CA Final May 2023 Suggested Answers Paper 3 Advanced Auditing and Professional Ethics (Old Scheme)

FOR CA FINAL EXAM PREPARATION

CA Final 2023
Suggested Answers ·
Paper 3 Advanced
Auditing and
Professional Ethics
(Old Scheme)
EXAM YEAR TYPE

CA Final 2023 Suggested Answers
SUBJECT DATE

Paper 3 Advanced Auditing and Professional Ethics (Old Scheme) May 2023

Notes · Sample Papers · Previous Year Papers · Mock Tests

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

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Answer any four out of remaining five.

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(a) Joy Ltd. is. an entertainment company which runs a circus and travels around the country e
Question 1

e m the masses. The circus began losing its popularity over the past few years and las
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to entertain
has reportedly dropped by as much as 75% in the current financial year. Animal g
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attendance

a elephants in the show. The CEO noted that the audience seemed to be abandoning the
rights activists continuously targeted the circus for its use of animal creatures like

circus due to their expanding entertainment options. The high cost of moving the show
from city to city eventually made the business model untenable. As a result, many key
managerial personnel of the company left the company, there were delays in the payment
of wages and salaries, and the bank from whom the company had taken funds also decided
not to extend further finance or to fund further working capital requirements of the
company.

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When discussed with the management, the statutory auditor understood that the company

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had no action plan to mitigate such circumstances (Use of going concern assumption is

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inappropriate). Further, all such circumstances were not reflected in the financial

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statements of Joy Ltd. What course of action should the statutory auditor of the company

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take in the auditor's report in such situation?

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(5 Marks)

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(b) HAM Ltd. is engaged in the business of manufacturing of medicines. The manufacturing
process requires raw materials such as hydrochloric acid, caustic soda and other
chemicals for the manufacturing of various drugs. The Company has maintained large
stock of raw materials of all types of chemicals being used. The nature of raw material is
such that its physical verification requires the involvement of an expert. Management hired
their expert for the stock taking and auditors also involved their expert for the same
purpose.
The auditor observed that the work of the auditor's expert was not adequate for the

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auditor's purposes and he could not resolve the matter through additional audit procedures

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which included further work performed by both the auditor's expert and the auditor.

the auditor's report because he has not obtained sufficient appropriate s
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Based on above, the auditor knows that it would be right to express a modified opinion in

s he was reluctant in doing so and issued a clean audit report and g la the name of the
audit evidence. But

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included

ag expert in his report to reduce his responsibility for the audit opinion
Comment with respect to relevant Standard of Auditing relating to the action of the auditor
of issuing clean audit report. (5 Marks)

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2 FINAL EXAMINATION: MAY, 2023

(c) M/s ABC Limited is engaged in the business of construction of infrastructure and housing
projects. While preparing the financial statements for the year ended 31.03.2023,
management has made various accounting estimates and confirmed to the auditor that all
necessary accounting estimates have been recognised, measured and disclosed in the
financial statements are in accordance with the applicable financial reporting framework.
The auditor during the course of audit observed some changed circumstances giving rise
to the need for an accounting estimate. Inquiries of same were sought from the
management. Can you list down some circumstances, change of which will result in
inquiries from the management? (4 Marks)
Answer
(a) SA 570, “Going Concern”, deals with the auditor’s responsibilities in the audit of financial
statements relating to going concern and the implications for the auditor’s report.
The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding,
and conclude on, the appropriateness of management’s use of the going concern basis of
accounting in the preparation of the financial statements, and to conclude, based on the
audit evidence obtained, whether a material uncertainty exists about the entity’s abilit y to
continue as a going concern.
When the use of going concern basis of accounting is inappropriate i.e., if the
financial statements have been prepared using the going concern basis of accounting but
in the auditor’s judgment, management’s use of the going concern basis of accounting in
the preparation of the financial statements is inappropriate, the auditor shall express an
adverse opinion.
Also, when adequate disclosure of a material uncertainty is not made in the financial
statements the auditor shall express a qualified opinion or adverse opinion, as
appropriate, in accordance with SA 705 (Revised); and in the Basis for Qualified (Adverse)
Opinion section of the auditor’s report, state that a material uncertainty exists that may
cast significant doubt on the entity’s ability to continue as a going concern and that the
financial statements do not adequately disclose this matter.
In the present case, the following circumstances indicate the inability of Joy Ltd. to
continue as a going concern:
• Losing popularity over the past few years.
• Animal Rights activists continuously targeting the circus.
• Audience abandoning the circus due to their expanding entertainment options.
• High Cost of moving the show from city to city making the business model untenable.
• Key Managerial Personnel leaving the Company.

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PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS 3

• Banks decided not to extend further finance and not to fund the working capital
requirements of the Company.

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• Non availability of sound action plan to mitigate such circumstances.

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Therefore, considering the above factors it is clear that the going concern basis is

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inappropriate for the Company. Further, such circumstances are not reflected in the
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financial statements of the Company.

