, 3, 5, 7, 6, 8, 9
(C) Step 1, 2, 3, 5, 4, 8, 6, 7, 9
(D) Step 1, 2, 5, 3, 4, 8, 7, 6, 9 (2 Marks)

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9. As regards the method suggested for conducting performance audit of Wind
power Ltd., by which team member, do you think that, it may not be possible
for the auditor to work with complete data due to its high volume and in such
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cases sampling techniques are required to be used?
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(A) Mr. P
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(B) Mr.
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a (D) Mr. S (2 Marks)
10. The following audit procedures are undertaken by the audit team in relation
to audit of advances of the Indore Main branch:
(i) Examine existence, enforceability, and valuation of securities in respect
of securities requiring registration.
(ii) Verify correctness of master data of loan accounts updated in CBS. Check

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parameters like instalments, EMI, rate of interest, tenure of loans etc.

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(iii) Examine whether system laid down in bank for review/renewals of
advances is being followed.
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(iv) Examine accounts identified to be problem accounts but which have not

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yet slipped into NPA category. This can be done by obtaining list of SMA1
and SMA2 borrowers from the bank and same can be considered for
selection of problematic accounts.
(v) Review auditor's reports in case of borrowers having credit facilities from
the banking system beyond a cut-off limit fixed by board of directors of
bank.
From the above, identify the audit procedures that Mr. Y should focus upon.

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(A) (i), (ii), (iii)

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(B) (ii), (iv), (v)

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las (D) (iii) & (iv)
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ag 11. What is the Drawing Power (DP) available to Kiran Ltd. as of 31 March 2025? st

(A) ` 1005 lakhs
(B) ` 1000 lakhs

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(C) ` 945 lakhs
(D) ` 990 lakhs (2 Marks)
Integrated Case Scenario - III
M/s GDP Associates, a renowned firm of Chartered Accountants consisting of
15 partners was appointed as statutory auditors for the Financial Year 2024-25
of SYNC Technology Ltd., a technology focused engineering company engaged in
turnkey electronics manufacturing services, specializing in precision
manufacturing for diverse end-use industries including the automotive,
healthcare, IT, industrial appliances, energy management, water purification,
power supply and consumer products industries. The company's portfolio includes
memory, SSDs, motherboards, power adapters, and systems integration.
In conducting an initial audit engagement, the objective of the
M/s GDP Associates is to obtain sufficient appropriate audit evidence about
whether Opening balances contain misstatements that materially affect the
current period's financial statements; and appropriate accounting policies
reflected in the opening balances have been consistently applied in the current
period's financial statements, or changes thereto are properly accounted for and
adequately presented and disclosed in accordance with the applicable financial
reporting framework. The company's prior year financial statements were audited
by M/s JK Associates, but the predecessor auditor's report was modified due to
the non-disclosure of certain liabilities. The opening balances include significant
provisions and carry forward adjustments.
M/s GDP Associates decides to use sampling to test compliance with internal
controls over revenue recognition. As part of the audit of SYNC Technology Ltd.,
M/s GDP Associates is performing sampling for tests of controls and substantive
procedures. At the end of the sampling process, the auditor needed to conclude
on whether the sampling results provided a reasonable basis for conclusions
about the population tested.
During testing, the following scenarios arose:
(1) A selected item could not be tested because supporting documentation was
unavailable. The auditor is unable to apply the designed audit procedures
since documentation relating to sales is lost, like the sales order record, sales
invoice, document for dispatch.

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

(2) A deviation was identified in the sample that could potentially indicate a
misstatement in the population.

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(3) The auditor found an item that seemed anomalous but required further

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procedures to confirm it was not representative of the population.

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As part of audit, to confirm the accounts receivable balances with customers,
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M/s GDP Associates sends confirmation requests to SYNC Technology Ltd.'s top

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50 customers, whose account balances represent 80% of the company's total
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receivables. The auditor sends confirmation requests to confirm balances of cash held
in bank accounts and outstanding loans with the bank. The auditor also sends
confirmation requests to 200 small suppliers with low-value account balances.
The following events occur during the confirmation process:
(1) Out of the 50 positive confirmation requests, 10 responses indicate
agreement with the balances, 5 responses indicate discrepancies, and 35 do
not respond.

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(2) One response to a positive confirmation appears unreliable due to
discrepancies in the customer's letterhead and inconsistent information.

s em receive no responses.
(3) The 100 negative confirmation requests

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(4) In the case of non-response,l a the audit firm examined subsequent cash
notes.
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disbursements, email correspondences, and other records like goods received

Further M/s GDP Associates engaged an external IT expert to evaluate the entity's
cyber security framework, a significant area of risk identified during risk
assessment. M/s GDP Associates and the expert held discussions to finalize the
terms of the engagement, which included:
(1) The expert's role in assessing the robustness of SYNC Technology Ltd.'s cyber

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security systems.

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(2) The communication protocol, specifying that the expert would provide

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interim oral reports during the engagement and a formal written report upon

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(3) The need for confidentiality agreements, as the entity requested additional
restrictions on the disclosure of sensitive cyber security information.
(4) The identification of specific audit team members responsible for liaising with
the expert and facilitating communication between the expert and the entity.

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During the audit, the following issues arose:
 The expert delayed submitting the formal report, citing unclear
communication about the expected scope of work.
 The entity expressed concerns about the confidentiality provisions not being
adequately addressed.
 The expert had limited interaction with the auditor, leading to misalignment
on the interim findings.
On the basis of the above details, you are required to answer the following
questions (Q. Nos. 12 to 15):
12. Considering the factors influencing audit procedures for opening balances,
which of the following is the most appropriate course of action under relevant
Standard on Auditing?
(A) Perform audit procedures in prior period to obtain evidence relevant to
opening balances or evaluate whether prior period's closing balances
have been correctly brought forward.
(B) Evaluate the effect of the matter giving rise to modification in the
predecessor auditors M/s JK Associates' report, with respect to the
current period's financial statements.
(C) Assume the opening balances are immaterial since the predecessor
auditors, M/s JK Associates issued a modified opinion and focus only on
current year's transactions.
(D) Accept the accounting policies applied to the opening balances based
solely on management's assertion, provided they appear consistent with
current period's policies. (2 Marks)
13. Based on SA 530, which of the following is the most appropriate response for
the auditor in handling these situations while performing sampling tests and
procedures?
(A) If the audit procedure is not applicable to the selected item, then the
auditor shall perform only the alternative procedure but not on a
replacement item.
(B) In case when the auditor considers a misstatement or deviation
discovered in a sample to be an anomaly, the auditor shall obtain a high

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

degree of certainty that such misstatement or deviation is representative
of the population.

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(C) Rely solely on the results of the sample and assume that any deviations

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identified are immaterial to the population.

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(D) If the auditor is unable to apply the designed audit procedures, or
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suitable alternative procedures, to a selected item, the auditor shall treat

l a that item as a misstatement, in the case of tests of details. (2 Marks)
a
a14.g Which of the following is the most appropriate for M/s GDP Associates in
response to the events that occurred when performing external confirmation
procedures to obtain relevant and reliable audit evidence in accordance with
relevant Standard on Auditing?
(A) The failure to receive a response to a negative confirmation request
explicitly indicate receipt by the intended confirming party of the
confirmation request or verification of the accuracy of the information

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contained in the request.

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(B) Confirming parties also may be more likely to respond indicating their

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disagreement with a confirmation request when the information in the
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request is in their favour, and less likely to respond otherwise.

g confirmation does not mean that there is
some misstatement a
(C) Non-response for negative
as negative confirmation request itself is to respond
to the auditor only if the confirming party disagrees with the information
provided in the request.
(D) The auditor shall use negative confirmation requests as the sole
substantive audit procedure when he is aware of circumstances or
conditions that would cause recipients of negative confirmation requests
to disregard such requests. (2 Marks)
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15. M/s GDP Associates are concerned with SA 620, which deals with the
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work is used to assist the auditor in evaluating cyber security framework.

