Navkar Institue

CODE : NF-3006 MARKS : 100

FINAL
ADVANCED AUDITING & PROFESSIONAL ETHICS
Syllabus :AUDIT - MODULE-I (AS PER SM)
QUESTION ONE IS COMPULSARY . ANSWER ANY FOUR FROM THE REST.
Q.1(a)When a sub-service organization performs services for a service organization, there are two
alternative methods of presenting the description of controls. The service organization determines
which method will be used. As a user auditor what information would you obtain about
controls at a sub -service organization?
(5 MARKS)
Q.1(b)The financial statements of Ace Ltd. have been prepared by the management in accordance
with special purpose frame work to meet the financial reporting provisions of a regulator. As an
auditor, what considerations would be undertaken while planning an d performing an audit in case
of such special purpose frame work?
(5 MARKS)
Q.1(c)Dishonest Limited, a company incorporated in India has six members in its Audit Committee. Due to
recessionary conditions in India the revenue of the company is going down and there is slow down
in other activities of the company. Therefore, it was expected that there would not be significant
work for members of the Audit Committee. Considering the overall recession in the company
and the economy, the members of the Committee decided unanimously to meet once in a year
only on March 31, 2017. T hey reviewed monthly information system of the Company and found
no errors. As an auditor of Dishonest Limited would you consider the decision taken by the Audit
Committee is in line with the SEBI ( Listing Obligations and Disclosure Requirements) Regulations,
2015?
(5 MARKS)
Q.1(d)A real-time environment is a type of automated environment in which business operations and
transactions are initiated, processed and recorded immediately as they happen without delay. It
has several critical IT components that enable anytime, anywhere transactions totake place. You
are required to name the components and its example of real-time environment.
(5 MARKS)
Q.2(a)KRP Ltd., at its annual general meeting, appointed Mr. X, Mr. Y and Mr. Z as joint auditors to
conduct auditing for the financial year 201 5-16. For the valuation of gratuity scheme of t he
company, Mr. X, Mr. Y and Mr. Z wanted to refer their own known Actuaries. Due to difference of
opinion, all the joint auditors consulted their respective Actuaries. Subsequently, major
difference was found in the actuary reports. However, Mr. X agreed to Mr. Y’s actuary report,
though, Mr. Z did not. Mr. X contends that Mr. Y’s actuary report shall be considered in audit
report due to majority of votes. Now, Mr. Z is in dilemma.
(a) You are required to briefly explain the responsibilities of auditors w hen they are jointly and
severally responsible in respect of audit conducted by them and also guide Mr. Z in such situation.
(b) Explain the responsibility of auditors, in case, report made by Mr. Y’s actuary, later on, found
faulty.
(8 MARKS)
Q.2(b)T & Co. wants to issue a prospectus, to provide potential investors with information about future
expectations of the Company. You are hired by T & Co. to examine the projected financial statements
and give report thereon. What things you will consider before accepting the audit engagement
and what audit evidence will be obtained for reporting on projected financial statements?
(6 MARKS)

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Q.2(c)Under CARO, 2016, as a statutory auditor, how would you report on the following:
(i) A Term Loan was obtained from a bank for ` 80 lakh for acquiring R&D equipment, out of which
` 15 lakh was used to buy a car for use of the concerned director who was overlooking the R&D
activities.
(ii) Physical verification of only 50% of items of inventory has been conducted by the company. The
balance 50% will be conducted in next year due to lack of time and resources.
(6 MARKS)
Q.3(a)While auditing Z Ltd., you observe certain material financial statement assertions have been based
on estimates made by the management. As the auditor how do you minimize the risk of material
misstatements?
(5 MARKS)
Q.3(b)During the course of his audit, the auditor noticed material weaknesses in the internal control
system and he wishes to communicate the same to the management. You are required to
elucidate the important points the auditor should keep in the mind while drafting the letter of
weaknesses in internal control system.
(5 MARKS)
Q.3(c)Contravene Ltd. appointed CA Innocent as an auditor for the company for the current
financial year. Further the company offered him the services of actuarial, investment
advisory and investment banking which was also approved by the Board of Directors.
(5 MARKS)
Q.3(d)CA. Ashutosh has been appointed as an auditor of Awesome Health Ltd. for the financial
year 2017 -18 which was audited by CA. Amrawa ti in 2016 -17. As the Auditor of Awesome Health
Ltd., state the steps that CA. Ashutosh would take to ensure that the Closing Balances of the
financial year 2016 -17 have been brought to account in 2017-18 as Opening Balances and the
Opening Balances do not contain any misstatements.
(5 MARKS)
Q.4(a)Key phases in the audit execution stage are Execution Planning, Risk and Control Evaluation, Testing
and Reporting. Explain.
(6 MARKS)
Q.4(b)The Balance Sheet of G Ltd. as at 31st March 16 is as under. Comment on the presentation in terms
of Schedule III .

