CA Intermediate May 2026 Suggested Answers Paper 5 Auditing and Ethics

FOR CA INTERMEDIATE EXAM PREPARATION

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

CA Intermediate 2026 Suggested Answers
SUBJECT DATE

Paper 5 Auditing and Ethics May 2026

Notes · Sample Papers · Previous Year Papers · Mock Tests

m
m .co
c. o

e m
em l a s
s a g

PAPER – 5 : AUDITING AND ETHICS
m
m PART – I Multiple Choice Questions c. o
.co s e m
e m l a
s
laFoods Private Ltd., engaged in the production and distribution of packageda
Case Scenario - I
g
g
asnacks. To increase sales, it introduced volume discounts and extended credit
Shree

facilities to distributors.
The statutory audit of Shree Foods Private Ltd. was assigned to CA Vivek. While
planning the audit programme, CA Vivek first obtained an understanding of the
company's internal control system and evaluated whether such controls were
actually operating effectively. He prepared a detailed audit plan specifying
procedures such as:

o m
c
Testing a sample of 100 invoices out of 1200 revenue transactions.
. notes.
-
-
m
ewere noted:
Reviewing discount approvals and credit
s
larevenue amounts were not included in the
During the audit, the following issues

a g
(i) Some invoices with incorrect
selected sample and hence misstatements remained undetected.
(ii) One audit team member misunderstood the bulk discount policy and treated
overstated revenue as valid.
(iii) While testing invoices and trade receivables, CA Vivek identified
misstatement in some transactions. He needs to project these misstatements
to the population to assess their overall impact.

o m
m c
(iv) Management refused to provide requested written representation required by

m .
c. o (v) Additionally, while verifying trade receivables, CA Vivek performed
CA Vivek relating to valuation of one of the major Trade Receivables.

m s e several
s e g l a
a a ageing report and
other audit procedures such as -
l
ag (a) Selecting few invoices from the accounts receivables
compare them with supporting documentation to see if they billed with
the correct amounts, to the correct customer and on the correct dates.

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 1 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

(b) Matching sales invoices issued around the reporting date with the related
shipping/dispatch records to ensure receivables are recorded in the
correct accounting period.
(c) Reviewing the ageing analysis of receivables to identify long-
outstanding balances and evaluate adequacy of provision of doubtful
debts.
(d) Sending balance confirmation requests to selected distributors asking
them to confirm the outstanding receivable balances as at the reporting
date.
Based on the above facts, answer the following questions: (1 to 5)
1. CA Vivek formulates his audit programme after obtaining a satisfactory
understanding of the internal control system. Which of the following
statement is correct in this respect?
(A) A detailed evaluation of internal control by the auditor would
unnecessarily expand the scope of the audit programme and his audit
programme may become unwieldy and unnecessarily heavy.
(B) If the auditor does not care to study the internal control system, his audit
programme may become unwieldy and unnecessarily heavy, and the
object of the audit may be altogether lost in the mass of entries and
vouchers.
(C) If the internal control is considered strong, the auditor should introduce
additional audit procedures that otherwise might not be required to
ensure absolute assurance.
(D) A proper understanding of the internal control system, its content and
functioning, does not significantly influence the auditor's selection of
audit procedure to be applied in the various areas covered in the audit
programme. (2 Marks)
2. During testing of 100 invoices out of 1200, some invoices with incorrect
revenue amounts were not selected and the bulk discount policy was
misinterpreted, and overstated revenue was treated as valid.
Which of the following combinations correctly identifies the type of risk
represented in each of the respective situations?
(A) Detection Risk - Sampling Risk & Detection Risk - Non-Sampling Risk

2

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 2 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

(B) Inherent Risk & Control risk
(C) Detection Risk - Non-Sampling Risk & Detection Risk - Sampling Risk
m
m
(D) Control Risk & Detection Risk - Non-Sampling Risk (2 Marks)
c. o
3.
.co
CA Vivek identified misstatements in some transactions. Some misstatements
s e m
em
were anomalies. He needs to project these misstatements to the population
la
l a s
to assess their overall impact.
a g
ag Which of the following statement best describes the correct approach in this
scenario?
(A) The auditor is required to project misstatement for the population to
obtain a broad view of the scale of misstatement, and this projection is
sufficient to determine the amount to be recorded.
(B) When a misstatement has been established as an anomaly, it may be
excluded when projecting misstatements to the population, however, the

m
effect of any such misstatement, if uncorrected, still needs to be

c. o
considered in addition to the projection of the non-anomalous

emshall project misstatement found in the
misstatements.
s
lawhereas for test of controls, explicit projection
(C) For test of details, the auditor
g
a required.
sample to the population,
of deviation is always
(D) When a misstatement has been established as an anomaly, it must
always be included when projecting misstatements to the population.
(2 Marks)
4. CA Vivek requested management to furnish a written representation relating
to valuation of Trade receivable. Management failed to provide the same. In

m
c. o
the given situation, which of the following actions should not be taken by the

m
c. o
auditor referring SA 580?

em of non-
em s
(A) Re-evaluate the integrity of management and assess the impact
availability of written representation on the reliabilityaof audit evidence
l
las as a whole.
a g
ag (B) Take appropriate actions, including determining the possible effect on
the opinion in the auditor's report in accordance with SA 705 having
regard to the requirement of disclaimer of opinion.

3

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 3 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

(C) Treat the absence of written representation as a disagreement with
management and issue a qualified opinion.
(D) Discuss the matter with management. (2 Marks)
5. Based on the other audit procedures performed by CA Vivek in relation to
trade receivables in the above case study, match the audit procedures with
the relevant audit assertions:

Audit Procedures Assertions
a i. Existence
b ii. Completeness
c iii. Cut-off
d iv. Valuation

Options:
(A) a-ii, b-iii, c-i, d-iv
(B) a-iv, b-iii, c-i, d-ii
(C) a-i, b-ii, c-iv, d-iii
(D) a-ii, b-iii, c-iv, d-i (2 Marks)
Case Scenario - II
Green Peak Ltd., a leading producer of sustainable packaging material
manufactures a range of products including corrugated boxes and paper
products.
For the financial year 2025-26, LMN & Co., Chartered Accountants, were
appointed as the statutory auditors of the company. The audit was led by
CA Aman Verma. The engagement partner CA Verma ensures that the audit team
follows the firm's policies, supervises audit work, and ensures compliance with
professional standards.
CA Verma obtained an understanding of the company's operations and
documented audit plan activities including matters relevant to the overall audit
strategy and audit programme.
During the audit, the audit team performed procedures relating to property, plant
and equipment, including examination of accounting records, supporting

4

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 4 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

documents, fixed asset register, and depreciation calculations in the financial
statements.

