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

FOR CA FINAL EXAM PREPARATION

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

CA Final 2024 Suggested Answers
SUBJECT DATE

Paper 3 Advanced Auditing, Assurance and Professional Ethics May 2024

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 3 : ADVANCED AUDITING,
ASSURANCE AND PROFESSIONAL ETHICS
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Question No. 1 is compulsory.

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aQuestion
Answer any four out of remaining five.

(a) PQR Associates are the statutory auditors of a large un-listed company,
which is engaged in manufacturing of auto components. Subsequent to re-
appointment of auditors in the Annual General Meeting, the Company shared
the appointment letter with PQR Associates, seeking acknowledgement and
acceptance letter. CA. R is the engagement partner and is planning to issue
the acceptance letter. During the current financial year, there was a search
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by the Income-tax Authorities on the company, and certain accounting
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records were seized for verification. Based on the information available on

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social media, CA. R noted that the promoters’ brother, is contemplating to

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contest in the ensuing elections, under the banner of a political party. One of
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the current senior engagement team manager, who has been doing the audit
engagement till last year, has left PQR Associates and is planning to provide
some accounting services to one of the associate companies. PQR Associates
are yet to recruit another senior manager having adequate experience in the
audits of clients engaged in automotive sector.
Elaborate the matters to be considered by PQR Associates with respect to
acceptance & continuance of client relationships considering the above
issues. (5 Marks)
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(b) Fancy Limited is a foreign company providing software support services

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having its Branch Office at Delhi. During the year 2023-24, Fancy Limited

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incorporated a subsidiary Nancy Private Limited in Gurgaon. For furtherance

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of objectives, Fancy Limited entered into a Business Transfer Agreement

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dated 5thOctober 2023 with Nancy Private Limited for transfer of all assets

a and liabilities along with the business of Delhi Branch to Nancy Private
Limited on a going concern basis effective from 01 st April, 2023. Further
necessary approval from regulatory authorities is also received on
20th December, 2023 for such transfer. Fancy Limited promised that it shall

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

provide continuing financial and operational support to Delhi Branch and
further confirmed that any losses incurred post the date of transfer shall be
borne by Fancy Limited.
During the year 2023-24, Delhi Branch of Fancy Limited have prepared its
financial statements on the basis that the Branch Office does not continue to
be a going concern and all its assets are carried in the books of accounts at
the values likely to be recovered at the time of closure of operations, to the
extent ascertainable at the time of preparation of the financial statements.
Delhi Branch has incorporated above matter in detailed form in Note XX to
the financial statements.
You are the statutory auditor of Delhi Branch of Fancy Limited for the
financial year 2023-24. According to you, Delhi Branch has correctly
disclosed about the matter in Note XX to the Financial Statements regarding
management's intention to close the operations of the branch office. Further
you have obtained sufficient appropriate audit evidence concerning audit
and on the verge of finalization of audit report.
Draft a suitable opinion paragraph and basis thereof in the given case along
with disclosure of Note XX with suitable place in audit report in terms of
relevant auditing standard. (5 Marks)
(c) Mr. BK has been engaged by XYZ Ltd. to report on summary financial
statements derived from the financial statements audited by him in
accordance with SAs. Mr. BK wants to determine whether the applied criteria
are acceptable before accepting such assignment. Guide him the factors
affecting auditor's determination of the acceptability of applied criteria as
per relevant Standard on Auditing. (4 Marks)
Answer
(a) Acceptance and Continuance of Client Relationships: As per SQC 1,
“Quality Control for Firms that Perform Audits and Reviews of Historical
Financial Information, and Other Assurance and Related Services
Engagements,” a firm before accepting an engagement should acquire vital
information about the client. Such an information should help firm to
decide about: -
 Integrity of Client, promoters, and key managerial personnel.

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ADVANCED AUDITING, ASSURANCE AND
SUGGESTED ANSWER
PROFESSIONAL ETHICS

 Competence (including capabilities, time, and resources) to perform

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engagement.

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 Compliance with ethic al requirements.

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The firm should obtain such information as it considers necessary in the

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circumstances before accepting an engagement with a new client, when
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deciding whether to continue an existing engagement, and when
considering acceptance of a new engagement with an existing client.
Where issues have been identified, and the firm decides to accept or
continue the client relationship or a specific engagement, it should
document how the issues were resolved.
Further, as per SA 220, “Quality Control for an Audit of Financial
Statements”, the engagement partner shall form a conclusion on
compliance with independence requirements that apply to the audit
engagement. In doing so, the engagement partner shall obtain relevant
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information from the firm and, where applicable, network firms, to identify
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and evaluate circumstances and relationships that create threats to

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independence.

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In view of the above, PQR Associates should:
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follow their firm's policies and procedures for client acceptance and
continuance. This includes evaluating the integrity of the client,
assessing potential risks associated with the engagement, and
ensuring the firm has the necessary resources and expertise to perform
the engagement effectively. The engagement team, should assess,
whether the company is involved in any funding activities, to the
political parties, and if so enquire and assess the risks related to such

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transactions.

