Navkar Institute

DATE:3-3-19 CODE:NI-6027 BATCH:INTER REV MAY 19 GR II & BOTH MARKS:100

CA INTERMEDIATE
AUDIT and ASSURANCE
syllabus:FULL
Q-1. MCQ:
1. Full form of ICM-
a) International control management
b) International control memorandum
c) Internal control memorandum
d) Internal control management
2. Full form of SOD-
a) Segregation of division
b) Separation of division
c) Segregation of duties
d) Separation of duties
3. Full form of ERM-
a) Entity risk management
b) Enterprise records management
c) Enterprise risk management
d) Entity records management
4. Full form of COSO-
a) Committee of service organizations
b) Committee of segregate organizations
C) Committee of sponsoring organizations
b) Committee of system organizations

5. In case of sales return, the auditor should check

A. Credit notes and delivery challans
B. Whether cash has been repaid to the client
C. Purchase invoices and goods received notes
D. Credit notes and goods received notes
6. State the following statement is correct or not:
“While vouching dividend received, the auditor has to verify the schedule of investments.”
A. True
B. False
7. Which of the following is not true?
A. Valuation of assets is the responsibility of management
B. The auditor can rely on certificate issued by an authorized valuationer as to the valuation of
assets in the balance sheet
C. The auditor should value the assets as per generally accepted accounting principle
D. Valuation is no part of Auditor’s duty
8. Which of the following controls would ensure that securities are not lost, stolen or diverted?
A. Establish physical barriers over investment securities
B. Maintain files of authorized signatures
C. Segregate investment approval form accounting and from custody of securities
D. All the above
9. When counting cash on hand the auditor should ______
A. Ensure presence of somebody from management
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 B. Obtain a receipt from custodian as to its return
C. Ensure postage and revenue stamps are not counted in physical count
D. Temporary advances to employees are counted to calculate balance of cash in hand
10. Inspection report/receiving report supports entries in
A. Sales book and sales return book
B. Purchase book and sales return book
C. Cash book and purchase book
D. Sales book and purchase return book
11. At the time of destroying the goods the duty will be refunded called as _____
A. Custom duty
B. Bill of entry
C. Clearing bill
D. Duty drawback
12. If the custom duty has been paid by the client directly, what should be checked by the auditor?
A. Bill of entry
B. Duty drawback
C. Bill of entry with reference to agent’s bill
D. Receipt evidencing payment of custom duty
13. Internal auditor is appointed by....
A. the share holders
B. the management
C. the government
D. the statutory body
14. Which of the following statement is not correct?
A. A partnership firm can be appointed as a statutory auditor of limited company
B. Appointment can be made in the name of the firm
C. majority of the partners should be practicing in India
D. all partners should be Chartered Accountants
15. The authority to remove the first auditor before the expiry of term is with....
A. the share holder in general meeting
B. the share holder in first annual general meeting
C. the Board of Directors
D. the Central Government
16. The retiring auditor does not have right to ......
A. make written representation
B. get his representation circulated
C. be heard at the general meeting
D. speak as a member of the company
17. Two key concepts that underlie management’s design and implementation of internal controls are:
A. Costs and materiality
B. Absolute assurance and cost
C. Inherent limitations and reasonable assurance
D. Collusion and materiality
18. The assessment of risk is a matter of ____
A. Professional judgement
B. Precise judgement
C. Provision made by government
D. All the above
19. Audit risk is related to ….
AAGAMA.PUBLISHERS
Expression of opinion - 2-
 B. Process of auditing
C. Way of litigate loss
D. All the above
20. A major control available in a small company, which might not be feasible in a big company, is:
A. A wider segregation of duties
B. A voucher system
C. Fewer transaction to process
D. The owner-manager’s personal interest and close relationship with personnel
21. Procedure and techniques are often used interchangeable but some distinction does
exist.
