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

FOR CA FINAL EXAM PREPARATION

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

CA Final 2026 Suggested Answers
SUBJECT DATE

Paper 3 Advanced Auditing, Assurance and Professional Ethics May 2026

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 3: ADVANCED AUDITING,
ASSURANCE AND PROFESSIONAL ETHICS
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PART – I Multiple Choice Questions

g la Case Scenario - I
Integrated a
aMyra Developers Ltd. ('MDL') is a prominent, publicly listed conglomerate
primarily engaged in the development of "Smart City" infrastructure and large-
scale urban transit systems. The Company currently manages several high-value
projects under the Service Concession Arrangement (SCA) model. Effective
Financial Year 2025-26, M/s. MS & Associates, Chartered Accountants were re-
appointed as the statutory auditors, for a period of five years, with CA Raja as the
Engagement Partner. To comply with the firm's quality control policies for high-

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risk listed clients, CA Puja was designated as the Engagement Quality Control
Reviewer (EQCR).

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The audit environment became increasingly during the final quarter of

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Assets, which are valued basedg on discounted future cash flows from projected
the year. A primary area of concern involved the valuation of Service Concession

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toll collections and government subsidies. Due to the high degree of estimation
uncertainty and specialized mathematical models involved, CA Raja determined
this to be a "significant risk" area. To address this, the firm engaged a third-party
valuation specialist. CA Raja verified the expert's professional membership and
checked two previous project reports the expert had completed for other firms.
However, he chose not to delve into the specific discount rates or growth
assumptions used in the current model, citing that his decade-long experience in

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construction auditing provided him with enough "intuitive comfort" to accept the

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c. o As the audit progressed into April 2026, the engagement team
expert's final figures without further technical challenge.
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s Emerald Ventures Private Ltd. Investigation revealed that g
transaction involving an unsecured, interest-free loan of ` 15 crores

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the spouse of MDL's
Managing Director holds a 30% equity stake in Emerald Ventures. The Board was
just informed about this transaction without any specific details and the board
approvals were entirely bypassed. When confronted, the CFO argued that the loan
was a 'temporary bridge' for a sub-contractor and that the amount was negligible,

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SUGGESTED ANSWERS FINAL EXAMINATION: MAY 2026

representing less than 1% of MDL's total asset base and thus did not warrant any
disclosure.
Concurrent with the financial review, the team evaluated MDL's compliance with
broader regulatory frameworks. It was discovered that the Environmental
Management Authority had issued a 'Show Cause Notice' to MDL for failing to
renew the mandatory operating licenses for three major project sites. These
licenses are fundamental to the Company's legal right to operate, while these
projects continued to generate revenue and no financial penalties had been
crystallized by the balance sheet date. CA Raja noted the non-compliance in the
working papers but concluded that since it had no 'direct effect' on the calculation
of the current year's depreciation or revenue, it did not require specific procedures
beyond a standard management representation letter.
The audit report was formally signed dated May 15, 2026. However, a week later,
on May 22, 2026, before the Company had printed and dispatched the annual
reports to the shareholders, a catastrophic fire occurred at the Company's central
logistics hub. The fire decimated specialized equipment and inventory worth
` 40 crores. Since the insurance policy for that specific hub had lapsed two months
prior, the loss was total. When CA Raja requested management to adjust the
financial statements or at least include a detailed note for the subsequent event,
the Board refused, claiming that auditor’s responsibility for FY 2025-26 accounts
ended the moment the audit report was signed off.
Based on the above facts, answer the following Q. Nos. 1 to 5 by choosing the
most appropriate option:
1. Considering the mandatory requirements for listed entities, which of the
following represents a lapse in objective evaluation of an EQCR?
(A) EQCR has made a review of the financial statements and the proposed
auditor's report.
(B) EQCR did not specifically evaluate and document the engagement
team's assessment of the firm's independence prior to report finalization.
(C) EQCR disagreed with the engagement partner's reporting conclusion but
escalated the matter to the firm's technical committee as per policy.
(D) EQCR restricted the detailed review to areas involving significant
judgment instead of reviewing all routine audit documentation.
(2 Marks)
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2. Regarding the "Show Cause Notice" and the expired environmental licenses,

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how should the auditor's responsibility be categorized under the standards

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on auditing?
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(A) The auditor's responsibility is limited to performing specified audit
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procedures, specifically inquiry and inspection, to identify non-compliance
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that may have a material effect on the financial statements.
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ag (B) The auditor must obtain sufficient appropriate audit evidence regarding
compliance because these regulations have a direct effect on the
determination of material amounts and disclosures.
(C) Since the non-compliance is "fundamental to the operating aspects," the
auditor must treat this as a "direct effect" law and perform extensive
substantive testing on all environmental filings.
(D) No responsibility exists under the auditing standards because the legal

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non-compliance had not resulted in a quantified financial penalty or
"direct" monetary misstatement by the year-end. (2 Marks)

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3. Given the dispute over the ` 15 crore
spouse held shares, what is theamandatory
to a Company in which the MD's

& Associates under CARO g
l requirement for M/s. MS

a 2020?
(A) Since the amount is less than 1% of the total assets, it is considered
"immaterial" for CARO purposes and no mention is required.
(B) The auditor must state whether the provisions of Section 185 and 186
have been complied with, and since they have not, provide the specific
details of the non-compliance.

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(C) The auditor should report this under the "Related Party Transactions"

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clause of CARO only if the transaction was not at "arm's length,"
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regardless of Section 185 compliance.

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(D) Because the transaction involves a spouse and not the Director

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4. Following the warehouse fire on May 22, 2026, and management's
(2 Marks)

subsequent refusal to amend the financial statements, which is the most
appropriate course of action for CA Raja?

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SUGGESTED ANSWERS FINAL EXAMINATION: MAY 2026

(A) He should issue a "Qualified Opinion" immediately, dating the new
report May 22, 2026, to account for the unadjusted inventory loss.
(B) As the report is already signed, he should inform the management that
he will "withdraw" his signature, effectively cancelling the previous
report via a public notice.
(C) He must notify those charged with governance not to issue the financial
statements to third parties; if they are still issued, he must take steps to
prevent reliance on the report.
(D) He should include an "Emphasis of Matter" paragraph in the next year's
audit report (FY 2026-27) to explain the loss that occurred in the previous
period. (2 Marks)
5. CA Raja's reliance on the valuation expert's findings for the Service
Concession Assets was based on his 'intuitive comfort' and the expert's
professional credentials. With reference to relevant Standard on Auditing,
which of the following statements is appropriate?
(A) CA Raja's approach is appropriate because an auditor is not expected to
review the assumptions and methods of a specialized valuer and is
entitled to rely on the expert's professional membership as sufficient
evidence of the reliability of the work.
(B) CA Raja failed to meet the requirements of the standards because he did
not evaluate the adequacy of the expert's work, which includes
evaluating the relevance and reasonableness of the expert's significant
assumptions and methods.
(C) The auditor's reliance is technically deficient because the engagement of
a third-party expert for a 'significant risk' area automatically requires
the Engagement Quality Control Reviewer to perform an independent
re-calculation of the model.
(D) CA Raja acted correctly by focusing on the expert's previous project
reports for other firms, as this fulfils the requirement to obtain a
sufficient understanding of the expert's field of expertise to verify the
final valuation figures. (2 Marks)

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Integrated Case Scenario - II
Horizon Tech-Solutions Ltd. (HTSL) is a prominent, unlisted public company
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specializing in providing end-to-end cloud infrastructure and digital
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transformation services. M/s. JK & Associates, Chartered Accountants were the
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Statutory Auditors, with CA Vicky as the engagement partner for third consecutive
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year. HTSL's operations are highly decentralized, with its primary revenue driver
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being the 'HR-Flow' platform. To maintain cost efficiency, HTSL has outsourced
its entire data processing and payroll calculation engine to Data-Sync Private Ltd.
(DSPL). During the audit planning phase in October 2025, the CFO, Mr. Rane,
received an urgent email from an address nearly identical to the Group
Chairman's, requesting a 'discreet' $50,000 wire transfer for an undisclosed
project. Simultaneously, several junior staff members in the accounts department
reported receiving urgent SMS alerts claiming their corporate login credentials
had expired and providing a link to a 'Security Portal' to prevent account lockout.
Later, in December 2025, the IT Manager was contacted by a person claiming to
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be from the Company's telecom provider, who successfully convinced him to
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reveal the administrative password for the VoIP gateway over a recorded

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'verification call'.