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 (6 MARKS)
Q.4(c)Compare and explain Audit Qualification vs. Emphasis of Matter.
(4 MARKS)
Q.4(d)Your engagement team member, Mr. Shyam, is engaged as practitioner for compilation of historical
financial information of Rama Ltd.
You as a senior audit engagement team in-charge, you are required to examine thepractitioner’s
responsibilities as he is engaged to assist management with the preparation and presentation of
historical financial information without obtaining any assurance on that information.
(4 MARKS)
Q.5(a)(i)In the course of audit of K Ltd., its auditor Mr. 'N' observed that there was a special audit
conducted at the instance of the mana gement on a possible suspicion of a fraud and
requested for a copy of the report to enable him to report on the fraud aspects. Despite many
reminders it was not provided. In absence of the special audit report, Mr. 'N' insisted that he be
provided with at least a written representation in respect of fraud on/by the company. For this
request also, the management remained silent. Please guide Mr. 'N'.
(ii) During the course of audit of Star Limited the auditor received some of the confirmation of the
balances of trade payables outstanding in the balance sheet through external confirmation
by negative confirmation request. In the list of trade payables, there are number of trade
payables of small balances except one, old outstanding of ` 15 Lacs, of whom, no confirmation on
the credit balance received. Comment with respect to Standard of Auditing.
(10 MARKS)
Q.5(b)Write short notes on Corporate Governance.
(5 MARKS)
Q.5(c)R & M Co. wants to be alert on the possibility of non -compliance with Laws and Regulations
during the course of audit of SRS Ltd. R & M Co. seeks your guidance for identifying the indications
of non compliance with Laws and Regulations.
(5 MARKS)
Q.6(a)Draft a Practitioner’s report regarding payment of statutory dues, pursuant to request by
lenders.
AAGAM PUBLISHERS 3
 (6 MARKS)
Q.6(b)T Pvt. Ltd.’s paid up Capital & Reserves are less than ` 50 lakhs and it has no outstanding loan
exceeding ` 25 lakhs from any bank or financial institution. Its sales ar e ` 6 crores before
deducting Trade discount ` 10 lakhs and Sales returns ` 95 lakhs. The services rendered by the
company amounted to ` 10 lakhs. The company contends that reporting under Companies Auditor’s
Reports Order (CARO) is not applicable. Discuss.
(4 MARKS)
Q.6(c)As an auditor of RST Ltd. Mr. P applied the concept of materiality for the financial
statements as a whole. On the basis of obtaining additional information of significant
contractual arrangements that draw attention to a particular aspect of a company's
business, he wants to re-evaluate the materiality concept. Please, guide him.
(5 MARKS)
Q.6(d)State the main features of the Qualified and Independent Audit Committee set up SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015.
(5 MARKS)

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AAGAM PUBLISHERS 4
 ANSWER SHEET
CODE : NF-3006 MARKS : 100
FINAL
ADVANCED AUDITING & PROFESSIONAL ETHICS
Syllabus :AUDIT - MODULE-I (AS PER SM)

A.1(a)Controls at a Sub-Service Organisation: In accordance with SA 402 “ Audit Considerations

relating to an Entity Using a Service Organisation”, a user entity may use a service organisation
that in turn uses a sub -service organisation to provide some of the services provided to a user
entity that are part of the user entity’s information system relevant to financial r eporting.
The sub-service organisation may be a separate entity from the service organisation or may be
related to the service organisation.
A user auditor may need to consider controls at the sub -service organisation. In situations where
one or more sub-service organisations are used, the interaction between the activities of the
user entity and those of the service organisation is expanded to include the interaction between
the user entity, the service organisation and the sub -service organisations. The degree of this
interaction, as well as the nature and materiality of the transactions processed by the service
organisation and the sub -service organisations are the most important factors for the user auditor
to consider in determining the significance of the service organisation’s and sub -service
organisation’s controls to the user entity’s controls.
Further, the user auditor shall determine whether a sufficient understanding of the nature and
significance of the services provided by the service organisat ion and their effect on the user
entity's internal control relevant to the audit has been obtained to provide a basis for the
identification and assessment of risks of material misstatement.
If the user auditor is unable to obtain a sufficient understandin g from the user entity, the user
auditor shall obtain that understanding by application of the following two methods of presenting
description of internal controls i.e. (i) Type 1 report; or (ii) Type 2 report.
If a service organisation uses a subservice o rganisation, the service auditor's report may either
include or exclude the subservice organisation's relevant control objectives and related
controls in the service organisation's description of its system and in the scope of the service
auditor's engage ment. These two methods of reporting are known as the inclusive method and
the carve -out method respectively.
In either method, the service organisation includes in its description of controls a description
of the functions and nature of the processing per formed by the sub -service organisation.
If the Type 1 or Type 2 report excludes the control at a subservice organization and the services
provided by the subservice organization are relevant to the audit of the user entity’s
financial statements, the user auditor is required to apply the requirements of the SA 402 in
respect of the subservice organization.
The nature and extent of work to be performed by the user auditor regarding the services provided
by a subservice organization depend on the nature and s ignificance of those services to the user
entity and relevance of those services to the audit.
A.1(b)Considerations for Planning and Performing Audit in case of Special Purpose Framework: As per
SA 800 “Special Considerations-Audits of Financial Statements Prepared in accordance with
Special Purpose Frameworks”, financial statements prepared in accordance with a special
purpose framework may be the only financial statements an entity prepares. In such circumstances,
those fin ancial statements may be used by users other than those for whom the financial reporting
framework is designed.
While planning and performing audit of such special purpose framework based company, the auditor
should consider below mentioned factors:
(i) To obtain an understanding of the entity’s selection and application of accounting policies. In the