(A) True
(B) False
22. Sufficiency is the measure of…
(A) Quantity
(B) Quality
(C) Analytical procedure
(D) Materiality
23. Which of the following is comprise a number of techniques and represents the broad Frame of the
manner of handling the audit work
(A) Auditing
(B) Procedure
(C) Analysis
(D) Audit techniques
24. Which of the following is not an assertion about presentation and disclosure ?
(A) Occurrence and rights and obligation
(B) Completeness
(C) Classification and understandability
(D) Existence
25. In case of smaller, more homogeneous population would be required ______ evidence
(A) Less
(B) More
(C) Equal
26. When we say that financial information which are obtained by auditor is material ?
(A) If its misstatement influence the decisions of users taken on the basis of such information
(B) If chances of fraud are more on that financial information
(C) A And B Both
(D) None of the Above
27. What aspects are helps the auditor to decide that what items are examined , which Methods are
followed ?
(A) Assessment of materiality regarding various aspects such as specific account balances,and
classes of transactions
(B) Experience of auditor
(C) Knowledge and skills for examine and analysis of different matters
(D) All of the Above
28. Audit should be planned at that stage which bring the audit risk at _____ level ?
(A) Acceptably high level
(B) Acceptably low level
(C) Reasonably high level

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 (D) Reasonably low level
29. In determining the level of materiality for an audit what should not be considered ?
(A) Prior period errors
(B) The auditor remuneration
(C) Adjusted interim financial statement
(D) Prior period financial statement
30. The working papers which Auditor prepares for financial statements Audit are:
(A) Evidence for audit conclusions
(B) Owned by the clients
(C) Owned by the Auditor
(D) Retained in Auditor’s office until a change in Auditors
(30 Marks)
(Q.2 is compulsory . Answer any 4 from the rest)
Q-2.(a) Mention the special points to be examined by the auditor in the audit of a charitable institution
running hostel for students pursuing the Chartered Accountancy Course and which charges only ‘ 500
per month from a student for his lodging/boarding.
(7 Marks)
Q-2.(b) What are the factors that determine the extent of reliance that the auditor places on results of
analytical procedures? Explain with reference to SA-520 on "Analytical procedures".
(7 Marks)
Q-3.(a)“The engagement team should hold discussions to gain better understanding of the bank and its
environment, including internal control, and also to assess the potential for material misstatements
of the financial statements. All these discussions should be appropriately documented for future
reference”. Explain.
(7 Marks)
Q-3.(b)Write a short note on - Audit Programme.
(7 Marks)
Q-4.(a) “The auditor shall evaluate whether the fi nancial statements are prepared, in all material respects,
in accordance with the requirements of the applicable financial reporting framework. This evaluation
shall include consideration of the qualitative aspects of the entity’s accounting practices, including
indicators of possible bias in management’s judgments.” Discuss stating clearly qualitative aspects of
the entity’s accounting practices.
(7 Marks)
Q-4.(b)'A Joint Auditor is not bound by the views of the majority of the joint auditors regarding matters
to be covered in the report.'
(7 Marks)
Q-5.(a) Ram and Hanuman Associates, Chartered Accountants in practice have been appointed as Statutory
Auditor of Krishna Ltd. for the accounting year 2015-2016. Mr. Hanuman holds 100 equity shares of
Shiva Ltd., a subsidiary company of Krishna Ltd. Discuss. Managing Director of PQR Ltd. himself
wants to appoint Shri Ganpati, a practicing Chartered Accountant, as fi rst auditor of the company.
Comment on the proposed action of the Managing Director.
(7 Marks)
Q-5.(b) How will you vouch and/or verify the following:
(a) Goods sent out on Sale or Return Basis.
(b) Borrowing from Banks.
(7 Marks)
Q-6.(a) Write short notes on the following:
(a) Advantages of Statistical sampling in Auditing.
(b) Stratified sampling
(7 Marks)
Q-6.(b) Describe how risks in IT systems, if not mitigated, could have an impact on audit.
AAGAM PUBLISHERS - 4-
 (7 Marks)
Q-7.(a) Fraud can be committed by management overriding controls using such techniques as engaging in
complex transactions that are structured to misrepresent the financial position or fi nancial
performance of the entity.
In view of the above-mentioned circumstances of management fraud, explain briefl y duties and
responsibilities of an auditor in case of material misstatement resulting from such Management Fraud.
(7 Marks)
Q-7.(b) “The SAs do not ordinarily refer to inherent risk and control risk separately, but rather to a
combined assessment of the “risks of material misstatement”” Explain.