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✓ communicate clearly with the client regarding the scope of the
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engagement, the responsibilities of both parties, and any limitations

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on the services to be provided. This helps manage expectations and

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a engagement. Any
ensures alignment between the firm and the client.

ag ✓ independence and objectivity throughout the
potential threats to independence, such as relationships with the
client's affiliates or involvement in political activities by related parties,
should be evaluated and mitigated appropriately. Since the senior

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

manager who was on this engagement is providing certain accounting
services, to one of the group companies, the engagement partner,
should assess, whether it would have any impact on the audit and
examine the relevant ethical/independence requirements.
✓ continually monitor the client relationship for any changes or
developments that may impact the firm's ability to provide services
effectively. This includes staying informed about significant events
such as the income-tax search, changes in client management, or
potential conflicts of interest. Since there was an income-tax raid on
the organisation, the engagement partner should evaluate the risks of
material misstatements, and non-disclosure of tax disputes and
liabilities.
✓ ensure that their engagement team possesses the necessary
competence and capabilities to perform the audit effectively. The
departure of a senior manager and the need to recruit a replacement
with specific industry experience should be addressed promptly to
maintain audit quality. Since one of the senior engagement team
members has left PQR Associates, the engagement partner should
assess, whether he would be in a position to devote adequate time on
the engagement or whether to recruit another resource, before
commencement of the audit.
(b) Drafting of Opinion Paragraph and basis thereof along with disclosure
of Note XX:
INDEPENDENT AUDITOR’S REPORT
To the Members of Delhi Branch Office of Fancy Limited
Report on the Audit of the Standalone Financial Statements
Opinion
We have audited the standalone financial statements of Delhi Branch Office
of Fancy Limited (“the Company”), which comprise the balance sheet as at
March 31, 2024, and the statement of Profit & Loss, (statement of changes
in equity) and the statement of cash flows for the year then ended, and
notes to the financial statements, including a summary of significant
accounting policies and other explanatory information.

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ADVANCED AUDITING, ASSURANCE AND
SUGGESTED ANSWER
PROFESSIONAL ETHICS

In our opinion, and to the best of our information and according to the

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explanations given to us the aforesaid financial statements, give a true and

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fair view, in conformity with the accounting principles generally accepted

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in India, of the state of affairs of the Delhi Branch Office of the Company as

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at March 31, 2024 and profit/loss, (changes in equity) and its cash flows for

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the year ended on that date.
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ag We conducted our audit in accordance with Standards on Auditing (SAs).
Basis

Our responsibilities under those standards are further described in the
Auditor’s Responsibilities for the Audit of the Financial Statements section
of our report. We are independent of the Company in accordance with the
ethical requirements that are relevant to our audit of the financial
statements as per the ICAI’s Code of Ethics and the provisions of the
Companies Act, 2013, and we have fulfilled our other ethical responsibilities

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in accordance with these requirements. We believe that the audit evidence

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we have obtained is sufficient and appropriate to provide a basis for our

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opinion.
Emphasis of Matter
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We draw attention to NotegXX regarding Delhi Branch Office management’s
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intention to close the operations of the Branch Office subject to regulatory
approvals. Accordingly, the financial statements have been prepared on the
basis that the Delhi Branch Office does not continue to be a going concern
and provisions have been made in the books of account for the losses
arising or likely to arise on account of closure of operations including the
losses on the realizability of current assets.

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Our opinion is not modified in respect of this matter.

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(c) In the given situation, Mr. BK has been engaged by XYZ Ltd. to report on
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summary financial statements derived from the financial statements

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audited by him in accordance with SAs. Mr. BK, wants to determine whether

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the applied criteria are acceptable before accepting such assignment.
As per SA 810, “Engagements to Report on Summarya
ag Financial Statements”,
before accepting an engagement to report on summary of financial
statements, the auditor shall determine whether applied criteria are
acceptable. ‘Applied criteria’ refers to the criteria applied by management

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

in the preparation of the summary financial statements.
Factors affecting the auditor’s determination of the acceptability of the
applied criteria are:
➢ The nature of the entity;
➢ The purpose of the summary financial statements;
➢ The information needs of the intended users of the summary financial
statements; and
➢ Whether the applied criteria will result in summary financial statements
that are not misleading in the circumstances.
Question 2
(a) Happy Hospital is a very renowned hospital for Orthopedic Surgeries in
Mumbai having sophisticated infrastructure. Happy Hospital has started
using a novice system which includes complete record of Indoor Patient i.e.
their diagnosis, their treatment, their medications, their billings, and receipts
thereon which is developed and managed by CT Contractors. CA Z is a
statutory auditor of Happy Hospital. CA Z came to know about this system
while auditing. CA Z is concerned whether the controls at CT Contractor s
Associates are operating effectively or not. For this purpose, CA Z demanded
from CT Contractors, an assurance report from a practicing chartered
accountant about their opinion on the description of CT Contractor's system,
and the effectiveness of the control. Which type of report should be obtained
by CA Z in terms of relevant Standard on Auditing? What aspects are to be
considered by CA Z in using such assurance report as audit evidence that
controls at CT Contractors are operating effectively? (5 Marks)
(b) In terms of subsection 114 of Revised Code of Ethics, a professional
accountant shall comply with the principle of confidentiality, which requires
an accountant to respect the confidentiality of information acquired as result
of professional and employment relationships. Confidentiality serves the
public interest because it facilitates the free flow of information from the
professional accountant's client or employing organization to the accountant
in knowledge that the information will not be disclosed to a third party. In
this context, enumerate the circumstances where professional accountants
are or might be required to disclose confidential information or when such
disclosure might be appropriate. In deciding whether to disclose confidential

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ADVANCED AUDITING, ASSURANCE AND
SUGGESTED ANSWER
PROFESSIONAL ETHICS

information what are the points that should be kept in the mind of

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professional accountants? (5 Marks)

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(c) The management of High Limited is concerned with the reporting
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requirement cast through Rule 11 of the Companies (Audit and Auditors)
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Rules, 2014 for the financial year 2023-24 with regard to the Audit Trail (edit
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log). Audit trails may be enabled at the accounting software level depending
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on the features available in such software or same may be captured directly
in the database underlying such accounting software. Consequently, the
management of the company approached CA J and asked him to suggest
them list of internal controls which may be required to be implemented and
operated to demonstrate that the Audit trail (or Edit Log) feature was
functional, operated and was not disabled. Help CA J. (4 Marks)
Answer
(a) In the given scenario, CA. Z, as the statutory auditor of Happy Hospital, is