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Which of the following is incorrect option in relation to agreement with the
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auditor's expert?
a (A) When the work of the auditor's expert relates to the auditor's conclusions
regarding a significant risk, only a formal written report at the

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ADVANCED AUDITING, ASSURANCE AND
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PROFESSIONAL ETHICS

conclusion of that expert's work may be appropriate while oral reports
as the work progresses are not required.
(B) Ensure that the nature, scope, and objectives of the expert's work are
agreed upon in writing, including the timeline for deliverables.
(C) Identification of specific partners or staff, who will liaise with the
auditor's expert, and procedures for communication between that expert
and the entity, assists timely and effective communication, particularly
on larger engagements.
(D) It is necessary for the confidentiality provisions of relevant ethical
requirements that apply to the auditor also to apply to the auditor's
expert. (2 Marks)
Answer Key

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

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PART – II Descriptive Questions
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.

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Question 1
a
a(a)g PQR Motors Ltd., a listed entity engaged in the manufacture, and sale of
automobiles and related parts has prepared its annual financial statements
for the financial year 2024-25. The company's management is also
responsible for preparing other information, which includes:
(1) Annual Report:
• A Director's Report and Management Discussion & Analysis (MD&A)
prepared by the management.

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A Corporate Social Responsibility (CSR) report highlighting the
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•

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company's initiatives and outcomes.
(2) Chairman's Message:
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A message from the chairman discussing the company's financial
performance and strategic outlook.
(3) Future Projections:
• Forward-looking statements in the annual report about anticipated
growth in revenue and expansion plans.
The Statutory auditors, M/s ST & Co., Chartered Accountants, have completed
its audit of the financial statements and prepared the auditor's report. During
the course of the audit, the following circumstances arise:
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. to the
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• The Director's Report and MD&A are finalized and provided

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auditor before the date of the auditor's report.

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la a will be released after
• The Chairman's Message and Future Projections are not finalized but are

ag expected to be included in the annual report, which
the auditor's report is issued.

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ADVANCED AUDITING, ASSURANCE AND
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PROFESSIONAL ETHICS

Issues Identified:
(1) In the MD&A, M/s ST & Co., noted a misstatement regarding the
company's claim of achieving a 20% reduction in production costs. Audit
evidence suggests the reduction was only 10%.
(2) The Chairman's Message, which is yet to be reviewed, contains optimistic
revenue projections that appear inconsistent with the historical growth
trend.
Answer the following with reference to the relevant Standard on Auditing:
(i) What should M/s ST & Co., include in the "Other Information" section of
the auditor's report for PQR Motors Ltd.?
(ii) If management does not correct the identified misstatement in the
MD&A, even after the same was brought to their attention, what should
M/s ST & Co. report under the "Other Information" section? (5 Marks)
(b) Alpha Manufacturing Ltd. (AML) is engaged in the production of speciality
machinery for the automotive industry. The company operates in a
competitive market and is under pressure to meet aggressive revenue and
profitability targets to secure additional funding from the investors. The audit
firm BETA LLP has been engaged to conduct AML's statutory audit for the
financial year 2024-25. BETA LLP performed risk assessment procedures and
related activities towards obtaining information in identifying risk of material
misstatement due to fraud and also evaluated whether there is an indication
that one or more fraud risk factors are present. Analytical procedures reveal
unexpected relationships potentially indicating fraudulent activities, such as
sales inflation by management to meet earnings targets. Management is
inflating sales by entering into sales agreements that include terms that
preclude revenue recognition or by invoicing sales before delivery.
Guide BETA LLP to decide the course of action in determining overall
responses to address the assessed risks of material misstatement due to fraud
at the (i) Financial Statement Level and (ii) Assertion Level. (5 Marks)
(c) Smart Technology Ltd. plans to issue a prospectus to raise capital through a
public offering. Smart Technology Ltd. acquired Cloud Computing Ltd., a
leader in cloud advisory services, to strengthen its capabilities in providing
cloud solutions and this acquisition aligned for a digital transformation
strategy. The prospectus includes pro forma financial information to

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demonstrate the financial effects of a significant acquisition completed
recently. As the engagement practitioner, you are entrusted with providing
an assurance report on the compilation of this pro forma financial
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information in accordance with relevant Standard on Assurance
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.c
Engagement.
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Smart Technology Ltd.'s management has provided the following details:
l a s
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(1)s The source of the unadjusted financial information includes unaudited g
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a (2) Pro forma adjustments which include Fair value adjustments for
financial statements for a subsidiary acquired during the year.

acquired assets and liabilities.
(3) The applicable financial reporting framework is IFRS, with modifications
specific to the jurisdiction of operation.
In the above context, answer the following:
(i) State the aspects you will consider during planning and performing the
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Engagement while evaluating the source from which the unadjusted

m evidence about the appropriateness
financial information has been extracted.
(ii) As a practitioner you need toeobtain
s
la Explain what it includes. (4 Marks)
g
of the pro forma adjustments.
Answer a
(a) (i) As per SA 720 (Revised), “The Auditor’s Responsibilities Relating to
Other Information”, the auditor is required to report on "Other
Information" in the auditor’s report for listed entities. “Other
Information” refers to financial and non-financial information (other
than financial statements and the auditor’s report thereon) included in
an entity’s annual report.
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In the “Other Information” section of the auditor’s report, the following

c. o emthe other
should be included:
• A statement that management is responsible sfor
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la • Identification of other information obtained:a
information included in the annual report.

ag
- The Director’s Report and MD&A have been obtained prior to
the date of the auditor’s report.

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PROFESSIONAL ETHICS

- Mention of other information expected to be obtained later (e.g.,
Chairman’s Message and Future Projections)
• A statement that the auditor’s opinion does not cover the other
information, and the auditor does not express any form of
assurance conclusion on it.
• A description of the auditor’s responsibilities relating to reading,
considering, and reporting on the other information as per SA 720.
• A statement on the results of the auditor’s review of the other
information:
- If no misstatement is identified, a statement to that effect.
- If a material misstatement is identified, a description of the
uncorrected misstatement (as applicable).
(ii) As per SA 720 (Revised), if the auditor identifies a material
misstatement in the other information and management refuses to
correct it, M/s ST & Co. shall report the uncorrected misstatement in
the “Other Information” section as:
• We have identified a material misstatement in the MD&A
regarding the company’s claim of a 20% reduction in production
costs. However, based on our audit evidence, the reduction was
only 10%.
(b) (i) Responses to the Assessed Risks of Material Misstatement due to
Fraud at the Financial Statement Level: In determining overall
responses to address the assessed risks of material misstatement due
to fraud at the financial statement level, the auditor shall:
(a) Assign and supervise personnel taking account of the knowledge,
skill, and ability of the individuals to be given significant
engagement responsibilities and the auditor’s assessment of the
risks of material misstatement due to fraud for the engagement;
(b) Evaluate whether the selection and application of accounting
policies by the entity, particularly those related to subjective
measurements and complex transactions, may be indicative of
fraudulent financial reporting resulting from management’s effort
to manage earnings; and

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(c) Incorporate an element of unpredictability in the selection of the
nature, timing, and extent of audit procedures.

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(ii) Audit Procedures Responsive to Assessed Risks of Material

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Misstatement due to Fraud at the Assertion Level:

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(a) The auditor shall design and perform further audit procedures
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whose nature, timing, and extent are responsive to the assessed

l a risks of material misstatement due to fraud at the assertion level.
a
ag In doing so, the auditor may change the nature, timing, and extent
of audit procedures to obtain audit evidence that is more reliable
and relevant or to obtain additional corroborative information.
(b) If the auditor identifies that management is under pressure to
meet earnings expectations, there may be a related risk that
management is inflating sales by entering into sales agreements
that include terms that preclude revenue recognition or by
invoicing sales before delivery.
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In these circumstances, the auditor may, for example, design

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external confirmations not only to confirm outstanding amounts,

a s
but also to confirm the details of the sales agreements, including
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date, any rights of return, and delivery terms.
a
(ii) In addition, the auditor might find it effective to supplement
such external confirmations with inquiries of non-financial
personnel in the entity regarding any changes in sales
agreements and delivery terms.
(c) (i) As per SAE 3420, as a practitioner, while planning and performing the
engagement, the following aspects must be evaluated regarding the
source of the unadjusted financial information:

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The practitioner shall obtain evidence about the appropriateness
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•

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of the source from which the unadjusted financial information has

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been extracted.