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As the audit progressed into the finalization stage, HTSL provided CA Vicky with
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a Type 2 Report for DSPL. This report covered the description, design and
operating effectiveness of controls at DSPL. CA Vicky's audit assistant, noting that
payroll costs constitute 68% of the total expenditure, drafted an unmodified audit
report including a paragraph stating: "Our opinion is based in part on the report
of the service organization's auditor, which confirms the effectiveness of the
payroll processing engine." To meet the reporting deadline, CA Vicky decided to
utilize the internal audit function. He assigned them to trace transaction flows
from the CRM to the general ledger and to attend the physical verification of
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high-value hardware at four remote data centers. However, he also asked them
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to 'independently evaluate' whether the Management's assessment of the

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Company's ability to continue as a going concern was 'reasonable' given a recent

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loss of a major contract.
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Meanwhile, CA Anaya, a senior partner at the firm, was offered the role of 'Whole-
a time Director' at a reputable non-profit educational Trust. she has no
financial interest in the Trust, the role involves significant administrative
responsibilities and a fixed monthly honorarium.

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SUGGESTED ANSWERS FINAL EXAMINATION: MAY 2026

Based on the above facts, answer the following Q. Nos. 6 to 9 by choosing the
most appropriate option:
6. Considering the various security breaches described (the Chairman's email,
the SMS alerts, and the password disclosure over the phone), which of the
following accurately categorizes the nature of these social engineering
attacks for the purpose of the Risk Assessment and Internal Control
evaluation?
(A) The Chairman impersonation email represents Whaling; the SMS
credential reset alerts represent Smishing; and the password extraction
through the verification call represents Vishing.
(B) The Chairman impersonation email represents Spear-phishing; the SMS
alerts represent Smishing; and the phone-based credential extraction
represents Vishing.
(C) The Chairman impersonation email and the phone-based password
extraction both represent Whaling due to targeting employees in
sensitive control positions, while the SMS alerts represent Smishing.
(D) All three incidents represent targeted Spear-phishing attempts using
different communication channels. (2 Marks)
7. CA Vicky is reviewing the audit report draft prepared by his assistant
regarding the reliance on the Type 2 report of DSPL. Considering the
materiality of payroll, which of the following is the most appropriate
professional response?
(A) The assistant is correct; because the payroll cost is a material 68% a
reference to the service auditor is necessary to limit M/s JK & Associates'
liability.
(B) The reference should be removed from the report; however, CA Vicky
must perform additional procedures to obtain an understanding of the
controls at the service organization.
(C) The reference should be moved to an 'Emphasis of Matter' paragraph to
highlight the significant reliance on the service auditor's Type 2 report
without modifying the opinion.

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(D) The reference is permitted only if CA Vicky issues a 'Qualified Opinion',
as the use of services of DSPL constitute a limitation on the scope of the
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statutory audit. (2 Marks)
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CA Vicky has assigned several tasks to the internal audit function. Evaluate
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the appropriateness of these assignments under the framework of using the
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(A) All assigned tasks (tracing transactions, hardware counts, and evaluatinga
work of internal auditors.
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ag going concern) are appropriate as they pertain to the operating
effectiveness of the entity's reporting framework.
(B) Tracing transactions and attending hardware counts are inappropriate
for internal auditors as these are core substantive procedures that must
be performed by the engagement team to ensure independence.
(C) Only the evaluation of the going concern is inappropriate; however, the

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internal auditors can perform hardware counts only if CA Vicky provides

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'direct assistance' supervision throughout the process.

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(D) Only the tracing of transactions

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the evaluation of the going

ag responsibility of the external auditor.
judgment and is the sole
(2 Marks)
9. Regarding CA Anaya's offer to become a Whole-time Director at the
educational Trust. Which of the following is most appropriate in the
background of professional guidelines issued by the Institute?
(A) Since she holds no 'substantial interest’ and the entity is a non-profit,
she can accept the role without any notification to the Institute, provided

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the honorarium is below the prescribed limit.
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(B) She can accept the role only if she resigns as a partner
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M/s. JK & Associates, as a member cannot simultaneously be in
'Full-time Practice' and 'Full-time Employment as alDirector.
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ag (C) She may accept the role of a Whole-time Director
the specific and prior approval of the Council, regardless of whether the
entity is a business or a non-business concern.

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SUGGESTED ANSWERS FINAL EXAMINATION: MAY 2026

(D) She is permitted to accept the role under the "General Permission'
category of the Institute, provided she informs the Council within 30 days
of joining the trust. (2 Marks)
Integrated Case Scenario - III
M/s. Sterling & Co LLP, Chartered Accountants are the statutory auditors of
Green-Horizon Infrastructure Ltd. (GHIL), a listed entity. The management has
requested the firm to draft and finalize their comprehensive Business
Responsibility & Sustainability Report (BRSR) for the current fiscal year.
CA Prem, the engagement partner, reviewed the section concerning the
Company's influence on public and regulatory policy. The Company is a
prominent "Platinum Member" of the National Infrastructure Council (NIC) and
the Renewable Energy Federation (REF), paying substantial annual fees to these
industry chambers. Additionally, the Company's CEO served as a key member of
a Ministry-led task force that drafted the "National Green Hydrogen Policy 2024",
providing extensive technical inputs on subsidies and regulatory easing. The
Company also submitted a formal white paper to the Ministry of Power
suggesting specific amendments to the Electricity Act regarding grid access.
During the year, it had also submitted to one of the industry chambers certain
key inputs on leveraging India's power infrastructure for creating renewable
energy solutions as its task force member on the subject.
The Managing Director argues that since the auditors are already the designated
"Assurance Provider of BRSR Core" as per SEBI requirements, having them also
prepare the underlying study would ensure maximum data consistency. He
further contends that the firm can legally provide both preparation and assurance
services for the same BRSR framework to an audit client.
GHIL is currently undergoing an ` 80 crore expansion, called the 'Green Data
Park'. The budget is allocated as ` 45 crore for cooling systems, ` 30 crore for civil
construction (steel and cement), and ` 5 crore for licensing. An internal
whistleblower alleged that the civil contractor, in collusion with the Project
Manager, submitted invoices for 'Grade-A Steel' while installing 'Grade-B’
material, pocketing the price difference. The Board is now debating the technical
distinction between the two, asking CA Prem to perform 'extended audit
procedures' on these construction invoices versus appointing a separate firm for
a 'Forensic Accounting' engagement.

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Based on the above facts, answer the following Q. Nos. 10 to 12 by choosing the

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most appropriate option:

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10. How the above information would likely to be disclosed by GHIL in "principle-
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wise performance disclosures" as a part of BRSR for the current year? Select
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the correct option.
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(A) Information relating to membership of Chamber/associations is in the
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ag nature of Leadership Indicators and requires optional disclosures.
Information relating to inputs provided by company to the Ministry of
Power on a legislative bill is in the nature of Essential Indicators and
requires mandatory disclosures.
(B) Information relating to membership of Chamber/associations is in the
nature of Leadership Indicators and requires mandatory disclosures.
Information relating to inputs provided by company to the Ministry of

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Power on a legislative bill is in the nature of Leadership Indicators and
requires mandatory disclosures.
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. of Chamber/associations is in the
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e and requires optional disclosures.
(C) Information relating to membership
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Information relating to linputs
nature of Essential Indicators

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a bill is in the nature of Leadership Indicators and
Power on a legislative
requires mandatory disclosures.
(D) Information relating to membership of Chamber/associations is in the
nature of Essential Indicators and requires mandatory disclosures.
Information relating to inputs provided by company to the Ministry of
Power on a legislative bill is in the nature of Leadership Indicators and
requires optional disclosures. (2 Marks)
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11. Select the correct option with reference to professional code of conduct
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c. o applicable for the M/s. Sterling & Co LLP who are involved in preparation of

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BRSR study, providing advisory services, and acting as BRSR Core Assurance

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(A) Preparation of BRSR study by M/s. Sterling & CoaLLP is permissible by
ag recent decisions of Ethical Standards Board for the same client. However,
providing advisory services or acting as BRSR Core Assurance provider is
not permissible as per SEBI framework for the same client.

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SUGGESTED ANSWERS FINAL EXAMINATION: MAY 2026

(B) Preparation of BRSR study or providing advisory services by M/s. Sterling
& Co LLP is permissible by recent decisions of Ethical Standards Board
for the same client. However, acting as BRSR Core Assurance provider is
not permissible as per SEBI framework for the same client.
(C) Preparation of BRSR study by M/s. Sterling & Co LLP is not permissible
by recent decisions of Ethical Standards Board for the same client.
However, providing advisory services or acting as BRSR Core Assurance
provider is permissible as per SEBI framework for the same client.
(D) Preparation of BRSR study or acting as BRSR Core Assurance provider by
M/s. Sterling & Co LLP is not permissible by recent decisions of Ethical
Standards Board for the same client. However, providing advisory
services is permissible as per SEBI framework for the same client.
(2 Marks)
12. The Board is debating the forensic investigation for the steel price inflation
in the "Green Data Park”. Which of the following statements is inappropriate
in this regard?
(A) In statutory audit individual transactions and balances play a major role
irrespective of the fact whether they have a material impact on the
overall financial statements,
(B) The Forensic professional does not conduct an audit using sample
selection methodologies to perform substantive or compliance tests.
(C) No audit report with any opinion is issued by Forensic Professional.
(D) The Forensic Professional's mandate is limited to present his findings to
a superior authority who will examine these from a legal point of view
to establish whether the law has been violated or not. (2 Marks)
13. Virup Global Holdings Ltd. (VGHL) is preparing Consolidated Financial
Statements for the year ended March 31, 2026. VGHL owns 80% of Nexus
Systems Private Ltd. (NSPL). During the year, VGHL sold goods to NSPL at a
25% markup on cost. At year end, 40% of these goods remained unsold in
NSPL's inventory. The applicable tax rate is 30%.