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concerned about the effectiveness of controls at the service organization,

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specifically the system managed by CT Contractors. To address this

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concern, CT Contractors should provide a Type 2 assurance report from a

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practicing chartered accountant as per SA 402, “Audit Considerations

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Relating to an Entity Using a Service Organisation”. This report will offer an
opinion on the description of the system in use at Happy Hospital, as well
as evaluate the effectiveness of the controls implemented by CT
Contractors.
Using a Type 2 report as audit evidence that controls at the service
organisation are operating effectively: If, the user auditor plans to use a
Type 2 report as audit evidence that controls at the service organisation are
operating effectively, the user auditor shall determine whether the service

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auditor’s report provides sufficient appropriate audit evidence about the

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effectiveness of the controls to support the user auditor’s risk assessment

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by:

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effectiveness of controls at the service organisation

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(b) Determining whether complementary user entity controls identified by
the service organisation are relevant to the user entity and, if so,
obtaining an understanding of whether the user entity has designed

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

and implemented such controls and, if so, testing their operating
effectiveness;
(c) Evaluating the adequacy of the time period covered by the tests of
controls and the time elapsed since the performance of the tests of
controls; and
(d) Evaluating whether the tests of controls performed by the service
auditor and the results thereof, as described in the service auditor’s
report, are relevant to the assertions in the user entity’s financial
statements and provide sufficient appropriate audit evidence to
support the user auditor’s risk assessment.
(b) Principle of Confidentiality: In terms of subsection 114 of Revised Code
of Ethics, a professional accountant shall comply with the principle of
confidentiality, which requires an accountant to respect the confidentiality
of information acquired as a result of professional and employment
relationships. Confidentiality serves the public interest because it facilitates
the free flow of information from the professional accountant’s client or
employing organization to the accountant in the knowledge that the
information will not be disclosed to a third party. Nevertheless, the
following are circumstances where professional accountants are or might
be required to disclose confidential information or when such disclosure
might be appropriate:
(1) Disclosure is required by law,
(2) Disclosure is permitted by law and is authorized by the client or the
employing organisation;
(3) There is a professional duty or right to disclose, when not prohibited
by law:
(i) To comply with the requirements of Peer Review or Quality Review
of the Institute;
(ii) To respond to an inquiry or investigation by a professional or
regulatory body;
(iii) To protect the professional interests of a professional accountant
in legal proceedings; or

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ADVANCED AUDITING, ASSURANCE AND
SUGGESTED ANSWER
PROFESSIONAL ETHICS

(iv) To comply with technical and professional standards, including

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ethics requirements.

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In deciding whether to disclose confidential information,
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professional accountants should consider the following points:
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interests might be affected, could be harmed if the client or gl
the interests of any party, including third parties whose
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a by the professional accountant;
(2) Whether all the relevant information is known and substantiated,
to the extent it is practicable; and
(3) The proposed type of communication, and to whom it is
addressed;
(4) Whether the parties to whom the communication is addressed are

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appropriate recipients.

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(c) In order to demonstrate that the audit trail feature was functional, operated

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and was not disabled, a company would have to design and implement

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specific internal controls (predominantly IT controls) which in turn, would
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be evaluated by the auditors, as appropriate. An illustrative list of internal
controls which may be required to be implemented and operated are given
below:
 Controls to ensure that the audit trail feature has not been disabled or
deactivated.
 Controls to ensure that User IDs are assigned to each individual and
that User IDs are not shared.

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 Controls to ensure that changes to the configurations of the audit trail

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are authorized and logs of such changes are maintained.
 Controls to ensure that access to the audit trail (and m
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backups) is
disabled or restricted and access logs, whenever theaaudit trails have
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a  Controls to ensure that periodic backups of the audit trails are taken
and archived as per the statutory period specified under the provisions
of the Act.

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

Question 3
(a) Core Limited submitted a credit proposal XYZ Bank Limited for the sanction
of a Term Loan of ` 150.00 crore required for procuring and installing a latest
Plant and machinery for their upcoming project. Based on the application,
XYZ Bank Limited approached CA P to investigate the profitability of the
business for judging the accuracy of the schedule of repayment furnished by
Core Limited, as well as the value of the security in the form of assets of the
business already possessed and those which will be created out of the loan.
Elucidate the steps that should be undertaken by CA P? (5 Marks)
(b) CA N is carrying out an audit of restated financial statements of BQR Limited
for past 3 financial years i.e. 2023-24, 2022-23 and 2021-22 for onward
submission to SEBI pursuant to their upcoming IPO (Initial Public Offer). CA
N is planning to issue an Audit Report on 5 th August, 2024 covering these
restated financial statements. Before issuing the audit report, CA N requested
Management Representation Letter from the management of the Company
for this assignment. The Management of the Company provided
Management Representation Letter dated 1 st April, 2024 covering the period
of financial year 2023-24 only as they were not in position to provide for the
financial year 2022-23 and 2021-22 because they were not in place during
that period.
How would CA N deal with the above situation as per relevant Standard on
Auditing? (5 Marks)
(c) CA Raj, a practicing chartered accountant, is offered to take up an
appointment as a "Secretary" in his professional capacity by the Central
Government for a Metro Project for a term of 2 years not on a salary-cum-
full-time basis. After giving deep thought to the offer, CA Raj accepted the
appointment. Comment in terms of the Chartered Accountant Act, 1949 and
Schedules thereto. (4 Marks)
Answer
(a) To investigate the profitability of the business for judging the accuracy of
the schedule of repayment furnished by the borrower, as well as the value
of the security in the form of assets of the business already possessed and
those which will be created out of the loan, the investigating accountant
should take the under-mentioned steps:

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ADVANCED AUDITING, ASSURANCE AND
SUGGESTED ANSWER
PROFESSIONAL ETHICS

(1) Prepare a condensed income statement from the Statement of Profit

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and Loss for the previous five years, showing separately therein various

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items of income and expenses, the amounts of gross and net profits

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earned and taxes paid annually during each of the five years. The

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amount of maintainable profits determined on the basis of foregoing

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statement should be increased by the amount by which these would
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increase on the investment of borrowed funds.
the under-mentioned ratios separately and then include
them in the statement to show the trend as well as changes that have
taken place in the financial position of the company:
(i) Sales to Average Inventories held.
(ii) Sales to Fixed Assets.
(iii) Equity to Fixed Assets.