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 case of financial statements prepared in accordance with the provisions of a contract, the
auditor shall obtain an understanding of any significant interpretations of the contract that
management made in the preparation of those financial statements.
(ii) Compliance of all SAs relevant to audit, the auditor may judge it necessary to depart from a
relevant requirement in an SA by performing alternative audi t procedures to achieve the aim of
that requirement.
(iii) Application of some of the requirements of the SAs in an audit of special purpose financial
statements may require special consideration by the auditor. For example, in SA 320, judgments
about ma tters that are material to users of the financial statements are based on a
consideration of the common financial information needs of users as a group. In the case of an
audit of special purpose financial statements, however, those judgments are based on a
consideration of the financial information needs of the intended users.
(iv) In the case of special purpose financial statements, such as those prepared in accordance
with the requirements of a contract, management may agree with the intended users on a threshold
below which misstatements identified during the audit will not be corrected or otherwise adjusted.
The existence of such a threshold does not relieve the auditor from the requirement to determine
materiality in accordance with SA 320 for purposes of planning and performing the audit of the
special purpose financial statements.
(v) Communication with those charged with governance in accordance with SAs is based on the
relationship between those charged with governance and the financial statements subject to audit,
in particular, whether those charged with governance are responsible for overseeing the preparation
of those financial statements. In the case of special purpose financial statements, those charged
with governance may not have such a responsibility.
A.1(c)One of the following additional requirement as stipulated under SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) on which Section 177 of the
Companies Act, 2013 (relating to audit committee) is silent is – The Audit Commi ttee should
meet at least four times in a year and not more than one hundred and twenty days shall elapse
between two meetings. The quorum shall be either two members or one third of the members
of the audit committee whichever is greater, but there should be a minimum of two independent
directors present.
Besides, there is a mandatory review requirement and to review only monthly information
system is not sufficient. Here the audit committee members reviewed only monthly information
system of the company and the same is not sufficient as per LODR Regulations.
The Audit Committee shall mandatorily review the following information as per LODR Regulations:
(i) Management discussion and analysis of financial condition and results of operations;
(ii) Statement of significant related party transactions (as define d by the Audit Committee),
submitted by management;
(iii) Management letters / letters of internal control weaknesses issued by the statutory
auditors;
(iv) Internal audit reports relating to internal control weaknesses;
(v) The appointment, removal and terms of remuneration of the Chief internal auditor shall be subject
to review by the Audit Committee; and
(vi) Statement of deviations: (a) quarterly statement of deviations including report of monitoring agency
if applicable and (b) annual statement of funds utilized for purposes other than those stated in
the offer document/ prospectus/ notice.
Applying the above, the decision taken by the audit committee is not in line with the LODR
Regulations.

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A.1(d)Real Time Environment: IT Components: To facilitate transactions in real-time, it is
essential to have the systems, networks and applications available during all times. A realtime
environment has several critical IT components that enable anytime, anywhere transactions to
take place. Any failure even in one component could render the real-time system unavailable and
could result in a loss of revenue. IT Components include:
(i) Applications: For example, ERP applications SAP, Oracle R12, Core banking applications.
(ii) Middleware.: For example, Webservers like Apache, ATM switches.
(iii) Networks: For example, Wide Area Networks, Internet hosting.
(iv) Hardware: For example, Data centers, Backup and Storage devices, Power supply.
A.2(a)(a) Difference of Opinion Among 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. 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 re sponsible 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;
(v) for ensuring that the audit report complies with the requirements of the relevant statute;
(vi) it is the separate and spe cific responsibility of 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 evalu ating 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 generall y 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 their own opinion through a separate report. A joint auditor is not bound by the
views of 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.
In the instant case, there are three auditors, namely, Mr. X, Mr. Y and Mr. Z, jointly
appointed as an auditor of KRP Ltd. For the valuation of gratuity scheme of the Company they
referred their own known Actuaries. Mr. Z (one of the joint auditor) is not satisfied with the
report submitted by Mr. Y’s referred actuary. He is not agreed with the matters to be covered by
the report whereas Mr. X agreed with the same.
Hence, as per SA 299, Mr. Z is suggested to express his own opinion through a separate report
whereas Mr. X and Mr. Y may provide their joint report for the same.
(b) Using the work of an Auditor’s Expert: As per SA 620 “Using the Work of an Auditor’s Expert”,
the expertise of an expert may be required in the actuarial calculation of liabilities associated
with insurance contracts or employee benefit plans etc., however, the auditor has sole responsibility
for the audit opinion expressed, and that responsibility is not reduced by the auditor’s use of