The group prepares consolidated financial statements under Ind AS.
Separately, NSPL had a customer receivable of ` 4 crore outstanding as at

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PROFESSIONAL ETHICS

March 31, 2026. On May 15, 2026, the customer was declared insolvent

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following a fire incident that occurred on March 30, 2026 in his factory.

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The required consolidation adjustments and treatment of subsequent events
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l deferred tax adjustment is not required, and the customer insolvency isa
(A) Unrealised profit elimination equals 10% of intercompany sales value,

ag treated as a non-adjusting event requiring disclosure only.

(B) Unrealised profit elimination equals 40% of intercompany profit only,
deferred tax adjustment is not required on consolidation entries, and the
customer insolvency is treated as a non-adjusting event.

(C) Unrealised profit elimination equals 25% of closing inventory value,

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deferred tax adjustment is optional based on materiality, and the

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customer insolvency is treated as a disclosure event only.

(D) Unrealised profit elimination m
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s on unrealised profit elimination, and
equals 8% of intercompany sales value,
deferred tax adjustment isarequired
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the customer insolvency
recognition of impairment. (2 Marks)

14. During the statutory branch audit of ABC Bank for the financial year ended
March 31, 2026, you are reviewing the credit portfolio of the Corporate
Banking division. One significant exposure involves G-Mart Ltd., which was
granted a working capital credit limit of ` 100 lakh on September 1, 2023.

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According to the bank's internal policy and regulatory norms, these limits

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were due for a comprehensive renewal on September 1, 2025.
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Upon scrutiny, you observe that as of March 31, 2026, the formal

s em had not been executed, despite more than 180 days havingaelapsed since the
gl is "perfectly
gla due date. The Branch Manager contends that theaaccount
a healthy", noting that the balance has remained within the sanctioned
Drawing Power, interest has been serviced promptly, and the account shows
high turnover. The delay is attributed to the sudden demise of G-Mart Ltd.'s

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SUGGESTED ANSWERS FINAL EXAMINATION: MAY 2026

statutory auditor, which stalled the finalization of audited financial
statements required for renewal.

A letter dated February 15, 2026, from the client confirms that a new auditor
was appointed and the audited financial statements were finally submitted
on April 10, 2026, and the bank issued the formal renewal letter on April 12,
2026, prior to the signing of your branch audit report.

Your audit assistant argues that because the 180-day grace period expired
during the financial year without a formal renewal, the account's status is
non-negotiable and must be downgraded to NPA.

As the Statutory Branch Auditor, how should you evaluate the asset
classification of G-Mart Ltd.'s account for the year ended March 31, 2026?

(A) Classify as NPA, the 180-day grace period from the due date expired
prior to the balance sheet date, making the account technically irregular
regardless of the reason for delay.

(B) Classify as NPA; it is a non-adjusting event under AS 4 "Contingencies
and Events Occurring after the Balance Sheet date". There is no matter
of substance over form.

(C) Classify as Standard; it is an adjusting event under AS 4 "Contingencies
and Events Occurring after the Balance Sheet date". It is a matter of
substance over form.

(D) Classify as NPA; however, the classification can be reversed in the same
financial year's audit report if the renewal is completed before the
independent auditor's report is signed. (2 Marks)

15. The examination of public enterprises by the Committee takes the form of
comprehensive appraisal or evaluation of performance of the undertaking. It
involves a thorough examination, including evaluation of the policies,
programmes and financial working of the undertaking. Therefore, the
Parliament and the State Legislatures have, for this purpose, constituted
specialized Committees. Funds were approved to procure medical equipment

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for district hospitals. Audit reports show that 30% of the equipment remains

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unused due to lack of trained staff. Which Committee can bring to the notice

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of the house that the particular policy is not leading to the desired results or
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is leading to waste:
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(A) Committee on Public Undertakings.
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ag (C) Financial Committee.
(B) Public Accounts Committee.

(D) Estimates Committee. (2 Marks)
Answer Key

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

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ag 15. (D)

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SUGGESTED ANSWERS FINAL EXAMINATION: MAY 2026

PART – II Descriptive Questions
Question No.1 is compulsory.
Candidates are required to answer any four questions from the remaining five
questions.
Working notes should form part of the answer.
Question 1
(a) The statutory audit of Nizovus Pharmaceuticals Ltd., for the financial year
2025-26, is underway. During the review of "Professional and Legal Fees"
ledger, the engagement team noted a significant payment to a high-profile
law firm specializing in Intellectual Property (IP) disputes. The management,
during initial inquiries, stated that the payment was for 'general advisory
services and that no active litigation exists that requires disclosure under the
applicable financial reporting framework. However, the minutes of the Board
Meeting from February 2026 hint at a potential significant patent
infringement claim from a global competitor.
The engagement partner, CA Rukma, insisted on sending a letter of direct
inquiry to the external legal counsel to assess the probability of an outflow
of resources. The management has refused to permit this communication,
citing 'confidentiality clauses' in their contract with the law firm. They have
offered to provide a comprehensive written representation confirming that
no material litigations are pending. CA Rukma is concerned about the
management's stand and non-availability of direct confirmation from the
lawyers.
Is management's written representation sufficient in place of legal
confirmation? Advise CA Rukma, about the additional audit procedures and
reporting implications, if legal confirmation is denied. (5 Marks)
(b) Hortiko Ltd. is a logistics company that maintains its primary inventory and
research assets in a specialized cold-storage facility. On April 5, 2026, a
massive technical failure in the cooling systems led to the spoilage of
specialized raw materials valued at ` 21 crore. This event occurred after the
balance sheet date but before the financial statements were authorized for
issue.
Management has determined this to be a 'non-adjusting event' and has
provided a detailed disclosure in Note 28 to the Financial Statements,

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explaining the financial impact and the status of the insurance claim. The
statutory auditor, after performing subsequent event procedures, is satisfied
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with the disclosure and has concluded that the matter is fundamental to the
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users' understanding of the financial statements. However, the auditor has

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also confirmed that this event does not impact the 'Going Concern'
s e
s e
assumption for the foreseeable future.
g l a
a
lConsidering the above facts, state the reporting requirements under relevanta
ag Standard on Auditing and draft a suitable paragraph to be included in the
Independent Auditor's Report. (5 Marks)
(c) CA Pawan is engaged by M/s RK Industries, a partnership firm to compile its
financial statements for the past two financial years. During performance of
the engagement, CA Pawan, was not satisfied with certain significant
adjustments made to inventory valuation over the years. The matter was
subsequently resolved after obtaining appropriate clarifications from the

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management. Further, at the completion stage, CA Pawan, has provided the

c. o
final compiled statements along with the compilation report to

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M/s RK Industries.
You are required to explain thesdocumentation
g l a requirements that should be

a
adhered to by CA Pawan for this type of engagement. (4 Marks)
Answer
(a) SA 580 “Written Representations” deals with the auditor’s responsibility to
obtain written representations from management and, where appropriate,
those charged with governance. Although written representations provide
necessary audit evidence, they do not provide sufficient appropriate audit
evidence on their own about any of the matters with which they deal.

m
Furthermore, the fact that management has provided reliable written

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representations does not affect the nature or extent of other audit evidence
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that the auditor obtains about the fulfilment of management’s

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responsibilities or about specific assertions.
la se
las Further, SA 501 “Audit Evidence - Specific Considerations for Selected
a g
ag Items”, states that when audit procedures performed indicate that material
litigation or claims may exist, the auditor shall seek direct communication
with the entity’s external legal counsel. The auditor shall do so through a
letter of inquiry prepared by management and sent by the auditor,

