Auditing and Assurance Model Test Paper - 5 (Questions) - CA Intermediate PDF Download

 Page 1


MODEL TEST PAPER 5 
INTERMEDIATE GROUP – II  
PAPER – 5: AUDITING AND ETHICS 
Time Allowed – 3 Hours Maximum Marks – 100 
PART I - Case Scenario based MCQs (30 Marks) 
Write the most appropriate answer to each of the following multiple-choice 
questions by choosing one of the four options given. All MCQs are 
compulsory and carries 2 Marks each. 
Case Scenario 1 
DLP & Associates, a firm of Chartered Accountants, are in midst of conducting audit 
of Twist and Spin Limited. The company is in business since last 15 years and have 
appointed DPL & Associates as their auditor for the first time for a term of 5 years 
beginning from financial year 2023-24. While identifying and assessing the risk of 
material misstatement at assertion level, the engagement team had assessed risk 
of material misstatement for revenues and trade receivables to be high.   
The team is considering to send negative confirmation requests as sole substantive 
procedure to some business entities representing trade receivables appearing in 
the financial statements of the company. The company had made sales to these 
business entities in January, 2024. Such business entities are few and have quite 
large balances as on 31
st 
March, 2024. However, team members are not on the 
same page regarding sending negative confirmation requests. 
Besides considering sending of confirmation requests, engagement team has 
planned certain audit procedures pertaining to trade receivables. These procedures 
include: -  
1. Verification of invoices issued during last 7 days of financial year
2023-24 to verify that goods have been despatched by the company.
2. Selection of a few invoices from ageing report of the month March 2024 for
verification of correctness of the billed amounts, to correct customers and on
correct dates.
3. Preparation of schedule of movement of bad debts.
4. Review of the process of providing discounts to ensure that it is in accordance
with company policy.
Another junior team member, S, observed that “Share Options Outstanding 
Account” reflected in the financial statements of the company. He started searching 
classification requirements of Schedule III of Companies Act, 2013 in this regard. 
144
Page 2


MODEL TEST PAPER 5 
INTERMEDIATE GROUP – II  
PAPER – 5: AUDITING AND ETHICS 
Time Allowed – 3 Hours Maximum Marks – 100 
PART I - Case Scenario based MCQs (30 Marks) 
Write the most appropriate answer to each of the following multiple-choice 
questions by choosing one of the four options given. All MCQs are 
compulsory and carries 2 Marks each. 
Case Scenario 1 
DLP & Associates, a firm of Chartered Accountants, are in midst of conducting audit 
of Twist and Spin Limited. The company is in business since last 15 years and have 
appointed DPL & Associates as their auditor for the first time for a term of 5 years 
beginning from financial year 2023-24. While identifying and assessing the risk of 
material misstatement at assertion level, the engagement team had assessed risk 
of material misstatement for revenues and trade receivables to be high.   
The team is considering to send negative confirmation requests as sole substantive 
procedure to some business entities representing trade receivables appearing in 
the financial statements of the company. The company had made sales to these 
business entities in January, 2024. Such business entities are few and have quite 
large balances as on 31
st 
March, 2024. However, team members are not on the 
same page regarding sending negative confirmation requests. 
Besides considering sending of confirmation requests, engagement team has 
planned certain audit procedures pertaining to trade receivables. These procedures 
include: -  
1. Verification of invoices issued during last 7 days of financial year
2023-24 to verify that goods have been despatched by the company.
2. Selection of a few invoices from ageing report of the month March 2024 for
verification of correctness of the billed amounts, to correct customers and on
correct dates.
3. Preparation of schedule of movement of bad debts.
4. Review of the process of providing discounts to ensure that it is in accordance
with company policy.
Another junior team member, S, observed that “Share Options Outstanding 
Account” reflected in the financial statements of the company. He started searching 
classification requirements of Schedule III of Companies Act, 2013 in this regard. 