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If there is no audit or review report on the source from which the
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unadjusted financial information has been extracted, the
a practitioner shall perform procedures to be satisfied that the
source is appropriate.
• The practitioner shall determine whether the responsible party has

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ADVANCED AUDITING, ASSURANCE AND
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PROFESSIONAL ETHICS

appropriately extracted the unadjusted financial information from
the source.
• The practitioner shall obtain evidence about the appropriateness
of the pro forma adjustments.
(ii) The practitioner shall obtain evidence about the appropriateness
of the pro forma adjustments: In relation to unadjusted financial
information, Pro forma adjustments include:
(a) Adjustments to unadjusted financial information that illustrate the
impact of a significant event or transaction as if the event had
occurred or the transaction had been undertaken at an earlier date
selected for purposes of the illustration, and
(b) Adjustments to unadjusted financial information that are
necessary for the pro forma financial information to be compiled
on a basis consistent with the applicable financial reporting
framework of the reporting entity and its accounting policies
under that framework.
Question 2
(a) XYZ and Associates, Chartered Accountants, is an audit firm, giving services
to the various types of clients in the field of auditing, taxation and
management consultancy. It has been doing statutory audit of B Ltd., a listed
entity since last seven years. CA X who has been the engagement partner for
the company since beginning has a complete idea about the strengths and
weaknesses of the internal controls of the company. He maintains good
relations with the management and those charged with the governance.
Every year audit is completed in a cordial and healthy manner. During
current year the quality control reviewer insisted to change the engagement
partner for the company saying that continuation of same engagement
partner poses certain audit risk and threats to the organization and advises
to review the firm's policies and procedures in relation to the engagement
partner. The management of the company does not wish to change the
engagement partner. How do you view the above situation from the
viewpoint of quality control system in audit firm in terms of requirements of
SQC 1? Guide the firm in establishing the policies and procedures in respect
of an engagement partner. (5 Marks)

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(b) CA A has been appointed as an auditor of Datacom Ltd. to conduct statutory
audit. The company has various derivative contracts - options, forward
contracts, interest rate swaps etc. which were required to be fairly valued for
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which company got the fair valuation done through an external third party.
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CA A involved a registered valuer Mr. S as an auditor's expert to do the
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valuation of derivatives in order to obtain sufficient appropriate audit
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evidence. CA A and Mr. S are new to each other and they were working for
l a g
ag
the first time. Mr. S performed his work and submitted the report. CA A, while
evaluating the adequacy of the work of Mr. S, observed that expert's work
involved use of significant assumptions and methods. Consequently he wants
to test the relevance and reasonableness of those assumptions and methods
in the applicable circumstances. Guide CA A in this regard as per relevant
Standard on Auditing. (5 Marks)
(c) Metaverse is the emerging 3-D digital space that uses virtual reality,
augmented reality, and other advanced internet technology to allow people

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to have lifelike personal and business experiences online. It represents a

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convergence of digital technology to combine and extend the reach and use

em
of Cryptocurrency, Artificial Intelligence (AI), Augmented Reality (AR) and
Virtual Reality (VR).
l a s
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State the key considerations for sustainable future of Metaverse. (4 Marks)
Answer
(a) Quality control system in an audit firm (SQC 1): SQC 1, “Quality Control
for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements,” lays
special emphasis on familiarity threat. Using the same senior personnel on
assurance engagements over a prolonged period may impair the quality of
performance of the engagement.
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Therefore, the firm should establish criteria for determining the need for
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c. o safeguards to address this threat. In determining appropriate criteria, the
se
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firm considers such matters as

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the nature of the engagement, including the extent to which it involves

ag a matter of public interest, and
(ii) the length of service of the senior personnel on the engagement.
♦ The familiarity threat is particularly relevant in the context of

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PROFESSIONAL ETHICS

financial statement audits of listed entities. For these audits, the
engagement partner should be rotated after a pre-defined period,
normally not more than seven years (except in cases where audit
of listed entities is conducted by a sole practitioner). However, to
ensure quality control exists in such firms and appropriate reports
are issued, there is a process for mandatory peer review of such
firms.
In the given situation, XYZ and Associates, Chartered Accountants, has been
conducting the statutory audit of B Ltd., a listed company, for the past
seven years. CA X served as the engagement partner throughout this
period. CA X has developed an in-depth understanding of the company’s
internal controls and maintains a strong, cordial relationship with the
management and those charged with governance. However, during the
current year, the firm’s quality control reviewer raised concerns about the
continued involvement of CA X, citing the continuation of the same
engagement partner poses certain audit risk and threats to the
organisation, and advised reviewing the firm’s policies regarding
engagement partner rotation.
In view of SQC 1, the continued involvement of the same engagement
partner, CA. X with a listed entity for an extended period, i.e., more than 7
years, poses a familiarity threat, potentially impairing audit quality and
independence. Therefore, the firm should implement a policy of mandatory
partner rotation and review its quality control procedures to ensure
compliance with professional standards and maintain the integrity of the
audit process.
The firm should establish policies and procedures requiring that:
(I) The identity and role of the engagement partner are communicated to
key members of the client’s management and those charged with
governance;
(II) The engagement partner has the appropriate capabilities, competence,
authority, and time to perform the role; and
(III) The responsibilities of the engagement partner are clearly defined and
communicated to that partner.

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(b) Testing the relevance and reasonableness of assumptions and methods
used by the auditor’s expert: As per SA 620, “Using the Work of an
Auditor’s Expert”, when an auditor uses the work of an expert, they must
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evaluate whether the expert’s work is adequate for the auditor’s purposes.
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In the given case, CA A, statutory auditor of Datacom Ltd., is using the
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valuation report of Mr. S, a registered valuer, for auditing derivative
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instruments. CA A also observed that an expert’s work involves the use of
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significant assumptions and methods. Accordingly, he must assess the
relevance and reasonableness of the expert's assumptions, methods, and
findings in the circumstances as per SA 620.
SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting
Estimates and Related Disclosures“, discusses the assumptions and
methods used by management in making accounting estimates, including
the use in some cases of highly specialised, entity-developed models.
Although that discussion is written in the context of the auditor obtaining

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sufficient appropriate audit evidence regarding management’s

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assumptions and methods, it may also assist the auditor when evaluating

m the use of significant assumptions
an auditor’s expert’s assumptions and methods.
einvolves
s
la to the auditor’s evaluation of those
When an auditor’s expert’s work

g
a include whether they are:
and methods, factors relevant
assumptions and methods
• Generally accepted within the auditor’s expert’s field;
• Consistent with the requirements of the applicable financial reporting
framework;
• Dependent on the use of specialised models; and
• Consistent with those of management, and if not, the reason for, and
effects of, the differences.
o m
m (c) Considerations for sustainable future of the Metaverse: m. c
c. o • Beyond cryptocurrencies, coins, and exchanges, s e in the
em a
Metaverse will need to consider how to build digitallmonetary systems
players

l as a g land.
ag
and apply economic principles to things like digital
• Governance models will become ever more difficult to balance
openness and user contribution with strategic direction and
innovation.