m
c. o
Additionally the auditor carried out the following substantive analytical
m
co
procedures to collect various other evidences-

. e m
(i)
m
The auditor compares the current year's administrative expenses with the
e l a s
s
expenses of the previous four years and analysed the fluctuations.
a noticed, that the company pays sales commission at 4% of total sales.a
(ii) lHe
g
g
a Based on total sales recorded during the year, the auditor estimates the
expected commission and compares it with the commission expense recorded
in the books.
(iii) He compared the inventory turnover ratio of the current year with that of
previous years.
(iv) Using historical data of production volume and power consumption, the
auditor develops a statistical model to estimate expected electricity expenses

o m
c
for the current year.

m . (6 to 9)
e relating to the firm's system of quality
Based on the above facts, answer the following:
s
la with SQC 1?
6. Which of the following statements

a g
control is/are correct in accordance
(I) The firm's system of quality control consists of policies designed to be
established separately for each audit engagement.
(II) It is designed to provide reasonable assurance that the firm and its
personnel comply with professional standards and legal requirements.
(III) The responsibility for establishing the firm's system of quality control lies
with the engagement partner of each audit engagement.

m
co
(IV) The firm's system of quality control consists of policies designed to
m .
c. o m
achieve its objectives.

em
(A) (I) and (II) only
la se
las (B) (I) and (III) only
a g
ag (C) (II) only
(D) (II) and (IV) only (2 Marks)

5

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 5 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

7. Suggest the audit team members of LMN & Co. to match the apt combination
from the following information as per SA 300.

Description Elements of Planning
(a) Evaluating compliance with ethical (i) Audit Programme
requirement, including independence
(b) Detailed plan of applying audit (ii) Preliminary
procedures engagement activity
(c) Determination of materiality (iii) Audit Strategy
(d) Consideration of number and (iv) Audit Plan
location of branches for audit

(A) (a)-(iv), (b)-(iii), (c)-(ii), (d)-(i)
(B) (a)-(ii), (b)-(i), (c)-(iv), (d)-(iii)
(C) (a)-(iii), (b)-(iv), (c)-(ii), (d)-(i)
(D) (a)-(ii), (b)-(iv), (c)-(i), (d)-(iii) (2 Marks)
8. As per the understanding of CA Verma, which of the following options, falls
outside the scope of audit of financial statements?
(I) Assessing the physical condition of industrial buildings and heavy &
sophisticated machinery.
(II) Examining the reliability and sufficiency of financial information for
audit purposes.
(III) Determining the suitability of buildings for continued use and estimating
their remaining useful life.
(IV) Ensuring proper disclosure of property, plant and equipment in the
financial statements.
(A) (I) and (III)
(B) (II) and (IV)
(C) (I), (II) and (III)
(D) (I) and (II) (2 Marks)

6

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 6 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

9. CA Verma performed various substantive analytical procedures in the above
case study. Which type of procedure is being performed in each of the given
four circumstances?
m
m c. o
co m
Procedures Type
(i)
m . (a) Ratio Analysis
s e
a s e
(ii) (b) Structural modelling
g la
l a
ag (iv)
(iii) (c) Reasonableness Tests
(d) Trend Analysis
(A) (i)-(c), (ii)-(d), (iii)-(a), (iv)-(b)
(B) (i)-(d), (ii)-(b), (iii)-(a), (iv)-(c)
(C) (i)-(a), (ii)-(c), (iii)-(b), (iv)-(d)
(D) (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b) (2 Marks)

m
Case Scenario - III

. co
XYZ bank, a scheduled commercial bank, is preparing its financial statements for
the financial year ended on 31st March, 2026.
s em
g l a
During the financial year, the bank undertook various lending and investment
a
transactions in the ordinary course of its banking operations. These transactions
involved secured advances and bill discounting activities, giving rise to income
recognition considerations at the year-end.
In respect of its lending portfolio, the bank accounted for interest income
amounting to ` 1.07 crores on advances secured by term deposits, National
Savings Certificates (NSCs), and life insurance policies, even though the amounts
had not been received as of the balance sheet date.

m
co
Further, on 01/01/2026, the bank purchased six-month bills and earned a total

m .
c. o
discount of ` 2.4 crores. Since half of the bill period extended beyond 31st March
m
se
2026, part of the discount is related to the subsequent accounting period.

em la
Additionally, rediscounting charges of ` 0.5 crores were netted off against the

las discount income in the books of account. These transactions require examination
a g
ag to determine whether income has been recognised in accordance with accrual
principles and applicable banking guidelines.
XYZ bank is also a co-lender in a consortium arrangement where several banks
jointly advanced a term loan of ` 150 crore to a corporate borrower. ABC Bank

7

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 7 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

Limited acts as the lead bank and is responsible for collecting and distributing
borrower remittances among the consortium members.
At the year-end, it was observed that XYZ bank had not received its share of
repayment from the lead bank, although the borrower had been remitting
payments to the lead bank. The auditor must evaluate the correct asset
classification and income recognition in respect of XYZ Bank's share of the
consortium advance.
In addition, the bank monitors its loan portfolio in accordance with RBI prudential
norms relating to asset classification. As of March 2026, certain borrowers had
overdue instalments as follows:
Borrower A - 20 days, Borrower B - 30 days, Borrower C - 85 days. The bank
follows Special Mention Account (SMA) framework to identify incipient stress
before accounts become Non-Performing Assets (NPAs).
Based on the above, answer the following: (10 to 12)
10. Since, XYZ Bank recognised interest on advances secured by term deposits,
NSCs, and life insurance policies and earned discount on Purchased bills
where Rediscounting charges were netted off against the discount income.
Which of the following statements correctly reflects the appropriate
accounting treatment?
(A) Interest on secured advances and the entire discount on bills purchased
may both be recognised immediately, and rediscounting charges may be
netted off under accrual principles.
(B) Interest on secured advances may be recognised on an accrual basis
where an adequate margin exists; however on bills purchased only the
portion of discount earned up to 31st March should be recognised, and
rediscounting charges should not be netted off from the discount earned.
(C) Interest on secured advances may be recognised on an accrual basis
where an adequate margin exists; however on bills purchased only the
portion of discount earned up to 31st March should be recognised, and
rediscounting charges should be netted off from the discount earned.
(D) Both interest and discount income should be deferred until actual
receipt, and rediscounting charges must be adjusted against discount
income. (2 Marks)

8

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 8 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

11. In the consortium lending arrangement where ABC Bank Ltd. is the lead bank,
how should XYZ Bank classify its portion of the loan?

m
c. o
(A) Classify as standard, since the borrower has remitted payment to the
m
co
lead bank.