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requesting the entity’s external legal counsel to communicate directly with
the auditor.
In the given situation, significant payment to an IP litigation law firm,
references in Board minutes to a possible patent infringement claim, and
management’s refusal to allow direct communication with legal counsel
indicate a significant audit risk. As the matter may involve a contingent
liability requiring disclosure or provision, she should not rely solely on
management representation in this matter. The refusal to permit direct
communication with external legal counsel is a significant audit concern
and may indicate a scope limitation and risk of material misstatement
relating to contingent liabilities and litigation disclosures.
Accordingly, CA Rukma shall design and perform additional audit
procedures in order to identify litigation and claims involving the entity by:
- Inquiry of management and, where applicable, others within the entity
including in-house legal counsel.
- Reviewing minutes of meetings of those charged with governance and
correspondence between the entity and its external legal counsel.
- Reviewing legal expense account.
CA Rukma should express the modified opinion in accordance with SA 705
“Modifications to the Opinion in the Independent Auditor’s Report”, if she
could not communicate with external legal counsel and unable to obtain
sufficient appropriate audit evidence by performing additional audit
procedures.
(b) In the given case of Hortiko Ltd, a technical failure in the cold-storage
facility on April 5, 2026, resulted in spoilage of raw materials worth
` 21 crore after the balance sheet date but before authorization of the
financial statements. Management has appropriately treated the matter as
a non-adjusting event and disclosed the financial impact and insurance
claim details in Note 28. The statutory auditor, after performing subsequent
event procedures under SA 560, is satisfied that adequate disclosure has
been made and has also concluded that the event does not affect the going
concern assumption. However, as the matter is fundamental to the users’
understanding of the financial statements, the auditor should include an

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Emphasis of Matter paragraph in accordance with SA 706, while expressing

m
an unmodified opinion.

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c. o
When the auditor includes an Emphasis of Matter Paragraph in the auditor’s
report, the auditor shall:
e m
m the paragraph within a separate section of the auditor’s report las
ewith
s an appropriate heading that includes the term “Emphasis of g
(i) Include

g l a a
a (ii) Include in the paragraph a clear reference to the matter being
Matter”;

emphasized and to where relevant disclosures that fully describe the
matter can be found in the financial statements. The paragraph shall
refer only to information presented or disclosed in the financial
statements; and
(iii) Indicate that the auditor’s opinion is not modified in respect of the
matter emphasized.
m
Emphasis of Matter c. o
e mof financial statements regarding the
We draw attention to Note 28
l s
a systems at the Company’s specialised
g
technical failure in the cooling
a
cold-storage facility on 5 April, 2026, subsequent to the Balance Sheet
th

date, which resulted in spoilage of specialized raw materials valued at
` 21 crore. This event has been considered by the Management as a
non-adjusting event and appropriate disclosure has been made explaining
the financial impact and status of the insurance claim.
Our opinion is not modified in respect of this matter.
(c) As per SRS 4410 “Compilation Engagements”, the practitioner shall include

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in the engagement documentation: -

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(i) Significant matters arising during the compilation engagement and

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how those matters were addressed by the practitioner;

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las a g
(ii) A record of how the compiled financial information reconciles with the

ag underlying records, documents, explanations and other information,
provided by management; and

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(iii) A copy of the final version of the compiled financial information for
which management or those charged with governance, as appropriate,
has acknowledged their responsibility, and the practitioner’s report.
(iv) The practitioner may consider also including in the engagement
documentation a copy of the entity’s trial balance, summary of
significant accounting records or other information that the
practitioner used to perform the compilation.
Question 2
(a) CA Ravi is the engagement partner of PQR Ltd. for conducting the Statutory
audit for the FY 2025-26. During the audit of PQR Ltd., he had the following
observations:
(i) Management used an outdated discount rate (12% as against 8%)
leading to ` 2 crore understatement of recoverable amount/
overstatement of impairment loss, which in the auditor's view is not
appropriate.
(ii) Management delayed providing expected inventory records for 10 days,
causing extensive extra effort.
You are required to:
(i) State with reasons how each of the above constitutes a significant
finding requiring communication to "Those charged with governance" as
per relevant Standard on Auditing.
(ii) State, apart from the above, other significant findings that an auditor
should communicate to "Those charged with governance". (5 Marks)
(b) CA Vinit, a practicing Chartered Accountant, after attending various courses in
Data Analytics and Artificial intelligence designates as "Al Professional" in his
visiting cards and letter heads. He wants to advertise through a write up, setting
out the professional services provided by him and consequently he has included
the basic details such as his name, membership number, professional address,
website, email, details of employees and various services provided. In the Profile
section of write up, he includes the following details:
(i) Disclosure of client MNP Ltd.'s turnover figures from recent audit as
‘` 500 crores audited’ to show case expertise in large-scale statutory
audits.

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(ii) A mention of the 'Outstanding Accountant of the Year 2025' award
received from the local Rotary Club in the previous year;
m
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(iii) The firm's tagline "Precision in Every Calculation" which CA Vinit
o c. o
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believes is an honest description of his work.
e m
s em and provisions of the Chartered Accountants Act, 1949. (5 Marks) glas
Analyze and comment whether the act of CA Vinit is in compliance with the

la a
guidelines
(c)g G-Tech Solutions Ltd. is a large multinational corporation engaged in
a providing cloud-based financial services. The company's operations are
heavily reliant on proprietary software applications and extensive databases
containing sensitive client financial information.
During the statutory audit for the financial year 2025-26, the engagement
partner, CA Harsh, observes that the company has recently integrated
multiple new digital platforms to automate revenue recognition processes

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and safeguard its trade secrets. Further, the company has disclosed that an

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incident involving an attempted unauthorized access to its network occurred

em
approximately six months prior to the year end, although management has
described the incident as minor.
l a s
a g
As the statutory auditor, CA Harsh is in the planning stage of the audit and
wants to evaluate the entity's risk assessment process with specific reference
to cybersecurity risks. Explain the key aspects that CA Harsh would evaluate
in identifying the entity's risk assessment process relating to cybersecurity.
(4 Marks)
Answer
(a) (i) Whether the given matters constitute significant findings

m
requiring communication to TCWG: As per SA 260 “Communication

c. o
with Those Charged with Governance”, the auditor is required to
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c. o emgovernance
communicate the following matters:

em s
a aspects of the
I. The auditor shall communicate with those charged with
l
las g
the auditor’s views about significant qualitative
entity’s accounting practices, including aaccounting policies,
ag accounting estimates and financial statement disclosures. When
applicable, the auditor shall explain to those charged with
governance why the auditor considers a significant accounting

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SUGGESTED ANSWERS FINAL EXAMINATION: MAY 2026

practice, that is acceptable under the applicable financial reporting
framework, not to be most appropriate to the particular
circumstances of the entity. In this case, Management used a
discount rate of 12% instead of 8%, resulting in understatement of
recoverable amount by ` 2 crore; and overstatement of impairment
loss. Use of an outdated discount rate indicates deficiency in
management’s estimation process and affects the appropriateness
of accounting estimates. The incorrect discount rate resulted in a
` 2 crore overstatement of impairment loss/understatement of
recoverable amount. Such a material error is a significant audit
finding. Therefore, the inappropriate use of outdated discount rate
constitutes a significant audit finding that must be communicated
to TCWG under SA 260.
II. The auditor shall communicate with those charged with
governance significant difficulties, if any, encountered during the
audit. Management delayed providing inventory records for
10 days, causing extensive extra effort to the auditor. This also
constitutes a significant finding requiring communication to TCWG
under SA 260.
(ii) Other significant findings that an auditor should communicate to
“Those charged with governance”:
• Unless all of those charged with governance are involved in
managing the entity: -
 Significant matters arising during the audit that were
discussed, or subject to correspondence, with management;
 Written representations the auditor is requesting;
• Circumstances that affect the form and content of the auditor’s
report, if any and
• Any other significant matters arising during the audit that, in the
auditor’s professional judgment, are relevant to the oversight of
the financial reporting process.
(b) As per Clause (7) of Part I of the First Schedule to the Chartered
Accountants Act, 1949, a Chartered Accountant in practice is deemed to be
guilty of professional misconduct if he advertises his professional

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attainments or services or uses any designation or expressions other than
“Chartered Accountant” on professional documents, visiting cards,
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letterheads or sign boards, except as permitted under the Act and the

o m m
c
Guidelines issued by the Council.
. e
em out the services provided and particulars of the member or firm glas
However, the proviso to the clause permits advertisement through a write-
s
a to the ICAI Guidelines for Advertisement, 2008.
up setting
lsubject a
g
a In the given case, CA Vinit has circulated a write-up containing his name,
membership number, professional address, website, email address,
employee details and services provided. Such particulars are specifically
permitted under the ICAI Advertisement Guidelines, 2008. Further, mention
of website, employee details and services rendered is permissible under the
list of particulars allowed in the write-up. Hence, inclusion of these details
is in compliance with the Guidelines.

