CA Inter Jan 25 Suggested Answers | Audit
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Table of Content
CA Inter Jan 25 Suggested Answer Other Subjects Blogs :
MCQs :
1. Which of the following statements is not correct about Limited Liability Partnership (LLP)?
Answer:
2. In case any intangible asset is not in active use by the entity, the auditor should check whether:
Answer:
3. Management of ECX Systems Limited acknowledged that going concern assumption will not be suitable while preparing financial statements and informs the auditor that the fact of uncertainty related to going concern would suitably be disclosed in the notes of accounts. How should the auditor address this while preparing Independent Auditor’s Report?
Answer:
Case Scenario – I
PKH & Associates, a Chartered accountant firm, is practicing in Mumbai since last two decades. Rahul got the opportunity to work as an article clerk with PKH & Associates. After completion of formalities of article clerk registration, Rahul is placed in the statutory audit team of the firm. CA P, the partner heading audit team, planned to take Rahul in the audit work of M/s Fox India Limited for the financial year 2023-24. Till last year, CA K was the head of the audit team for audit of M/s Fox India Limited. As it is the first assignment of Rahul, he was instructed by the partner to go through the audit file of M/s Fox India Limited for the financial year 2022-23 and familiarize himself with audit procedures and methodology to be followed for upcoming audit assignment.
On-going through the audit file of F.Y 2022-23, Rahul found revised engagement letter, other working papers relating to MAT & Deferred tax calculations and the following extract on verification of expenses:
Name of concern: M/s. Fox India Limited
Financial Year: 2022-23
Prepared by: D (05.05.2023)
Reviewed by: F (06.05.2023)
Approved by: CA K (07.05.2023)
|
Sr. No. |
Nature of Procedure |
Extent of Check |
Basis of Sample |
Done by |
|
1. |
Vouch few expense invoices available in record of concern |
10% |
Random Sampling |
D |
|
2. |
Trace these invoices into the account books of the concern |
10% |
Random Sampling |
D |
|
3. |
Verify few invoices with the GST data of the concern |
10% |
Random Sampling |
D |
Rahul immediately drafted a revised engagement letter for the financial year 2023-24 and also specified the scope of audit to include the following statements:
Statement I: Reliability and sufficiency of financial information.
Statement II: Proper disclosure of financial information.
Statement III: Responsibility of an auditor to prepare the financial statements, and
Statement IV: Coverage of all aspects of entity relevant to the financial statements being audited.
He thought that it is mandatory to obtain an engagement letter every year and handed over the revised draft to CA P. CA P is surprised as to why Rahul drafted the same and explained him the situations under which it is necessary to obtain a revised engagement letter
Before finalizing the audit report of M/s. Fox India Limited for the F.Y 2023-24, Rahul performed the following procedures regarding subsequent events:
(i) Obtained an understanding of procedures established by the company to ensure that subsequent events are identified.
(ii) Inquired management of the company as to whether any subsequent events have occurred which affects the financial statements as on 31.03.2024.
(iii) Read the entity’s latest subsequent interim financial statements.
(iv) Read the minutes of meetings of M/s. Fox India Limited that have been held up to 31.03.2024.
Based on the above facts, answer the following Q. Nos. 4 to 7.
4. Which of the audit procedure performed (before finalizing the audit report of M/s. Fox India Limited) by Rahul is not as per SA 560?
Answer:
5. Which of the following would not form part of the explanation given by CA P to Rahul?
Answer:
6. Which of the statements included by Rahul in revised draft engagement letter is incorrect?
Answer:
7. How will you categorize the information pertaining to F.Y 2022-23 in relation to extract found?
Case Scenario -II
CA F has been appointed as an auditor of a manufacturing entity. Pursuant to appointment, CA F planned to assess the risk of material misstatement. During this process, CA F observed that the entity has identified various controls to mitigate the risk. The entity has implemented a control (named TARGET) whose objective is to ensure that production systems are processed to meet financial reporting objectives.
On completion of risk assessment procedure, CA F was wandering as to how he can verify the existence of related party relationships and transactions. So, he consulted one of his colleagues, CA Z, who suggested the following ways to identify the same:
(i) Information supplied by the entity to regulatory authorities.