. e m
m
(B) Classify as standard, provided the overall consortium exposure is being
e l a s
sserviced.
a Classify as NPA until XYZ Bank actually receives its share of repaymenta
l(C) g
ag from the lead bank.
(D) Recognize interest income on an accrual basis irrespective of receipt
from the lead bank. (2 Marks)
12. Based on RBI guidelines for Special Mention Accounts (SMA), how should the
borrowers be classified?
(A) Borrower A-SMA 0, Borrower B-SMA 0, Borrower C-SMA 2

o m
(B) Borrower A-SMA 0, Borrower B-SMA 1, Borrower C-SMA 2
c
. B-SMA 1, Borrower C-SMA 2
m
(C) Borrower A-Standard Regular, Borrower

s eB-SMA 2, Borrower C-SMA 2 (2 Marks)
la control for audits of financial statements,
(D) Borrower A-SMA 0, Borrower

a g
13. As part of a firm's system of quality
a monitoring process is designed to provide reasonable assurance that the
firm's policies and procedures are relevant, adequate, and operating
effectively.
Which of the following matter, the engagement partner need not to
document as part of the monitoring element of quality control?
(A) Issues identified with respect to compliance with relevant ethical
requirements and how they were resolved.
m
m .co
c. o
(B) Conclusions on compliance with independence requirements that apply
m
se
to the audit engagement.

s em g la
la
(C) Observations about the efficiency of audit procedures performed or

g
suggestions for improving audit team productivity. a
a (D) Conclusions reached regarding the acceptance and continuance of client
relationships and audit engagements. (2 Marks)

9

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 9 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

14. The engagement partner CA B, while evaluating and reporting on the designs
and efficiency of internal financial controls at GHB Ltd., also highlighted to
the directors, independent directors and the audit committee the manner in
which the Companies Act, 2013 places greater emphasis on the effective
implementation and reporting on the internal control of a company.
With reference to reporting on the internal financial controls system under
the Companies Act, 2013, which of the following statements does not fall
within the nature of responsibility of GHB Ltd.?
(A) In accordance with the terms of reference specified in writing by the
Board, act of every audit committee to include evaluation of internal
financial controls and risk management systems.
(B) Director's responsibility statement to state that the Director has laid
down internal financial controls to be followed by the company and that
such internal financial controls are adequate and were operating
effectively.
(C) Board of Directors have to appoint an expert to state that the internal
financial controls of the company are commensurate with the size and
nature of its business.
(D) In terms of code for Independent Directors, independent directors to get
themselves satisfied that financial controls and systems of risk
management are robust and defensible. (2 Marks)
15. While auditing the financial statements of Triveni Manufacturing Ltd. for the
year ended 31/03/2026, the auditor observed that the company had certain
transactions with MNO Trading Pvt. Ltd. During the audit, it was noted that
MNO Trading Pvt. Ltd. had been struck off by the Registrar of Companies
(ROC) under Sec 248 of the Companies Act, 2013. The transactions between
Triveni Manufacturing Ltd. & MNO Trading Pvt. Ltd. included:
- Purchases of IT hardware during the year amounted to ` 18.50 lakh.
- As at 31 March 2026, ` 4.20 lakh remained outstanding and payable.
- One of the directors of Triveni Manufacturing Ltd. held 15% equity in
MNO Trading Pvt. Ltd.
Which of the following details are required to be disclosed in the financial
statements of Triveni Manufacturing Ltd.?

10

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 10 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

I. Name of the struck-off company (MNO Trading Pvt. Ltd.)
II. Nature of transactions entered into with such company
m
m
III. Balance outstanding on reporting date (`4.20 lakh)
c. o
.co
IV. Total purchase amount from MNO Trading Pvt. Ltd. during the year
s e m
m
eRelationship with the Struck off company, if any
(` 18.50 lakh)
la
l a
V. s a g
ag VI. Date on which MNO Trading Pvt. Ltd. was struck off by the ROC.
(A) I, II, III and IV
(B) I, II, IV and V
(C) I, II and IV
(D) I, II, III and V (2 Marks)
Answer Key
m
MCQ No. Correct Option
. co
1. (B)
s em
2. (A)
g l a
3.
4.
(B)
(C)
a
5. (D)
6. (D)
7. (B)
8. (A)
9. (D)

m
co
10. (B)
m .
c. o m
11. (C)

em
12. (A)
la se
las 13. (C)
a g
ag 14.
15.
(C)
(D)

11

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 11 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

PART – II Descriptive Questions
Question No.1 is compulsory.
Attempt any four questions from the remaining five questions.
Question 1
(a) M/s XYZ & Co., Chartered Accountants, is conducting the statutory audit of
ABC Ltd. During the audit, the engagement partner notices certain unusual
year-end sales transactions that have significantly increased the company's
profits. Management explains that these are genuine transactions and
provide supporting invoices.
However, the engagement partner expresses concern that such unusual year-
end transactions require deeper examination, notwithstanding the
availability of documentation. He emphasizes that an auditor should remain
alert to conditions that may indicate possible misstatements. He further
remarks that although the firm generally follows a rule-based approach to
ethics, auditors should not limit themselves to mere compliance with rules
but also uphold the spirit of ethical principles while conducting an audit.
(i) Determine the attitude that the engagement partner expects the audit
team to maintain in the above situation. Which risks can be reduced
while maintaining such an attitude throughout the audit? (3 Marks)
(ii) Distinguish briefly between the principles-based approach and the rules-
based approach to ethics. (2 Marks)
(b) While auditing the trade receivables of Ocean Limited, CA R plans to select
100 customer balances from a population of 1000 receivables accounts
appearing in the trade receivables ledger. For this purpose, he decides to
select customer account number 5th as the starting point and thereafter select
every 10th account from the ledger until the required sample size is obtained.
Based on the above:
(i) Identify and briefly explain the sampling method being used by CA R in
the above situation. (2 Marks)
(ii) State the important consideration that an auditor should keep in mind
while using this method and how the risk arising from such sampling
can be minimized? (2 Marks)

12

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 12 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

(iii) Further, the audit partner suggests that instead of this approach, CA R
should verify the first 150 customer accounts appearing in the
receivables ledger for the last month. State the sampling method
m
m
suggested by the partner. (1 Mark)
c. o
.co
(c) During the statutory audit of Orion Manufacturing Ltd., the auditor,
s e m
em la
s
CA Raghav Mehta, observed that the company's management had changed

l a
during the financial year. The earlier management resigned midway through
a g
ag While completing the audit, the auditor requested written representations
the year, and a new management team assumed charge thereafter.

from the management regarding their responsibilities for the preparation of
financial statements and other audit-related matters. However, the new
management stated that they could provide written representations only for
the period from the date they assumed office and not for the earlier period
when the previous management was in charge.

m
Examine the above situation and explain with reference to SA 580, the

. co
appropriate date of the written representation and the period that should be

em
covered by such representation. (4 Marks)
Answer
l a s
(a) (i) In the given case, thegengagement partner expects the audit team to
maintain an attitudeaof professional skepticism throughout the audit,
especially while evaluating unusual year-end sales transactions.
Professional skepticism refers to an attitude that includes a
questioning mind, being alert to conditions which may indicate
possible misstatement due to error or fraud, and a critical assessment
of audit evidence.
Maintaining professional skepticism throughout the audit is necessary

o m
c
if the auditor is to reduce the risks of:
m .
c. o • Overlooking unusual circumstances.

s
m
e from audit
s em • Over generalising when drawing conclusions
g l a
la a
observations.

ag • Using inappropriate assumptions in determining the nature,
timing, and extent of the audit procedures and evaluating the
results thereof.