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Further, CA Vinit describes himself as an “AI Professional” after attending
.
various courses in Data Analytics and Artificial Intelligence. Under

s em
Clause (7), use of designations other than “Chartered Accountant” is

l a
generally prohibited unless it is a recognized qualification or title permitted
g
a
by ICAI. The expression “AI Professional” is not a recognized qualification
approved by ICAI or the Central Government. Therefore, use of such
expression on visiting cards and letterheads may amount to violation of
Clause (7) of Part I of the First Schedule.
Furthermore, disclosure of client MNP Ltd.’s turnover figure of ` 500 crores
audited by him is not permissible. ICAI Advertisement (Write-up) Guidelines
specifically prohibit mention of names of clients, whether past or present,
in the write-up. Moreover, disclosure of turnover details obtained during
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professional engagement breaches client confidentiality and may amount
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c. o
to professional misconduct under Clause (1) of Part I of the Second
m
se
Schedule, which prohibits disclosure of confidential information acquired

s em in the course of professional engagement without client consent or legal
g la
la a
requirement.

ag In addition to above, mention of the “Outstanding Accountant of the
Year 2025” award received from the local Rotary Club is also not permissible.
ICAI Advertisement (Write-up) Guidelines prohibit inclusion of information
regarding achievements or awards except those given by the Central
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Government, State Government or Regulatory Bodies. Since the award has
been granted by a local Rotary Club, its inclusion violates the Guidelines and
consequently attracts Clause (7) of Part I of the First Schedule relating to
impermissible advertisement of professional attainments.
Similarly, the tagline “Precision in Every Calculation” is not permissible.
ICAI Advertisement (Write-up) Guidelines specifically prohibit use of
monograms, catch words or similar promotional expressions. The tagline
used by CA Vinit is a promotional catch phrase and therefore violates the
Guidelines, thereby attracting Clause (7) of Part I of the First Schedule.
Accordingly, while inclusion of basic professional particulars and services
rendered is permissible under the ICAI Advertisement Guidelines, use of
the expression “AI Professional”, disclosure of client turnover details,
mention of Rotary Club award and use of the promotional tagline are not
in compliance with the Chartered Accountants Act, 1949 and the ICAI
Advertisement Guidelines, 2008.
(c) The auditor has to determine whether the entity's risk assessment process
considers cybersecurity risks.
While planning the audit in accordance with SA 315, key aspects CA Harsh
would evaluate in identifying the entity’s risk assessment process relating
to cybersecurity are:
• Entity should conduct a periodic risk assessment & develop a
management strategy which identifies cybersecurity risks around IT
system failure affecting the entity's primary business or potential loss
of data or inability to access data as required, risk of unauthorized
access to the IT network.
• The entity should maintain and periodically review an inventory of their
information assets- i.e., Asset Management (e.g., intellectual property,
patents, copyrighted material, trade secrets and other intangibles).
• The entity should classify and prioritize protection of their information
assets based on sensitivity and business value and periodically review
the systems connected to the network on which digital assets reside.
• From the governance perspective management should review how
cybersecurity risks affect internal controls over financial reporting. In
case of adverse attack how management is going to assess the impact

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on the recoverability of financial data and impact on revenue
recognition.
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•
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Management needs to identify if any established a risk-based
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cybersecurity program can be leveraged (e.g. NIST, ISO etc.).
e m
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eenvironment,
• To determine
entity should establish roles and responsibilities over la
overall responsibility for cybersecurity in the business s
l a s cybersecurity (CISO, CIO). Further the risk assessment should bea
g
ag discussed with those charged with governance (e.g., the Audit
Committee or Board of Directors).
Since G-Tech Solutions Ltd. is highly dependent on proprietary software
applications, automated revenue recognition systems and sensitive
financial databases, the cybersecurity environment assumes significant
importance from an audit perspective. Further, the attempted unauthorized
access incident indicates the possibility of heightened cybersecurity risks.

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Therefore, CA Harsh should carefully evaluate the adequacy and

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effectiveness of the entity’s cybersecurity risk assessment process,

em
governance framework and related internal controls to identify risks of

a s
material misstatement and determine the nature, timing and extent of
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further audit procedures.
Question 3 a g
(a) FinBridge Digital Lending Ltd., a non-deposit taking financial intermediary
registered with the financial sector regulator, operates an online platform
that enables individual lenders to fund retail borrowers after performing
onboarding, credit scoring, documentation, and recovery support functions.
During the audit, CA Mehta, the engagement partner, observed that certain
borrower accounts with overdue instalments were internally tagged as
m
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"watchlist" instead of being migrated to non-performing categories pending
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expected recovery from collection agents.
mrecognised
Further, income relating to such stressed accounts continued toebe
em l a s
las ag reports were
based on contractual schedules. The Board has approved broad risk policies,

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however, detailed operational guidance and periodic monitoring

a not consistently documented.
Mr. Mehta wants to assess whether FinBridge Digital Lending Ltd., is complying
with the Prudential Norms. Guide Mr. Mehta in this regard. (5 Marks)

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(b) CA Jiva, a practicing Chartered Accountant since last five years, is providing
various advisory services to a wide range of clients. One of his client
ASP Ltd. is a subsidiary of an overseas conglomerate. CA Jiva is providing
advisory services in the field of taxation, GST consultancy, issuing Form 15CB
for foreign remittances. All services were being smoothly provided to ASP Ltd.
until after a certain period it was revealed on an enquiry from the Regulator
that the overseas conglomerate had invested in ASP Ltd. to use it for carrying
out money laundering and crypto laundering. The regulator directed CA Jiva
to provide details about ASP Ltd. for the ongoing enquiry. CA Jiva contended
that he was providing only taxation, GST consultancy and certification to
ASP Ltd. and therefore was not required to keep detailed information about
the company.
Based on the guidelines issued by ICAI comment on the contentions of
CA Jiva? (5 Marks)
(c) CA Deepa is the statutory auditor of SGP Textiles Ltd. for the FY 2025-26 and
is in the process of finalizing the audit report.
During the course of the audit CA Deepa obtained information indicating
that SGP Textiles Ltd. is experiencing severe liquidity crisis arising from a
sudden shift in market demand and cancellation of its largest export order.
As at the Balance Sheet date, the company's current liabilities exceed its
current assets and it has defaulted in repayment of certain borrowings.
Management has disclosed in the notes to the financial statements that these
events or conditions indicate material uncertainty that may cast significant
doubt on the entity's ability to continue as a going concern. However, the
financial statements for the FY 2025-26 have been prepared on going
concern basis, based on management's expectation that a proposed merger
with a larger conglomerate will be completed and will stabilize the
company's financial position.
Analyze and state the reporting responsibilities of CA Deepa in the
Independent Auditor's Report of SGP Textiles Ltd. in accordance with the
relevant applicable Standard on Auditing. (4 Marks)
Answer
(a) Mr. Mehta should assess the compliance of Prudential Norms by applying
the following audit procedures:

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(i) Check compliance with prudential norms encompassing income
recognition, income from investments, accounting standards,
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accounting for investments, asset classification, provisioning for bad
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and doubtful debts, capital adequacy norms, prohibition on granting

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of loans by NBFC against its own shares, prohibition on loans and
s e
a s einvestments for failure to repay public deposits and norms for
g la
l concentration of credit/investments.
a
ag (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

m
and that proper provision has been made in accordance with the
o
Directions.
c
. accounts have been correctly
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Assess whether overdue borrower

accordance with thegl
a
classified as Standard, Sub-standard, Doubtful or Loss Assets in

a cannot override regulatory asset classification
Prudential Norms. Mere internal tagging of
accounts as “watchlist”
requirements.
(iv) In respect of Non-Performing Assets, an auditor should check whether
the unrealised 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 realisation basis only.

m
(v) Check whether all accounts which have been classified as NPAs in the

m
previous year also continue to be shown as such in the current year
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also. If the same is not treated as an NPA in the current year, the auditor

em
should specifically examine such accounts to ascertain whether the
la se
las account has become regular and the same can be treated as
a g
g
performing as per the Directions.
a Considering the facts of the case, Mr. Mehta should critically examine
whether overdue borrower accounts were deliberately retained in
“watchlist” categories to avoid NPA classification and provisioning

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SUGGESTED ANSWERS FINAL EXAMINATION: MAY 2026

requirements. He should also verify whether income from such stressed
accounts has been incorrectly recognised on accrual basis contrary to
Prudential Norms. If material non-compliance is identified, appropriate
adjustments, additional disclosures and reporting implications should be
considered in the audit report.
(b) The financial services industry globally is required to obtain information of
their clients and comply with Know Your Client Norms (KYC norms).
Keeping in mind the highest standards of Chartered Accountancy
profession in India, the Council of ICAI issued such norms to be observed
by the members of the profession who are in practice.
In the given situation, CA Jiva provided advisory services in the field of
taxation, GST consultancy and issuing Form 15CB for foreign remittances to
ASP Ltd., which was a subsidiary of an overseas conglomerate. Later, it was
revealed that the overseas conglomerate had invested in ASP Ltd. to use it
for carrying out money laundering and crypto laundering. CA Jiva was asked
to provide details about ASP Ltd. for the ongoing enquiry. The contention of
CA Jiva that he provided only taxation, GST consultancy and certification to
ASP Ltd. and therefore was not required to keep detailed information about
the company is not valid as CA Jiva should have kept following information
in compliance with KYC Norms which are mandatory in nature and shall apply
in all assignments pertaining to attestation functions.
In the given case of ASP Ltd., a Corporate Entity, CA Jiva should have kept
following information:
A. General Information
• Name and Address of the Entity
• Business Description
• Name of the Parent Company in case of Subsidiary
• Copy of last Audited Financial Statement
B. Engagement Information
• Type of Engagement
C. Regulatory Information
• Company PAN No.