(7 Marks)

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AAGAM PUBLISHERS - 5-
 Navkar Institute
DATE:3-3-19 CODE:NI-6027 BATCH:INTER REV MAY 19 GR II & BOTH MARKS:100
CA INTERMEDIATE
AUDIT and ASSURANCE
syllabus:FULL
A-1.
1. C
2. C
3. C
4. C
5. D
6. A
7. C
8. D
9. C
10. C
11. D
12. D
13. B
14. D
15. A
16. D
17. C
18. A
19. B.
20. D
21. A
22. A
23. B
24. D
25. A
26. A
27. A
28. B
29. B
30. C
A-2.(a) 1. General
(i) Study the constitution under which the charitable institution has been set up whether under the
Society Registration Act, as a trust or as a company limited by guarantee. Verify whether it is managed
as contemplated by the law and rules and regulations made thereunder.
(ii) Examine the internal control structure particularly with reference to admission to hostel, expenses
incurred on diff erent kinds of activities.
(iii) Verify the broad nature of expenses likely to be incurred with reference to the previous year’s
annual audited accounts.
2. Verification of the receipts
(i) Check the amounts received on account of, monthly rentals, etc., and receipts issued for the same.
(ii) Ascertain that there is adequate internal control over the issue of offi cial receipts, custody of
unused receipt books, printing of receipt books, etc.
(iii) Cross - tally the rent received along with the number of students (from the student register) staying
in the hostel during the year.
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(v) Check the amounts received from additional services rendered like guest fees, receipts for breakage,
fi nes, penalties, etc.
3. Verification of expenses
(i) Check the day-to-day administration expenses incurred along with the necessary vouchers, supporting
for the same like salary registers, repairs register, etc.
(ii) Verify whether the expenses incurred are in conformity with the budgets prepared internally or fi
led with the relevant authorities.
(iii) Check the amount spent on provisions of hostel facilities with reference to bills, etc.
(iv) See that whenever heavy expenditure has been incurred on renovation of the hostel, computer centre,
etc. the same is accounted for properly (if such facilities are being provided by the hostel).
4. Verify investments made from surplus funds as well as existing investments by physically verifying
the same and that they are in the name of the institution and that there is no charge/pledge against
the same.
5. Verify all capital expenditure and expenditure on repairs, etc., incurred with the vouchers and also
whether proper tenders, etc., were invited for the same. See that all furniture, glass, cutlery, kitchen
utensils, liner, etc. are adequately depreciated.
6. Library Facilities: See that proper library register are maintained. The system regarding issue and
receipt of books is in order. Late fee fi nes and money received on account of lost book is accounted
for properly. Obsolete books are written off only after proper authorisation. Expenses incurred on
newspapers and weekly magazines as compared to Journals and periodicals have been accounted for
properly.
7. Check the provision of other additional facilities like computer facilities, etc. Ensure that proper
registers are maintained for charging fees, based on monthly or hourly basis. In case such facility is
extended to each room, whether the charges are payable on lump-sum basis or on actual usage basis.
Also ensure that amounts spent have been allocated properly.
8. Verify whether the institution is eligible for income tax exemption and if not, whether provision for
taxation has been made.
A-2.(b) Extent of reliance on analytical procedures (SA-520): The application of analytical procedures is
based on the expectation that relationships among data exist and continue in the absence of known
conditions to the contrary. The presence of these relationships provides audit evidence as to the
completeness, accuracy and validity of the data produced by the accounting system. However, reliance
on the results of analytical procedures will depend on the auditor's assessment of the risk that the
analytical procedures may identify relationships as expected when, in fact, a material misstatement
exists.
The extent of reliance that the auditor places on the results of analytical procedures depends on the
following factors:
(i) Materiality of the items involved, for example, when inventory balances are material, the auditor
does not rely only on analytical procedures in forming conclusions.
However, the auditor may rely solely on analytical procedures for certain income and expense items
when they are not individually material.
(ii) Other audit procedures directed towardthe same audit objectives, for example, other procedures
performed by the auditor inreviewing the collectibility of accounts receivable, such as the review of
subsequent cash receipts, might confirm or dispel questions raised from the application of analytical
procedures to an ageing schedule of customers' accounts.
(iii) Accuracy with which the expected results of analytical procedures can be predicted.