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ag (1)(2) Express
As such, the statutory auditor of Joy Ltd. should:
an adverse opinion in accordance with SA 705 (Revised) and
In the Basis of Adverse Opinion paragraph of the auditor’s report, the statutory auditor
should state that a material uncertainty exists that may cast significant doubt on the
entity’s ability to continue as a going concern and that the financial statements do not
adequately disclose this matter.
The auditor is also required to report as per clause (xix) of CARO 2020 that on the basis
of the financial ratios, ageing and expected dates of realisation of financial assets and
payment of financial liabilities, other information accompanying the financial statements,

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the auditor’s knowledge of the Board of Directors and management plans, whether the

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auditor is of the opinion that no material uncertainty exists as on the date of the audit report

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that company is capable of meeting its liabilities existing at the date of balance sheet as

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and when they fall due within a period of one year from the balance sheet date.
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(b) As per SA 620, “Using the work of an Auditor’s Expert”, if the auditor concludes that the
work of the auditor’s expert is not adequate for the auditor’s purposes and the auditor
cannot resolve the matter through the additional audit procedures, which may involve
further work being performed by both the expert and the auditor, or include employing or
engaging another expert, it may be necessary to express a modified opinion in the auditor’s
report in accordance with SA 705 because the auditor has not obtained sufficient
appropriate audit evidence.
In addition, the auditor shall not refer to the work of an auditor’s expert in an auditor’s
report containing an unmodified opinion unless required by law or regulation to do so. If

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such reference is required by law or regulation, the auditor shall indica te in the auditor’s

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report that the reference does not reduce the auditor’s responsibility for the audit opinion.

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If the auditor makes reference to the work of an auditor’s expert in the auditor’s

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because such reference is relevant to an understanding of a modification

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opinion, the auditor shall indicate in the auditor’s report that such does not

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reduce the auditor’s responsibility for that opinion. In such circumstances, the auditor may
a need the permission of the auditor’s expert before making such a reference.
In the given case, the auditor cannot reduce his responsibility by referring the name of
auditor’s expert and thereby issuing a clean report. The auditor should have issued a
modified report and could have given reference to the work of an auditor’s expert in that

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4 FINAL EXAMINATION: MAY, 2023

report if such reference was relevant to understanding of a modification to the auditor’s
opinion but even in that case the auditor should have indicated in his report that such
reference of an auditor’s expert does not reduce his responsibility for that opinion.
(c) As per SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting
Estimates, and Related Disclosures”, inquiries of management about changes in
circumstances may include, for example, inquiries about whether:
• The entity has engaged in new types of transactions that may give rise to accounting
estimates.
• Terms of transactions that gave rise to accounting estimates have changed.
• Accounting policies relating to accounting estimates have changed, as a result of
changes to the requirements of the applicable financial reporting framework or
otherwise.
• Regulatory or other changes outside the control of management have occurred that
may require management to revise, or make new, accounting estimates.
• New conditions or events have occurred that may give rise to the need for new or
revised accounting estimates.
During the audit, the auditor may identify transactions, events and conditions that give rise
to the need for accounting estimates that management failed to identify. SA 315 deals with
circumstances where the auditor identifies risks of material misstatement that management
failed to identify, including determining whether there is a significant deficiency in internal
control with regard to the entity’s risk assessment processes.
Question 2
(a) While conducting audit of PC Ltd., CA. T decided to use sampling technique to test the
trade receivables at the planning stage. He directed his team members to divide the whole
population of trade receivables balances to be tested in a few separate groups called
'strata'. He directed to treat each stratum as if it was a separate population and divided the
trade receivables balances of PC Ltd. for the Financial Year 2022 -23 into groups on the
basis of personal judgment as follows:
SI. No. Particulars
1 (a) Balances in excess of ` 50,00,000;
2 (b) Balances in the range of ` 40,00,001 to ` 50,00,000;
3 (c) Balances in the range of ` 30,00,001 to ` 40,00,000;
4 (d) Balances in the range of ` 20,00,001 to ` 30,00,000;
5 (e) Balances in the range of ` 10,00,001 to ` 20,00,000;
6 (f) Balances ` 10,00,000 and below

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PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS 5

From the above mentioned groups, CA. T directed to pick up different percentage of items
for examination from each of the group. One of the team members, Mr. Neel, wants to use

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some other technique of sampling for the above purpose as the concept of stratification is

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not clear to him. You are required to explain the concept of stratification and its uses to

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Mr. Neel. (5 Marks)

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(b) SPM Ltd., about to complete fifty years of age since its incorporation in the F.Y 2023-2024,

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decided during the F.Y year 2022-23 to upgrade its registered office at an important

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location in Mumbai city. As part of planned package, it decided to acquire a land very
adjacent to the site of registered office, which had been owned by Mr. Parry, who is a
director of the Company. Since he was reluctant to part with the ownership, he had been
persuaded to convey the property in favour of the company in exchange of a site owned
by the company located at the next street to the street where the registered office is
situated, which is 1.50 times larger in area than that of the site owned by the director
adjacent to the Registered office. Happier with what he was offered in negotiation,
Mr. Parry agreed for transferring the property in favour of the company in a deed of
exchange duly executed by authorized persons of the Board, and Mr. Parry. The
registration formalities were completed by 31st December, 2022. Assuming that you are

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the engagement partner for the audit of the accounts of the company for the financial year
ended on 31st March, 2023, give a list of additional audit procedures and reporting

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requirements, if any, that this transaction might trigger in your audit. (5 Marks)

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lofa landof forsugarcane
(c) Discuss the reporting of the following issues

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in - (i) giving consultancy for agriculture planting and (ii) cultivation / growing
of sugarcane crop at a stretch
government. a about 15 KMs taken on lease from state

(i) The company during the year absorbed another company- AFM Ltd., (resulting in the
latter becoming merged with this Company). The purchase price over the value of net
assets taken over was more by ` 40 lakhs. The Management wished to write it off
over five years and to claim the same as depreciation for intangibles at rates as
allowed by Income-tax Rules for intangible assets.
(ii) The Profit and loss statement of the company indicated the operating revenue of

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consultancy fees ` 75 lakhs and agriculture income of ` 225 lakhs (gross revenue

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from crop sale). The expenses included material consumed for plantation and

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add-ons for crop growing, staff cost - for plantation, interest cost (combined),

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depreciation for plantation equipment and its ancillary parts. (4 Marks)

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la a a population into sub-
Answer

ag (a) Concept of Stratification: Stratification is the process of dividing
populations, each of which is a group of sampling units which have similar characteristics
(often monetary value).