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ADVANCED AUDITING, ASSURANCE AND
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PROFESSIONAL ETHICS

• Identity in the digital world has historically been different based on the
platform utilized. The practical challenge of identity will also have to
be considered in the Metaverse (e.g., KYC).
• Synchronicity is the ability for aspects of the Metaverse to be
multiplayer, simultaneous, and real-time. This includes transactions
and actions happening in the Metaverse and are dependent on the
infrastructure of digital economies, networking, and computing power
required to operate a digital world.
Question 3
(a) Brown Enterprises Limited, an unlisted public company, has granted loans to
two of its subsidiaries, stood as a guarantor for loans taken by a Limited
Liability Partnership (LLP), and made investments in a start-up company
during the financial year 2024-25. The company's financial statements
disclose the following:
(1) Loans Provided:
• ` 10 crore to Subsidiary A, with ` 6 crore outstanding as of
March 31, 2025.
• ` 5 crore to Subsidiary B, fully repaid during the year.
• ` 3 crore loan to a UR & Co. a partnership firm with ` 1.5 crore
overdue for 120 days. UR & Co. is not a related party.
(2) Guarantees:
• Guarantee provided to Milestone LLP for ` 7 crore loan availed from
a bank, outstanding in full as of March 31, 2025.
(3) Investments:
• ` 4 crore equity investment in KD start-up.
Additional information:
• For the overdue loan, Brown Enterprises Ltd. has initiated legal
proceedings for recovery but no settlement has been achieved.
• All loans and guarantees have been documented with terms and
conditions.

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• One loan, ` 2 crore to Subsidiary A, was renewed upon maturity without
repayment, adjusting the overdue balance.

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Based on the above facts you are required to:
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(i) Analyse the reporting requirements under CARO, 2020, for Brown

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Enterprises Ltd.
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a
(ii) The management of Brown Enterprises Limited contended that reporting
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requirements under CARO, 2020, of overdue in respect of UR & Co., and
Subsidiary A, are not applicable. Comment. (5 Marks)
(b) M/s JAZZ & Co. is a partnership firm consisting of two partners CA J and
CA Z.
CA J is exclusively associated with the firm and is not doing practice in individual
capacity, whereas CA Z is doing practice in his individual capacity also.
For the financial year 2023-24, the firm has already undertaken audits and
signed audit reports under section 44AB/44AD of the Income-tax Act, 1961

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as under:

m . section 44AB
44AB for corporate sefor non-corporate
Under section Under Under section

la
44AD/44AD

CA J 30 a
clients
g clients
60 20
CA Z 5 10 12

For the financial year 2023-24, CA Z has undertaken audits in individual
capacity and signed audit reports under section 44AB/44AD of the Income-
tax Act, 1961 as under:

Under section 44AB Under section 44AB Under section
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for corporate for non-corporate 44AD/44ADA
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clients
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clients

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CA Z 4 9
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For the financial year 2023-24, the firm is approached further to take up the

ag following assignments:
3 tax audit assignments under section 44AB for corporate clients.
4 tax audit assignments under section 44AD.

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Advise whether the firm should accept the further tax audit assignments for
the financial year 2023-24 as above in the light of professional code of
conduct. (5 Marks)
(c) Coastal Ventures Ltd., a newly formed real estate development firm, is
applying for a loan from a financial institution to fund a new residential
project. The bank requires the submission of the company's financial
statements for the year ending March 31, 2025. The company engages an
independent practitioner, CA X to compile the financial statements based on
its accounting records and other information provided. The financial
statements will be prepared in accordance with Ind AS (Indian Accounting
Standards). CA X intends to record the agreed terms of engagement in an
engagement letter prior to performing the engagement.
CA X is of the view that independence requirements will not be applicable for
the above assignment. Do you agree?
CA X is concerned with engagement acceptance and continuance. Suggest
him focus points in respect of management responsibilities that will be
recorded in the agreed terms of engagement in the engagement letter.
(4 Marks)
Answer
(a) (i) Reporting Requirements Under Clause (iii) of Para 3 of CARO 2020
• Loans and Advances provided:
o Report the aggregate amount of loans provided during the
year to subsidiaries (` 15 crore) and other parties (` 3 crore).
o Disclose the outstanding balance as of March 31, 2025:
 Subsidiary A: ` 6 crores.
 Subsidiary B: Nil (fully repaid).
 UR & Co., Partnership firm: ` 1.5 crore overdue for 120
days.
• Guarantees and Security Offered:
o Disclose the guarantee of ` 7 crore provided to Milestone LLP
and confirm whether it was prejudicial to the company’s interest.

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• Investments Made:
Report the ` 4 crore equity investment and ensure compliance
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with terms and disclosure requirements.
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c.o o In the case of UR & Co., disclose the overdue amount of sem
• Overdue Loan:

s em ` 1.5 crore for more than 90 days and assess the company's gla
g la recovery actions. Mention if legal proceedings are progressinga
a adequately.
• Loan Renewal:
o Report the renewal of the ` 2 crore loan to Subsidiary A as a fresh
loan granted to settle existing dues.
o Include this amount and its proportion in the total loans granted
during the year.

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(ii) In view of above it can be concluded that the contention of
.
management of Brown Enterprises Limited is not correct as the auditor

s em
is required to report the overdue loan amount in respect of UR & Co.

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and Subsidiary A under Clause (iii) of Paragraph 3 of CARO 2020.
g
Alternative Answer:
a
(a) (i) Clause (iii) of Para 3 of CARO, 2020, requires the auditor to report
whether during the year the company has made investments in,
provided any guarantee or security or granted any loans or advances
in the nature of loans, secured or unsecured, to companies, firms,
Limited Liability Partnerships or any other parties, if so-
(a) whether during the year the company has provided loans or

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provided advances in the nature of loans, or stood guarantee, or

m provided security to any other entity [not applicable to companies

c. o m
eand
whose principal business is to give loans], if so, indicate-
s
s em (A) the aggregate amount during the year,
g l a balance

gla a
outstanding at the balance sheet date with respect to such

a loans or advances and guarantees or security to subsidiaries,
joint ventures and associates;
(B) the aggregate amount during the year, and balance
outstanding at the balance sheet date with respect to such
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loans or advances and guarantees or security to parties other
than subsidiaries, joint ventures and associates;
(b) whether the investments made, guarantees provided, security
given and the terms and conditions of the grant of all loans and
advances in the nature of loans and guarantees provided are not
prejudicial to the company’s interest;
(c) in respect of loans and advances in the nature of loans, whether
the schedule of repayment of principal and payment of interest
has been stipulated and whether the repayments or receipts are
regular;
(d) if the amount is overdue, state the total amount overdue for more
than ninety days, and whether reasonable steps have been taken
by the company for recovery of the principal and interest;
(e) whether any loan or advance in the nature of loan granted which
has fallen due during the year, has been renewed or extended or
fresh loans granted to settle the overdues of existing loans given
to the same parties, if so, specify the aggregate amount of such
dues renewed or extended or settled by fresh loans and the
percentage of the aggregate to the total loans or advances in the
nature of loans granted during the year [not applicable to
companies whose principal business is to give loans];
(f) whether the company has granted any loans or advances in the
nature of loans either repayable on demand or without specifying
any terms or period of repayment, if so, specify the aggregate
amount, percentage thereof to the total loans granted, aggregate
amount of loans granted to Promoters, related parties as defined
in clause (76) of section 2 of the Companies Act, 2013;
In the given situation, the auditor of Brown Enterprises Limited, an
unlisted public company, is required to report under Clause (iii) of
Paragraph 3 of CARO 2020:
• aggregate amount of loans provided to subsidiaries [i.e., ` 10 crore
to Subsidiary A & ` 5 crore to Subsidiary B] and ` 6 crore for the
loan outstanding from subsidiary A at the balance sheet date.

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• the loans provided to Partnership firm UR & Co. of ` 3 crore and
Guarantee provided to Milestone LLP of ` 7 crore.

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• an amount of ` 1.5 crore in respect of the loan given to the
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partnership firm UR & Co., as the amount has been overdue for

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120 days i.e., more than 90 days] and reports that Brown

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Enterprises Ltd. has taken reasonable steps initiated legal

l a proceedings for the recovery, but no settlement has been
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achieved.
• loan of ` 2 crore to Subsidiary A, was renewed upon maturity
without repayment, adjusting the overdue balance.
(ii) In view of above it can be concluded that the contention of
management of Brown Enterprises Limited is not correct as the auditor
is required to report the overdue loan amount in respect of UR & Co.
and Subsidiary A under Clause (iii) of Paragraph 3 of CARO 2020.