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 the work of an auditor’s expert.
The auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s purposes,
including the relevance and reasonableness of that expert’s findings or conclusions, and their
consistency with other audit evidence as per SA 500.
Further, in view of SA 620, if the expert’s work involves use of significant assumptions and methods,
then the relevance and reasonablen ess of those assumptions and methods must be ensured by the
auditor and if the expert’s work involves the use of source data that is significant to that expert’s
work, the relevance, completeness, and accuracy of that source data in the circumstances must
be verified by the auditor.
In the instant case, Mr. X, Mr. Y and Mr. Z, jointly appointed as an auditor of KRP Ltd., referred
their own known Actuaries for valuation of gratuity scheme. Actuaries are an auditor’s
expert as per SA 620. Mr. Y’s referred act uary has provided the gratuity valuation report, which
later on found faulty. Further, Mr. Z is not agreed with this report therefore he submitted a
separate audit report specifically for such gratuity valuation.
In such situation, it was duty of Mr. X, M r. Y and Mr. Z, before using the gratuity valuation report
of Actuary, to ensure the relevance and reasonableness of assumptions and methods used.
They were also required to examine the relevance, completeness and accuracy of source data
used for such repo rt before expressing their opinion.
Mr. X and Mr. Y will be held responsible for grossly negligence and using such faulty report
without examining the adequacy of expert actuary’s work whereas Mr. Z will not be held liable for
the same due to separate opin ion expressed by him.
A.2(b)Projected Financial Statements: As per SAE 3400, “The Examination of Prospective Financial
Information”, the answer is divided into two parts i.e. (i) the things to be considered before
accepting the engagement and (ii) audit evidence to be obtained for reporting on projected financial
statements.
(i) Acceptance of Engagement: As per SAE 3400, “The Examination of Prospective Financial
Information”, before accepting an engagement to examine prospective financial information,
the auditor would consider, amongst other things:
(1) the intended use of the information;
(2) whether the information will be for general or limited distribution;
(3) the nature of the assumptions, that is, whether they are best -estimates or hypothetical
assumptions;
(4) the elements to be included in the information; and
(5) the period covered by the information.
Further, the auditor should not accept, or should withdraw from, an engagement when the
assumptions are clearly unrealistic or when the auditor believes that the prospective financial
information will be inappropriate for its intended use.
In accordance with SA 210, “Terms of Audit Engagement”, it is necessary that the auditor and the
client should agree on the terms of the engagement.
(ii) Audit evidence to be obtained for Reporting on Projected Financial Statements: The auditor
should document matters, which are important in providing evidence to support his report on
examination of prospective financial information, and evidence that such examination was carried
out.
The audit evidence in form of working papers will include:
(1) the sources of information,
(2) basis of forecasts,
(3) the assumptions made in arriving the forecasts,

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 (4) hypothetical assumptions, evidence supporting the assumptions,
(5) management representations regarding the intended use and distribution of the information,
completeness of material assumptions,
(6) management’s acceptance of its responsibility for the information,
(7) audit plan,
(8) the nature, timing and extent of examination procedures performed, and,
(9) in case the auditor expresses a modified opinion or withdraws from the engagement, the
reasons forming the basis of such decision.
A.2(c)Reporting under CARO, 2016
(i) Utilisation of Term Loans: According to clause (ix) of Para 3 of CARO, 2016, the auditor is required
to report “whether moneys raised by way of initial public offer orfurther public offer (including
debt instruments) and term loans were applied for the purposes for which those are raised. If not,
the details together with delays or default and subsequent rectification, if any, as may be applicable”.
The auditor should examine the terms and conditions of the term loan with the actual utilisation of
the loans. If the auditor find s that the fund has not been utilized for the purpose for which they
were obtained, the report should state the fact.
In the instant case, term loan taken for the purpose of R&D equipment has been utilized for the
purchase of car which has no relation wit h R&D equipment.
Therefore, car though used for R&D Director cannot be considered as R&D equipment. The
auditor should state the fact in his report as per Paragraph 3 clause ix of the CARO 2016, that out
of the term loan taken for R&D equipment, ` 15 lakh was not utilised for the purpose of acquiring
R&D equipment.
(ii) Physical Verification of Inventory: Clause (ii) of Para 3 of CARO, 2016 requires the auditor to
report on whether physical verification of inventory has been conducted at reasonable intervals
by the management. Physical verification of inventory is the responsibility of the management
which should verify all material items at least once in a year and more often in appropriate cases.
The auditor in order to satisfy himself about verification at reasonable intervals should examine
the adequacy of evidence and record of verification.
In the given case, the above requirement of CARO, 2016 has not been fulfilled as such and the
auditor should point out the specific areas where he believes th e procedure of inventory
verification is not reasonable. He may consider the impact on financial statement and report
accordingly.
A.3(a)As per SA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates,
and Related Disclosures” , the auditor shall obtain an understanding of the following in order
to provide a basis for the identification and assessment of the risks of material misstatements
for accounting estimates:
(i) The requirements of the applicable financial reporting framework relevant to the accounting
estimates, including related disclosures.
(ii) How Management identifies those transactions, event s and conditions that may give rise to the
need for accounting estimates to be recognised or disclosed, in the financial statements. In
obtaining this understanding, the auditor shall make inquiries of management about changes in
circumstances that may giv e rise to new, or the need to revise existing, accounting estimates.
(iii) The estimation making process adopted by the management including -
(1) The method, including where applicable the model, used in making the accounting estimates.
(2) Relevant controls.
(3) Whether management has used an expert?
(4) The assumption underlying the accounting estimates.
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 (5) Whether there has been or ought to have been a change from the prior period in the methods
for making the accounting estimates, and if so, why; and
(6) Whether and, if so, how the management has assessed the effect of estimation
uncertainty.
A.3(b)Important Points to be kept in Mind While Drafting Letter of Weakness: As per SA 265,
“Communicat ing Deficiencies in Internal Control to Those who Charged with Governance and
Management”, the auditor shall include in the written communication of significant deficiencies in
internal control -
(i) A description of the deficiencies and an explanation of their potential effects; and
(ii) Sufficient information to enable those charged with governance and management to understand
the context of the communication.
In other words, the auditor should communicate material weaknesses to the management or the
audit committee, if any, on a timely basis. This communication should be, preferably, in writing
through a letter of weakness or management letter. Important points with regard to such a letter
are as follows-
(1) The letter lists down the area of weaknesses in the system and offers suggestions for improvement.
(2) It should clearly indicate that it discusses only weaknesses which have come to the attention
of the auditor as a result o f his audit and that his examination has not been designed to
determine the adequacy of internal control for management.
(3) This letter serves as a valuable reference document for management for the purpose of revising
the system and insisting on its strict implementation.
(4) The letter may also serve to minimize legal liability in the event of a major defalcation or other loss
resulting from a weakness in internal control
A.3(c)Services not to be Rendered by the Auditor: Section 144 of the Companies Act , 2013 prescribes
certain services not to be rendered by the auditor. An auditor appointed under this Act shall
provide to the company only such other services as are approved by the Board of Directors or the
audit committee, as the case may be, but which shall not include any of the following services
(whether such services are rendered directly or indirectly to the company or its holding company
or subsidiary company), namely:
(i) accounting and book keeping services;
(ii) internal audit;
(iii) design and implementation of any financial information system;
(iv) actuarial services;
(v) investment advisory services;
(vi) investment banking services;
(vii) rendering of outsourced financial services;
(viii) management services; and
(ix) any other kind of services as may be prescribed.
Further section 141(3)(i) of the Companies Act, 2013 also disqualify a person for appointment
as an auditor of a company who is engaged as on the date of appointment in consulting and
specialized services as provided in section 144.
In the given case, CA Innocent was appointed as an auditor of Contravene Ltd. He was offered
additional services of actuarial, investment advisory and investment banking which was also
approved by the Board of Directors. The auditor is ad vised not to accept the services as these
services are specifically notified in the services not to be rendered by him as an auditor as per
section 144 of the Act.