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6 FINAL EXAMINATION: MAY, 2023

Uses of Stratification
1. Audit efficiency may be improved if the auditor stratifies a population by dividing it
into discrete sub-populations which have an identifying characteristic. The objective
of stratification is to reduce the variability of items within each stratum and therefore
allow sample size to be reduced without increasing sampling risk.
2. When performing tests of details, the population is often stratified by monetary value.
This allows greater audit effort to be directed to the larger value items, as these items
may contain the greatest potential misstatement in terms of overstatement. Similarly,
a population may be stratified according to a particular characteristic that indicates a
higher risk of misstatement, for example, when testing the allowance for doubtful
accounts in the valuation of accounts receivable, balances may be stratified by age.
3. The results of audit procedures applied to a sample of items within a stratum can only
be projected to the items that make up that stratum. To draw a conclusion on the
entire population, the auditor will need to consider the risk of material misstatement
in relation to whatever other strata make up the entire population. For example, 20%
of the items in a population may make up 90% of the value of an account balance.
The auditor may decide to examine a sample of these items. The auditor evaluates
the results of this sample and reaches a conclusion on the 90% of value separately
from the remaining 10% (on which a further sample or other means of gathering audit
evidence will be used, or which may be considered immaterial).
4. If a class of transactions or account balance has been divided into strata, the
misstatement is projected for each stratum separately. Projected misstatements for
each stratum are then combined when considering the possible effect of
misstatements on the total class of transactions or account balance.
(b) CARO Audit Procedures and Reporting:
In the given situation, SPM Ltd has entered into non-cash transactions with one of the
directors, Mr. Parry during the year, by transferring the property (by Mr. Parry) in favour of
the Company in a deed of exchange of a site owned by the company.
Paragraph 3 Clause (xv) of the CARO 2020 & Reporting Requirements:
The auditor is required to report the transaction as per Paragraph 3(xv) of the CARO, 2020
which states that whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions of section 192
of Companies Act have been complied with.
For reporting on the first part of this clause, the starting point of the auditor’s procedures
could be obtaining a management representation as to whether the company has
undertaken any non-cash transactions with the directors or persons connected with the
directors, as envisaged in section 192(1) of the Act.

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PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS 7

The second part of this clause requires the auditor to report whether the company has
complied with the provisions of section 192 in this regard. Section 192(1) and (2) of the

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Act envisage the following compliances in respect of such transactions:
(i)
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The company should have obtained a prior approval for such arrangement by a
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resolution in the general meeting.

ewithmthe value of assets involved.
(ii) Notice for approval of the resolution should contain details of the arrangement along
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general meeting that it includes particulars of arrangement along with the value of
involved in such arrangements.
This transaction was duly executed by the authorised persons of the Board. The auditor
has to state the fact whether approval has been obtained in the general meeting of the
company.
Related Party Transactions
This is a transaction with a related party. The provisions of section 188 of the Companies

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Act, 2013 as regards Related Party Transactions are to be checked for compliance. Section

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189 of the Companies Act, 2013 requires a register to be maintained wherein the contract

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with related parties are to be entered. The compliance with section 177 and section 188

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has to be reported under Clause (xiii) of the CARO, 2020.
Documents to be verified:
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A scrutiny of the following books
of such audit evidence to the auditor as to the existence of such non- cash transactions.
• Register of Loans, Guarantee, Security and Acquisition Made by the Company,
Register of Contracts with Related Party and Contracts and Bodies etc. in which
Directors are Interested.
• Movements in the Fixed Asset Register.
• Minutes book of the General Meeting and Meetings of Directors.

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Report on Annual General Meeting.

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e which is not
Ltd. absorbed another company-AFM Ltd., and purchase price

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assets taken over was more by 40 lakh rupees. Since

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price over the value of net assets taken over will be resulting in goodwill

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recognised as per section 32 of the Income-tax Act, 1961. Hence,
clause 18 will be required under tax audit report/Form 3CD.
(ii) Expenditure Inadmissible Under Section 14A [Clause 21(h)]: The tax auditor is
required to report the amount of deduction inadmissible in terms of section 14A in

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8 FINAL EXAMINATION: MAY, 2023