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• Company Identification No.

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Directors’ Names & Addresses

c. o
•

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Directors’ Identification No.
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•

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(c) In accordance with SA 570 "Going Concern”, if events or conditions have
s e
s e
been identified that may cast significant doubt on the entity’s ability to
a g la
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continue as a going concern, the auditor shall obtain sufficient appropriate
a
ag audit evidence to determine whether or not a material uncertainty exists
related to events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern by performing additional
audit procedures, including consideration of mitigating factors.
In the given case, SGP Textiles Ltd. is experiencing severe liquidity crisis
arising from sudden shift in market demand and cancellation of its largest
export order. Further, as at the Balance Sheet date, the company’s current
liabilities exceed its current assets and it has defaulted in repayment of
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certain borrowings. These conditions indicate existence of a material
.
em
uncertainty that may cast significant doubt on the company’s ability to

s
continue as a going concern.

g l a
However, the management has disclosed these matters in the notes to the
a
financial statements for FY 2025-26 and has prepared the financial
statements on going concern basis based on expectation that a proposed
merger with a larger conglomerate is expected to stabilize the company’s
financial position.
As such, considering that the going concern assumption is appropriate but
a material uncertainty exists, CA Deepa should:
(1) Express an unmodified opinion; and
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(2) Include in his audit report, a separate section under the heading

c. o em that
“Material Uncertainty Related to Going Concern” to:

em la s
(i) Draw attention to the note in the financial statements

las discloses the matters; and
a g
ag (ii) State that these events or conditions indicate that a material
uncertainty exists that may cast significant doubt on the entity’s
ability to continue as a going concern and that the auditor’s
opinion is not modified in respect of the matter.

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Thus, CA Deepa should report the matter in her Independent Auditor’s
Report in the above manner in accordance with SA 570.
Question 4
(a) Evershine Refineries Ltd. has recognized a substantial provision towards
decommissioning and environmental restoration obligations relating to its
offshore drilling operations. The measurement of this provision requires
complex assumptions involving long-term discounting, engineering life-cycle
estimates, and evolving environmental compliance costs. For the current
financial year, the Company has relied on a technical assessment prepared
by its internal Chief Technical Officer (CTO), who is a qualified environmental
engineer and has been associated with the organization for over two decades.
Based on internally developed operational efficiency measures, the CTO's
report recommends a 15% reduction in the existing provision.
During the audit, the engagement partner, CA Meera, has identified the
provision as a significant matter due to the significant estimation uncertainty
and its material effect on the profitability of the Company. Although the CTO
possesses relevant technical competence, CA Meera has noted that the CTO's
performance incentives are linked to the Company's profitability targets.
Further, the audit team does not possess specialized engineering expertise to
independently validate the technical assumptions underlying the revised
provision estimate, and no comparable external market benchmarks are
available for similar offshore decommissioning projects.
Analyse the case and guide CA Meera whether to rely on CTO'S
recommendations with reference to the relevant Standard on Auditing.
(5 Marks)
(b) CA Pranav is engaged to perform a review of the historical financial
statements of LAN Innovations Ltd. for the financial year 2024-25. While
performing analytical procedures, CA Pranav identifies several significant
payments made to a newly incorporated entity. Based on the nature and
pattern of transactions, CA Pranav suspects that the entity may be a related
party. Upon inquiry, management provides only a vague oral explanation,
asserting that the entity is an independent third party vendor. To corroborate
management's assertions, CA Pranav requests written representations,
confirming identity, completeness and appropriate disclosure of all related
party relationships and transactions. However, management refuses to

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provide written representations, stating that oral explanations are sufficient
for a limited review engagement.
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In the context of SRE 2400, explain the course of action CA Pranav should
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take in response to management's refusal to provide written representations.
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Discuss the circumstances under which CA Pranav would be required to
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disclaim a conclusion or withdraw from the engagement. (5 Marks)
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(c)g MK Steel Manufacturing Ltd. is a listed company among the top 1000 entitiesa
l
a in India, leading in steel production and related products. The company has
been expanding its operations over the past four years and is now operating
five large manufacturing units across different industrial belts in the country.
The steel manufacturing process generates substantial waste including slag, dust
and chemical residues, majority of which is disposed of in landfills without
proper treatment. The company's energy consumption has also increased by
50% over the last three years, which is met mostly through coal-based thermal

o m
power, thereby contributing significantly to carbon emissions.
c
Outline the BRSR principle which is. most relevant to the above scenario

s em with it.
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mentioning the core elements associated (4 Marks)
Answer
a g
(a) In the case of Evershine Refineries Ltd., the Company reduced its
decommissioning and environmental restoration provision by 15% based
on a technical assessment prepared by its internal CTO, who is a
management expert. Since the provision involves significant estimation
uncertainty and materially impacts profitability, and the CTO’s incentives
are linked to profitability targets, there is a risk of management bias
affecting objectivity. Accordingly, as the assessment is prepared by

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management’s expert, the provisions of SA 500 relating to evaluation of

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information prepared by management’s expert are applicable.

em as audit
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As per SA 500 “Audit Evidence”, when information to be used

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evidence has been prepared using the work of a management’s expert, the

gla a
auditor shall, to the extent necessary, having regard to the significance of

a that expert’s work for the auditor’s purposes,
(i) Evaluate the competence, capabilities and objectivity of that expert;
(ii) Obtain an understanding of the work of that expert; and

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(iii) Evaluate the appropriateness of that expert’s work as audit evidence
for the relevant assertion.
The auditor may obtain information regarding the competence, capabilities
and objectivity of a management’s expert from a variety of sources, such as
personal experience with previous work of that expert; discussions with that
expert; discussions with others who are familiar with that expert’s work;
knowledge of that expert’s qualifications; published papers or books
written by that expert.
Aspects of the management’s expert’s field relevant to the auditor’s
understanding may include what assumptions and methods are used by
the management’s expert, and whether they are generally accepted within
that expert’s field and appropriate for financial reporting purposes.
The auditor may also consider the following while evaluating the
appropriateness of the management’s expert’s work as audit evidence for
the relevant assertion:
(i) The relevance and reasonableness of that expert’s findings or
conclusions, their consistency with other audit evidence, and whether
they have been appropriately reflected in the financial statements.
(ii) If that expert’s work involves use of significant assumptions and
methods, the relevance and reasonableness of those assumptions and
methods; and
(iii) If that expert’s work involves significant use of source data, the
relevance, completeness, and accuracy of that source data.
In view of above, despite the CTO’s technical competence, CA Meera cannot
rely solely on the CTO’s assessment due to the possible threat to objectivity
and significant estimation uncertainty involved. She should evaluate the
assumptions, methods, and supporting data in accordance with SA 500 and
obtain sufficient appropriate audit evidence before concluding on the
reasonableness of the provision.
(b) As per SRE 2400 “Engagements to Review Historical Financial Statements”,
if management does not provide one or more of the requested written
representations, CA Pranav, the practitioner shall:
• Discuss the matter with management and those charged with
governance, as appropriate;
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• Re-evaluate the integrity of management, and evaluate the effect that this
may have on the reliability of representations (oral or written) and
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evidence in general; and
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Take appropriate actions, including determining the possible effect on the
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conclusion in the practitioner’s report in accordance with this SRE.
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CA Pranav shall disclaim a conclusion on the financial statements, or
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withdraw from the engagement if withdrawal is possible under applicable
law or regulation, as appropriate, if:
• The practitioner concludes that there is sufficient doubt about the
integrity of management such that the written representations are not
reliable or
• Management does not provide the required representations in respect of
its responsibilities for preparation of financial statements and recording

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of all transactions in financial statements.