For example, the auditor will ordinarily expect greater consistency in comparing gross profit margins
from one period to another than in comparing discretionary expenses, such as research or advertising.
(iv) Assessments of inherent and control risks, for example, if internal control over sales order processing
is weak and, therefore,control risk is high, more reliance on tests of details of transactions and
balances than on analytical procedures in drawing conclusions on receivables may be required.
(v) The auditor will need to consider testing the controls, if any, over the preparation of information
used in applying analytical procedures. When such controls are effective, the auditor will have greater
confidence in the reliability of the information and, therefore, in the results of analytical procedures.
The controls over nonfinancial information can often be tested inconjunction with tests of
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 accountingrelated controls. For example, an entity in establishing controls over the processing of
sales invoices may include controls over the recording of unit sales. In these circumstances, the
auditor could test the controls over the recording of unit sales in conjunction with tests of the
controls over the processing of sales invoices.
A-3.(A)Engagement Team Discussions
The engagement team should hold discussions to gain better understanding of the bank and its
environment, including internal control, and also to assess the potential for material misstatements
of the fi nancial statements. All these discussions should be appropriately documented for future
reference. The discussion provides:
* An opportunity for more experienced engagement team members, including the audit engagement
partner, to share their insights based on their knowledge of the bank and its environment.
* An opportunity for engagement team members to exchange information about the bank’s business
risks.
* An understanding amongst the engagement team members about eff ect of the results of the risk
assessment procedures on other aspects of the audit, including decisions about the nature, timing,
and extent of further audit procedures.
The discussion between the members of the engagement team and the audit engagement partner
should be done on the susceptibility of the bank’s financial statements to material misstatements.
These discussions are ordinarily done at the planning stage of an audit.
The engagement team discussion ordinarily includes a discussion of the following matters:
* Errors that may be more likely to occur;
* Errors which have been identifi ed in prior years;
* Method by which fraud might be perpetrated by bank personnel or others within particular account
balances and/or disclosures;
* Audit responses to Engagement Risk, Pervasive Risks, and Specifi c Risks;
* Need to maintain professional skepticism throughout the audit engagement;
* Need to alert for information or other conditions that indicates that a material misstatement may
have occurred (e.g., the bank’s application of accounting policies in the given facts and circumstances).
A-3.(b)Audit Programme: An audit programme is a detailed plan of applying the audit procedure in the given
circumstances with instructions for the appropriate techniques to be adopted for accomplishing the
audit objectives. It is framed keeping in view the nature, size and composition of the business,
dependability of the internal control and the given scope of work.
Audit programme provides sufficient details to serve as a set of instructions to the audit team and
also helps to control the proper execution of the work. On the basis of experience while carrying out
the audit work, the programme may bealtered to take care of situations which were left out originally,
but found relevant for the particular audit situation. Similarly, if any work originally provided for
proves beyond doubt to be unnecessary or irrelevant, that may be dropped. There should be periodic
review of the audit programme to assess whether the same continues to be adequate for obtaining
requisite knowledge and evidence about the transactions.
For the purpose of framing an audit programme the following points should be kept in view:
• Audit objective
• Audit procedure to be applied
• Extent of check
• Timing of check
• Allocation of work amongst the team members
• Special instructions based on past experience of the auditee
A-4.(a) Evaluations by the Auditor
The auditor shall evaluate whether the fi nancial statements are prepared in accordance with the
requirements of the applicable fi nancial reporting framework.
This evaluation shall include consideration of the qualitative aspects of the entity’s accounting
practices, including indicators of possible bias in management’s judgments.
Qualitative Aspects of the Entity’s Accounting Practices

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1. Management makes a number of judgments about the amounts and disclosures in the financial
statements.
2. SA 260 (Revised) contains a discussion of the qualitative aspects of accounting
3. In considering the qualitative aspects of the entity’s accounting practices, the auditor may become
aware of possible bias in management’s judgments.
The auditor may conclude that lack of neutrality together with uncorrected misstatements causes
the fi nancial statements to be materially misstated.
Indicators of a lack of neutrality include the following:
(i) The selective correction of misstatements brought to management’s attention during the audit.
(ii) Possible management bias in the making of accounting estimates.