13

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 13 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

(ii) Ethical guidance may follow principles-based approach or rules-based
approach. The essence of principles-based approach to ethics is that it
requires compliance with spirit of ethics. It requires accountants to
exercise professional judgment in every situation based upon their
professional knowledge, skill and expertise. It requires that
accountants should use professional judgment to evaluate every
situation to arrive at conclusions.
However, rules-based approach to ethics strictly follows clearly
established rules. It may lead to a narrow outlook and spirit of ethics
may be overlooked while strictly adhering to rules. Further, rules-
based approach is somewhat rigid as it may not be possible to deal
with every practical situation relying upon rules.
Therefore, it is necessary that spirit of code is followed.
(b) (i) Interval Sampling or Systematic Sampling: Systematic selection is a
selection method in which the number of sampling units in the
population is divided by the sample size to give a sampling interval,
for example; 10 is the sampling interval in given situation (1000/100)
and having determined starting point with customer number 5, each
10th sampling thereafter is selected until the required sample size is
obtained. Although the starting point may be determined haphazardly,
the sample is more likely to be truly random if it is determined by use
of a computerized random number generator or random number
tables.
(ii) Important considerations an auditor should keep in mind while
using this method and how the risk arising from such sampling can
be minimised: When using systematic selection, the auditor would
need to determine that sampling units within the population are not
structured in such a way that the sampling interval corresponds with a
particular pattern in the population. Therefore, systematic sampling
when chosen as a method should be carefully applied to bring together
every type of transaction within its purview.
To minimise the effect of the possible known buyers through a pattern
in the population, more than one starting point may be taken. The
multiple random starting point is taken because it minimises the risk
of interval sampling pattern with that of the population being sampled.

14

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 14 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

(iii) The method selected by the partner is Block Sampling: This method
involves selection of a block(s) of contiguous items from within the
population.
m
m c. o
co
(c) As per SA 580 “Written Representations”, the date of the written

. e m
s
representations shall be as near as practicable to, but not after, the date of

em la
s
the auditor’s report on the financial statements. The written

l a
representations shall be for all financial statements and period(s) referred
a g
ag Because written representations are necessary audit evidence, the auditor’s
to in the auditor’s report.

opinion cannot be expressed, and the auditor’s report cannot be dated,
before the date of the written representations. Furthermore, because 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.
m
. co
The written representations are for all periods referred to in the auditor’s

em
report because management needs to reaffirm that the written

l a s
representations it previously made with respect to the prior periods remain

g
appropriate.
a
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 of 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

m
relevant period(s) still applies.

m .co
c. o
In the given case, CA Raghav Mehta should obtain written representations
m
se
from the current management as near as practicable to, but not after, the

em la
date of the auditor’s report. Further, such written representations must

las a g
cover the entire financial year referred to in the auditor’s report, including

ag the period during which the previous management was in charge. The
inability of the current management to have been present during the earlier
period does not reduce its responsibility for the financial statements as a
whole. Therefore, the auditor is still required to request written

15

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 15 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

representations covering the whole relevant period in accordance with
SA 580.
Question 2
(a) During the audit of Urban Build Constructions Ltd., the auditor reviewed the
accounting information system used for recording and processing financial
transactions in the company. Transactions relating to purchases, payroll and
expenses are recorded through this system by different departments.
During discussion with employees, the auditor realized that there is limited
documentation how financial information flows through the system.
What are the areas relating to the entity's information system and related
business processes relevant to financial reporting that the auditor should
obtain an understanding as a part of risk assessment procedures? (5 Marks)
(b) PQR & Associates, a large firm of Chartered Accountants, have been
appointed as the auditors of a listed company. CA P, an engagement partner,
gathered his audit team to explain them the importance of audit programme.
The audit team was impressed by the advantages of audit programme and
decided to strictly follow the same. CA P, however, explained that an audit
programme can have disadvantages also, if not used diligently.
(i) What are the Disadvantages of an Audit programme (Any 3)? (3 Marks)
(ii) How can these Disadvantages be minimized? (2 Marks)
(c) You are appointed as the auditor of JK Apparels Ltd., a public limited
company. The company entered into an arrangement during the financial
year 2025-26 with one of its promoters Mr. K whose son is a director in
JK Apparels Ltd. Under this arrangement, the company acquired an
immovable property owned by the promoter. As consideration for the
purchase, the company allotted 2% of its equity share capital to the promoter
instead of making payment in cash. The title deed of the property has been
duly transferred and held in the name of the company.
(i) Discuss the reporting requirements of the auditor under CARO, 2020.
(2 Marks)
(ii) Discuss the disclosure requirements of Shareholding of Promoters under
Schedule III (Part I) of the Companies Act, 2013. (2 Marks)

16

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 16 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

Answer
(a) The auditor shall obtain an understanding of the information system,
m
c. o
including the related business processes, relevant to financial reporting,
m
co
including the following areas: -

. e m
(i)
m a
The classes of transactions in the entity’s operations that are significant
e l s
s
to the financial statements.

l(ii)a The procedures by which those transactions are initiated, recorded,a g
ag processed, corrected as necessary, transferred to the general ledger
and reported in the financial statements.
(iii) The related accounting records, supporting information and specific
accounts in the financial statements that are used to initiate, record,
process and report transactions.
(iv) How the information system captures events and conditions that are
significant to the financial statements. An information system consists
m
co
of infrastructure (physical and hardware components), software,
.
em
people, procedures, and data. Many information systems make

s
extensive use of information technology (IT). Information system

l a
should provide qualitative financial information.
g process used to prepare the entity’s financial
a
(v) The financial reporting
statements.
(vi) Controls surrounding journal entries.
Alternate Answer
The Entity’s Risk Assessment Process
The auditor shall obtain an understanding of whether the entity has a

m
co
process for:

m .
c. o m
(i) Identifying business risks relevant to financial reporting objectives

em
(ii) Estimating the significance of the risks
la se
las (iii) Assessing the likelihood of their occurrence
a g
ag (iv) Deciding about actions to address those risks
(v) The entity’s risk assessment process forms the basis for the risks to be
managed. If that process is appropriate, it would assist the auditor in