(ii) Entity’s income tax returns.
(iii) Inventory records maintained by the entity.
(iv) Life insurance policies acquired by the entity.
On-going through the financial statement provided by the entity, CA F observed that the entity has significantly borrowed the amount during the financial year 2023-24. CA F wanted to ensure that all borrowing on the balance sheet represent valid claims by banks or other third parties. Accordingly, he performed the following procedures:
(i) Reviewed subsequent transactions after the end of the reporting period.
(ii) Recomputed the interest on borrowing.
(iii) Reviewed board minutes for approval of new lending agreements.
(iv) Agreed loan balance and loan payables to the loan agreement.
CA F decided to perform analytical procedures to obtain audit evidence as to overall reasonableness of purchase quantity and price. For this, CA F scrutinized raw material consumed as per manufacturing account and compared the same with previous years with closing stock. The variations observed were discussed with the management of the entity.
Based on the above facts, answer the following Q. Nos. 8 to 11.
8. CA F performed which of the following analytical procedure to obtain the audit evidence with respect to the overall reasonableness of purchase quantity and price of raw material?
Answer:
9.Control “TARGET” will be categorised in which of the following?
Answer:
10. Which of the procedures performed by CA F is suitable for satisfaction of concern regarding borrowing?
Answer:
11. Do you agree with all the ways suggested by CA Z to CA F?
Answer:
Question 1 (A) :
AP & Co., Chartered Accountants, are appointed as statutory auditor of Heavy Industries Limited, a listed company engaged in manufacturing of electric vehicles, for the F.Y 2023-24. As per the recent guideline issued by the regulatory authority, every listed company is required to maintain the digital database of all those personnel who could access the books of the company to avoid Insider Trading. In case of non-compliance, hefty fines may be imposed on the company. CA P is the engagement partner from auditor firm for the audit of Heavy Industries Limited. During planning, CA P planned that he would inquire from in-house IT Head of the company about the maintenance of the digital database to identify and assess the risk of non-compliance with regulatory guidelines. In the light of above facts, explain:
Answer:
Question 1 (B) :
Fashion Garments Limited (FGL) is a company engaged in the manufacturing and sale of ready-made garments. The products manufactured by FGL cater to clothing requirements of men, women, and kids' section. Pearl & Associates, Chartered Accountants, is the statutory auditor of FGL. Partner CA Pearl asked her audit assistant to go through the segment information disclosed and presented in the financial statements. The assistant is new to the audit engagement and seeks her guidance on what is the key responsibility of the auditor in relation to segment information.
What should CA Pearl guide the assistant on the said matter?
What audit procedures should CA Pearl perform to ensure that methods used by the management to present segment information are in accordance with the applicable financial reporting framework?
Answer:
Question 1 (C) :
Spare Parts Limited received an input from internal auditors that internal controls implemented by the company appear to be reasonable but not so strong that any fraudulent activity can be prevented or timely detected by such controls. Accordingly, a qualified person should head the internal controls department. CA Raj has been appointed as an Internal Control Head of the company. His scope of work includes development of internal controls in various departments/areas of the company. On his joining, he studied the various verticals and after identifying the important areas (prone to fraud) implemented strong controls in those areas. In his meeting with senior management and statutory auditors, he assured that satisfactory control environment exists and fraud cannot happen.
Whether existence of a satisfactory control environment can be considered as an absolute deterrent to fraud?
Answer:
Question 2 (A) :
XYZ Ltd., a manufacturing company engaged in the production of various types of yarn, is planning to expand its operations into a new geographical market and also add new products. The company has prepared prospective financial information to be presented to potential investors and financial institutions to secure funding for the expansion.
XYZ Ltd. engages a firm of auditors to conduct an assurance engagement on this prospective financial information. During the engagement, the auditors reviewed the assumptions made by XYZ Ltd.'s management and issued a report.
Explain the key differences between prospective financial information and historical financial information. How does this distinction impact the level of assurance provided in an assurance engagement on prospective financial information?
Answer:
Question 2 (B) :
CA H is managing partner of HK & Co., a Chartered Accountant firm, having registered office at Delhi. With the annual task of reviewing whether any threat to independence is observed in the firm, CA H noted down the following observations received from the staff and partners of the firm for the F.Y 2023-24:
You are requested to help CA H in classifying the type of threats to independence in each of the above observations received from the staff and partners of the firm.