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(c) In the given case, MK Steel Manufacturing Ltd. is involved in large-scale

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steel production, which results in substantial waste generation, high energy
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consumption, and increased carbon emissions. Therefore, the most relevant

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a
BRSR principle applicable to the company is Principle 6 – Protection and
Restoration of Environment. This principle looks at the environmental
responsibility as a basic requirement for the economic prosperity and
sustainability.
The core elements associated with this principle are:
(i) The entities should have policies, procedures, and practices in place to
assess and rectify impacts to the environment. This should cover the

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whole life cycle of the product.

m (ii) The entities have to make use of natural and manmade resources in an
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c. o optimum manner to ensure their sustainability by taking feedback from
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the stakeholders.

las (iii) The entities have to measure their performance relating to the
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ag prevention of pollution, destruction of forests, waste generation,
energy use, land use, etc.

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(iv) The entities have to contribute towards climate change resilience in
line with India’s commitment to various international mechanisms such
as, Paris Agreement and National Action Plans for Climate Change.
(v) The entities should explore the comparison of its activities with
industry best practices to reduce, reuse and recycle/ recover materials,
resources.
(vi) The companies have to look out for avenues by which they can improve
their performance towards various environmental responsibilities.
Question 5
(a) TOOLS Limited is a Public company engaged in manufacturing of industrial
components. During the course of statutory audit for the FY 2025-26,
CA Vasu, the engagement partner, identified a serious discrepancy on
15 th April 2026 involving misappropriation of funds amounting to ` 75 lakhs,
perpetrated by the senior accountant through the creation of fictitious vendor
invoices. Subsequent verification and inquiry revealed that the accountant
had acted independently, without the involvement of other employees. The
management acknowledged the failure of internal controls and requested
CA Vasu not to highlight this in the audit report, contending that the amount
was immaterial in context of the company's turnover of ` 500 crore.
Evaluate the scenario and elaborate the duties of CA Vasu under the
Companies Act, 2013 with respect to the fraud and reporting requirements,
if any, in accordance with CARO, 2020.
You are also required to state the responsibility cast on the Board of Directors
in relation to the fraud which has occurred. (5 Marks)
(b) QR Ltd., a listed company, has appointed CA Suba as its Chief Internal
Auditor, and she is continuing in this role for the third consecutive year.
The following unresolved issues were reported in the Internal audit reports
for quarter ended June 2025 and September 2025:
• Lack of adequate segregation of duties in inventory procurement cycle.
• Persistent delays in reconciliation of vendor balances.
• Deficiencies in IT user access controls.
During a recent meeting, the Audit Committee expressed concern over the

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recurrence of these issues and asked CA Suba to present a list of corrective
actions taken by management against the above-mentioned findings.
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In context of the applicable Standards on Internal Audit, answer the
o c. o
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following:
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(1) Explain the responsibilities of CA Suba with regard to the above reported

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ag (2) Identify the most appropriate report that should be submitted to the
Audit Committee in this situation and briefly outline the key matters that
should be covered in such a Report? (5 Marks)
(c) CA Karan, a practicing Chartered Accountant, was approached by Greentech
Solutions Ltd. requesting him to issue a certificate regarding the utilization
of term loan funds for their expansion project. The company had received
` 25 crores from a financial institution and needed to submit a utilization

m
certificate within 60 days of disbursement. CA Karan issued the utilization

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certificate, stating that the entire loan amount was properly utilized for the

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intended purpose. However, his verification process was limited to reviewing

a s
the summary reports provided by the finance manager and brief discussions
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with the managing director. He did not examine the bank statements,
a
supporting documents like purchase invoices, contracts, payments, etc. The
certificate did not mention any limitations or assumptions made during the
verification process.
Four months later, it was discovered that ` 5 crores of the loan amount were
diverted for purposes other than the approved project, leading to regulatory
action against the company.
Comment on the action of CA Karan with reference to the Chartered
Accountants Act, 1949 and Schedules thereto.
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(4 Marks)

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c. o (a) In the given case of TOOLS Limited, CA Vasu identified asfraud
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Answer

m e involving
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misappropriation of funds amounting to ` 75 lakhs lthrough
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fictitious

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vendor invoices created by the senior accountant. Although management
a has argued that the amount is immaterial considering the company’s
turnover of ` 500 crore and requested that the matter should not be
highlighted in the audit report, the auditor’s reporting responsibilities

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under the Companies Act, 2013 and CARO 2020 are independent of
management’s views.
As per sub-section (12) of section 143 of the Companies Act, 2013, if an
auditor of a company in the course of the performance of his duties as
auditor, has reason to believe that an offence of fraud involving lesser than
the specified amount [i.e. less than ` 1 crore], the auditor shall report the
matter to the audit committee constituted under section 177 or to the
Board in other cases within such time and in such manner as may be
prescribed.
In this regard, sub-rule (3) of Rule 13 of the Companies (Audit and Auditors)
Rules, 2014 states that in case of a fraud involving lesser than the amount
specified in sub-rule (1) [i.e. less than ` 1 crore], the auditor shall report the
matter to Audit Committee constituted under section 177 or to the Board
immediately but not later than 2 days of his knowledge of the fraud and he
shall report the matter specifying the following:
(i) Nature of Fraud with description;
(ii) Approximate amount involved; and
(iii) Parties involved.
In the instant case, since the fraud amount in the present case is ` 75 lakhs,
reporting to the Audit Committee constituted under section 177 or to the
Board is required on immediate basis in the abovementioned prescribed
manner.
The auditor CA Vasu is also required to report under clause (xi) of
paragraph 3 of Companies (Auditor’s Report) Order, 2020 on whether any
fraud by the company or any fraud on the Company has been noticed or
reported during the year. If yes, the nature and the amount involved is to
be indicated.
Thus, CA Vasu must report fraud in the CARO Report irrespective of
materiality considerations raised by management.
In this regard, sub-rule (4) of Rule 13 of the Companies (Audit and Auditors)
Rules, 2014 states that the company is required to disclose in the Board’s
Report the following details of each of the fraud reported to the Audit
Committee or the Board under sub-rule (3) during the year:

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(a) Nature of Fraud with description;
(b) Approximate Amount involved;
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(c) Parties involved, if remedial action not taken; and
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(d) Remedial actions taken.
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(b) (1) As per SIA 390 Monitoring and Reporting of Prior Audit Issues, the Chief
a g
ag
Internal Auditor CA Suba is responsible for continuously monitoring the
closure of prior audit issues through timely implementation of action
plans included in past audits. This shall be done with a formal monitoring
process, elements of which are pre-agreed with management and those
charged with governance. The responsibility to implement the action
plans remains with the management.
In monitoring and reporting of prior audit issues, the responsibility of
the Internal Auditor is usually in the form of an “Action Taken Report

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(ATR) of previous audits”. The internal auditor should review whether

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follow-up action is taken by the management on the basis of his report.

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If no action is taken within a reasonable time, he should draw the
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management’s attention to it. Where the management has not acted

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upon his suggestions or not implemented his recommendations, the
internal auditor should ascertain the reasons thereof.
Where the management has accepted his recommendations and
initiated the necessary action, the internal auditor should periodically
review the manner and the extent of implementation of the
recommendations and report to the management, highlighting the
recommendations which have not been implemented fully or partly.

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In the given situation, CA Suba is responsible not only for reporting

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internal control weaknesses but also for following up on the status of
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corrective actions taken by management. Since the deficiencies

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relating to segregation of duties, vendor reconciliations, and IT access

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controls were repeatedly reported in earlier internal audit reports and

gla still remain unresolved, she should evaluate the adequacy and
a
a effectiveness of management’s corrective measures, assess the risk
arising from continued non-compliance, and communicate the status
of unresolved issues to the Audit Committee. She should also highlight
delays or failure by management in implementing recommendations

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and assess whether the recurring weaknesses increase the risk of fraud,
errors, or control failures within the organization.
(2) In the given situation, the most appropriate report to be submitted is
a Follow-up Internal Audit Report / Action Taken Report (ATR) to the
Audit Committee with the status of corrective actions taken by
management on previously reported observations. Action Taken
Report may include the following:
(i) Reference to the previous audit reporting containing the reported
issues.
(ii) Implementation Action agreed by the management along with
target implementation date.
(iii) Status of action taken by management. The same may be classified
under Implemented/ Not Implemented.
(iv) Residual risk and rating for any unimplemented action.
(v) Audit findings not implemented for long period of time.
(vi) Any critical audit finding that requires immediate action for action
or implementation.
(c) According to Clause (7) of Part I of Second Schedule of the Chartered
Accountants Act, 1949, a Chartered Accountant in practice is deemed to be
guilty of professional misconduct if he does not exercise due diligence or
is grossly negligent in the conduct of his professional duties.
It is a vital clause which unusually gets attracted whenever it is necessary
to judge whether the accountant has honestly and reasonably discharged
his duties. The expression negligence covers a wide field and extends from
the frontiers of fraud to collateral minor negligence.
Further, as per Clause (8) of Part I of Second Schedule of the Chartered
Accountants Act, 1949, a Chartered Accountant in practice is deemed to be
guilty of professional misconduct if he fails to obtain sufficient information
which is necessary for expression of an opinion or its exceptions are
sufficiently material to negate the expression of an opinion.
In the given case, CA Karan issued a utilization certificate for a term loan of
` 25 crores stating that the entire amount was utilised for the intended
expansion project without conducting adequate verification procedures.