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(iv) Current Assets to Current Liabilities.

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(v) Quick Assets (the current assets that are readily realisable) to Quick

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Liabilities.

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(vi) Equity to Long Term Loans.
(vii) Sales to Book Debts.
(viii) Return on Capital Employed.
(3) Enter in a separate part of the statement the break-up of annual sales
product-wise to show their trend.
(b) In the given situation, CA N is carrying out an audit of restated financial
statements of BQR Limited for past 3 financial years i.e., 2023-24, 2022-23
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and 2021-22 so he requested Management Representation Letter from the

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management of the Company for this assignment before issuance of the
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report. The management of the Company provided the Management

s em Representation Letter only for the financial year 2023-24 as they were not
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in place during that period.

ag As per SA 580, “Written Representations”, as written representations are
necessary audit evidence, the auditor’s opinion cannot be expressed, and
the auditor’s report cannot be dated before the date of the written
representations.

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

As per SA 560, “Subsequent Events”, the auditor is concerned with events
occurring up to the date of the auditor’s report that may require adjustment
to or disclosure in the financial statements, the written representations are
dated as near as practicable to, but not after, the date of the auditor’s
report on the financial statements.
In some circumstances it may be appropriate for the auditor to obtain a
written representation about a specific assertion in the financial statements
during the course of the audit. Where this is the case, it may be necessary
to request an updated written representation.
The written representations are for all periods referred to in the auditor’s
report because management needs to reaffirm that the written
representations it previously made with respect to the prior periods remain
appropriate. The auditor and management may agree to a form of written
representation that updates written representations relating to the prior
periods by addressing whether there are any changes to such written
representations and, if so, what they are.
Situations may arise where current management were not present during
all periods referred to in the auditor’s report. Such persons may assert that
they are not in a position to provide some or all the written representations
because they were not in place during the period. This fact, however, does
not diminish such persons’ responsibilities for the financial statements as a
whole.
Accordingly, the requirement for the auditor to request from them written
representations that cover the whole of the relevant period(s) still applies.
Therefore, as per the above requirement of SA 580 CA. N should take
written representation letter from management of BQR Limited for the
financial year 2022-23 and 2021-22 also.
In case the management of BQR Limited does not provide written
representation as requested, the auditor shall discuss with the
management, re-evaluate the integrity of management, and take
appropriate actions including the impact on the audit report as per SA 705.
(c) As per Section 2(2)(iv) of the Chartered Accountant Act, 1949 as amended
from time to time, a member of the Institute shall be deemed ‘to be in
practice’ when individually or in partnership with Chartered Accountants in
practice, or in partnership with members of such other recognized

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ADVANCED AUDITING, ASSURANCE AND
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PROFESSIONAL ETHICS

professional as may be prescribed, he, in consideration of remuneration

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received or to be received, renders such other services as, in the opinion of

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the Council, are or may be rendered by a Chartered Accountant in practice.

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As per Clause (11) of Part I of First Schedule of Chartered Accountants Act,
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1949, a Chartered Accountant in practice is deemed to be guilty of
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professional misconduct if he engages in any business or occupation other
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than the profession of Chartered Accountant unless permitted by the
Council so to engage.
However, the Council of the Institute is empowered to permit chartered
accountants in practice to engage in any other business or occupation
considered fit and proper. Accordingly, the Council formulated Regulations
191 to the Chartered Accountants Regulations, 1988 specifying the
activities with which a member in practice can associate himself with or
without the permission of the Council. As per Regulation 191 a Chartered

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Accountant in practice may take up an appointment that may be made by

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the Central Government or a State Government or a court of law or any

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other legal authority or may act as a secretary in his professional capacity,

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provided his employment is not on a salary-cum-full-time basis”.
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In the instant case, CA Raj, a practicing chartered accountant has been
appointed as a “Secretary” in his professional capacity by the Central
Government for a metro project for a term of 2 years not on a salary-cum-
full-time basis.
Conclusion: In view of above, in the given scenario, CA Raj will not be held
liable for misconduct for acceptance of appointment as Secretary in terms
of compliance of Regulations 191 read with Clause (11) of Part I of First
Schedule of Chartered Accountants Act, 1949.

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Question 4
m (a) CA Giri is a senior partner of M/s TSV Associates. M/s TSV Associates. is a
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e largefor listed
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reputed firm of Chartered Accountants which has been in practice more

as than five decades. The firm undertakes statutory
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audits of
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companies across various industry sectors and has more than fifty qualified
experienced professionals. CA Giri has been assigned as an Engagement
Quality Control Reviewer for an audit engagement of a listed company. What
are the aspects, which would be looked into by CA Giri as an EQCR in relation
to the engagement?