17

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 17 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

identifying risks of material misstatement. Risks can arise or change
due to factor such as new technology, new business models, products
or activities, changes in operating environment etc. Whether the
entity’s risk assessment process is appropriate to the circumstances
is a matter of judgment.
(b) (i) Some disadvantages are also there in the use of audit programmes
but most of these can be removed by following some concrete
steps. The disadvantages of audit program are:
(1) The work may become mechanical and particular parts of the
programme may be carried out without any understanding of the
object of such parts in the whole audit scheme.
(2) The programme often tends to become rigid and inflexible
following set grooves; the business may change in its operation of
conduct, but the old programme may still be carried on. Changes
in staff or internal control may render precaution necessary at
points different from those originally decided upon.
(3) Inefficient assistants may take shelter behind the programme i.e.,
defend deficiencies in their work on the ground that no instruction
in the matter is contained therein.
(4) A hard and fast audit programme may kill the initiative of efficient
and enterprising assistants.
(ii) All these disadvantages may be minimised/eliminated by the
auditor in the following manner by:
(1) imaginative supervision of the work carried on by the assistants;
(2) having a receptive attitude as regards the assistants;
(3) encouraging the assistants to observe matters objectively and
(4) encouraging assistants to bring significant matters to the notice of
supervisor/principal.
(c) (i) Disclosure requirements of shareholding of promoters under
Schedule III (Part I) of the Companies Act, 2013: As per clause (xv)
of Paragraph 3 of CARO, 2020, the auditor is required to report -
whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the

18

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 18 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

provisions of section 192 of the Companies Act, 2013 have been
complied with.

m
c. o
(ii) A company shall disclose Shareholding of Promoters* as below:

m
.co
Shares held by promoters at the end of the % Change during

s e m
m
year
e S.
the year***
la
a s
l No.
Promoter No. of % of total
a g
ag
Name shares shares**
Total
* Promoter here means promoter as defined in the Companies Act,
2013.
** Details shall be given separately for each class of shares
***percentage change shall be computed with respect to the number at
the beginning of the year or if issued during the year for the first time

m
then with respect to the date of issue.
Question 3 c. o
s emEngineering Ltd. are audited for the year
a to perform tests of controls over purchase
(a) Alpha Manufacturing Ltd. and Beta

g l
ended 31 March 2026. CA Y plans
a
transactions in both companies.
The following information is available:

Particulars Alpha Beta
Manufacturing Ltd. Engineering Ltd.
Population of purchase 12,000 12,000
invoices
Tolerable deviation rate 5%
m5%
oSame
m .c
c. o
Reliance the auditor places Same
m
se
on the operating

s em effectiveness of control
g la
gla Expected deviation rate 2%
a 6%

a (i) Briefly explain factors to be considered by CA Y in determining the
sample size for tests of controls. (4 Marks)

19

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 19 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

(ii) Based on the above information, which company will require a larger
sample size and why? (1 Mark)
(b) During the statutory audit of Moon Ltd., the auditor finalized the auditor's
report. While reviewing the draft, the audit team was unsure about where the
"Basis for Opinion" section should be placed in the auditor's report and what
it should contain as per auditing standards. As a senior auditor, explain:
(i) Where should the "Basis for Opinion" section be included in the auditor's
report? (1 Mark)
(ii) What are the key elements included in this section? (4 Marks)
(c) During the audit of a manufacturing company, the engagement team
encountered several complex areas requiring careful evaluation. The audit
senior reminded the team that matters involving higher judgement must be
documented more thoroughly.
An important factor in determining the form, content and extent of audit
documentation of significant matters is the extent of professional judgement
exercised in performing the work and evaluating the results. Explain, stating
clearly the examples of significant matters (referring SA 230). (4 Marks)
Answer
(a) (i) The following are factors that the auditor may consider when
determining the sample size for tests of controls. These factors, which
need to be considered together, assume the auditor does not modify
the nature or timing of tests of controls or otherwise modify the
approach to substantive procedures in response to assessed risks.
(I) When there is an increase in the extent to which the auditor’s risk
assessment takes into account relevant controls. The more
assurance the auditor intends to obtain from the operating
effectiveness of controls, the lower the auditor’s assessment of the
risk of material misstatement will be, and the larger the sample
size will need to be. When the auditor’s assessment of the risk of
material misstatement at the assertion level includes an
expectation of the operating effectiveness of controls, the auditor
is required to perform tests of controls. Other things being equal,
the greater the reliance the auditor places on the operating
effectiveness of controls in the risk assessment, the greater is the

20

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 20 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

extent of the auditor’s tests of controls (and therefore, the sample
size is increased). Thus, sample size will increase.

m
c. o
(II) If there is an increase in the tolerable rate of deviation, then sample

m
co
size will decrease, as lower the tolerable rate of deviation, larger the

. e m
s
sample size needs to be. Tolerable error is the maximum error in the

em population that auditor is ready to accept in a given sample size.
la
l a s Smaller the tolerable error, larger will be the sample size.
a g
ag (III) When there is an increase in the expected rate of deviation of the
population to be tested then sample size will increase, as higher the
expected rate of deviation, larger the sample size needs to be so that
the auditor is in a position to make a reasonable estimate of the
actual rate of deviation. Factors relevant to the auditor’s
consideration of the expected rate of deviation include the auditor’s
understanding of the business (in particular, risk assessment
procedures undertaken to obtain an understanding of internal

m
co
control), changes in personnel or in internal control, the results of

.
audit procedures applied in prior periods and the results of other

em
audit procedures. High expected control deviation rates ordinarily

l a s
warrant little, if any, reduction of the assessed risk of material
misstatement.
a g
(IV) An increase in the auditor’s desired level of assurance that the
tolerable rate of deviation is not exceeded by the actual rate of
deviation in the population will increase the sample size. Thus, the
greater the level of assurance that the auditor desires that the results
of the sample are in fact indicative of the actual incidence of deviation
in the population, the larger the sample size needs to be.
(V) In case of large populations, the actual size of the population has
m
co
little, if any, effect on sample size. For small populations however,
m .
c. o m
audit sampling may not be as efficient as alternative means of

se
obtaining sufficient appropriate audit evidence. Therefore, there will

s em be negligible effect on sample size due to increase in the number of
g la
la a
sampling units in the population.