144
The engagement team wants to ensure that only the inventories held by company 
have been recorded in the financial statements and do not include any inventories 
belonging to third parties. They are keen to verify completeness assertion for 
inventories. The team has planned following audit procedures in this respect: - 
1. Comparison of inventory turnover ratio of current period with previous years;
2. Vertical analysis of current period with previous years;
3. Comparison of budgetary expectations vis-à-vis actuals;
4. Performing purchase and sales cut-off tests
During the course of audit, R, a team member concluded that company has 
followed a particular accounting policy for revenue recognition during year 2023-24 
which is in accordance with Accounting Standards and applicable financial 
reporting framework, but it was not consistently applied in preceding period having 
an impact upon opening balances of trade receivables of current year 2023-24. R 
is confused regarding the possible implications on auditor’s report on this issue. 
Based upon above, answer the following questions: - 
1. The engagement team members are not able to take decision on sending
negative confirmation requests to some entities described in case scenario.
Which of the following statements is in accordance with Standards on
Auditing?
(a) It would be appropriate for engagement team to send negative
confirmation requests to these business entities.
(b) It would be inappropriate for engagement team to send negative
confirmation requests to these business entities.
(c) Sending negative confirmation requests depends upon auditor’s
professional judgment and Standards on Auditing do not spell out any
confirmation requirements in this respect.
(d) Business entities are more likely to respond in case of disagreement.
Therefore, sending negative confirmation requests always provides
better qualitative audit evidence as compared to other confirmation
modes.
2. Which of the planned audit procedure(s) pertaining to trade receivables
described in case scenario is/are not related to verification of “Completeness
assertion”?
(a) 2 only
(b) 2 and 3
(c) 3 only
(d) 1 and 3
3. Guide team member S by selecting the correct option with respect to “Share
Options Outstanding Account”:
(a) It is required to be classified under head “Current liabilities”.
145
Page 3


MODEL TEST PAPER 5 
INTERMEDIATE GROUP – II  
PAPER – 5: AUDITING AND ETHICS 
Time Allowed – 3 Hours Maximum Marks – 100 
PART I - Case Scenario based MCQs (30 Marks) 
Write the most appropriate answer to each of the following multiple-choice 
questions by choosing one of the four options given. All MCQs are 
compulsory and carries 2 Marks each. 
Case Scenario 1 
DLP & Associates, a firm of Chartered Accountants, are in midst of conducting audit 
of Twist and Spin Limited. The company is in business since last 15 years and have 
appointed DPL & Associates as their auditor for the first time for a term of 5 years 
beginning from financial year 2023-24. While identifying and assessing the risk of 
material misstatement at assertion level, the engagement team had assessed risk 
of material misstatement for revenues and trade receivables to be high.   
The team is considering to send negative confirmation requests as sole substantive 
procedure to some business entities representing trade receivables appearing in 
the financial statements of the company. The company had made sales to these 
business entities in January, 2024. Such business entities are few and have quite 
large balances as on 31
st 
March, 2024. However, team members are not on the 
same page regarding sending negative confirmation requests. 
Besides considering sending of confirmation requests, engagement team has 
planned certain audit procedures pertaining to trade receivables. These procedures 
include: -  
1. Verification of invoices issued during last 7 days of financial year
2023-24 to verify that goods have been despatched by the company.
2. Selection of a few invoices from ageing report of the month March 2024 for
verification of correctness of the billed amounts, to correct customers and on
correct dates.
3. Preparation of schedule of movement of bad debts.
4. Review of the process of providing discounts to ensure that it is in accordance
with company policy.
Another junior team member, S, observed that “Share Options Outstanding 
Account” reflected in the financial statements of the company. He started searching 
classification requirements of Schedule III of Companies Act, 2013 in this regard. 
144
The engagement team wants to ensure that only the inventories held by company 
have been recorded in the financial statements and do not include any inventories 
belonging to third parties. They are keen to verify completeness assertion for 
inventories. The team has planned following audit procedures in this respect: - 
1. Comparison of inventory turnover ratio of current period with previous years;
2. Vertical analysis of current period with previous years;
3. Comparison of budgetary expectations vis-à-vis actuals;
4. Performing purchase and sales cut-off tests
During the course of audit, R, a team member concluded that company has 
followed a particular accounting policy for revenue recognition during year 2023-24 
which is in accordance with Accounting Standards and applicable financial 
reporting framework, but it was not consistently applied in preceding period having 
an impact upon opening balances of trade receivables of current year 2023-24. R 
is confused regarding the possible implications on auditor’s report on this issue. 