In case such threats exist, what should the auditor do?
Answer:
Question 2 (C) :
FRP & Associates are the statutory auditors of Paint Private Limited. The company is into the business of trading and has operations across India. CA M, partner in charge of the audit, is carrying out the audit procedures with his audit team. He entrusted CA Ravi, one of the team members, with the task of obtaining various audit evidences connected with the audit and submit the same to the engagement partner for finalizing the audit report.
How can CA M ensure that the evidences collected by CA Ravi during the audit will be sufficient for the purpose of audit or not?
Answer:
Question 3 (A) :
ABC & Co., a Chartered Accountant firm, has been appointed as the statutory auditors of Pen Private Limited for the F.Y 2023-24. During audit, one of the team members, Mr. R noticed that Pen Private Limited has purchased software amounting to ₹2.00 crore and the said software is not an integral part of the related hardware. Mr. R further observed that Pen Private Limited has conducted some research on an internal project work amounting to ₹1.00 crore. Pen Private Limited, following Indian GAAP, has presented the aforesaid details in the Balance Sheet as on 31st March, 2024 as follows:
|
Property, Plant, and Equipment |
₹ |
|
Software |
2.00 crore |
|
Research |
1.00 crore |
Mr. R approached the engagement partner with the above details and enquired about the correctness of the presentation made by Pen Private Limited in terms of Schedule III to the Companies Act, 2013. Mr. R further wanted to ensure that all additions to Intangible assets during the year 2023-24 have been recorded appropriately in the financial statements of Pen Private Limited. Guide Mr. R.
Answer:
Question 3 (B) :
Project India Limited (PIL) is engaged in manufacturing and trading of disposable glasses and plates used in social gatherings/functions. XYZ & Co., Chartered Accountants, is the statutory auditor of PIL for the F.Y 2023-24. Analytical procedures carried out by the audit team, headed by CA Z, indicate that the company’s business is going downward and PIL...
could achieve only 50% of total revenue of F.Y 2022-23. Management has not taken any steps to increase the revenue or add new products or customers to stabilize the revenue and profitability. Also, the suppliers are demanding cash payment at the time of purchase of raw material.
Before finalizing the audit report, the audit in charge asked for a cash flow forecast from management for the next 12 months from the end date of financial statements. Keeping in view the above facts, answer the following:
Answer:
Question 3 (C) :
Singh & Associates, while carrying out statutory audit of Rubber Industries Limited, observed that debtors are not making payments invoice-wise. As the debtors constitute sixty percent of the total assets, auditors requested management to provide external confirmations of all the debtors outstanding for an amount exceeding ₹1.00 Lac. However, management resisted and no external confirmations were made available.
The auditor firm has decided to disclaim an opinion on the financial statements and seek your guidance on amendments that should be made in the "Basis for Opinion" section and elements required by SA 705 (Revised) which need not be included in the auditor’s report. Guide them suitably.
Answer:
Question 4 (A) :
PQR & Co., Chartered Accountants, has been appointed as statutory auditor of MGM Ltd. The financial statements of the company have material amount outstanding as debtors. Ageing of debtors is being done by the internal auditors and is given by them in their monthly report. This issue was also discussed with the management. The engagement partner from PQR & Co. decided to give the age-wise debtors as per the report of internal auditor due to a shortage of time. After the audit report was released, the engagement partner realized that the disclosure of the debtors is misleading and the ageing was not done by the internal auditor on correct principles due to which the provision made against old debtors was wrong. The engagement partner held the internal auditor responsible for this.
Is he correct in making the statement that the internal auditor is responsible for false provisioning? What considerations PQR & Co. should have undertaken before relying on the work of the internal auditor?