respect of the expenditure incurred in relation to income which does not form part of
the total income under Clause 21(h) of Form 3CD.
The provisions of sub-section (2) of section 14A shall also apply in relation to a case
where an assessee claims that no expenditure has been incurred by him in relation
to income which does not form part of the total income under the Income-tax Act.
In the given situation, PPK Ltd is generating income both from agriculture as well as
non-agriculture activities. Giving consultancy for agriculture of sugarcane planting is
non-agriculture activity whereas, cultivation/ growing of sugarcane crop is an
agriculture activity.
Since the total income of the assessee includes agriculture income of ` 225 lakh
which is exempt from tax, the auditor would report that assessee has claimed
expenses against agriculture income as per clause 21(h).
Further, interest cost which is combined for agriculture activities and non -agriculture
activities would have to be allocated between exempt and taxable income. The tax
auditor would note down the amount and mention against this clause.
Question 3
(a) As a part of the listing process, M/s Sun Ltd. prepared and issued its prospectus to the
public. The top executives thought that pending litigation against the company (which
would cause a cash outflow of ` 1.25 crores) may affect the demand for share applications.
Due to this, they omitted the fact, for the well-being of the company. Mr. A, who was well
aware of this matter had authorised himself to be named in the prospectus as a director.
However, Mr. A was a little reluctant, so he informed and agreed that he shall become such
director after an interval of some time. Unfortunately, after a few days, but before joining
of Mr. A as director, this matter got leaked and several subscribers sustained losses. Mr.
A is now defending himself stating that he is currently not holding the director's post hence
no action can be taken against him. Analyse and Comment on the situation. (5 Marks)
(b) CTR & Associates is an audit firm with CA C and CA T as partners. M/s CTR & Associates
has been appointed as statutory auditor of M/s TP Hotel Ltd. for the financial year
2022-23. The audit firm is a regular customer of the hotel and the partners usually used to
stay in the same hotel at various locations in the course of travelling for their various
professional assignments. Normally, payments for such stays are settled against monthly
bills raised by the company. Give your comment on qualification of the audit firm with
respect to the provisions of the Companies Act, 2013. (5 Marks)
(c) SR and Associates are the statutory auditor of ABC Ltd. Audit of the company is pending
for F.Y 2021-22 and 2022-23 due to a dispute between auditor and company with respect
to certain proposed remarks by the auditor in the audit report for F.Y. 2021-22. The
company removed the auditor on 02.05.2023 in shareholders meeting complying with all
legal formalities. SR and Associates after coming to know about the removal, intimated the
Registrar of Companies (ROC) through letter highlighting the points of dispute including

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PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS 9

non-existence of fixed assets, bogus creditors etc. ABC Ltd complained to ICAI against SR
and Associates for their above letter to ROC. Comment with reference to the Chartered

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Accountants Act, 1949 and Schedules thereto. (4 Marks)
Answer
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(a) Damages for negligence: Civil liability for mis-statement in prospectus under section 35
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of the Companies Act, 2013, includes where a person has subscribed for securities of a
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company acting on any statement included, or the inclusion or omission of any matter, in
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the prospectus which is misleading and has sustained any loss or damage as a
consequence thereof, the company and every person who has authorized himself to be
named and is named in the prospectus as a director of the company or has agreed to
become such director either immediately or after an interval of time; shall, without prejudice
to any punishment to which any person may be liable under section 36, be liable to pay
compensation to every person who has sustained such loss or damage. Notwithstanding
anything contained in this section, where it is proved that a prospectus has been issued
with intent to defraud the applicants for the securities of a company or any other person or
for any fraudulent purpose, every person referred to in subsection (1) shall be personally
responsible, without any limitation of liability, for all or any of the losses or damages that

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may have been incurred by any person who subscribed to the securities on the basis of
such prospectus.
c
. Act, 2013, without prejudice to any liability
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ethis Act or any other law for the time being in force,
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Further, as per section 447 of the Companies

la of fraud
including repayment of any debt under

rupees or one percent of thea g
any person who is found to be guilty
turnover of the
[involving an amount of at least ten lakh
company, whichever is lower] shall be
punishable with imprisonment for a term which shall not be less than six months but which
may extend to ten years and shall also be liable to fine which shall not be less than the
amount involved in the fraud, but which may extend to three times the amount involved in
the fraud. It may be noted that where the fraud in question involves public interest, the
term of imprisonment shall not be less than three years.
Hence, in this case, Mr. A is liable for punishment even though he is currently not a director
in the company as per section 35 of the Companies Act, 2013. He shall be liable to

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punishment as per section 447 discussed above as he was aware of the litigation against the

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company which may cause outflow of ` 1.25 crore which may affect the demand for share

c. o (b) Indebtedness to the Company: According to the section 141(3)(d)(ii)sofem
application and had also authorized himself to be named in the prospectus as director.

em Act, 2013, a person who is indebted to the company for an amountlexceeding a ` 5,00,000
the Companies

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shall be disqualified to act as an auditor of such company and further under section 141(4)
he shall vacate his office of auditor when he incurs this disqualification subsequent to his
appointment.
Further, a person or a firm who directly or indirectly has business relationship with a
company or its subsidiary or its holding or associate company, is also not qualified to be

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10 FINAL EXAMINATION: MAY, 2023

appointed as an auditor of the company. But here business relationship does not include
commercial transactions which are in the ordinary course of the business of the company
at arm’s length price.
However, where the person has liquidated his debt before the appointment date, there is
no disqualification to be construed for such appointment.
In the given case, CTR & Associates, an audit firm with CA C & CA T as partners is
appointed as statutory auditor of M/s. TP Hotel Ltd. and the audit firm is a regular customer
of the hotel and the partners usually stay in the same hotel at various locations. They also
settle the payments for such stay against monthly bills raised by the company.
Assuming the balance amount at any time during the year due to the hotel does not exceed
the prescribed limits of ` 5,00,000, CTR & Associates, is not disqualified to be appointed
as statutory auditor of M/s TP Hotel Ltd as per section 141(3)(d)(ii). In the absence of the
same, the auditor shall be disqualified to act as an auditor and shall vacate his office of
auditor when he incurs this disqualification subsequent to the appointment.
Since in terms of the section 141(3)(e) of the Companies Act, 2013, CTR & Associates are
not a person or a firm who, whether directly or indirectly, has business relationship with
the company, or its subsidiary, or its holding or associate company or subsidiary of such
holding company or associate company of such nature as may be prescribed, they shall
not be disqualified to act as an auditor and shall not require to vacate their office of auditor.
(c) Clause (1) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 states
that a chartered accountant in practice shall be deemed to be guilty of professional
misconduct, if he discloses information acquired in the course of his professional
engagement to any person other than his client so engaging him, without the consent of
his client or otherwise than as required by any law for the time being in force.
An accountant, in public practice, has access to a great deal of information of his client
which is of a highly confidential character. It is important for the work of an accountant and
for maintaining the dignity and status of the profession that he should treat such information
as having been provided to him, only to facilitate the performance of his professional duties
for which his services have been engaged. The Code of Ethics further clarifies that such a
duty continues even after completion of the assignment.
In the given situation, SR & Associates complained to the Registrar of Companies (ROC)
through letter highlighting the points of dispute including non-existence of fixed assets,
bogus creditors, etc. after coming to know about the removal. SR & Associates made
voluntary disclosure of the information acquired during the professional engagement
without the consent of the client and without there being any requirement in law to disclose
the same.