Based upon above, answer the following questions: - 
1. The engagement team members are not able to take decision on sending
negative confirmation requests to some entities described in case scenario.
Which of the following statements is in accordance with Standards on
Auditing?
(a) It would be appropriate for engagement team to send negative
confirmation requests to these business entities.
(b) It would be inappropriate for engagement team to send negative
confirmation requests to these business entities.
(c) Sending negative confirmation requests depends upon auditor’s
professional judgment and Standards on Auditing do not spell out any
confirmation requirements in this respect.
(d) Business entities are more likely to respond in case of disagreement.
Therefore, sending negative confirmation requests always provides
better qualitative audit evidence as compared to other confirmation
modes.
2. Which of the planned audit procedure(s) pertaining to trade receivables
described in case scenario is/are not related to verification of “Completeness
assertion”?
(a) 2 only
(b) 2 and 3
(c) 3 only
(d) 1 and 3
3. Guide team member S by selecting the correct option with respect to “Share
Options Outstanding Account”:
(a) It is required to be classified under head “Current liabilities”.
145
(b) It is required to be classified under Shareholder funds under “Share
Capital”. Further, it is to be classified separately under “Paid up Share
Capital”.
(c) It is required to be classified under Shareholder funds under “Reserves
& Surplus”. Further, it is to be classified separately as such under
“Reserves & Surplus”.
(d) It is required to be classified under Shareholder funds under “Reserves
& Surplus”. However, it is shown as part of Capital Reserve. No Separate
disclosure is mandated under Schedule III of Companies Act, 2013.
4. Which of the planned audit procedures in relation to the inventories described
in the case scenario is/are not in nature of analytical procedure(s)?
(a) 2 and 3
(b) 3 only
(c) 2 and 4
(d) 4 only
Case Scenario 2 
CA J is nearing completion of audit of Cheap Cost Private Limited, a manufacturing 
company for the year 2023-24. The draft financial statements of the company show 
a profit before tax of ` 5 crores. Materiality for financial statements as a whole has 
been determined @ 5% of Profit before Tax. At the end of June 2024, he is 
considering following issues flagged during the course of audit which remain 
uncorrected: - 
• A fire took place in one of the premises of the company on 1
st
 May, 2024
resulting in damages to all the inventories lying there amounting to ` 1 crores.
The inventories of affected premises are insured with Quick Bima Limited for
` 50 lakhs and company has also lodged a claim with it which is still to be
settled.
• The company has debited ` 10 lakhs under “Machinery Account” whereas
expenditure relates to normal wear and tear of high-speed automated
machinery. The amount has been wrongly capitalised under “Machinery
account”. (Ignore depreciation effect)
• The company has not properly accounted for necessary elements of cost in
arriving at work in progress. Further, estimates regarding various stages of
production have not been made properly. All such factors have resulted in
overstatement of work in progress inventories by ` 20 lakhs.
No other issues except as stated above merit attention. Besides, written 
representation letter has also been obtained on matters concerning management’s 
responsibilities regarding fulfilment of responsibilities for preparation of financial 
statements and providing access to all information to CA J. However, written 
representation provided to CA J begins in the below stated manner:  
“This representation letter is provided in connection with your audit of the financial 
statements of Cheap Cost Private Limited for the year ended March 31, 2024, for 
146
Page 4


MODEL TEST PAPER 5 
INTERMEDIATE GROUP – II  
PAPER – 5: AUDITING AND ETHICS 
Time Allowed – 3 Hours Maximum Marks – 100 
PART I - Case Scenario based MCQs (30 Marks) 
Write the most appropriate answer to each of the following multiple-choice 
questions by choosing one of the four options given. All MCQs are 
compulsory and carries 2 Marks each. 
Case Scenario 1 
DLP & Associates, a firm of Chartered Accountants, are in midst of conducting audit 
of Twist and Spin Limited. The company is in business since last 15 years and have 
appointed DPL & Associates as their auditor for the first time for a term of 5 years 
beginning from financial year 2023-24. While identifying and assessing the risk of 
material misstatement at assertion level, the engagement team had assessed risk 
of material misstatement for revenues and trade receivables to be high.   