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A.3(d)Obtaining sufficient appropriate audit evidence while conducting Initial Audit Engagement:
According to SA 510 on “Initial Audit Engagements - Opening Balances”, the objective of the
Auditor while conducting an initial audit engagement with respect to opening balances is to obtain
sufficient appropriate audit evidence so that the -
(i) opening balances of the preceding period have been correctly brought forward to the current
period;
(ii) opening balances do not contain any misstatement that materially affect the current period’s
financial statements; and
(iii) appropriate accounting policies reflected in the opening balances have been consistently
applied in the current period’s financial statements, or changes thereto are properly accounted
for and adequately presented and disclosed in accordance with the applicable financial reporting
framework.
Being a new assignment, audit evidence regarding opening balances can be obtained by perusing
the copies of the audited financial statements.
For current assets and liabilities, some audit evidence about opening balances may be obtained as
part of the current period’s audit procedures. For example, the collection/ payment of
opening accounts r eceivable/ accounts payable during the current period will provide some
audit evidence of their existence, rights and obligations, completeness and valuation at the
beginning of the period.
In respect of other assets and liabilities such as property plan t and equipment, investments,
long term debts, the auditor will examine the records relating to opening balances. The auditor
may also be able to get the confirmation from third parties (e.g., balances of long term loan
obtained from banks can be confirme d from the Bank Loan statement).
A.4(a) Key phases in the audit execution stage are Execution Planning, Risk and Control Evaluation,
Testing and Reporting.

1. Execution Planning: Prior to commencement of an audit engagement, it is important to lay down

the roadmap for audit execution to ensure timely and quality audit results. The auditors need to
plan their work in order to carry out the audit in an effective, efficient and timely manner. A
detailed audit program is prepared laying down the audit objectives, scope and audit approach.
The manpower requirement, audit team qualifications, and the time element, etc. are some of the
important considerations during execution planning. In order to plan effectively, the auditor may
need some more information about the audit area. A preliminary survey would help in gathering the
required information.
2. Risk and Control Evaluation: For each segment of audit, the auditors should conduct a detailed
risk and control assessment i.e. list the risks that must be reviewed in that segment, capture for
each risk the controls that exist or those that are needed to protect against the risk and show for
each control, the work steps required to test the effectiveness of the controls. While making Risk
& Control assessment it is necessary to borne in mind Materiality levels as the same is linked with
Audit Risks.
3 Testing: Once a comprehensive understanding is gained of the key risks and the controls to be
evaluated in a given audit area, the auditors should test the operating effectiveness of the controls
to determine whether controls are operating as designed. There are multiple test methods which
can be used to arrive at the conclusions on the effectiveness of the controls