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PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS 11

Question 4
(a) BETA Ltd is engaged in the Construction business since year 2001. The auditor understands

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that a thorough construction estimate is vital to the viability of any construction business and

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requested the information related to financing and operating estimated costs from the

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management to review the outcome of accounting estimates included in the prior period

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financial statements and their subsequent re-estimation for the purpose of current period.

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The management refused to provide the information to the auditor as it believed that the
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judgments and estimates made in the prior periods were based on the information available
at that time, and the review of the prior period information should not be done by the auditor
in the current financial year. With reference to the relevant SA, comment on whether the
contention of management is correct or not. (5 Marks)
(b) RB & Co. are the statutory auditors of Legal Finance Ltd., an NBFC engaged in the
business of accepting public deposits and giving loans. Auditors are concerned that the
format of the financial statements should be prepared as per the notification issued by the
Ministry of Corporate Affairs dated 11th October, 2018. While auditing there was a
difference of opinion between CA R and CA B regarding the disclosure of "Other Income"

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in the financial statements. CA R believes that there is no difference in the presentation

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requirements between Division II and Division III of Schedule III of the Companies Act,

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2013. Is the contention of CA R correct? (5 Marks)

s e2021-22,
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(c) ABC & Co is a firm of Chartered Accountants

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(1) Eighteen listed companiesgconsisting of -
and Chennai. During the financial year the firm carried out statutory audits of

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(A) Ten companies with turnover exceeding ` 1000 crores - one public sector Listed
Company, the rest nine being companies in private sector and
(B) Eight companies with turnover exceeding ` 500 crores and less than or equal to
` 1000 crores and
(2) Twenty four private limited companies.
The firm had subjected itself to Peer Review process during 2020-21 and continues to hold

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certificate issued by Peer Review Board with validity date unexpired. During the F.Y.

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2022-23 it had been decided that the firm be subjected to Quality Review (QR) by QRB of

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the Institute. Can QR be so conducted for this firm? If yes, can one of the audits of listed

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companies- viz. audit of public sector Company done by firm in 2021-22 be subjected to

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QR by QRB, as this is the biggest statutory audit in terms of turnover of the auditee, as

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well as of complexity of audit issues involved? (4 Marks)

a Answer
(a) As per SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting
Estimates, and Related Disclosures”, the auditor shall review the outcome of accounting
estimates included in the prior period financial statements, or, where applicable, their

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12 FINAL EXAMINATION: MAY, 2023

subsequent re-estimation for the purpose of the current period. The nature and extent of
the auditor’s review takes account of the nature of the accounting estimates, and whether
the information obtained from the review would be relevant to identifying and assessing
risks of material misstatement of accounting estimates made in the current period financial
statements.
The outcome of an accounting estimate will often differ from the accounting estimate
recognised in the prior period financial statements. By performing risk assessment
procedures to identify and understand the reasons for such differences, the auditor may
obtain:
• Information regarding the effectiveness of management’s prior period estimation
process, from which the auditor can judge the likely effectiveness of management’s
current process.
• Audit evidence that is pertinent to the re-estimation, in the current period, of prior
period accounting estimates.
• Audit evidence of matters, such as estimation uncertainty, that may be required to be
disclosed in the financial statements.
The review of prior period accounting estimates may also assist the auditor, in the current
period, in identifying circumstances or conditions that increase the susceptibility of
accounting estimates to, or indicate the presence of, possible management bias. The
auditor’s professional skepticism assists in identifying such circumstances or conditions
and in determining the nature, timing and extent of further audit procedures. However, the
review is not intended to call into question the judgments made in the prior periods that
were based on information available at that time.
In the given case, the management is not correct in refusing the relevant information to the
auditor.
(b) Though presentation requirements under Division III for NBFCs are similar to Division II
(Non NBFC) to a large extent however there are certain following differences in the same:
(a) An NBFC is required to separately disclose by way of a note any item of ‘other income’
or ‘other expenditure’ which exceeds 1 per cent of the total income. Division II, on the
other hand, requires disclosure for any item of income or expenditure which exceeds
1 per cent of the revenue from operations or ` 10 lakhs, whichever is higher.
(b) NBFCs have been allowed to present the items of the balance sheet in order of their
liquidity which is not allowed to companies required to follow Division II.
(c) NBFCs are required to separately disclose under ‘receivables’, the debts due from
any Limited Liability Partnership (LLP) in which its director is a partner or member.
(d) NBFCs are also required to disclose items comprising ‘revenue from operations’ and
‘other comprehensive income’ on the face of the Statement of profit and loss instead
of showing those only as part of the notes.

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PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS 13

(e) Separate disclosure of trade receivable which have significant increase in credit risk
& credit impaired.

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(f) The conditions or restrictions for distribution attached to statutory reserves have to

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be separately disclose in the notes as stipulated by the relevant statute.