The team is considering to send negative confirmation requests as sole substantive 
procedure to some business entities representing trade receivables appearing in 
the financial statements of the company. The company had made sales to these 
business entities in January, 2024. Such business entities are few and have quite 
large balances as on 31
st 
March, 2024. However, team members are not on the 
same page regarding sending negative confirmation requests. 
Besides considering sending of confirmation requests, engagement team has 
planned certain audit procedures pertaining to trade receivables. These procedures 
include: -  
1. Verification of invoices issued during last 7 days of financial year
2023-24 to verify that goods have been despatched by the company.
2. Selection of a few invoices from ageing report of the month March 2024 for
verification of correctness of the billed amounts, to correct customers and on
correct dates.
3. Preparation of schedule of movement of bad debts.
4. Review of the process of providing discounts to ensure that it is in accordance
with company policy.
Another junior team member, S, observed that “Share Options Outstanding 
Account” reflected in the financial statements of the company. He started searching 
classification requirements of Schedule III of Companies Act, 2013 in this regard. 
144
The engagement team wants to ensure that only the inventories held by company 
have been recorded in the financial statements and do not include any inventories 
belonging to third parties. They are keen to verify completeness assertion for 
inventories. The team has planned following audit procedures in this respect: - 
1. Comparison of inventory turnover ratio of current period with previous years;
2. Vertical analysis of current period with previous years;
3. Comparison of budgetary expectations vis-à-vis actuals;
4. Performing purchase and sales cut-off tests
During the course of audit, R, a team member concluded that company has 
followed a particular accounting policy for revenue recognition during year 2023-24 
which is in accordance with Accounting Standards and applicable financial 
reporting framework, but it was not consistently applied in preceding period having 
an impact upon opening balances of trade receivables of current year 2023-24. R 
is confused regarding the possible implications on auditor’s report on this issue. 
Based upon above, answer the following questions: - 
1. The engagement team members are not able to take decision on sending
negative confirmation requests to some entities described in case scenario.
Which of the following statements is in accordance with Standards on
Auditing?
(a) It would be appropriate for engagement team to send negative
confirmation requests to these business entities.
(b) It would be inappropriate for engagement team to send negative
confirmation requests to these business entities.
(c) Sending negative confirmation requests depends upon auditor’s
professional judgment and Standards on Auditing do not spell out any
confirmation requirements in this respect.
(d) Business entities are more likely to respond in case of disagreement.
Therefore, sending negative confirmation requests always provides
better qualitative audit evidence as compared to other confirmation
modes.
2. Which of the planned audit procedure(s) pertaining to trade receivables
described in case scenario is/are not related to verification of “Completeness
assertion”?
(a) 2 only
(b) 2 and 3
(c) 3 only
(d) 1 and 3
3. Guide team member S by selecting the correct option with respect to “Share
Options Outstanding Account”:
(a) It is required to be classified under head “Current liabilities”.
145
(b) It is required to be classified under Shareholder funds under “Share
Capital”. Further, it is to be classified separately under “Paid up Share
Capital”.
(c) It is required to be classified under Shareholder funds under “Reserves
& Surplus”. Further, it is to be classified separately as such under
“Reserves & Surplus”.
(d) It is required to be classified under Shareholder funds under “Reserves
& Surplus”. However, it is shown as part of Capital Reserve. No Separate
disclosure is mandated under Schedule III of Companies Act, 2013.
4. Which of the planned audit procedures in relation to the inventories described
in the case scenario is/are not in nature of analytical procedure(s)?
(a) 2 and 3
(b) 3 only
(c) 2 and 4
(d) 4 only
Case Scenario 2 
CA J is nearing completion of audit of Cheap Cost Private Limited, a manufacturing 
company for the year 2023-24. The draft financial statements of the company show 
a profit before tax of ` 5 crores. Materiality for financial statements as a whole has 
been determined @ 5% of Profit before Tax. At the end of June 2024, he is 
considering following issues flagged during the course of audit which remain 
uncorrected: - 
• A fire took place in one of the premises of the company on 1
st
 May, 2024
resulting in damages to all the inventories lying there amounting to ` 1 crores.
The inventories of affected premises are insured with Quick Bima Limited for
` 50 lakhs and company has also lodged a claim with it which is still to be
settled.