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

Upon completion of the review, CA Giri has identified certain issues, with
respect to revenue recognition and adequacy of provisions relating to
onerous contracts. The views of CA Giri are not accepted by the Engagement
Partner. Suggest the ways of resolving the differences of opinion between CA
Giri and the engagement partner. (5 Marks)
(b) MNC Limited has engaged CA Lalit to help the company in compilation of
the financial information. CA Lalit explained his team members, the scope of
work and the responsibilities under this engagement. The team members
have done mostly audit engagements and do not have exposure to
compilation engagements. Discuss the key issues that CA Lalit should
deliberate and guide his team members with respect to this engagement and
the manner it differ from assurance engagements. Give your views on the
applicability of SQC 1 to this engagement. (5 Marks)
(c) SU Limited is amongst the top 1000 listed entities. With the introduction of
new reporting requirements by SEBI on ESG parameters called the Business
Responsibility and Sustainability Report (BRSR), it requires SU Limited to
make disclosures on their performance against the various principles of the
"National Guidelines on Responsible Business Conduct". One of the principles
emphasizes that the business decisions in an organization should be open to
disclosure and accessible to the relevant interested parties. Elucidate the
essence of core elements associated with the aforesaid principle. (4 Marks)
Answer
(a) As per SA 220, “Quality Control for an Audit of Financial Statements”, for
audits of financial statements of listed entities, CA. Giri, the engagement
quality control reviewer, on performing an engagement quality control
review, shall also consider the following:
(i) The engagement team’s evaluation of the firm’s independence in
relation to the audit engagement;
(ii) Whether appropriate consultation has taken place on matters involving
differences of opinion or other difficult or contentious matters, and the
conclusions arising from those consultations;
(iii) Whether audit documentation selected for review reflects the work
performed in relation to the significant judgments made and supports
the conclusions reached.

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As per SQC 1, “Quality Control for Firms that Perform Audits and Reviews

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of Historical Financial Information, and Other Assurance and Related

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Services Engagements,”, there might be difference of opinion within

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engagement team, with those consulted and between engagement partner

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and engagement quality control reviewer. The report should only be issued

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after resolution of such differences. In case, recommendations of
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engagement quality control reviewer are not accepted by engagement
partner and matter is not resolved to reviewer’s satisfaction, the matter
should be resolved by following established procedures of firm like by
consulting with another practitioner or firm, or a professional or regulatory
body.
In the given situation, under completion of review, CA. Giri, Engagement
Quality Control Reviewer has identified certain issues. However, the view of
CA Giri, the EQCR are not accepted by the Engagement Partner. This

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difference of opinion among the CA Giri and Engagement Partner should

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be resolved with abovementioned manner as per SQC 1.
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practitioner applies accounting e m
(b) As per SRS 4410, Compilation engagement is an engagement in which a

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a and presentation of financial information
and financial reporting expertise to assist

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management in the preparation

and issues a report.
a
of an entity in accordance with an applicable financial reporting framework

Management may request a professional accountant in public practice to
assist with the preparation and presentation of financial information of an
entity. Financial information that is the subject of a compilation
engagement may be required for various purposes including: -
• To comply with mandatory periodic financial reporting requirements

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established in law or regulation, if any or

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• For purposes unrelated to mandatory financial reporting under

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relevant law or regulation, including for example: -

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✓ For management or those charged with governance, prepared on

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a basis appropriate for their particular purposes (such as
a preparation of financial information for internal use).
✓ For periodic financial reporting undertaken for external parties
under a contract or other form of agreement (such as financial

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

information provided to a funding body to support provision or
continuation of a grant).
✓ For transactional purposes, for example to support a transaction
involving changes to the entity’s ownership or financing structure
(such as for a merger or acquisition).
“Assurance engagement” means an engagement in which a practitioner
expresses a conclusion designed to enhance the degree of confidence of
the intended users other than the responsible party about the outcome of
the evaluation or measurement of a subject matter against criteria. It means
that the practitioner gives an opinion about specific information due to
which users of information are able to make confident decisions knowing
well that chance of information being incorrect is diminished.
A compilation engagement is not an assurance engagement. A compilation
engagement does not require the practitioner to verify the accuracy or
completeness of the information provided by management for the
compilation, or otherwise to gather evidence to express an audit opinion
or a review conclusion on the preparation of the financial information.
Further, SQC 1 is applicable to all Engagement and Quality Control
Standards. Since SRS 4410 is also one of Engagement and Quality Control
Standards, SQC 1 applies to firms in respect of firm’s compilation
engagements too which is covered in Related Services.
(c) Principle 1 – Ethics, Transparency and Accountability: The first principle
emphasizes that the business decisions in an organisation should be open
to disclosure and accessible to the relevant interested parties.
The essence of the core elements associated with the first principle are:
(i) The entities’ governing structure should develop policies, procedures,
and practices for their offices, factories, and work areas, ensuring that
ethics is not compromised.
(ii) The information relating to the policies, procedures, and practices
along with the performance should be made available to the
stakeholders.
(iii) In case of adverse effects, more care has to be taken for transparent
disclosures.

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(iv) The entities in the value chain should be encouraged to adopt these

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principles by the governance structure.

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(v) The entities should proactively respond to the outside entities that

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violate the nine principles of the BRSRs. This includes their suppliers,
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distributors, sub-contractors, or regulatory officers that may engage
la s
l a swith the business concern.
a g
a(a)g GAK Limited has compiled the interim financial information, as per the
Question 5

Listing agreement requirements and submitted to the auditors for their
review. CA Reena, has been assigned on the engagement to review the
interim financial information of GAK Limited. Based on the inquiries and
other review procedures carried out, CA Reena, assessed that GAK Limited,
has been facing continuous working capital shortages. No financial
institutions or banks are ready to lend additional funding limits to GAK
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Limited, since the company has been continuously incurring losses for over 3

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years and the company has defaulted payment of loan instalments & interest

s
over the last one year and operations have been curtailed significantly.