4. SA 540 addresses possible management bias in making accounting estimates.
Indicators of possible management bias do not constitute misstatements for purposes of drawing
conclusions on the reasonableness of individual accounting estimates. They may, however, aff ect the
auditor’s evaluation of whether the financial statements as a whole are free from material
misstatement.
A-4.(b)Responsibility of Joint Auditors: SA 299 on, “Responsibility of Joint Auditors” deals with the
professional responsibilities, which the auditors undertake in accepting such appointments as joint
auditors. The responsibilities of joint auditors, as a rule are no different from the responsibilities of
individualauditors as enumerated in the Companies Act, 1956. Main features of the said SA are
discussed below:
 Division of Work:Where joint auditors are appointed, they should, by mutual discussion, divide the audit
of identifiable units or specified areas. Certain areas of work, owing to their importance or owing to
the nature of work involved would not be divided and would be covered by all the joint auditors. Such
a division affected by the joint auditors should be adequately documented and preferably
communicated to the auditee.
 Coordination: Where in the course of his work, a joint auditor comes across matters which are relevant
to the areas of other joint auditors and which require joint discussion, he should communicate the
same to all the other joint auditors in writing before the finalisation of audit and preparation of
audit report.
In respect of the work divided amongst the joint auditors, each joint auditor is responsible only for
the work allocated to him, whether or not he has made a separate report on the work performed by
him. On the other hand the joint auditors are jointly and severally responsible in respect of the audit
conducted by them as under:
(i) in respect of the audit work which is not divided among the joint auditors and is carried out by all of
them;
(ii) in respect of decisions taken by all the joint auditors concerning the nature, timing or extent of the
audit procedures to be performed by any of the joint auditors.
(iii) in respect of matters which are brought to the notice of the joint auditors by any one of them and on
which there is an agreement among the joint auditors;
(iv) for examining that the financial statements of the entity comply with the disclosure requirements of
the relevant statute; and
(v) for ensuring that the audit report complies with the requirements of the relevant statute.
(vi) it is the separate and specific responsibilityof each joint auditor to study and evaluate the prevailing
system of internal control relating to the work allocated to him, the extent of enquiries to be made
in the course of his audit.
(vii) the responsibility of obtaining and evaluating information and explanation from the management is
generally a joint responsibility of all the auditors.
(viii) each joint auditor is entitled to assure that the other joint auditors have carried out their part of
work in accordance with the generally accepted audit procedures and therefore it would not be
necessary for joint auditor to review the work performed by other joint auditors.
Normally, the joint auditors are able to arrive at an agreed report. However where the joint auditors
are in disagreement with regard to any matters to be covered by the report, each one of them should
express his own opinion through a separate report. A joint auditor is not bound by the views of
AAGAM PUBLISHERS - 9-
 majority of joint auditors regarding matters to be covered in the report and should express his
opinion in a separate report in case of a disagreement.
A-5.(a) Auditor Holding Securities of a Company: As per sub-section (3)(d)(i) of Section 141 of the
Companies Act, 2013 read with Rule 10 of the Companies (Audit and Auditors) Rule, 2014, a person
shall not be eligible for appointment as an auditor of a company, who, or his relative or partner is
holding any security of or interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company. However, the relative may hold security or interest
in the company of face value not exceeding ‘ 1 lakh.
Also, as per sub-section 4 of Section 141 of the Companies Act, 2013, where a person appointed as an
auditor of a company incurs any of the disqualifications mentioned in sub-section (3) after his
appointment, he shall vacate his offi ce as such auditor and such vacation shall be deemed to be a
casual vacancy in the offi ce of the auditor.
In the present case, Mr. Hanuman, Chartered Accountant, a partner of M/s Ram and Hanuman
Associates, holds 100 equity shares of Shiva Ltd. which is a subsidiary of Krishna Ltd. Therefore, the
fi rm, M/s Ram and Hanuman Associates would be disqualifi ed to be appointed as statutory auditor
of Krishna Ltd., which is the holding company of Shiva Ltd., because one of the partners Mr. Hanuman
is holding equity shares of its subsidiary.
* Appointment of First Auditor of Company: Section 139(6) of the Companies Act, 2013 lays down
that the fi rst auditor or auditors of a company shall be appointed by the Board of directors within
30 days from the date of registration of the company.