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In view of the above, contention of CA R that there is no difference in the presentation

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requirement between Division II and Division III of the Companies Act, 2013 is not correct.
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(c) Peer review is a review of the systems and procedures of an audit firm. Peer review is a
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part of the activities of ICAI aimed at improving the quality of service s. Whereas Quality
Review Board (QRB) is constituted by the Central Government and is independent of ICAI.
As per Section 28A of the Chartered Accountant’s Act, the Central Government has the
authority to constitute a Quality Review Board. QRB carries out supervisory and
disciplinary functions.
Further, Rule 3 (1) of National Financial Reporting Authority Rules, 2018 inter alia, provides
that the Authority (NFRA) shall have power to monitor and enforce compliance with
accounting standards and auditing standards, oversee the quality of service under sub -
section (2) of section 132 or undertake investigation under sub-section (4) of such section

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of the auditors of the prescribed class of companies and bodies corporate including

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. to the Quality Review Board that in view of
companies whose securities are listed on any stock exchange in India or outside India.

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The Ministry of Corporate Affairs has clarified

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issue of QRB reviewing audits oflthe
Sec.132 (2) of the Companies Act, 2013

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companies/bodies corporate specified under Rule 3
of the NFRA Rules, 2018 will only arise in case a reference is so made to QRB by NFRA,
and not otherwise.
In the given situation, ABC & Co., a Chartered Accountant firm, is having unexpired validity
date Peer Review Certificate issued by Peer Review Board. It was also decide d to have
Quality Review of ABC & Co. by Quality Review Board. In view of above, it can be
concluded that Peer Review and Quality Review both are separate distinct activities.
Therefore, Quality Review of ABC & Co. can be conducted in respect of twenty-four private
limited companies.

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Further, considering the above, in the case of statutory audits of all 18 listed entities, NFRA

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has power to oversee quality of services of these audit firms. Therefore, none of the audits

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of listed companies – viz. audit of public sector company done by firm in 2021-22 can be

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subjected to Quality Review by Quality Review Board irrespective of the fact that it is

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biggest statutory audit in terms of turnover of the auditee, as well as of complexity of audit
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issues involved.

a Question 5
(a) MBP Ltd. is into the footwear manufacturing business and started its operations in the year
2015. For the last two financial years, the company's profit declined even when there was
an increase in the sales and production of goods by the company. So, the management of

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14 FINAL EXAMINATION: MAY, 2023

MBP Ltd. felt a need to assess how well their team is applying its strategies and resources.
They appointed Mr. Pal to conduct the management audit with the objective of detecting
and overcoming current managerial deficiencies.
After completing the management audit, Mr. Pal is in the process of drafting the final
management audit report. Briefly discuss the steps to be taken into consideration by him
in preparing the management audit report. (5 Marks)
(b) CA Mohan has been appointed as a Peer Reviewer for M/s TB & Associates. He has asked
for all the management consultancy engagements done by the firm and representations
before various authorities carried out by the M/s TB Associates for his peer review during
the period considered for peer review purposes by the board. He has also sent out a mail
to Peer Review Board regarding his selections. Mr. T, the managing partner of the firm
believes that these areas are outside the scope of the Peer Reviewer. Is the contention of
Mr. T correct or not? (5 Marks)
(c) LMN Ltd., a manufacturing concern, sold a house property owned by it in Chennai for a
consideration of ` 58 lakhs, to Mr. X on 14.09.2022. LMN Ltd. purchased the house
property in the year 2017 for ` 45 lakhs. The stamp duty value on the date of transfer i.e.
14.09.2022·is ` 74 lakhs for the said house property. How would you deal with this matter
in the tax audit report of LMN Ltd.? (4 Marks)
Answer
(a) The Steps to Prepare the Management Audit Report:
(i) Planning the Audit Report - Before starting the report, the auditor should ask
himself, “What do I want to tell the reader about this audit?” The answer will enable
him to communicate effectively.
(ii) Supporting information - The management auditor should supplement his report
with appropriate audit evidence which sufficiently and convincingly supports the
conclusions.
(iii) Preparing draft report - Before writing the final report, the auditor should prepare a
draft report. This would help him in finding out the most effective manner of presenting
his report. It would also indicate whether there is any superfluous information or a
gap in reasoning.
(iv) Writing and issuing the final report - The final report should be written only when
the auditor is completely satisfied with the draft report. The head of the management
auditing department may review and approve the final report. Before issuing the final
report, the auditor should discuss conclusions and recommendations at appropriate
levels of management. The report should be duly signed and dated.
(v) Follow-up of the audit report - The management auditor should review whether
follow-up action is taken by management on the basis of his report. If no action is
taken within a reasonable time, he should draw management’s attention to it.

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PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS 15

(vi) Action / Response of Management on Audit Report: Where management has not
acted upon his suggestions or not implemented his recommendations, the auditor

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should ascertain the reasons thereof. In cases where he finds that non-

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implementation is due to a gap in communication, he should initiate further

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discussions to bridge such gaps. The actions and responses to the Management

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Audit Report reflect management’s attitude to the audit. In any case, the auditor to
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retain the usefulness of the audit function should ascertain from the management,

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preferably in writing, the reasons for non- implementation. It is possible that because
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of change in circumstances, the audit observation did not require any action on the
part of the management. The auditor should satisfy himself on the appropriateness of
such reasons as well to close the issue.
Alternative Answer
(a) The Steps to Prepare the Management Audit Report
(i) Title -The management audit report should have a short but descriptive title so that
its subject matter can be easily identified.
(ii) Objectives - The management auditor may describe the objectives of the audit