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4 Reporting: SA 700, “Forming an Opinion and Reporting on Financial Statements” establishes
standards on the form and content of the auditor’s report issued as a result of an audit
performed by an auditor of the financial statements of an entity. The auditor should review and
assess the conclusions drawn from the audit evidence obtained as the basis for the expression of
an opinion on the financial statements. This review and assessment involves considering whether
the financial statements have been prepared in accordance with an acceptable financial reporting
framework applicable to the entity under audit. It is also necessary to consider whether the financial
statements comply with the relevant statutory requirements such as comp liance of Provisions
& Enactments of the Company Law, Accounting Standards framed by ICAI, latest Guidelines etc.
The auditor’s report should contain a clear written expression of opinion on the financial statements
taken as a whole. A measure of uniform ity in the form and content of the auditor’s report is
desirable because it helps to promote the reader’s understanding of the auditor’s report and
to identify unusual circumstances when they occur. A statute governing the entity or a regulator
may require the auditor to include certain matters in the audit report or prescribe the form in
which the auditor should issue his report.
5 Other Important Considerations: In addition to above, there are certain other consideration
which auditor is required to tak e care while executing the auditsuch as using the work of other
auditor, using the work of an auditor’s expert etc.
A.4(b) Following Errors are noticed in presentation as per Schedule III:
(i) Share Capital & Reserve & Surplus are to be reflected under the heading “Shareholders’
funds”, which is not shown while preparing the balanc e sheet. Although it is a part of Equity
and Liabilities yet it must be shown under head “shareholders’ funds”. The heading “Shareholders’
funds” is missing in the balance sheet given in the question.
(ii) Reserve & Surplus is showing zero balance, which i s not correct in the given case. Debit balance of
statement of Profit & Loss should be shown as a negative figure under the head ‘Surplus’. The
balance of ‘Reserves and Surplus’, after adjusting negative balance of surplus shall be shown
under the head ‘Re serves and Surplus’ even if the resulting figure is in the negative.
(iii) Schedule III requires that Employee Stock Option outstanding should be disclosed under the
heading “Reserves and Surplus”
(iv) Share application money refundable shall be shown und er the sub-heading “Other Current
Liabilities”. As this is refundable and not pending for allotment, hence it is not a part of equity.
(v) Deferred Tax Liability has been correctly shown under Non -Current Liabilities. But Deferred tax
assets and deferred t ax liabilities, both, cannot be shown in balance sheet because only the net
balance of Deferred Tax Liability or Asset is to be shown.
(vi) Under the main heading of Non-Current Assets, Fixed Assets are further classified as under:
(a) Tangible assets
(b) Intangible assets
(c) Capital work in Progress
(d) Intangible assets under development.
Keeping in view the above, the CWIP shall be shown under Fixed Assets as Capital Work in Progress.
The amount of Capital advances included in CWIP shall be disclosed under the sub -heading
“Long term loans and advances” under the heading Non-Current Assets.
(e) Deferred Tax Asset shall be shown under Non-Current Asset. It should be the net balance of
Deferred Tax Asset after adjusting the balance of deferred tax liability.

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A.4(c)

A.4(d)As per SRS 4410 “Compilation Engagements”, the engagement partner shall take responsibility
for-
(i) The overall quality of each compilation engagement to which that partner is assigned; and
(ii) The engagement being performed in accordance with the firm’s quality control policies and
procedures, by:
(1) Following appropriate procedures regarding the acceptance and continuance of client
relationships and engagements;
(2) Being satisfied that the engagement team collectively has the appropriate competence and
capabilities to perform the compilation engagement;
(3) Being alert for indications of non-compliance by members of th e engagement team with
relevant ethical requirements, and determining the appropriate action if matters come to the
engagement partner’s attention indicating that members of the engagement team have not complied
with relevant ethical requirements;
(4) Directing, supervising and performing the engagement in compliance with professional standards

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 and applicable legal and regulatory requirements; and
(5) Taking responsibility for appropriate engagement documentation being maintained.
A.5(a)(i)Auditor’s Responsibilities Relating to Fraud: As per SA 240 on “The Auditor’s
Responsibilities Relating to Fraud in an Audit of Financial Statements”, the auditor is
responsible for obtaining reasonable assurance that the financial statements, taken as a whole,
are free from material misstatement, whe ther caused by fraud or error.
As per SA 580 “Written Representations”, if management modifies or does not provide the requested
written representations, it may alert the auditor to the possibility that one or more significant
issues may exist.
In the instant case, the auditor observed that there was a special audit conducted at the instance
of the management on a possible suspicion of fraud. Therefore, the auditor requested for
special audit report which was not provided by the management despite of many reminders. The
auditor also insisted for written representation in respect of fraud on/by the company. For this
request also management remained silent.
It may be noted that, if management does not provide one or more of the requested written
representations, the auditor shall discuss the matter with management; re -evaluate the integrity
of management and evaluate the effect that this may have on the reliability of representations
(oral or written) and audit evidence in general; and take appropriate actions, including
determining the possible effect on the opinion in the auditor’s report.
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 th at an offence involving
fraud is being or has been committed against the company by officers 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 officers 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.
(ii) External Confirmation: As per SA 505, “External Confirmation”, Negative Confirmation is a
request that the confirming party respond directly to the auditor only if the confirming party
disagrees with the information provided in the request. Negative confirmations provide less
persuasive audit evidence than positive confirmations.
The failure to receive a response to a negative confirmation request does not explicitly indicate
receipt by the intended confirming party of the confirmation request or verification of the