Answer:
Question 4 (B) :
Identify and explain the assertions that the auditor will check by performing the following audit procedures:
Answer:
Question 4 (C) :
NHG & Co., Chartered Accountants, is statutory auditor of M/s Backlog Private Limited (BPL) for the F.Y 2023-24. BPL is engaged in providing telecom services and received a notice from telecom regulator to deposit fee for violating norms. BPL went into litigation and filed an appeal with telecom appellate authority and the matter is pending for decision as at the end of the financial year. However, the company has disclosed the same in its financial statements. Audit team members have completed the audit procedures for the year 2023-24 and are in the process of drafting the audit report. Audit team leader knows that matter of norms violation and pending appeal need to be included in the audit report and seeks your guidance on how to report the matter in the auditor’s report. Guide him suitably.
Answer:
Question 5 (A) :
Z Ltd. engaged ABC & Co., Chartered Accountants, to conduct its statutory audit for the F.Y 2023-24. The audit team developed an overall audit strategy and plan to address the risk. During the audit, several significant changes occurred, including the discovery of a material misstatement in inventory valuation and changes in the scope of audit procedures due to an unexpected acquisition by Z Ltd. The audit documentation for Z Ltd. should reflect these changes but the auditor of a company failed to document the audit strategy and the audit plan.
As a senior auditor of the firm, briefly outline what should be included in the documentation of audit strategy and audit plan and how should the audit documentation address significant changes made during the audit engagement.
Answer:
Question 5 (B) :
SRP Limited appointed M/s JK & Co. as its statutory auditors. Auditors, while carrying out the audit, observed that the company has entered into a complex transaction having material effect on the financial statements. In order to have realistic information on the said transaction (relevant to the audit), the audit team decided to take assistance from those charged with governance. Two of the team members were discussing as to who can be “Those charged with governance” but could not get a fair idea of the same. Can you guide them by explaining the same?
Answer:
Question 5 (C) :
Helping Hands Co-operative society is working for the welfare of its members since last 10 years. Governing body observed that the society had some idle funds during the F.Y 2023-24 and, considering the equity markets growth, decided to invest the same in blue-chip mutual funds. The decision brought fortune and the society earned handsome returns on the investment made. Auditor of the society, however, gave a qualified opinion. Management has hired you to guide where they went wrong.
Give your comments considering Section 32 of the Central Act.
Answer:
Question 6 (A) :
CA P was consulted by one of his friends, Mr. Robin. Robin informed him that he wants to enter the education sector and invest in one of the schools being operated in the city. The operations of the school will be managed by Robin only and the proposed investment will be made once CA P confirms the revenue figures given to him (Robin) by existing management of the school. CA P said that the main source of revenue to the school is fee from students and that will be verified.
What special steps are involved in the verification of fees collected from students?
Answer:
Question 6 (B) :
Oval Enterprises Limited (OEL) is under legal obligation to represent its current year’s financial statements along with the previous year’s financial statements (comparative financial statements). Karan & Associates, Chartered Accountants, has been appointed as the statutory auditor for the year. CA Karan noticed that the last year’s financial statements contain an adverse opinion for the financial statement as a whole due to a misstatement in the evaluation and disclosure of the debtors. Guide CA Karan for his duty regarding the treatment and addressing the same while drafting his audit report. What disclosures are required to make in this regard?
Answer:
Question 6 (C) :
Identify and explain the fundamental principles being referred to in the following cases:
Answer:
OR
Question 6 (C) :
In an automated environment, there are generally four types of audit tests available. As a senior auditor, it’s crucial to guide your team in selecting the appropriate audit tests based on the situation. Explain the types of audit tests commonly used in an automated setting and provide insights on how to determine when and which tests to apply, emphasizing the role of professional judgment in making these decisions.
Answer:
Ruchika Saboo
An All India Ranker (AIR 7 - CA Finals, AIR 43 - CA Inter), she is one of those teachers who just loved studying as a student. Aims to bring the same drive in her students.
Ruchika Ma'am has been a meritorious student throughout her student life. She is one of those who did not study from exam point of view or out of fear but because of the fact that she JUST LOVED STUDYING. When she says - love what you study, it has a deeper meaning.
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She specializes in theory subjects - Law and Auditing.
Yashvardhan Saboo
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He cleared his CA Finals in May 2011 and has been into teaching since. He started teaching CA, CS, 11th, 12th, B.Com, M.Com students in an offline mode until 2016 when Konceptca was launched. One of the pioneers in Online Education, he believes in providing a learning experience which is NEAT, SMOOTH and AFFORDABLE.
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