In the instant case, the appointment of Shri Ganapati, a practicing Chartered Accountant as fi rst
auditors by the Managing Director of PQR Ltd. by himself is in violation of Section 139(6) of the
Companies Act, 2013, which authorizes the Board of Directors to appoint the fi rst auditor of the
company within 30 days of registration of the company.
In view of the above, the Managing Director of PQR Ltd. should be advised not to appoint the fi rst
auditor of the company.
A-5.(b)
(a) Goods Sent Out on Sale or Return Basis:
(i) Check whether a separate memoranda record of goods sent out on sale or return basis is maintained.
The party accounts are debited only after the goods have been sold and the sales account is credited.
(ii) See that price of such goods is unloaded from the sales account and the trade receivable’s record.
Refer to the memoranda record to confi rm that on the receipt of acceptance from each party, his
account has been debited and the sales account correspondingly credited.
(iii) Ensure that the goods in respect of which the period of approval has expired at the close of the year
either have been received back subsequently or customers’ accounts have been debited.
(iv) Confi rm that the inventory of goods sent out on approval, the period of approval in respect of which
had not expired till the close of the year lying with the party, has been included in the closing inventory.
(b) Borrowing from Banks: Borrowing from banks may be either in the form of overdraft limits or term
loans. In each case, the borrowings should be verified asfollows-
(i) Reconcile the balances in the overdraft or loan account with that shown in the pass book(s) and confi
rm the last mentioned balance by obtaining a certifi cate from the bank showing the balance in the
accounts as at the end of the year.
(ii) Obtain a certifi cate from the bank showing particulars of securities deposited with the bank as
security for the loans or of the charge created on an asset or assets of the concern and confirm that
the same has been correctly disclosed and duly registered with Registrar of Companies and recorded
in the Register of charges.
(iii) Verify the authority under which the loan or draft has been raised. In the case of a company, only the
Board of Directors is authorised to raise a loan or borrow from a bank.
(iv) Confi rm, in the case of a company, that the restraint contained in Section 180 of the Companies Act,
2013 as regards the maximum amount of loan that the company can raise has not been contravened.
Ascertain the purpose for which loan has been raised and the manner in which it has been utilised and
that this has not prejudicially affected the entity.

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A-6.(a)
(a) Appropriateness of Sampling Approaches
In statistical sampling, the sample results are measurable as to the adequacy and reliability of the
audit objectives whereas in non-statistical sampling the auditor’s opinion determines the sample size
but it cannot be measured how far the sample size would fulfi ll the audit objective.
The advantages of statistical sampling may be summarized as follows -
(1) The amount of testing (sample size) does not increase in proportion to the increase in the size of the
area (universe) tested.
(2) The sample selection is more objective and thereby more defensible
(3) The method provides a means of estimating the minimum sample size associated with a specifi ed risk
and precision.
(4) It provides a means for deriving a “calculated risk” and corresponding precision (sampling error) i.e.
the probable diff erence in result due to the use of a sample in lieu of examining all the records in the
group (universe), using the same audit procedures.
(5) It may provide a better description of a large mass of data than a complete examination of all the
data, since non-sampling errors such as processing and clerical mistakes are not as large.
Under some audit circumstances, statistical sampling methods may not be appropriate.
The auditor should not attempt to use statistical sampling when another approach is either necessary
or will provide satisfactory information in less time or with less eff ort, for instance when exact
accuracy is required or in case of legal requirements etc.
The decision whether to use a statistical or non-statistical sampling approach is a matter for the
auditor’s judgment; however, sample size is not a valid criterion to distinguish between statistical
and non-statistical approaches.
(b) Stratified Sampling: This method involves dividing the whole population to be tested in a few separate
groups called strata and taking a sample from each of them. Each stratum is treated as if it was a
separate population and if proportionate of items are selected from each of these stratum. The
number of groups into which the whole population has to be divided is determined on the basis of
auditor judgment.
The reasoning behind the stratifi ed sampling is that for a highly diversified population, weights
should be allocated to refl ect these diff erences. This is achieved by selecting diff erent proportions
from each strata. It can be seen that the stratifi ed sampling is simply an extension of simple random
sampling.
Therefore, we can say that random selection method is applied through random number generators,
for example, random number tables).