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 accuracy of the information contained in the request. Accordingly, a failure of a confirming
party to respond to a negative confirmation request provides significantly less persuasive audit
evidence than does a response to a positive confirmation request. Confirming parties also may
be more likely to respond indicating t heir disagreement with a confirmation request when the
information in the request is not in their favor, and less likely to respond otherwise.
In the instant case, the auditor sent the negative confirmation requesting the trade payables
having outstanding balances in the balance sheet while doing audit of Star Limited. One of the
old outstanding of ` 15 lacs has not sent the confirmation on the credit balance. In case of non
response, the auditor may examine subsequent cash disbursements or correspondence from
third parties, and other records, such as goods received notes. Further non response for negative
confirmation request does not means that there is some misstatement as negative confirmation
request itself is to respond to the auditor only if the con firming party disagrees with the
information provided in the request.
But, if the auditor identifies factors that give rise to doubts about the reliability of the
response to the confirmation request, he shall obtain further audit evidence to resolve those
doubts.
A.5(b)Corporate Governance: Corporate governance is the system by which companies are directed and
controlled by the management in the best interest of the shareholders and others ensuring greater
transparency and better and timely financial reporting. The Board of Directors are responsible
for governance of their companies. A number of reports and codes of corporate governance have
been published internationally.
The Securities and Exchange Board of India (SEBI) issued a circular dated April 17, 2014 to all
recognised stock exch anges, making amendments to Clauses 35B and Clause 49 of the Equity
Listing Agreement, with the intent to align the Listing Agreement with the provisions of the
Companies Act, 2013, to make the corporate governance framework more effective and to
adopt best practices on corporate governance. Further amendments were made to Clause 49 of
the Listing Agreement vide circular dated September 15, 2014.
Since a listing agreement is a statutorily mandated contract between the listed entity and the
stock exchange wh ere it is listed, it does not have the authority of law behind it. Hence, on
September 2, 2015, SEBI issued the Securities and Exchange Board of India (Listing Obligations
and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), with the objective of
streamlining and consolidating the provisions of various listing agreements in operation for
different segments of the capital markets, such as equity shares, preference shares, debt
instruments, units of mutual funds, Indian depository receipts, securitised debt instruments
and any other securities that the SEBI may specify.
The LODR Regulations are divided into two parts - the substantive provisions areincorporated
in the main body while the procedural requirements are incorporated in the form of schedules.
The LODR Regulations also capture the corporate governance principles found in Clause 49 of
SEBI’s Model Listing Agreement. It may be noted that theLODR Regulations deal with only post
-listing requirements and exclude all pre -listing requirements. Needless to add, the above -
mentioned circulars stand rescinded.
A.5(c)As per SA 250, “Consideration of Laws and Regulations, the auditor shall perform the audit
procedures to help identify instances of non -compliance with other laws and regulations that
may have a material effect on the financial statements by inquiring of management and,
where appropriate, those charged with governance, as to whether the entity is in compliance with
such laws and regulations; and Inspecting correspondence, if any, with the relevant licensing or
regulatory authorities.
However, when the auditor becomes aware of the existe nce of, or information about, the following
matters, it may also be an indication of non -compliance with laws and regulations:
* Investigations by regulatory organisations and government departments or payment of fines or
penalties.

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* Payments for unspecified services or loans to consultants, related parties, employees or government
employees.
* Sales commissions or agent’s fees that appear excessive in relation to those ordinarily paid by the
entity or in its industry or to the services actually received.
* Purchasing at prices significantly above or below market price.
* Unusual payments in cash, purchases in the form of cashiers’ cheques payable to bearer or transfers
to numbered bank accounts.
* Unusual payments towards legal and retainership fees.
* Unusual transactions with companies registered in tax havens.
* Payments for goods or services made other than to the country from which the goods or services
originated.
* Payments without proper exchange control documentation.
* Existence of an information system which fails, whether by design or by accident, to provide an
adequate audit trail or sufficient evidence.
* Unauthorised transactions or improperly recorded transactions.
* Adverse media comment.
A.6(a) Practitioner’s report regarding payment of statutory dues, pursuant to request by
lenders
Report on payment of statutory dues
1. The accompanying statement of deposit of dues under Employees Provident Funds and
Miscellaneous Provisions Act, 1952, Income tax Act, 1961 and Finance Act, 1994 (together known
as “statutory dues”) outstanding as at March 31, 2016 and dues pertaining to the period
……..to…………….has been prepared and approved by the management of …………………..(‘the Company’)
for submission with its lenders- ………………………..(specify the lenders), in relation to the borrowings
of ` …………million (Indian Rupee………………….).Management’s responsibility
2. The accompanying Statement, including the creation and maintenance of all accounting and other
records supporting their contents, is solely the responsibility of the Management of the Company.
The Company’s Management is responsible for the designing, implementing and maintaining internal
control relevant to the preparation and presentation of the Statement, and applying an appropriate
basis of preparation; and making estimates that are reasonable in the circumstances.
3. The Company’s Management is also responsible for ensuring that the Company complies with the
requirements of the loan agreement dated ………………. and for furnishing all relevant information
to the lenders.
Auditor’s responsibility
4. It is our responsibility to obtain limited assurance and form a conclusion as to whether the
Statement is in agreement with the audited financial statements for the year ended March 31,
……….. and unaudited trial balance of the Company for the period ……………. to ………………. and bank
book as extracted from the unau dited books of account of the Company, underlying challans and
respective ledger accounts forming part of unaudited books of accounts maintained by the
Company for the period ……………. to …………. and …………..(specify the bank name) bank statement for
the period … ……………. to ………………….The procedures performed vary in nature and timing from, and
are less extent than for, a reasonable assurance and consequently, the level of assurance obtained
is substantially lower than the assurance that would have been obtained had a reasonable assurance
engagement been performed.
5. We conducted our examination of the Statement in accordance with the Guidance Note on
Reports or Certificates for Special Purposes (Revised) issued by the Institute of Chartered
Accountants of India. The Guidance Note requires that we comply with the ethical requirements
of the Code of Ethics issued by the Institute of Chartered Accountants of India.
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6. We have complied with the relevant applicable requirements of the Standard on Quality Control
(SQC) 1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements.
7. We have performed the following procedures for verifying the deposit of statutory dues:
e. Traced and agreed the outs tanding liability of statutory dues as at March 31, XXXX in the
Statement to Note ………. of the audited financial statements of the Company for the year ended
March 31, …………..
f. Traced and agreed the deposit of statutory dues outstanding as on March 31, …….., as stated in
the Statement to the challans /bank statement of ……………….Bank account no. ………………… and the
relevant ledger account forming part of the books of account maintained by the company .
g. Traced and agreed the statutory dues pertaining to the period …… ……….. to …………….. and
outstanding as at …………………., as accounted for by the Company and stated in the Statement to the
unaudited trial balance of the Company for the period ……………. to …………… and also, to the respective
ledger accounts relating to Provident Fund, Income tax and Service tax, forming part of the
unaudited books of account of the Company for the period then ended.
h. Traced the deposit of statutory dues pertaining to the period ……. to …… in the Statement to
the deposit challans/ bank statement of ……. B ank bearing account no. …………. and respective ledger
accounts relating to Provident Fund, Income tax and Service tax, forming part of the
unaudited books of account of the Company for the period then ended.
Opinion
8. Based on the procedures performed and our examination, as above, and the information and
explanations given to us, nothing has come to our attention that causes us to believe that the
information given in the Statement in respect of deposit of statutory dues outstanding as at
March 31, …………. and for the period …………….. to…………… and outstanding as at ……………., is not
in agreement with the audited financial statements of the Company for the year ended March 31,
……… and the unaudited books of account and other records of the Company as mentioned above
and produced to us for our examination.
Restriction on Use
9. The Certificate is addressed to and provided to the Board of Directors of the Company solely for
the purpose of furnishing to the lenders of the Company and we hereby give consent to the extracts
of this Certificate being used by the Company in connection with the borrowings. We do not accept
or assume any liability or any duty of care for any other purpose or to any other person to whom
this Certificate is shown or into whose hands it may come withou t our prior consent in writing.
10. We have no responsibility to update this certificate for events and circumstances occurring after
the date of this certificate.
A.6(b)Applicability of CARO, 2016: The CARO, 2016 specifically exempts a private limited company, not
being a subsidiary or holding company of a public company, having a paid up capital and reserves
and surplus not more than rupees one crore as on the balance sheet date and which does not have
total borrowings exceeding rupees one crore from any bank or financial institution at a ny
point of time during the financial year and which does not have a total revenue as disclosed in
Scheduled III to the Companies Act, 2013 (including revenue from discontinuing operations)
exceeding rupees ten crore during the financial year as per the fi nancial statements.
In the given case, paid up capital and reserves of T Pvt. Ltd. is less than ` 1 crore and has no loan
outstanding exceeding ` one crore from any bank or financial institution. Further, its total revenue
as disclosed in Scheduled III t o the Companies Act, 2013 (including revenue from discontinuing
operations) is not exceeding rupees ten crore during the financial year as per the financial
statements.
Thus CARO 2016 will not be applicable to T Pvt. Ltd.