ag (ii) Alpha Manufacturing Ltd and Beta Engineering Ltd both have the same
population of purchase invoices of 12,000, the same tolerable
deviation rate of 5%, and the same level of reliance placed by the
auditor on the operating effectiveness of controls. The only difference
21

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 21 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

between the two companies is the expected deviation rate, which is 2%
for Alpha Manufacturing Ltd and 6% for Beta Engineering Ltd.
As discussed above, sample size increases when the expected rate of
deviation increases. A higher expected deviation rate indicates that the
auditor expects more control failures in the population and, therefore,
needs to examine a larger number of items to make a reliable estimate
of the actual deviation rate.
Accordingly, Beta Engineering Ltd will require a larger sample size
because its expected deviation rate of 6% is higher than the 2%
expected deviation rate of Alpha Manufacturing Ltd.
(b) (i) Basis for Opinion: The auditor’s report shall include a section, directly
following the Opinion section, with the heading “Basis for Opinion”
(ii) Key elements included in this section are:
(I) States that the audit was conducted in accordance with Standards
on Auditing;
(II) Refers to the section of the auditor’s report that describes the
auditor’s responsibilities under the SAs;
(III) Includes a statement that the auditor is independent of the entity
in accordance with the relevant ethical requirements relating to
the audit and has fulfilled the auditor’s other ethical
responsibilities in accordance with these requirements.
(IV) States whether the auditor believes that the audit evidence the
auditor has obtained is sufficient and appropriate to provide a
basis for the auditor’s opinion.
(c) Examples of significant matters include: Matters that give rise to significant
risks.
(i) Results of audit procedures indicating (a) that the financial statements
could be materially misstated, or (b) a need to revise the auditor’s
previous assessment of the risks of material misstatement and the
auditor’s responses to those risks.
(ii) Circumstances that cause the auditor significant difficulty in applying
necessary audit procedures.

22

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 22 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

(iii) Findings that could result in a modification to the audit opinion or the
inclusion of an Emphasis of Matter Paragraph in the auditor’s report.

m
c. o
Question 4
m
.co
(a) Bright Star Foods Limited processes a large volume of daily sales and

s e m
em
purchases using automated accounting software. Most transactions are
la
l a s
recorded automatically, and management claims that the system controls
a g
ag During the audit of the company's financial statements, the auditor needs to
reduce the need for manual intervention.

ensure that transactions are recorded accurately and completely. The auditor
also needs to decide which audit test to use, when, and in what combination.
Discuss the different ways in which testing is performed in an automated
environment and explain which combinations of audit tests are generally
considered most effective and efficient. (5 Marks)

m
co
(b) While auditing the financial statements of Moon Ltd. for the year ended
.
em
31 March 2026, the auditor was verifying the disclosures relating to trade

a s
payables and other liabilities. During the course of the audit, it was noticed
l
g
that the company has certain outstanding balance payable to Micro and
Small Enterprises. a
The auditor decided to ensure that the disclosures required under Schedule
III of the Companies Act 2013, in respect of such enterprises have been
appropriately made in the notes to accounts.

State the disclosures that the auditor should verify in respect of Micro and
Small Enterprises while auditing trade payables and other liabilities.

o m (5 Marks)
m .c
c. o (c) Apex em
Infra Ltd. is a mid-sized infrastructure company engaged

s
in

em construction of highways and bridges.
a
l disputes with
l as g
a heavy reliance on
During the statutory audit, the auditor notices frequent

ag contractors, pressure on site managers to meet targets,
automated data processing, and aggressive working capital management by
the finance department. The auditor realises that mere verification of
accounting records is insufficient to form an opinion. With reference to the
23

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 23 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

above case, explain why an auditor is expected to have working knowledge
of disciplines other than auditing, specifically in relation to:

(a) Statistics & Mathematics
(b) Financial Management
(c) Data Processing

(d) Behavioural Science (4 Marks)
Answer
(a) i. There are basically four types of audit tests that should be used. These
are inquiry, observation, inspection and reperformance. For example,
when testing in an automated environment, some of the more
common methods are: (i) Obtain an understanding of how an
automated transaction is processed by doing a walkthrough of one
end-to-end transaction using a combination of inquiry, observation
and inspection. (ii) Observe how a user processes transactions under
different scenarios. (iii) Inspect the configuration defined in an
application.
ii. Inquiry is the most efficient audit test but it also gives the least audit
evidence. Hence, inquiry should always be used in combination with
any one of the other audit testing methods. Inquiry alone is not
sufficient.
iii. Re-performance is most effective as an audit test and gives the best
audit evidence. However, testing by reperformance could be very time
consuming and least efficient most of the time.
iv. Generally, applying inquiry in combination with inspection gives the
most effective and efficient audit evidence.
v. However, which audit test to use, when and in what combination, is a
matter of professional judgment and will vary depending on several
factors including risk assessment, control environment, desired level of
evidence required, history of errors/misstatements, complexity of
business, assertions being addressed etc. The auditor should document
the nature of test (or combination of tests) applied along with the
judgements in the audit file.

24

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 24 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

(b) The auditor should ensure whether the following disclosures as
required under Schedule III (Part I) to Companies Act, 2013 have been
made: Whether the Company has disclosed the following details relating
m
m
to micro and small enterprises in the notes to accounts:
c. o
(i)
.co
the principal amount and the interest due thereon (to be shown
s e m
e m la
s
separately) remaining unpaid to any supplier at the end of each

l a accounting year.
a g
ag (ii) the amount of interest paid by the buyer in terms of section 16 of the
Micro, Small and Medium Enterprises Development Act, 2006, along
with the amount of the payment made to the supplier beyond the
appointed day during each accounting year.
(iii) the amount of interest due and payable for the period of delay in
making payment (which have been paid but beyond the appointed day
during the year) but without adding the interest specified under the

m
Micro, Small and Medium Enterprises Development Act, 2006.

. co
(iv) the amount of interest accrued and remaining unpaid at the end of
each accounting year.
s em
g l a
(v) the amount of further interest remaining due and payable even in the
a
succeeding years, until such date when the interest dues above are
actually paid to the small enterprise, for the purpose of disallowance
of a deductible expenditure under section 23 of the Micro, Small and
Medium Enterprises Development Act, 2006.
(vi) The following ageing schedule shall be given for Trade payables due for
payment:
Trade Payables ageing schedule

o m
m c
. due (Amount in `)

c. o Particulars
s em
Outstanding for following periods from

s em date of payment#
g a
l than Total
gla Less than 1-2 2-3
a
More

a (i) MSME
1 year years years 3 years

(ii) Others

25

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 25 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

(iii) Disputed Dues-
MSME
(iv) Disputed Dues
Others

# Similar information shall be given where no due date of payment is specified
in that case disclosure shall be from the date of the transaction. Unbilled dues shall
be disclosed separately.