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His review was restricted to summary reports provided by the finance
manager and discussions with the managing director, while he failed to
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examine supporting documents such as bank statements, invoices,
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contracts, and payment records. The certificate also did not disclose any

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limitations or assumptions in the verification process. Subsequently, it was
s e
s e
discovered that ` 5 crores had been diverted for purposes other than the
a g la
l
approved project. This indicates gross negligence and lack of due diligence
a
ag in the discharge of professional duties, as the certificate was issued without
obtaining sufficient appropriate information which is necessary for
expression of an opinion.
Therefore, CA Karan is guilty of professional misconduct under Clause (7) and
Clause (8) of Part I of Second Schedule of the Chartered Accountants Act, 1949.
Question 6
(a) ED Motors Ltd., a leading manufacturer of high-performance electric bikes,
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is planning to expand its operations globally. In order to obtain a long-term
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loan working capital funding of ` 450 crores from a consortium of banks, the

s em
company has prepared Prospective Financial Information (PFI) covering the
next three years.
l a
CA Madhu, who has been g
a the statutory auditor of the company for the past
four years, has been appointed to examine and report on the PFI prepared by
the management. During her preliminary discussions, CA Madhu noted the
following matters:
(i) The management is completely new to the complexities involved in
international marketing projections.
(ii) The financial projections are significantly dependent on hypothetical

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assumptions that the company will achieve a 20% market share in

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Europe, within the first year. This assumption would require productions
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levels exceeding the current installed capacity of their domestic

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manufacturing facility.

las (iii) Management has relied on a combination of internal budgetary data
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ag and external reports from independent industry analysts to justify their
growth projections.
On the basis of above information determine the nature, timing and extent

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of examination procedures that CA Madhu would perform on the Prospective
Financial Information in accordance with applicable Standard on Assurance
Engagements. (5 Marks)
(b) QRT Electricals Ltd. is a mid-sized manufacturing company with a substantial
investment in Fixed Assets comprising of Plant & machinery and Land.
UV Ltd. is proposing to acquire QRT Electricals Ltd. and for this purpose it has
considered various aspects like studying the overall picture, Statement of
Profit and Loss, Balance Sheet. You have been appointed as an investigating
accountant to carry out the business investigation and it was found that some
machinery owned by the company is over 15 years old. Furthermore, the
company has revalued its fixed assets two years ago, increasing their book
values. Maintenance expenses have also declined over the years. The
machinery related to packaging line has remained idle from past 2 years.
As an investigating accountant, you are required to highlight the
considerations that shall be taken into account while evaluating the Fixed
Assets item shown in the Balance Sheet of QRT Electricals Ltd. (5 Marks)
(c) CA Alok is the auditor of VT Limited, an unlisted public company, which has
a turnover of ` 100 crore during the FY 2025-26. The statutory audit fee for
the year is fixed at ` 10 lakh. During the year, the company also offered
CA Alok, the following further assignments:
(i) Tax audit of the company u/s 44AB of the Income-tax Act, 1961, for
which the fees is fixed at ` 5 lakh.
(ii) Various certification work for which fees is fixed at ` 2 lakh.
(iii) Representation before GST authorities for which fees is fixed at ` 4 lakh.
CA Alok seeks your advise for accepting the above assignments. Comment
with reference to the provisions of the Chartered Accountants Act, 1949.
OR
(c) The Ministry of Information Technology of the Government of India has
initiated a large-scale infrastructure project to improve rural connectivity
under its "Digital Connect" programme. As part of the audit team, you are
assigned to conduct a performance audit of this project with a focus on
assessing its efficiency. While auditing the efficiency of the project, what key
aspects should the auditor consider to determine whether resources are used
efficiently. (4 Marks)
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Answer
(a) As per SAE 3400 “The Examination of Prospective Financial Information”,
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when determining the nature, timing and extent of examination procedures,
o c. o
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the following matters should be considered by CA Madhu:
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s
• the knowledge obtained during any previous engagements;
•a management’s competence regarding the preparation of prospectiveag
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ag financial information;
• the likelihood of material misstatement;
• the extent to which the prospective financial information is affected by
the management’s judgment;
• the sources of information considered by the management for the
purpose, their adequacy, reliability of the underlying data, including data
derived from third parties, such as industry statistics, to support the

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assumptions;

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e with the business and the industry in
• the stability of entity’s business; and
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• the engagement team’s experience

a
which the entity operates
information.
g
(b) Consideration that shall be taken into account while evaluating the
Fixed Assets item shown in the Balance Sheet -
(i) Fixed assets, usually, are shown in accounts at cost less depreciation
but the accounts do not show the ages of different assets. It is
desirable, therefore, to obtain age analysis of various items of fixed

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assets.

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c. o
(ii) Assets which are old or are obsolete would naturally have to be
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replaced. It should be seen that their values are not in excess of the

s em value of service that they could be expected to render to the business
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la a
during the balance period of their active life and the amount they

ag would fetch on sale as scrap.
(iii) Title deeds should be verified to ascertain the extent of enterprise’s
ownership in such assets, like land and building jointly owned by two
or more companies or their subsidiaries.

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(iv) In addition, from a study of the maintenance expenses incurred from
year to year, it should be judged whether the assets have been properly
maintained. If not, it might be necessary to incur heavy expenditure on
repairs to put them in a proper working order. In such a case, an
allowance for this factor should be made in the value of assets.
(v) More particularly, it should be seen that if assets have been revalued,
the increased depreciation charge has been adjusted against profit.
(vi) Further, investigator has to assure whether assets whose recoverable
amount is less than carrying amount are impaired and requirement of
AS 28, “Impairment of Asset”, has been complied.
(vii) It would be the duty of the investigating accountant to eliminate idle
assets after proper identification from the net worth of the business.
However, proper value of the idle assets may be separately added to
the value of the business.
(c) Appointment as a Statutory Auditor of a PSUs’/Govt Company(ies)/
Listed Company(ies) and Other Public Company(ies): As per the Council
General Guidelines 2008, under Chapter IX on appointment as statutory
auditor a member of the Institute in practice shall not accepts the
appointment as a statutory auditor of a PSUs’/Govt company(ies)/Listed
company(ies) and other public company(ies) having a turnover of
` 50 crores or more in a year and where he accepts any other work(s) or
assignment(s) or service(s) in regard to same undertaking(s) on a
remuneration which in total exceeds the fee payable for carrying out the
statutory audit of the same undertaking.
For this purpose, the term “other work(s)” or “service(s)” or “assignment(s)”
shall include Management Consultancy and all other professional services
permitted by the Council pursuant to Section 2(2)(iv) of the Chartered
Accountants Act, 1949 but shall not include
(a) audit under any other statute;
(b) certification work required to be done by the statutory auditors; and
(c) any representation before an authority;
In the given case, turnover of the VT Limited, which is a public company, is
having turnover ` 50 crore or more, therefore CA Alok statutory auditor is
covered under the provision of Chapter IX of the Council Guidelines 2008.
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Fees for tax audit work under u/s 44AB of the Income-tax Act, 1961 for ` 5
lakh, certification work for ` 2 lakh and representation fees before GST
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authority for ` 4 lakh totaling to ` 11 lakh exceeds statutory audit fees ` 10
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lakh. However, all these three services are excluded from the term “other

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work(s)” or “service(s)” or “assignment(s)”.
s e
a s e
Therefore, there is no restriction for CA Alok to accept offer of these
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services, hence there is no misconduct on the part of CA Alok under the
Chartered Accountants Act, 1949.
OR
(c) Efficiency is the input-output ratio. In the case of public spending, efficiency
is achieved when the output is maximised at the minimum of inputs, or
input is minimised for any given quantity and quality of output. When the
audit objective of efficiency considers outputs, focus is usually on processes
by which an organisation transforms inputs into outputs.
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While conducting a performance audit of “Digital Connect” programme,

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the following key aspects should be considered by the auditor to determine
whether resources are used efficiently:
l a s
(i)
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sound procurement practices are followed;
(ii) resources are properly protected and maintained;
(iii) human, financial and other resources are efficiently used;
(iv) optimum amount of resources (staff, equipment, and facilities) are
used in producing or delivering the appropriate quantity and quality
of goods or services in a timely manner;
(v) public sector programmes, entities and activities are efficiently

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managed, regulated, organised and executed;
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c. o (vi) efficient operating procedures are used; and

s em
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(vii) the objectives of public sector programmes are met cost-effectively.
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gla a
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