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Under such circumstances CA Reena, who is doing the review for the first

a
time, noted that GAK Limited has not disclosed any information in the interim
financial information relating to material uncertainties. Given the situation,
please advise CA Reena, what kind of review report is required to be issued?
If, GAK Limited has disclosed information relating to material uncertainty,
can CA Reena give a clean report? Discuss. (5 Marks)
(b) R Limited is a listed company engaged in manufacture of round bars. The
company is having investment in the following components:

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(i) 2 Subsidiary Companies

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(ii) 1 Joint Venture Company

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(iii) 2 Associate Companies
la se
las (iv) 3 Business entities under common control
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ag (v) Interest in assets, liabilities, revenues, and expenses in a joint operation
with 1 Company

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

R Limited and all its components are required to present their accounts as
per Ind AS. While preparing consolidated financial statements, R Limited
consolidated its components on a line-by-line basis by adding together like
items of assets, liabilities, income, expenses, and cash flows.
R Limited seeks your advice on the accounting treatment in respect of the
above components for consolidation in accordance with the Companies
(Indian Accounting Standards) Rules, 2015. (5 Marks)
(c) TP Limited is a listed company engaged in the business of manufacturing of
kids garments under the brand name of MM. M/s R & Associates, firm of
chartered accountants, are appointed as a Statutory Auditor of the Company
for the year 2023-24. CA R is looking after the audit of the Company. During
audit, CA R observed that there are number of notices received from GST
Department and Income-tax Department for various issues. Further during
plant visit, CA R observed that few child labourers are engaged in some of
the activity. In response to the observation made, CA R followed the
procedure as envisaged in SA 250, "Consideration of Laws and Regulations
in an Audit of Financial Statements". According to CA R, the provisions of SA
250 and the provisions of NOCLAR (Non-Compliance with Laws and
Regulations) under Revised Code of Ethics are one and the same. Do you
agree? If not, give your comments. (4 Marks)
Answer
(a) Going Concern and Significant Uncertainties: As per SRE 2410, “Review
of Interim Financial Information Performed by the Independent Auditor of
the Entity”, if, as a result of inquiries or other review procedures, a material
uncertainty relating to an event or condition comes to the auditor’s
attention that may cast significant doubt on the entity’s ability to continue
as a going concern, and adequate disclosure is made in the interim financial
information the auditor modifies the review report by adding an emphasis
of matter paragraph.
The auditor may have modified a prior audit or review report by adding an
emphasis of matter paragraph to highlight a material uncertainty relating
to an event or condition that may cast significant doubt on the entity’s
ability to continue as a going concern.
If a material uncertainty that casts significant doubt about the entity’s
ability to continue as a going concern is not adequately disclosed in the

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interim financial information, the auditor should express a qualified or

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adverse conclusion, as appropriate. The report should include specific

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reference to the fact that there is such a material uncertainty.

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In view of above, in the given situation, GAK Limited has compiled the
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interim financial information, as per the Listing agreement requirements
la
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and submitted to the auditors for their review. CA Reena, has been assigned
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on the engagement to review the interim financial information of GAK
Limited. CA Reena noticed that GAK Limited has not disclosed any
information in the interim financial information relating to material
uncertainties that casts significant doubt about the entity’s ability to
continue as a going concern. Thus, the auditor should express a qualified
or adverse conclusion, as appropriate. The report should include specific
reference to the fact that there is such a material uncertainty.
If the material uncertainty still exists and adequate disclosure is made in

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the interim financial information, the auditor modifies the review report on

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the current interim financial information by adding a paragraph to highlight

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the continued material uncertainty. If GAK Limited has disclosed

a s
information relating to material uncertainties, CA Reena, should modify the
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review report by adding an emphasis of matter paragraph.
a
(b) For consolidation of subsidiaries in accordance with the Companies
(Indian Accounting Standards) Rules, 2015:
• the financial statements of the parent and its subsidiaries are combined
as per Ind AS 110, “Consolidated Financial Statements” on a line-by-
line basis by adding together like items of assets, liabilities, income,
expenses, and cash flows;

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• related goodwill/ capital reserve (or gain on bargain purchase) and

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• business combinations involving entities or businesses under. common
non-controlling interest is determined as per Ind AS 103;

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control shall be accounted for using the pooling of interest

las accordance with Ind AS 103;
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ag • adjustments like elimination of intra-group transactions, balances,
unrealised profits and deferred tax etc. are made in accordance with
the requirements of Ind AS 110;

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

• investments in associates and joint ventures are accounted for using
the Equity Method as prescribed in Indian Accounting Standard (Ind
AS) 28, “Investments in Associates and Joint Ventures”. Interests in
assets, liabilities, revenues, and expenses in a joint operation are
accounted for as part of separate financial statements of the entity in
accordance with Indian Accounting Standard (Ind AS) 111, “Joint
Arrangements”;
• in a business combination achieved in stages, the acquirer shall
remeasure its previously held equity interest in the acquiree at its
acquisition-date fair value and recognise the resulting gain or loss, if
any, in profit or loss or other comprehensive income, as appropriate in
accordance with Ind AS 103.
In the given situation, R Limited is, a listed company having investment in
the (i) 2 Subsidiary Companies, (ii) 1 Joint Venture Company, (iii) 2 Associate
Companies, (iv) 3 Business entities under common control, (v) Interest in
assets, liabilities, revenues, and expenses in a joint operation with 1
Company. R Limited and all its components are required to present their
accounts as per Ind AS. In view of above, R Limited consolidated its
components on a line-by-line basis by adding together like items of assets,
liabilities, income, expenses, and cash flows while preparing its
consolidated financial statements which is correct for the subsidiaries,
however the treatment is not correct for other components as per
abovementioned Companies (Indian Accounting Standards) Rules, 2015.
(c) In the given situation, CA R is looking after the audit of the TP Limited, a
listed company. During audit, CA R observed that there are number of
notices received from GST Department and Income-tax Department for
various issues. Further during plant visit, CA R observed that few child
labourers are engaged in some of the activity. In response to the
observation made, CA R followed the procedure as envisaged in SA 250,
"Consideration of Laws and Regulations in an Audit of Financial
Statements". assuming the provisions of SA 250 and the provisions of
NOCLAR (Non-Compliance with Laws and Regulations) under Revised Code
of Ethics are one and the same. However, following points indicates that
the provisions of SA 250 and NOCLAR (Non-Compliance with Laws and
Regulations) under the Revised Code of Ethics are not one and same:

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(i) SA 250 is applicable only on Audit, and not on other Assurance

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engagements. However, NOCLAR is applicable on professional

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accountants in service, and in practice.

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(ii) SA 250 talks of auditor’s responsibilities for laws having direct effect
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on the determination of material amounts and disclosures in the
la
l a sfinancial statements (such as tax and labour laws); and other laws and
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regulations that do not have a direct effect on the determination of the
amounts and disclosures in the financial statements, but compliance
with which may be fundamental to the operating aspects of the
business. NOCLAR, while being alike to SA 250 till this point, is further
ahead of it in that it takes into account non-compliance that causes
substantial harm resulting in serious consequences in financial or non-
financial terms.
(iii) SA 250 does not define stakeholders. NOCLAR is related to affect of

o m
non-compliance on investors, creditors, employees as also the general
public.
c
. circumstances, the professional
m
e of an imminent breach of a law or
accountant might becomesaware
(iv) As per NOCLAR, in exceptional

regulation that wouldgl
a
a public. Having first considered whether it
cause substantial harm to investors, creditors,
employees or the general
would be appropriate to discuss the matter with management or those
charged with governance of the company, the accountant shall
exercise professional judgment and determine whether to disclose the
matter immediately to an appropriate authority in order to prevent or
mitigate the consequences of such imminent breach. If disclosure is
made, that disclosure is permitted. This provision is not existent in
SA 250.
o m
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c. o (a) You are appointed as a Statutory Auditor of SDA Limitedsem
Question 6

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for the year

s e 01.05.2023 under section 148 of the Income-tax Act, g
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a
2023-24 in the place of CA T. During audit you found an order dated

l a
ag
1961 wherein tax of
` 50 lakhs were demanded owing to undisclosed cash sales of ₹ 150 lakhs for
the financial year 2020-21 which was accepted by the company and the
applicable tax was paid by the Company during the year 2023-24. The
company has not recorded such undisclosed income in their books of account

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

during the year 2023-24. On further inquiring the matter with CA T, you
came to know that CA T resigned due to non-recording of such transaction
by the company. Is there any reporting responsibility casted on you regarding
the above matters under CARO, 2020 for the year 2023-24? (5 Marks)
(b) MNC Limited, is engaged in manufacture & sale of FMCG products. It has
manufacturing locations across various states in India and engages dealer
channels to sell it products. One dealer is appointed for each district within
the state and products are despatched from the nearest manufacturing
location to the dealer. Considering the voluminous transactions, MNC
Limited has a robust ERP network, for recording the transactions. As statutory
auditors of MNC Ltd., your firm is about to commence the current year audit.
The audit team includes certain IT experts and discussions are underway
amongst the team members. As an IT manager of the engagement team,
explain the key areas for an auditor to understand IT environment.
(5 Marks)
(c) CA Kumar, a practicing-chartered accountant, is well known in the field of
pleading of Income-tax cases at Income-tax Tribunal and does not provide
any assurance services. Considering the long standing in the field, CA Kumar
is approached by XYZ Limited to file an appeal in the Tribunal against the
Income-tax Demand of ` 10 crore which was added by the CIT(A) and to
plead on behalf of XYZ Limited in the matter. CA Kumar offers to accept the
case with the following fee structure:
The fees for filing an appeal and to plead at Income-tax Tribunal will be
higher of the following (a) or (b):
(i) ` 5,00,000/-
(ii) 10% of Tax Demand Reduced.
Comment on the act of CA Kumar in terms of the Chartered Accountant Act,
1949 and Schedules thereon. (4 Marks)
OR
Yo-Yo Finance Limited is a NBFC-ML as per revised categorisation of NBFC
done by RBI. YAK & Associates, firm of chartered accountants, are appointed
as Statutory Auditors of the Company for the year 2023-24.
The audit team consist of CA Y, 1 Audit Manager and 3 junior assistants. The
Audit Manager is recently appointed, who is not having much exposure in

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the field of Auditing of NBFCs. During the engagement team meeting, the

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Audit Manager asked CA Y, regarding the audit procedures to be undertaken

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to verify whether the aforesaid Company has followed Prudential Norms? As

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an Engagement partner suggest any four procedures to the Audit Manager.