(c) In the given case of Apex Infra Ltd., the auditor observed disputes with
contractors, pressure on site managers, dependence on automated systems
and aggressive working capital practices. These factors indicate that mere
checking of books of account is not sufficient and that the auditor is
required to possess working knowledge of disciplines other than auditing.
(a) Auditing and Statistics & Mathematics: Auditor is expected to have
the knowledge of statistical sampling for meaningful conclusions and
mathematics for verification of inventories. In the case of Apex Infra
Ltd., where large-scale construction activities and inventories of
construction materials are involved, statistical techniques help the
auditor in selecting representative samples and drawing reliable
conclusions from voluminous transactions and records.
(b) Auditing and Financial Management: Auditor is also expected to
have knowledge about various financial techniques such as working
capital management, funds flow, ratio analysis, capital budgeting etc.
Since the finance department of the company is following aggressive
working capital management practices, the auditor requires
understanding of financial management concepts to assess liquidity
position, evaluate financial risks and analyse whether such practices
may lead to possible misstatements in the financial statements.
(c) Auditing and Data Processing: EDP auditing in itself is developing as
a discipline in itself. As the company heavily relies on automated data
processing systems, the auditor should understand the functioning of
computerised accounting systems, internal controls in EDP
environment and risks relating to processing of electronic data to
ensure reliability and accuracy of financial information.

26

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 26 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

(d) Auditing and Behavioural Science: Knowledge of human behaviour
is essential for an auditor to effectively discharge his duties. In the
given case, pressure on site managers to achieve targets and frequent
m
m
disputes with contractors may create conditions conducive to
c. o
.co
manipulation, bias or fraud. Understanding behavioural aspects helps
s e m
em
the auditor in assessing management attitude, identifying unusual
la
l a sconduct and evaluating the possibility of intentional misstatements.
a g
a(a)g ZX Technologies Ltd., a listed company engaged in software development,
Question 5

decided to reward certain key employees and directors for their contribution
towards development of proprietary technology and process improvements.
Accordingly, the company decided to issue shares to selected employees at a
concessional price in consideration of their technical know-how.
(i) Identify and briefly explain the type of shares the company is planning

m
to issue. (1 Mark)

. co
(ii) State the conditions that the auditor should verify which must be

em
complied with for valid issue of such shares under the Companies Act,
2013.
l a s (4 Marks)

equipment from the same aglessor.
(b) STP Ltd. has entered into lease arrangements for two different categories of
The key terms of the arrangements are
summarised below:

Particulars Manufacturing Specialised
equipment Manufacturing
Equipment
Lease period 5 years 8 years
Estimated economic life 10 years
o m 8 years
m .c
c. o m
Transfer of ownership NO NO

s e by STP Ltd.
em a Available
Insurance and major maintenance Borne by lessor Borne

s g lNot
la a
Alternative use after lease period Available

ag (i) Analyse the above arrangements and determine the appropriate
classification of lease in case of Manufacturing Equipment and
Specialised Manufacturing Equipment. (1 Mark)

27

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 27 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

(ii) As a senior auditor of STP Ltd., suggest the accounting treatment and
Tax benefits for: (4 Marks)
• Manufacturing Equipment
• Specialised Manufacturing Equipment
(c) ABC Ltd. is a listed company with an annual turnover of ` 1,000 crores. The
company has appointed three joint auditors, ST and Associates, TR and
Associates and PQ and Associates, to conduct the statutory audit for the
financial year 2025-26.
Since ABC Ltd. is a listed entity, the joint auditors are required to comply with
ethical requirements relating to independence. Before commencing the audit,
the audit firms held a meeting with the Audit Committee and submitted
written communications regarding their independence. During the meeting,
the Audit Committee asked the auditors to clarify the specific matters that
must be included in such communication to ensure compliance with
professional requirements.
With reference to SA 260, explain the matters that should be included in the
communication regarding auditor's independence to those charged with
governance in case of listed entities. (4 Marks)
Answer
(a) (i) As per the facts given in the case, the company ZX Technology Ltd. is
planning to issue Sweat equity shares.
“Sweat Equity Shares” mean equity shares issued by the company to
employees or directors at a
(I) discount or
(II) for consideration other than cash
for providing know-how or making available right in the nature of
intellectual property rights or value additions, by whatever name
called.
(ii) As per Section 54 of the Companies Act, 2013 the auditor needs to
verify that the following conditions have been complied with:
(I) the issue is authorized by a special resolution passed by the company;

28

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 28 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

(II) the resolution specifies the number of shares, the current market
price, consideration, if any, and the class or classes of directors or
employees to whom such equity shares are to be issued;
m
m c. o
co
(III) where the equity shares of the company are listed on a recognised

. e m
s
stock exchange, the sweat equity shares are issued in accordance

em la
s
with the regulations made by the Securities and Exchange Board in

l a this behalf and if they are not so listed, the sweat equity shares are
a g
ag
issued in accordance with such rules as may be prescribed.
(IV) the Sweat Equity Shares issued by the company are of a class of
shares already issued by them.
(b) (i) In case of Manufacturing Equipment, Lease is classified as
Operating Lease due to following reasons:
• Lease term extends to less than 75% of the projected useful life of
the leased asset. In the given case, estimated economic life is 10

m
c. o
years and lease period is 5 years which is significantly less than
75%.

e m lease payments. Insurance and major
s by lessor.
• Lessee pays only the monthly

l a
maintenance are borne
gManufacturing Equipment, Lease is classified as
a
In case of Specialised
Finance Lease, due to following reasons:
• Lease term is equal to estimated economic life of the asset under
the lease arrangement.
• Lessee bears insurance and major maintenance.
(ii) In case of Manufacturing Equipment: Accounting treatment:

m
Operating lease is generally treated like a renting arrangement. That

m c. o
means, the lease payments are treated as operating expenses and the

c. o em payment
asset does not appear as an asset on lessee’s balance sheet.
Tax Benefit: Since operating lease is as good as renting,slease
s em g la claimed by the
la a
is considered as expense. No depreciation can be

ag lessee.
In case of Specialised Manufacturing Equipment: Accounting
treatment: Finance lease is treated like loan arrangement. Hence, the