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(b) As per Chapter VI, Tax Audit assignments under Section 44 AB of the

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Income-tax Act, 1961, a member of the Institute in practice shall not accept,

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in a financial year, more than the “specified number of tax audit

a s
assignments” under Section 44AB of the Income-tax Act, 1961.
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a g
Further, in the case of a firm of Chartered Accountants in practice, the
“specified number of tax audit assignments” means 60 tax audit
assignments per partner in the firm, in a financial year, whether in respect
of corporate or non-corporate assesses.
It may be noted that the audits conducted under Section 44AD, 44ADA, and
44AE of the Income-tax Act, 1961 shall not be taken into account for the
purpose of reckoning the “specified number of tax audit assignments”.

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Furthermore, where any partner of a firm of Chartered Accountants in

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practice accepts one or more tax audit assignments in his individual

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capacity, the total number of such assignments which may be accepted by

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him shall not exceed the “specified number of tax audit assignments” in the

la se
las aggregate. In computing the “specified number of tax audit assignments”,
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the number of such assignments, which he or any partner of his firm has

a accepted, whether singly or in combination with any other Chartered
Accountant in practice or firm of such Chartered Accountants, shall be
taken into account.

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According to a clarification on Tax Audit Assignments by Committee on
Ethical Standards Board of the Institute, if there are 10 partners in a firm of
Chartered Accountants in practice, then all the partners of the firm can
collectively sign 600 tax audit reports. This maximum limit of 600 tax audit
assignments may be distributed between the partners in any manner
whatsoever. For instance, 1 partner can individually sign 600 tax audit reports in
case the remaining 9 partners are not signing any tax audit reports.
In the instant case, M/s JAZZ & Co. is a partnership firm of Partner CA J and
CA Z. CA Z is also doing practice in individual capacity. In the instant case,
60 tax audit assignments per partner in the firm, whether in respect of
corporate or non-corporate assesses, in a financial year, will be considered
for “specified number of tax audit assignments”, i.e., 120 tax audits =
2 Partners x 60 tax audits.
In the given situation, the number of tax audit reports signed under section
44AB are 118 [i.e., 90 reports signed by CA J {i.e., 30 reports for corporate
clients and 60 reports for non-corporate clients} whereas, CA Z signed 28
reports (15 reports as a Partner of the Firm {i.e., 5 for corporate clients and
10 for non-corporate clients} and 13 Reports in individual capacity i.e. {i.e.,
4 for corporate clients and 9 for non-corporate clients})] and number of tax
audit reports signed under section 44AD are 40 (i.e., 20 reports signed by
CA J and 20 reports signed by CA Z). It may be noted that the 40 audits
conducted under Section 44AD of the Income-tax Act, 1961 shall not be
taken into account for the purpose of reckoning the “specified number of
tax audit assignments”.
The firm is also approached further to take up 3 tax audit assignments
under section 44AB for corporate clients and 4 tax audit assignments under
section 44AD.
In view of the above provisions, partner CA J and CA Z of M/s JAZZ & Co.
have undertaken 118 audits, which is not more than 120 tax audits, i.e.,
“specified number of tax audit assignments” under Section 44AB of the
Income-tax Act, 1961. Therefore, the firm can accept 2 more tax audit
assignments for corporate clients under section 44AB and all 4 tax audit
assignments under section 44AD as there is no limit on assignments under
Section 44AD.

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(c) In the given case, the company engages CA X, an independent practitioner,
to compile the financial statements based on its accounting records and
other information. Being in the nature of non-assurance engagement,
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independence requirements do not apply to compilation engagements as
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per SRS 4410, “Compilation Engagements”. However, laws or regulations
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may specify requirements or disclosure rules pertaining to independence.
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Thus, the view of CA X is correct that independence requirements will not
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ag CA X should focus on the following points in respect of management
be applicable for the compilation engagement discussed in the situation.

responsibilities that will be recorded in the agreed terms of engagement in
the engagement letter.
(i) The financial information, and for the preparation and presentation
thereof, in accordance with a financial reporting framework that is
acceptable in view of the intended use of the financial information and
the intended users
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(ii) Design, implementation, and maintenance of such internal control as

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management determines is necessary to enable the preparation of

a s
financial statements that are free from material misstatement, whether
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due to fraud or error
a
(iii) The accuracy and completeness of the records, documents,
explanations, and other information provided by management for the
compilation engagement and
(iv) Judgments needed in the preparation and presentation of the financial
information, including those for which the practitioner may provide
assistance in the course of the compilation engagement.
Question 4
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(a) Instant Finance Ltd. is a Non-Banking Financial Company (NBFC-BL)
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c. o primarily engaged in providing loans to small businesses and individuals. As

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per its audited financials for the year ending March 31, 2025, the following

las information was observed:
g
a asset base of
ag 1. Instant Finance Ltd. has an aggregate risk-weighted
` 1,000 crore.
2. The company has reported Tier 1 capital of ` 130 crore, which includes
` 15 crore raised through perpetual debt instruments.

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3. Instant Finance Ltd. has investments in shares and bonds of other NBFCs
totalling ` 10 crore, which amounts to 12% of its owned fund.
4. The company's primary business involves lending against gold jewellery,
with such loans comprising 60% of its financial assets.
As a statutory auditor, you are entrusted with assessing compliance with the
prudential norms prescribed under the Master Direction - Reserve Bank of
India (Non-Banking Financial Company - Scale Based Regulation)
Directions, 2023, regarding capital adequacy.
You are required to:
(i) Evaluate whether Instant Finance Ltd. complies with the minimum Tier I
capital requirements as per the RBI prudential norms.
(ii) Discuss the treatment and impact of perpetual debt instruments in the
calculation of Tier I capital for NBFCs primarily engaged in lending
against gold jewellery.
(iii) Analyse the adjustment required in Tier 1 capital for Instant Finance Ltd.
due to its investments in other NBFCs. (5 Marks)
(b) CA A, the proprietor of A & Collegues, Chartered Accountants, is developing
his practice and recently secured a major audit assignment for B State
Cooperative Society. The engagement fee for this audit is ` 1 Cr.
In view of his vision of growth to expand the development of his business,
CA A has entered into an agreement with an unregistered financial
consultant, Mr. X, who is an MBA from a local university. Mr. X introduced
CA A to his business clients and in return, CA A agrees to pay him a
2.5% commission (` 2.5 lakhs) on the audit fee as a referral bonus.
Additionally, as per the State Cooperative Registrar's Circular, 5% of the audit
fee (` 5,00,000) has to be deposited into the State Treasury to cover
administrative expenses. CA A complies with this requirement.
Comment with reference to the Chartered Accountants Act, 1949 and
Schedules thereto. (5 Marks)
(c) Glow management Ltd., a workspace operator, seeks to secure funding from
investors. The funds will be used for repayment of debt and cost of capital for
strengthening its Balance sheet. To support this, the company has prepared
its financial statements for the year ended March 31, 2025. The investors

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request a limited assurance review rather than a full audit, to ensure the
reliability of the financial statements. The management of Glow
management Ltd. engages an independent practitioner CA Kishore to
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perform a review engagement under SRE 2400. During the review, CA Kishore
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identifies that there was significant increase in deferred revenue. On inquiry,
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CA Kishore found management's explanation unreasonable that it is related
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to advances received for upcoming projects and was unable to corroborate
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ag Based on the evidence gathered and procedures performed, CA Kishore
this with contracts.

determines, that the financial statements are materially misstated. He is
bound to express a qualified conclusion, as the effects of the matter(s) giving
rise to the modification are material, but not pervasive to the financial
statements.
In the above context, you are required to help CA Kishore to:
(i) State the phrases to be used in conclusion paragraph as appropriate.
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(ii) State the matters to be included in the basis for conclusion paragraph.

s em (4 Marks)

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ag Tier 1 Capital Requirements: As per RBI
Answer
(a) Compliance with Minimum
norms, Instant Finance Ltd. must maintain a minimum capital adequacy
ratio of 15 % of aggregate risk-weighted assets. Since 60 % of its financial
assets are loans against gold, it must maintain a Tier 1 Capital of at least
12% (` 120 Crore) of its risk-weighted assets.
(i) In the given situation, Instant Finance Ltd. has reported Tier 1 Capital
of ` 130 crore. However, NBFC-BL are not eligible to include perpetual

m
debt instruments in their Tier 1 capital. Thus, the amount of Tier 1
o
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. against
Capital will be ` 115 crores (` 130 crores - ` 15 crores = ` 115 crores).

c. o m
e assets
gold jewellery, with such loan comprising of 60% of itssfinancial
Since, Instant Finance Ltd.’s primary business involves lending

s em g a
l Instant Finance
la a of 12 percent of
which is exceeding the criteria of 50% or more, thus,

ag Ltd. is required to maintain a minimum Tier 1 capital
aggregate risk weighted assets of on-balance sheet and of risk
adjusted value of off-balance sheet items.