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assignment.

em -These may be given either department wise
(iii) Scope -The management auditor may give a brief description of the activities audited

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by him.

or in the order of importance.la
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(iv) Findings, conclusions and opinions

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facts and data pertaining to the situation should
be assembled, classified Each finding should be discussed
comprehensively and correlated with other findings. Conclusions and opinions should
normally follow the findings. Tables or graphs may be used for the presentation of
statistical data in appendices.
(v) Recommendations-A management audit report may include recommendations for
potential improvements. However, care should be taken in making recommendations
in order that the auditor’s own objectivity may not become the subject matter of
question. He may point out defects and make recommendations in a broad manner
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on how to overcome them. He should avoid providing detailed procedures in the

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capacity of an auditor. Normally specifying procedures etc. should rest with

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consultants.
(vi) Auditee’s views -The auditee’s views about audit conclusions orsrecommendations
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may also be included in the audit report in appropriate circumstances.

ag (vii) Summary -A summary of conclusions and recommendations
end. This is particularly useful in long reports.
A summary of past observations and their implementation and closure status may
also be included as a part of the Management Audit Report. This should also highlight

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16 FINAL EXAMINATION: MAY, 2023

the escalations made because of the non-implementation of the agreed audit
recommendations and the revised implementation timelines, if any.
(b) Selection of Assurance Service Engagements for Review: Peer Review Guidelines
defines the scope of peer review which revolves around compliance with technical,
professional and ethical standards; quality of reporting; systems and procedures for
carrying out assurance services; training programmes for staff including articled and audit
assistants involved in assurance engagements, self-evaluation under Audit Quality
Maturity Model or any other guideline issued by the Centre for Audit Quality, compliance
with directions and / or guidelines issued by the Council to its Members, including fees to
be charged, number of audits undertaken, register for Assurance Engagements conducted
during the year and such other related records and compliance with directions and / or
guidelines issued by the Council in relation to article assistants and / or audit assistants,
including attendance register, work diaries, stipend payments, and such other related
records. The entire peer review process is directed at the assurance services.
Assurance Services means assurance engagements services as specified in the
“Framework for Assurance Engagements” issued by the Institute of Chartered Accountants
of India and as may be amended from time to time means an engagement in which a
practitioner expresses a conclusion designed to enhance the degree of confidence of the
intended users other than the responsible party about the outcome of the evaluation or
measurement of a subject matter against criteria.
Assurance engagements does not include Management Consultancy Engagements;
Representation before various authorities, engagements to prepare tax returns or advising
clients in taxation matters, engagements for the compilation of financial statements;
engagements solely to assist the client in preparing, compiling or collating information
other than financial statements, testifying as an expert witness, providing expert opinion
on points of principle, such as Accounting Standards or the applicability of certain laws on
the basis of facts provided by the client; and Engagement for Due diligence.
In the given situation, CA. Mohan is appointed as a peer reviewer for M/s TB & Associates,
has asked for all the management consultancy engagements done by the firm and
representations before various authorities carried out by M/s TB & Associates for peer
review. In view of above, Peer Review of management consultancy engagements and
representation before various Authorities by CA. Mohan is not correct as management
consultancy engagements and representation before various authorities are not covered
in the scope of Assurance engagement and Peer Review is directed at assurance
engagement only.
(c) Reporting Requirement Under Clause (17) of Form 3CD: In the given case, LMN Ltd.,
has sold a house property during the year for a consideration of rupees 58 lakh which is
less than stamp duty value i.e. rupees 74 lakh. Hence, tax auditor is required to report on
the same under Clause 17 of Form 3CD.As per Clause 17 of Form 3CD, the tax auditor is
required to furnish detailed information in case if any land or building or both is transferred

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PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS 17

during the previous year for a consideration less than value adopted or assessed or
assessable by any authority of a State Government referred to in section 43CA or 50C.

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The detailed information required to be furnished is as under:

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Details of Consideration Value Whether provisions of second

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property received or adopted or proviso to subsection (1) of
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accrued assessed or section 43CA or fourth proviso to

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assessable clause (x) of sub-section (2) of
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section 56 applicable? [Yes/No].’’;

The auditor should obtain a list of all properties transferred by the assessee during the
previous year. He may also verify the same from the statement of profit and loss or balance
sheet, as the case may be. Further, the auditor has to furnish the amount of consideration
received or accrued, during the relevant previous year of audit, in respect of land/building
transferred during the year as disclosed in the books of account of the assessee.
For reporting the value adopted or assessed or assessable, the auditor should obtain from

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the assessee a copy of the registered sale deed in case, the property is registered. In case

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the property is not registered, the auditor may verify relevant documents from relevant

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authorities or obtain third party expert like lawyer, solicitor representation to satisfy the

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compliance of section 43CA / section 50C of the Act. In exceptional cases where the

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auditor is not able to obtain relevant documents, he may state the same through an
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observation in his report 3CA/CB.
Question 6
(a) SAM Yarns Limited - a listed Company, having its registered office at Meerut is engaged
in manufacturing of various types of yarns to be supplied to the textile mills. The Company
has installed pollution control equipment for processing the pollutants so that before
discharge of effluents outside factory, the level of pollution is kept at a level below the
prescribed standard. The Company managed to get pollution clearance certificate by unfair
means, while still there continues to be breach of pollution control laws in matters of

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discharge of polluting effluents. Amount of ` 10.25 Lacs had been incurred for arranging

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clearance certificate and the amount incurred unlawfully had been booked as pollution
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recycling expenditure. The matter had not reached to those in governance, and the

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Director-Finance who is a Chartered Accountant came to know of these matters on review