29

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 29 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

asset ownership is considered of that of the lessee and thus appears
on the balance sheet of the lessee.
Tax Benefit: Lessee can claim both interest and depreciation expense
as financial lease is treated like a loan.
(c) As per SA 260 “Communication with Those Charged with Governance”, in
case of listed entities, the auditor shall include following matters in the
communication regarding auditor’s independence to those charged with
governance:
(I) A statement that the engagement team and others in the firm as
appropriate, the firm and, when applicable, network firms have
complied with relevant ethical requirements regarding independence
and
(II) (i) All relationships and other matters between the firm, network
firms, and the entity that, in the auditor’s professional judgment,
may reasonably be thought to bear on independence. This shall
include total fees charged during the period covered by the
financial statements for audit and non-audit services provided by
the firm and network firms to the entity and components
controlled by the entity. These fees shall be allocated to
categories that are appropriate to assist those charged with
governance in assessing the effect of services on the
independence of the auditor and
(ii) The related safeguards that have been applied to eliminate
identified threats to independence or reduce them to an
acceptable level.
Question 6
(a) M/s PJ Shrimali & Co., Chartered Accountants, were appointed as the
statutory auditors of Pristine Limited. Before commencing the audit, the
auditors issued an engagement letter to the Board of Directors confirming
the terms of the audit engagement.
The letter described the objective of the audit, the scope of work to be
performed, and certain matters relating to the conduct of the audit. It also
contained a specific section explaining the responsibilities of the auditor
while performing the audit of financial statements.

30

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 30 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

With reference to the above situation, illustrate the responsibilities of the
auditor (Any 5) that are generally included in an engagement letter in
accordance with SA 210. (5 Marks)
m
m c. o
co
(b) The financial statements of SUN Ltd. for the year ended 31st March, 2026

. e m
s
include corresponding figures for the year ended 31st March, 2025. The prior

em la
s
period financial statements were audited by a predecessor auditor. The

l a
current auditor is permitted by law and regulation to refer to the predecessor
a g
ag (i) State and briefly explain the type of paragraph that the auditor should
auditor's report on the corresponding figures and decides to do so.

include in the auditor's report in the above circumstances. (2 Marks)
(ii) With reference to SA 710, list the information that should be included in
this paragraph regarding the prior period financial statements.
(3 Marks)
(c) SP Co-operative Ltd. is a large co-operative organisation engaged in multiple
m
co
activities. During audit, the auditor observed that although the entity
.
em
maintained few primary books of accounts such as the cash book and general

s
ledger, several subsidiary books and registers maintained were either

l
incomplete or not maintained.
g a
a
The management contended that for co-operative organisation,
maintenance of the subsidiary books and registers is not necessary.
As an auditor, you are required to guide the management about the
important subsidiary books and registers that should normally be maintained
by a large co-operative organisation. (4 Marks)
OR

m
(c) Discuss examples of the factors that the auditor may consider significant in

m
directing the engagement team's efforts while establishing the overall audit
.co
c. o Answer m
strategy. (4 Marks)

em l a included in an se
las (a) The responsibilities of the auditors that are
a g
generally

ag engagement letter in accordance with SA 210 “Agreeing the Terms of Audit
Engagements” are as follows:

31

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 31 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

(i) Conducting audit in accordance with Standards on Auditing (SAs)
issued by the Institute of Chartered Accountants of India (ICAI). These
Standards require compliance with ethical requirements. As part of an
audit in accordance with SAs, exercise professional judgment and
maintain professional skepticism throughout the audit.
(ii) Identifying and assessing the risks of material misstatement of the
financial statements, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence
that is sufficient and appropriate to provide a basis for auditor’s
opinion. The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions, misrepresentations, or
the override of internal control.
(iii) Obtaining an understanding of internal control relevant to the audit in
order to design audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion on the
effectiveness of the company’s internal control. Communicating in
writing any significant deficiencies in internal control relevant to the
audit of the financial statements that have been identified during the
audit.
(iv) Evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made
by management.
(v) Conclude on the appropriateness of management’s use of the going
concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the company’s ability to
continue as a going concern. If the auditor concludes that a material
uncertainty exists related to going concern, the auditor is required to
draw attention in the auditor’s report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify
the auditor’s opinion. Such conclusions are based on the audit
evidence obtained up to the date of the auditor’s report. However,
future events or conditions may cause the company to cease to
continue as a going concern.

32

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 32 of 34

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWERS AUDITING AND ETHICS

(vi) Evaluating the overall presentation, structure and content of the
financial statements, including the disclosures, and whether the
financial statements represent the underlying transactions and events
m
m
in a manner that achieves fair presentation.
c. o
.co
(vii) Because of the inherent limitations of an audit, together with the
s e m
em la
s
inherent limitations of internal control, there is an unavoidable risk that

l a some material misstatements may not be detected, even though the
a g
a(b)g (i) As per SA 710 “Comparative Information - Corresponding Figures and
audit is properly planned and performed in accordance with SAs.

Comparative Financial Statements”, If the financial statements of the
prior period were audited by a predecessor auditor and the auditor is
permitted by law or regulation to refer to the predecessor auditor’s
report on the corresponding figures and decides to do so, the auditor
shall include “Other Matter paragraph” in the auditor’s report.

m
Other Matter Paragraphs in the Auditor’s Report: Other Matter

co
paragraph is a paragraph included in the auditor’s report that refers to
.
em
a matter other than those presented or disclosed in the financial

l a s
statements that, in the auditor’s judgement, is relevant to users’

g
understanding of the audit, the auditor’s responsibilities or the
auditor’s report.
a
(ii) List of information that should be included in Other Matter paragraph
regarding the prior periods financial statements are as follows:
(I) That the financial statements of the prior period were audited by
the predecessor auditor;
(II) The type of opinion expressed by the predecessor auditor and, if
the opinion was modified, the reasons therefore; and

o m
m c
. books
(III) The date of that report.

c. o (c) Inandcaseregisters m
etotals will be
of large scale co-operative organisation, different subsidiary
s
em shall be maintained and the daily summary
l a
l as transferred to main Cash Book. For example:
a g
ag (i) Daily cash sales summary register.
(ii) A register of collection from debtors if credit sales are allowed by
bye-laws of society.

33

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 33 of 34

SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

(iii) A register of recovery of loans from salaries and directly by receipts
from members in case of credit society.
(iv) Loan disbursement register in case of credit society.
(v) Any other columnar subsidiaries depending upon the nature and
functions of society.
OR
(c) Examples of the factors that the auditor may consider significant in
directing the engagement team’s efforts while establishing the overall audit
strategy are listed as under:
• Volume of transactions which may determine whether it is more
efficient for the auditor to rely on internal control.
• Significant industry developments such as changes in industry
regulations and new reporting requirements.
• Significant changes in the financial reporting framework, such as
changes in accounting standards.
• Other significant relevant developments, such as changes in the legal
environment affecting the entity.

34

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 34 of 34