A-6.(b) When risks in IT systems are not mitigated the audit impact could be as follows:
(i) The auditor may not be able rely on the reports, data obtained, automated controls, calculations and
accounting procedures in the IT system.
(ii) The auditor has to perform additional audit work by spending more time and efforts.
(iii) The auditor may have to issue a modifi ed opinion, if necessary
A-7.(a)Duties & Responsibilities of an Auditor in case of Material Misstatement resulting from
Management Fraud: Misstatement in the fi nancial statements can arise from fraud or error. The
term fraud refers to an ‘Intentional Act’ by one or more individuals among management, those charged
with governance. The auditor is concerned with fraudulent acts that cause a material misstatement
in the fi nancial statements.
As per SA 240 on “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”,
fraud can be committed by management overriding controls using such techniques as engaging in
complex transactions that are structured to misrepresent the fi nancial position or fi nancial
performance of the entity.
Fraud involving one or more members of management or those charged with the governance is referred
to as “management fraud”. The primary responsibility for the prevention and detection of fraud
rests with those charged with the governance and the management of the entity.
Further, an auditor conducting an audit in accordance with SAs is responsible for obtaining reasonable
assurance that the fi nancial statements taken as a whole are free from material misstatement,
AAGAM PUBLISHERS - 11-
 whether caused by fraud or error.
Owing to the inherent limitations of an audit, there is an unavoidable risk that some material
misstatements of the fi nancial statements may not be detected, even though the audit is properly
planned and performed in accordance with the SAs.
The risk of the auditor not detecting a material misstatement resulting from management fraud is
greater than for employee fraud, because management is frequently in a position to directly or
indirectly manipulate accounting records, present fraudulent fi nancial information or override control
procedures designed to prevent similar frauds by other employees.
Auditor’s opinion on the fi nancial statements is based on the concept of obtaining reasonable
assurance, hence in an audit, the auditor does not guarantee that material misstatements will be
detected.
Further, as per section 143(12) 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 off ence involving fraud is
being or has been committed against the company by offi cers or employees of the company, he shall
immediately report the matter to the Central Government (in case amount of fraud is ‘ 1 crore or
above) or Audit Committee or Board in other cases (in case the amount of fraud involved is less than
‘ 1 crore) within such time and in such manner as may be prescribed.
The auditor is also required to report as per Clause (x) of Paragraph 3 of CARO, 2016, whether any
fraud by the company or any fraud on the company by its offi cers or employees has been noticed or
reported during the year. If yes, the nature and the amount involved is to be indicated.
If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor encounters
exceptional circumstances that bring into question the auditor’s ability to continue performing the
audit, the auditor shall:
(i) Determine the professional and legal responsibilities applicable in the circumstances, including whether
there is a requirement for the auditor to report to the person or persons who made the audit
appointment or, in some cases, to regulatory authorities;
(ii) Consider whether it is appropriate to withdraw from the engagement, where withdrawal from the
engagement is legally permitted; and
(iii) If the auditor withdraws:
(1) Discuss with the appropriate level of management and those charged with governance, the auditor’s
withdrawal from the engagement and the reasons for the withdrawal; and
(2) Determine whether there is a professional or legal requirement to report to the person or persons
who made the audit appointment or, in some cases, to regulatory authorities, the auditor’s withdrawal
from the engagement and the reasons for the withdrawal.
A-7.(b) Combined Assessment of the Risk of Material Misstatement
The SAs do not ordinarily refer to inherent risk and control risk separately, but rather to a combined
assessment of the “risks of material misstatement”. However, the auditor may make separate or
combined assessments of inherent and control risk depending on preferred audit techniques or
methodologies and practical considerations. The assessment of the risks of material misstatement
may be expressed in quantitative terms, such as in percentages, or in non-quantitative terms. In any
case, the need for the auditor to make appropriate risk assessments is more important than the diff
erent approaches by which they may be made.
It can be concluded from the above that
Risk of Material Misstatement= Inherent Risk x Control Risk———(2)
From (1) and (2), we arrive atAudit Risk = Inherent Risk x Control Risk x Detection Risk
SA 315 establishes requirements and provides guidance on identifying and assessing the risks of
material misstatement at the fi nancial statement and assertion levels.

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