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PROFESSIONAL ETHICS

Considering the ` 120 crore (Aggregate Risk Weighted assets
` 1000 crore*12% = ` 120 crore) as Tier 1 Capital, it can be concluded
that Instant Finance Ltd. has not complied with the minimum Tier 1
Capital requirements as per the RBI Prudential Norms.
Alternative Answer:
(i) As per the facts, Instant Finance Ltd. has investment in shares and
bonds of other NBFCs totalling of ` 10 crore, which amount to 12% of
its owned fund.
“Tier 1 capital” for NBFCs (except NBFCs-BL) is the sum of (i) Owned
fund as reduced by investment in shares of other NBFCs and in shares,
debentures, bonds, outstanding loans and advances including hire
purchase and lease finance made to and deposits with subsidiaries and
companies in the same group exceeding, in aggregate, ten percent of
the owned fund; and (ii) Perpetual debt instruments issued by a non-
deposit taking NBFCs in each year to the extent it does not exceed
15 percent of the aggregate Tier 1 capital of such company as on
March 31 of the previous accounting year. However, NBFCs-BL are not
eligible to include perpetual debt instruments in their Tier 1 capital.
Since Owned Fund = ` 83.33 crore [i.e., = ` 10 crore /12%] – ` 1.667 [in
excess of 10% of owned fund] = ` 81.667 crore
In the given situation, Instant Finance Ltd. has reported Tier 1 Capital
of ` 130 crore. However, NBFC BL are not eligible to include perpetual
debt instruments in their Tier 1 capital. Thus, amount of Tier 1 Capital
will be ` 113.333 crore = ` 130 crore – ` 15 crore – ` 1.667 crore (i.e.,
Tier 1 Capital-Perpetual Debt Instrument - excess of 10% of owned
fund).
Considering the ` 120 crore = (Aggregate Risk Weighted assets
1000*12%) as Tier 1 Capital, it can be concluded that Instant Finance
Ltd. has not complied with the minimum Tier 1 Capital requirements as
per the RBI Prudential Norms.
(ii) Perpetual debt instruments issued by a non-deposit taking NBFCs in
each year to the extent it does not exceed 15 percent of the aggregate
Tier 1 capital of such company as on March 31 of the previous
accounting year are included while calculating Tier 1 capital. However,

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NBFCs-BL are not eligible to include perpetual debt instruments in
their Tier 1 capital.

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In the instant case, Instant Finance Ltd. falls under the category of

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NBFC-BL, hence, perpetual debt instruments will not be included in

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m computing Tier I capital, Owned fund shall be reduced by las
Tier I Capital.

s einvestment
(iii) While
in shares of other NBFCs and in shares, debentures, bonds, g
g l a a
a finance made to and deposits with subsidiaries and companies in the
outstanding loans and advances including hire purchase and lease

same group exceeding, in aggregate, ten percent of the owned fund.
In the given case, Tier I capital of Instant Finance Ltd should be reduced
by investment in shares of other NBFCs, exceeding in aggregate ten
percent of the owned fund. In the current scenario, the investment in
shares and bonds of other NBFCs totaling to ` 10 crore is 12% of owned
funds, hence, the excess of 2% of owned funds should be adjusted to

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arrive at Tier I Capital.

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e Owned fund shall be reduced by
Alternative Answer:

s
a NBFCs and in shares, debentures, bonds,
investment in shares oflother
(iii) While computing Tier I capital,

outstanding loans a
g
and advances including hire purchase and lease
finance made to and deposits with subsidiaries and companies in the
same group exceeding, in aggregate, ten percent of the owned fund.
In the given case, Tier I capital of Instant Finance Ltd should be reduced
by investment in shares of other NBFCs, exceeding in aggregate ten
percent of the owned fund. In the current scenario, the investment in
shares and bonds of other NBFCs totaling to ` 10 crore is 11.33% of

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owned funds, hence, the excess of 1.33% of owned funds should be

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c. o (b) As
adjusted to arrive at Tier I Capital.

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Act, 1949, a Chartered Accountant in practice is deemedsto be guilty of
per Clause (2) of Part I to the First Schedule to Chartered Accountants’

em a
l to pay or allow,
l as professional misconduct if he pays or allows or agrees g
a in the fees or
ag directly or indirectly, any share, commission or brokerage
profits of his professional business, to any person other than a member of
the Institute or a partner or a retired partner or the legal representative of
a deceased partner, or a member of any other professional body or with

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PROFESSIONAL ETHICS

such other persons having such qualification as may be prescribed, for the
purpose of rendering such professional services from time to time in or
outside India.
The exception to this rule is specified in regulation 53A (3). The Regulation
specifies that a Master in Business Administration from Universities
established by law or technical institutions recognized by the All India
Council for Technical Education. In the given situation, Mr. X is an MBA from
a local university and CA. A agrees to pay commission on the audit fee as
a referral bonus to Mr. X for introducing him to his business clients. Hence,
CA A is guilty of misconduct.
Additionally, as per the State Cooperative Registrar’s Circular, 5% of the
audit fee (` 5 Lakh) must be deposited into the State Treasury to cover
administrative expenses. Council decided that as such, there is no bar in
the Code of Ethics to accept such an assignment wherein a percentage of
the professional fee is deducted by the Government to meet the
administrative and other expenditure. Hence, no violation is there.
(c) (i) As per SRE 2400, “Engagements to Review Historical Financial
Statements”, when the practitioner expresses a qualified conclusion on
the financial statements because of a material misstatement, the
practitioner shall, unless otherwise required by law or regulation, use
one of the following phrases, as appropriate: -
(a) “Based on our review, except for the effects of the matter(s)
described in the Basis for Qualified Conclusion paragraph, nothing
has come to our attention that causes us to believe that the
financial statements do not give a true and fair view (or do not
present fairly, in all material respects), in accordance with the
applicable financial reporting framework,” (for financial statements
prepared using a fair presentation framework) or
(b) “Based on our review, except for the effects of the matter(s)
described in the Basis for Qualified Conclusion paragraph, nothing
has come to our attention that causes us to believe that the
financial statements are not prepared, in all material respects, in
accordance with the applicable financial reporting framework,” (for
financial statements prepared using a compliance framework).

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(ii) In the basis for conclusion paragraph, in relation to material
misstatements that give rise to either a qualified conclusion or an
adverse conclusion, the practitioner shall: -
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(a) Describe and quantify the financial effects of the misstatement if

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the material misstatement relates to specific amounts in the

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financial statements (including quantitative disclosures), unless

l a impracticable, in which case the practitioner shall so state;
a g
ag (b) Explain how disclosures are misstated if the material misstatement
relates to narrative disclosures; or
(c) Describe the nature of omitted information if the material
misstatement relates to the non-disclosure of information
required to be disclosed. Unless prohibited by law or regulation,
the practitioner shall include the omitted disclosures where
practicable to do so.