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(4 Marks)

s e g
a
Reporting under Paragraph 3 of CARO, 2020: Clause (viii) of Paragrapha
l
Answer

g
a 3 of CARO, 2020 requires the auditor to report whether any transactions
(a)

not recorded in the books of account have been surrendered or disclosed
as income during the year in the tax assessments under the Income-tax Act,
1961 (43 of 1961), if so, whether the previously unrecorded income has
been properly recorded in the books of account during the year.
In addition, Clause (xviii) of Paragraph 3 of CARO, 2020 requires the auditor
to report whether there has been any resignation of the statutory auditors
m
c. o
during the year, if so, whether the auditor has taken into consideration the

man order dated 01.05.2023 under section
issues, objections or concerns raised by the outgoing auditors.

s e
la wascashnoticed
In the given situation, during audit

g
148 of the Income-tax Act,1961 wherein tax of `50 lakh were

a
demanded owing to undisclosed sales of 150 lakh for the financial
year 2020-21 which was accepted by the company and the applicable tax
was paid by the company during the year 2023-24. The company has not
recorded such undisclosed income in their books of account during the
year 2023-24. The auditor would be required to report as per Clause (viii)
of Paragraph 3 of CARO, 2020.
Further CA T, the auditor of SDA Limited resigned due to non-recording of

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such undisclosed income in their books of account. The auditor would be

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required to report the same in CARO, 2020 as per Clause (xviii) of Paragraph

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3 of CARO, 2020.

m s e (viii) and
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Hence, the auditor would be required to report as per Clause

las a g
Clause (xviii) of Paragraph 3 of CARO 2020 for the year 2023-24.

ag (b) Key Areas for an Auditor to Understand IT Environment:
an Auditor to Understand IT Environment are as follows:
Key Areas for

1. Understand the flow of transaction: The auditor's understanding of
the IT environment may focus on identifying and understanding the

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

nature and number of the specific IT applications and other aspects of
the IT environment that are relevant to the flows of transactions and
processing of information in the information system. Changes in the
flow of transactions, or information within the information system may
result from program changes to IT applications, or direct changes to
data in databases involved in processing or storing those transactions
or information.
2. Identification of Significant Systems: The auditor may identify the IT
applications and supporting IT infrastructure concurrently with the
auditor's understanding of how information relating to significant
classes of transactions, account balances and disclosures flows into,
through and out the entity's information system.
3. Identification of Manual and Automated Controls: An entity's
system of internal control contains manual elements and automated
elements (i.e., manual, and automated controls and other resources
used in the entity's system of internal control). An entity's mix of
manual and automated elements varies with the nature and complexity
of the entity's use of IT. The characteristics of manual or automated
elements are relevant to the auditor's identification and assessment of
the risks of material misstatement.
4. Identification of the technologies used: The need to understand the
emerging technologies implemented and the role they play in the
entity's information processing or other financial reporting activities
and consider whether there are risks arising from their use.
Given the potential complexities of these technologies, there is an
increased likelihood that the engagement team may decide to engage
specialists and/or auditor's experts to help understand whether and
how their use impacts the entity's financial reporting processes and
may give rise to risks from the use of IT.
5. Assessing the complexity of the IT environment: Not all applications
of the IT environment have the same level of complexity. The level of
complexity for individual characteristics differs across applications.
Complexity is based on the following factors – automation used in the
organization, entity’s reliance on system generated reports,
customization in IT applications, business model of the entity, any

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significant changes done during the year and implementation of

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emerging technologies.

o m
After considering the above factors for each application the over
c. o
.c
complexity is assessed of the IT environment.
e m
s eImof First Schedule to the Chartered Accountants Act, 1949, a Chartered glas
(c) Restriction on Fees based on a Percentage: According to Clause (10) of

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lAccountant
Part
in practice shall be deemed to be guilty of professionala
a misconduct if he charges or offers to charge, accepts or offers to accept in
respect of any professional employment fees which are based on a
percentage of profits or which are contingent upon the findings, or results
of such employment, except as permitted under any regulations made
under this Act.
However, Regulation 192 allow the Chartered Accountant in practice to
charge the fees in respect of any professional work which are based on a

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percentage of profits, or which are contingent upon the findings or results

.
of such work, in the case of a non-assurance services to non-audit clients,

s em
and the fees may be based on a percentage of Tax Demand Reduced.

g l a
In the given case, CA Kumar, a practicing Chartered Accountant, provides

a
non-assurance services. He is approached by XYZ Limited, a non-audit
client, to file an appeal in Tribunal against Income-tax Demand of `10 crore
which was added by the CIT(A) and to plead on behalf of XYZ Limited in
the matter. CA Kumar offers to accept the case and agrees to charge fees
either ` 5,00,000 or 10% of Tax Demand reduced whichever is higher.
Conclusion: Therefore, Mr. Kumar will not be held guilty of professional
misconduct since he is not providing any assurance services to non-audit

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client pursuant to Regulation 192 read with Clause 10 of Part I of First

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Schedule.
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c. o (c) Audit procedures to be undertakenOrby YAK & Associatessetomverify
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Yo-Yo Finance Limited has followed NBFC Prudentiall Norms:-
s
that

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ag (i) Check compliance with prudential norms encompassing
recognition, income from investments, accounting standards,
income

accounting for investments, asset classification, provisioning for bad
and doubtful debts, capital adequacy norms, prohibition on granting

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

of loans by a NBFC against its own shares, prohibition on loans and
investments for failure to repay public deposits and norms for
concentration of credit/investments.
(ii) An auditor should ensure that the Board of Directors of every NBFC
granting/intending to grant demand/call loans shall frame and
implement a policy for the company.
(iii) An auditor should assess on the basis of examinations conducted by
him whether the NBFC has complied with the prudential norms. In
particular, he should verify that advances and other credit facilities
have been properly classified as standard/substandard/doubtful/loss
and that proper provision has been made in accordance with the
Directions.
(iv) In respect of Non-Performing Assets, an auditor should check whether
the unrealized income in respect of such assets has not been taken to
the Profit & Loss Account on an accrual basis. Income from NPAs
should be accounted for on realization basis only.
(v) Check whether all accounts which have been classified as NPAs in the
previous year also continue to be shown as such in the current year
also. If the same is not treated as an NPA in the current year, the auditor
should specifically examine such accounts to ascertain whether the
account has become regular and the same can be treated as
performing as per the Directions.

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