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of major expenditure incurred during the period. Comment the action/responses expected

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of Director - Finance (CA Rahul) referring to any applicable requirements of Responses for

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NOCLAR under Code of Ethics. (5 Marks)
(b) When auditing in an automated environment, the auditor should be aware, adhere to, and
be guided by the various standards, guidelines, and procedures that may be relevant to
both audit and the automated environment. Explain briefly the following common standards
and guidelines that are relevant in this context-

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18 FINAL EXAMINATION: MAY, 2023

(i) The Cyber security Framework.
(ii) Control Objectives for Information and Related Technologies.
(iii) The Payment Card Industry.
(iv) Information Technology Infrastructure Library. (5 Marks)
(c) AB Ltd wants to acquire a unit of CT Ltd. AB Ltd is uncertain about the future viability of
the unit under consideration. You are appointed to investigate economic and financial
position of the unit. What are the factors that you shall consider while studying the
economic and financial position of the business? (4 Marks)
OR
RR & Co have been appointed as the auditors of HDG Insurance Company Limited. While
conducting its audit, engagement partner noticed various actuarial assumptions disclosed
by way of notes to the accounts and several other important actuarial processes being
followed in accordance with general regulatory guidelines. Actuaries in the life insurance
business have gained tremendous importance.
Explain the role of the auditor in the actuarial process, and the area of the insurance
business where the actuarial department concentrates. (4 Marks)
Answer
(a) In the given situation, SAM Yarns Limited, a listed company, has installed pollution control
equipment for processing the pollutants to keep the level of pollution below the prescribed
standard. The company managed to get pollution certificate by unfair means whereas
breach of pollution control laws still continues. For arranging clearance certificate amount
of 10.25 lakhs had been incurred unlawfully. CA. Rahul, Director Finance, came to know
about these matters on review of the same during the period.
NOCLAR, under Code of Ethics, is applicable on professional accountants in service, and
in practice. Among those in practice, it applies to Auditors, as well as professional services
other than Audit.
It is applicable to Senior Professional Accountants in service, being employees of listed
entities. Senior professional accountants in service (“senior professional accountants”)
includes directors.
NOCLAR takes into account non-compliance that causes substantial harm resulting in
serious consequences in financial or non-financial terms.
As per NOCLAR, in exceptional circumstances, the professional accountant might become
aware of an imminent breach of a law or regulation that would cause substantial harm to
investors, creditors, employees or the general public. Having first considered whether it
would be appropriate to discuss the matter with management or those charged with
governance of the company, the accountant shall exercise professional judgment and
determine whether to disclose the matter immediately to an appropriate authority in order

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PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS 19

to prevent or mitigate the consequences of such imminent breach. If disclosure is made,
that disclosure is permitted.

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CA Rahul, Director-Finance is expected of taking the following action/responses:

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• Obtaining an Understanding of the Matter.

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• Addressing the Matter.

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•

ag • Determining Whether to Disclose the Matter to an Appropriate Authority.
• Imminent Breach.
• Documentation.
(b) When auditing in an automated environment the auditor should be aware, adhere to and
be guided by the various standards, guidelines and procedures that may be relevant to
both audit and the automated environment. Given below are some of the common

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standards and guidelines that are relevant in this context include:

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(i) The Cybersecurity Framework (CSF) published by the National Institute of

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Standards and Technology is one of the most popular frameworks for improving

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critical infrastructure cybersecurity. This framework provides a set of standards and
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best practices for companies to manage cybersecurity risks.
(ii) Control Objectives for Information and Related Technologies (CoBIT) is best
practice IT Governance and Management framework published by Information
Systems Audit and Control Association. CoBIT provides the required tools, resources
and guidelines that are relevant to IT governance, risk, compliance and information
security.
(iii) The Payment Card Industry – Data Security Standard or PCI-DSS, is the most
widely adopted information security standard for the payment cards industry. Any
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card/debit card information are required to implement the security controls in
accordance with this standard.
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of best practice processes and procedures for IT service management

a Example for ITIL and ISO 20000 - change management, incident management,
problem management, IT operations, IT asset management are some of the areas
that could be relevant to audit.

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20 FINAL EXAMINATION: MAY, 2023

(c) For studying the economic and financial position of the business, the following
should be considered:
(i) The adequacy or otherwise of fixed and working capital. Are these sufficient for the
growth of the business?
(ii) What will be the trend of the sales and profits in the future? Establishing the trend of
sales, product-wise and area-wise will ordinarily help in drawing a conclusion on
whether the trend will be maintained in the future.
(iii) Whether the profit which the business could be expected to maintain in the future
would yield an adequate return on the capital employed?
(iv) Whether the business is operating at its 100 percent capacity or improvements can
be made to reach at full productivity?
OR
(c) Role of Auditor: Auditors in the Audit report are required to certify, whether the actuarial
valuation of liabilities is duly certified by the appointed actuary, including to the effect that
the assumptions for such valuation are in accordance with the guidelines and n orms, if
any, issued by the authority and/or the Actuarial Society of India in concurrence with the
IRDA.
Hence, the auditors generally rely on the Certificate issued by the Appointed Actuary,
certifying the Policy liabilities. However, the auditor may discuss with the Actuaries with
respect to process followed and assumptions made by him before certifying the Policy
liabilities.
Actuarial department broadly concentrates following key areas of Insurance business:
✓ Product Development/ Pricing and Experience analysis.
✓ Model Development.
✓ Statutory Valuations and reserving.
✓ Business Planning.
✓ Solvency management.
✓ Management reporting on various business valuations and profitability models of the
Life Insurance business.

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