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Question 5

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(a) Footwear Ltd., a manufacturing company has recently appointed you as its

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Internal Auditor to review its financial and operational controls. You have to
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conduct the internal audit in compliance with the standards of Internal Audit,
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within the framework governing Internal Audits. During the audit, you have
identified misappropriation of inventories and suspected fraudulent activities
by a procurement manager. You thought it would be more appropriate to
bring the same immediately to the attention of the management. As per the
principles outlined in Standard on Internal Audit, you need to prepare an
internal audit report covering the audit findings. Explain the stages of
internal audit reporting results as per relevant Standard on Internal Audit
and state the key elements to be included while issuing a clear, well

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documented Internal Audit Report by you as an internal auditor. (5 Marks)

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(b) GAS limited, is in the business of renewable energy, including fuel cell,
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electrolyzer, battery energy storage system wishes to contribute to clean

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energy ecosystem and National Green Hydrogen mission. GAS limited is

las among top 1000 listed entities and have to mandatorily provide
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ag BRSR reporting (Business Responsibility and Sustainability Reporting) on ESG
parameters in accordance with the principles of "National Guidelines on
Responsible Business Conduct" as mandated by SEBI. One of the principles
states that "This can work only with close participation and collaboration

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PROFESSIONAL ETHICS

amongst the entities, authorities, the civil associations contributing to one
another for a better livelihood, and assistance to the marginalized
communities." Elucidate the essence of core elements associated with the
aforesaid principle. (5 Marks)
(c) M/s GSTR & Associates, Chartered Accountants, is an audit firm consisting of
three partners. The partnership firm was formed in the year 2019.
M/s GSTR & Associates, specialised in internal audits and tax consultancy
services, admitted CA Y as partner in the year 2024. CA Y had vast experience
in audit of listed companies as he was the senior audit manager of a leading
audit firm before he joins M/s GSTR & Associates. Ruby Limited, a listed
entity, appointed M/s GSTR & Associates, Chartered Accountants as statutory
auditors for the year ended 31st March 2025. CA Y, the engagement partner
signed the balance sheet of Ruby Limited for the year ended 31st March 2025
on 21st May 2025. M/s GSTR & Associates, Chartered Accountants never
subjected themselves to the Peer Review process of the Institute. Comment
with reference to the Chartered Accountants Act, 1949. (4 Marks)
Answer
(a) As per Standard on Internal Audit (SIA) 370 Reporting Results,
reporting of internal audit results is generally undertaken in two
stages:
• At the end of a particular audit assignment, an “Internal Audit Report”
covering a specific area, function, or part of the entity is prepared by
the Internal Auditor, highlighting key observations arising from those
assignments. This report is generally issued with details of the manner
in which the assignment was conducted and the key findings from the
audit procedures undertaken. This report is issued to the auditee, with
copies shared with local and executive management, as agreed during
the planning phase.
• On a periodic basis, at the close of a plan period, a comprehensive
report of all the internal audit activities covering the entity and the plan
period is prepared by the Chief Internal Auditor (or the Engagement
Partner, in case of an external service provider). Such reporting is
normally done on a quarterly basis and submitted to the highest
governing authority responsible for internal audits, generally the Audit
Committee. Some part of the aforementioned Internal Audit Reports

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may form part of the periodic (e.g., Quarterly) report shared with the
Audit Committee.

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On the basis of the internal audit work completed, the Internal Auditor shall
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issue a clear, well-documented Internal Audit Report which includes the

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m overview of the objectives, scope, and approach of the audit las
following key elements:
(i) eAn

l a s a g
ag (ii) The
assignments;
fact that an internal audit has been conducted in accordance with
the Standards of Internal Audit;
(iii) An executive summary of key observations covering all important
aspects, and specific to the scope of the assignment;
(iv) A summary of the corrective actions required (or agreed by
management) for each observation; and
(v) Nature of assurance, if any, which can be derived from the

o m
c
observations.

m . and Equitable Development can
e and collaboration amongst the entities,
(b) Principle 8 – Promote Inclusive Growth
s
lathe marginalized
work only with close participation

livelihood, and assistancea g
authorities, the civil associations
to
contributing to one another for a better
communities.
The core elements of the eighth principle are:
(i) The entities should have systems in place to identify and address the
impacts of their activities on the social, cultural, and economic aspects
of the people. This includes business-created issues like land
acquisition and use, and construction activities for new facilities.
(ii) The entities should review, measure, and track the adverse impacts of
m
c. o
their activities on society and the environment and make action plans
m
c. o em products,
to mitigate them adequately.

em s
a marginalized
(iii) The entities should make efforts to bring up creative
technologies, and business concerns that help lthe
las g
a of life.
g
communities to have well-being and a better quality
a (iv) Entities, when designing their CSR activities, should review the local
and regional development priorities to help the marginalized groups
and communities.

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(v) The entities should take care to ensure that business-induced
displacement or relocation of communities does not happen, and in
unavoidable cases, should make sure to have mutually agreed,
participative, and informed negotiations to provide fair compensation
to the affected people.
(vi) All forms of intellectual property and traditional knowledge should get
the deserved respect from the organisation, and efforts should be
made to ensure that benefits derived from their knowledge are shared
equitably.
(c) Clause (9) of Part I of the Second Schedule to the Chartered Accountants
Act, 1949 states that a Chartered Accountant in practice shall be deemed
to be guilty of misconduct if he fails to invite attention to any material
departure from the generally accepted procedure of audit applicable to the
circumstances.
This clause implies that the audit should be performed in accordance with
“generally accepted procedure of audit applicable to the circumstances,”
and if for any reason the auditor has not been able to perform the audit in
accordance with such procedure, his report should draw attention to the
material departures from such procedures.
What constitutes “generally accepted audit procedure” would depend upon
the facts and circumstances of each case, but guidance is available in
general terms from the various pronouncements of the Institute is issued
by way of Engagement and Quality Control Standards, Statements, General
Clarifications, Guidance Notes Technical Guides, Practice Manuals, Studies
and Other Papers.
Audit of Listed Companies: Pursuant to SEBI Notification, statutory audit
of listed companies under the Companies Act, 2013 shall be done by only
those auditors who have subjected themselves to the Peer Review process
of the Institute, and hold a valid certificate issued by the Peer Review Board
of the ICAI.
In the given case of M/s. GSTR & Associates, which appointed auditors of
a listed entity, Ruby Limited, for the year ended 31.03.2025, CA Y, the
proprietor, signed the balance sheet on 21.05.2025 but never subjected the

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

firm to the Peer Review process of the Institute. CA Y would be held guilty
of professional misconduct under clause (9) of Part I of the Second
Schedule of the Chartered Accountants Act, 1949. Also, CA Y did not comply
m
m
with the SEBI Notification, which was required to be complied with.
c. o
.co
Alternative Answer:
s e m
em la
a s
(c) Clause (1) of Part II of the Second Schedule to the Chartered Accountants
l a g
ag
Act, 1949 states that a chartered accountant in practice shall be deemed to
be guilty of misconduct if he contravenes any of the provisions of this Act
or the regulations made thereunder or any guidelines issued by the Council.
It requires every member of the institute to act within the framework of the
Chartered Accountants Act, 1949, and the regulations and guidelines made
by the Council thereunder.
The Statement on Peer Review shall be deemed to be a guideline of the

m
Council under Clause (1) of Part II of the Second Schedule to the Act, and

c. o
it is obligatory for the Practice Unit to comply with the provisions contained

em Unit, including its branches who has
in this Statement.

s
lofa Enterprises whose equity or debt securities
As per the Statement, every Practice
conducted Statutory Audit g
a as defined under SEBI(LODR) regulations, 2015,
are listed in India or abroad
will be subject to Peer Review in accordance with this statement.
Audit of Listed Companies: Pursuant to SEBI Notification, Statutory Audit
of Listed Companies under the Companies Act, 2013 shall be done by only
those auditors who have subjected themselves to the Peer Review process
of the Institute, and hold a valid certificate issued by the Peer Review Board
of the ICAI.
o m
m c
In the given case of M/s GSTR & Associates, which is appointed .auditor of
c. o s emMr. Y, the
em
a listed entity, Ruby Limited, for the year ended 31.03.2025,

s g l a but never
la
engagement partner, signed the Balance sheet on 21.05.2025
subjected the firm to the Peer Review process ofathe Institute. Hence,
ag CA Y would be held guilty of professional misconduct under clause (1) of
Part II of the Second Schedule of the Chartered Accountants Act, 1949.