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A.6(c)Re-evaluation of the Materiality Concept : In the instant case, Mr. P, as an auditor of RST Ltd. has
applied the concept of materiality for the financial statements as a whole. But he wants to re-
evaluate the materiality concept on the basis of additional information of significant contractual
arrangements which draws attention to a particular aspect of the company’s business.
As per SA 320 “Materiality in Planning and Performing an Audit”, while establishing the overall
audit strategy, the auditor shall determine materiality for the financial statement as a whole. He
should set the benchmark on the basis of which he performs his audit procedure. If, in the
specific circumstances of the entity, there is one or more particular classes of transactions,
account balances or disclosures for which misstatements of lesser amounts than the materiality
for the financial statements as a whole could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements, the auditor shall also determine
the materiality level or levels to be applied to those particular classes of transactions, account
balances or disclosures.
The auditor shall revise materiality for the financial statements in the event of becoming aware
of information during the audit that would have caused the auditor to have determined a
different amount (or amounts) initially.
If the auditor concludes a lower materiality for the same, then he should consider the fact that
whether it is necessary to revise performance materiality and whether the nature, timing and
extent of the further audit procedures remain appropriate.
Thus, Mr. P can re-evaluate the materiality concepts after considering the necessity of such revision.
A.6(d)The main features of a qualified and independent audit committee to be set up under SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015 are as follows:
(i) The audit commi ttee shall have min imum three directors as members. Two-thirds of
themembers of audit commit tee shall be independent di rectors;
(ii) All members of audit c ommittee shall be financially literate and at le ast one member shallhave
accounting or related fi nancial management expertise;
Explanation (i): The term “financially literate” means the ability to read and understand
basicfinancial statements i.e. balance sheet, profit and loss account, and statement of
cashflows.
Explanation (ii): A member will be considered to have accounting or related financial
management expertise if he or she possesses experience in finance or accounting, or
requisite professional c ertification in accounting, or any other comparable experience or
background which res ults in t he indi vid ual ’s financial sophistic ation, including being or
having been a chi ef executive officer, c hief fi nancial officer or other senior offi cer with
financial oversight responsibilities
(iii) The Chair person of the Audit Committee shall be an independent director;
(iv) The Chairperson of the Audit Committee shall be present at Annual General Meeting
toanswer shareholder queries;
(v) The Audit Committee at its discretion shall invite the finance director or the head of the finance
function, head of internal audit and a representative of the statutory auditor and any other such
executives to be present at the meetings of the committee; provided that occasionally, the Audit
Committee may meet without the presence of any executives of the listed entity ;
(vi) The Company Secretary shall act as the secretary to the committee.

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