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Question 6
(a) Key Ventures Limited is availing the services of Chipmetric Limited for
processing of its accounting data including payroll operations. Payroll costs
account for 75% of the total costs of Key Ventures Limited. CA Tej, the auditor
of Key Ventures Limited wants to obtain an understanding of the nature and
significance of the services provided by Chipmetric Limited and their effect
on the user entity's internal control to identify and assess the risks of material
misstatement. In this regard, he wants to use Type 1 or Type 2 report.
What shall be the considerations of CA Tej in determining the sufficiency and
appropriateness of the audit evidence? Suggest the procedures if he plans to
use a Type 1 or Type 2 report as audit evidence to support the understanding
about the design and implementation of controls at Chipmetric Limited as
per relevant Standard on Auditing. (5 Marks)
(b) During the statutory audit of ELITE Bank Ltd., a leading private sector bank,
for the financial year 2024-25, the following issue emerged to statutory
central auditors. ELITE Bank Ltd. acquired a commercial property in
satisfaction of a loan default by a borrower in Financial Year 2016-2017. The
property was recorded at net book value of the loan. The bank plans to sell
this property in the next fiscal year to recover its dues. A legal dispute has
emerged over the ownership of the property, with a third party claiming
partial rights. The matter is pending in court. The management has not
disclosed this dispute in the financial statements but contends that a
favourable court ruling is expected. The auditor's review reveals that the
property's fair market value is significantly lower.
Based on the above facts, you are required to:
(i) Identify specific audit procedure the auditor should undertake to ensure
compliance of the Banking Regulation Act, 1949.
(ii) Under which head ELITE Bank Ltd. should record the above mentioned
property?
(iii) Suggest also other audit procedures that an auditor should focus upon.
(5 Marks)

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(c) Ring Limited is a subsidiary of Pearl Limited. For the financial year 2024-25
M/s Vani & Co., Chartered Accountants were appointed as the statutory

m
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auditors of Ring Limited. The CEO of Pearl Limited was impressed with the

m
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professional competence of CA Devi, one of the partners of the firm and

. e m
s
hence, he offered CA Devi to take up the position of Director (not MD/whole

em la
s
time director) of Pearl Limited. CA Devi is in a dilemma whether to accept

l a
the offer. She approaches you and seeks your advice on the same. Advise
a g
ag what CA Devi can do with the offer with reference to the Chartered
Accountants Act, 1949 and Schedules thereto. (4 Marks)
OR
(c) KLIM Ltd., a construction company, engaged in constructing and selling
residential or commercial properties, having suspected potential fraud of
substantial amount, engaged CA J, a forensic accountant, to investigate the

m
matter. During the course of performing a forensic accounting engagement

. co
in relation to suspected fraud, which aspects CA J should take care of while

em
undertaking the process of obtaining relevant evidence? (4 Marks)
Answer
l a s
a
(a) Using A Type 1 or Type g 2 Report to Support the User Auditor’s
Understanding of the Service Organisation:
As per SA 402, “Audit Considerations Relating to an Entity Using a Service
Organisation”, in determining the sufficiency and appropriateness of the
audit evidence provided by a Type 1 or Type 2 report, CA Tez, the user
auditor shall be satisfied as to: -
(i) The service auditor’s professional competence (except where the

m
c. o
service auditor is a member of the Institute of Chartered Accountants

m
c. o
of India) and independence from the service organisation; and
(ii) The adequacy of the standards under which the Typeem
em la s 1 or Type 2

las report was issued.
g
a as audit evidence
ag If the user auditor plans to use a Type 1 or Type 2 report
to support the user auditor’s understanding about the design and
implementation of controls at the service organisation Chipmetric Ltd., CA
Tez, the user auditor shall:

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(i) Evaluate whether the description and design of controls at the service
organisation is at a date or for a period that is appropriate for the
user auditor’s purposes;
(ii) Evaluate the sufficiency and appropriateness of the evidence
provided by the report for the understanding of the user entity’s
internal control relevant to the audit; and
(iii) Determine whether the complementary user entity controls identified
by the service organisation are relevant to the user entity and, if so,
obtain an understanding of whether the user entity has designed and
implemented such controls.
(b) (i) The auditor should ensure compliance with Section 9 of the Banking
Regulation Act, 1949, which restricts a banking company from holding
any immovable property, regardless of how it is acquired, including
in satisfaction of claims, for a period exceeding seven years from the
date of acquisition, unless such property is required for the bank's
own use.
(ii) Such property should be classified under the "Other Assets" head in
the Schedule to the financial statements by Elite Bank, i.e., Non-
Banking Assets Acquired in Satisfaction of Claims.
(iii) Other audit procedures the auditor should focus upon are to:
• ensure that the heading includes those immovable
properties/tangible assets which the bank has acquired in
satisfaction of debts due or its other claims, and these are being
held with the intention of being disposed off.
• verify such assets with reference to the relevant documentary
evidence, e.g., terms of settlement with the party, order of the
Court, or the award of arbitration, etc.
• check that the ownership of the property is legally vested with
the bank. If there is any dispute or other claim about the property,
the auditor should examine whether the recording of the asset is
appropriate or not. In case the dispute arises subsequently, the
auditor should examine whether a provision for liability or
disclosure of a contingent liability is appropriate, keeping in view
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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

the requirements of AS 29, "Provisions, Contingent Liabilities and
Contingent Assets".

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• ensure that the assets should be recorded at the lower of the net
m
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book value of the advance or the net realisable value of the asset

m . acquired on the date of acquisition.
s e
a s e
(c) Clause 11 of Part I of the First Schedule to the Chartered Accountants Act,
g la
l a
ag
1949 states that a Chartered Accountant in practice shall be deemed to
be guilty of professional misconduct, if he engages in any business or
occupation other than the profession of Chartered Accountants unless
permitted by the Council so to engage.
Provided that nothing contained herein shall disentitle a Chartered
Accountant from being a director of a Company, (not being a managing
director or a whole-time director), unless he or any of his partners is
interested in such a company as an auditor.

m
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In view of above, a Chartered Accountant in practice cannot engage
.
em
(unless permitted by the Council so to engage) in any business or

s
occupation other that the profession of Chartered Accountant but he can

g l a
be a director of a Company (not being a managing director or whole-time

a
director) wherein he or any of his partners is not interested in such
company as an auditor. Members, therefore, are expected to interpret the
requirement as regards independence much more strictly than what the
law requires and should not place themselves in positions which would
either compromise or jeopardise their independence. In view of the
above, the Board, via a clarification, decided that the auditor of a
Subsidiary Company can’t be a Director of its Holding Company, as it will
affect the independence of the auditor.
m
m
In the given situation, Ring Limited is the audit client of CA Devi’s firm
.co
c. o (M/s Vani & Co.) and Pearl Limited is the holding company of Ring

se
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Limited. The CEO of Pearl Limited is offering CA Devi a non-executive

las directorship in Pearl Ltd., while her firm is the auditor of Ring Ltd. (a
a g
g
subsidiary). CA Devi should not accept the offer as it will affect the
a independence of an auditor.

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OR
(c) During the course of performing a forensic accounting engagement
in relation to suspected fraud, while undertaking the process of
obtaining relevant evidence, CA J should take care of the following
aspects:
• Depending on the nature of the case, this may involve locating
documents, economic information, assets, a person or company,
another expert or proof of the occurrence of an event.
• In order to gather detailed evidence, the investigator must
understand the specific type of fraud that has been carried out and
how the fraud has been committed.
• The evidence should be sufficient to ultimately prove the identity of
the fraudster(s), the mechanics of the fraud scheme, and the amount
of financial loss suffered.
• It is important that the investigating team is skilled in collecting
evidence that can be used in a court case within the stipulated time
period, and in keeping a clear chain of custody until the evidence is
presented in court.
• If any evidence is inconclusive or there are gaps in the chain of
custody, then the evidence may be challenged in court, or even
become inadmissible. Investigators must be alert to documents being
falsified, damaged, or destroyed by the suspect(s).

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