• The company has debited ` 10 lakhs under “Machinery Account” whereas
expenditure relates to normal wear and tear of high-speed automated
machinery. The amount has been wrongly capitalised under “Machinery
account”. (Ignore depreciation effect)
• The company has not properly accounted for necessary elements of cost in
arriving at work in progress. Further, estimates regarding various stages of
production have not been made properly. All such factors have resulted in
overstatement of work in progress inventories by ` 20 lakhs.
No other issues except as stated above merit attention. Besides, written 
representation letter has also been obtained on matters concerning management’s 
responsibilities regarding fulfilment of responsibilities for preparation of financial 
statements and providing access to all information to CA J. However, written 
representation provided to CA J begins in the below stated manner:  
“This representation letter is provided in connection with your audit of the financial 
statements of Cheap Cost Private Limited for the year ended March 31, 2024, for 
146
the purpose of expressing an opinion as to whether the financial statements give a 
true and fair view in accordance with the applicable accounting standards in India. 
We confirm that (to the best of our knowledge and belief, having made such 
inquiries as we considered necessary for the purpose of appropriately informing 
ourselves) ………………” 
Based upon above, answer the following questions: - 
5. Which of following statements is most appropriate as regards to fire incident?
(a) The auditor should ask management to adjust financial statements for
period under audit and book a loss of ` 50 lakhs in its Statement of Profit
and Loss.
(b) The auditor should ask management to adjust financial statements for
period under audit and book a loss of ` 1 crores in its Statement of Profit
and Loss.
(c) The auditor should ask management to disclose it in notes to accounts.
(d) The auditor has no responsibility regarding described fire incident.
6. Identify the correct option regarding materiality of uncorrected misstatements
relating to wrong capitalisation under “Machinery Account” and overstatement
of inventories of work in progress.
(a) The uncorrected misstatements are not material in context of audit of
financial statements as a whole as these are below materiality level
determined by auditor.
(b) The uncorrected misstatements are material in context of audit of
financial statements as a whole and their effect on opinion should be
considered by auditor.
(c) The uncorrected misstatements are not material in context of audit of
financial statements as a whole as these are in nature of management’s
judgment.
(d) The uncorrected misstatements are material in context of audit of
financial statements as a whole and auditor should correct these.
7. The auditor has performed certain audit procedures described in case
scenario relating to inventories of work in progress. Such procedures are
related to verification of _______ assertion.
(a) Completeness
(b) Valuation
(c) Existence
(d) Rights and obligations
8. Which of the following statements is correct in respect to manner of providing
written representations by management?
(a) The extract of written representations provided in case scenario is
proper.
147
Page 5


MODEL TEST PAPER 5 
INTERMEDIATE GROUP – II  
PAPER – 5: AUDITING AND ETHICS 
Time Allowed – 3 Hours Maximum Marks – 100 
PART I - Case Scenario based MCQs (30 Marks) 
Write the most appropriate answer to each of the following multiple-choice 
questions by choosing one of the four options given. All MCQs are 
compulsory and carries 2 Marks each. 
Case Scenario 1 
DLP & Associates, a firm of Chartered Accountants, are in midst of conducting audit 
of Twist and Spin Limited. The company is in business since last 15 years and have 
appointed DPL & Associates as their auditor for the first time for a term of 5 years 
beginning from financial year 2023-24. While identifying and assessing the risk of 
material misstatement at assertion level, the engagement team had assessed risk 
of material misstatement for revenues and trade receivables to be high.   
The team is considering to send negative confirmation requests as sole substantive 
procedure to some business entities representing trade receivables appearing in 
the financial statements of the company. The company had made sales to these 
business entities in January, 2024. Such business entities are few and have quite 
large balances as on 31
st 
March, 2024. However, team members are not on the 
same page regarding sending negative confirmation requests. 
Besides considering sending of confirmation requests, engagement team has 
planned certain audit procedures pertaining to trade receivables. These procedures 
include: -  
1. Verification of invoices issued during last 7 days of financial year
2023-24 to verify that goods have been despatched by the company.
2. Selection of a few invoices from ageing report of the month March 2024 for
verification of correctness of the billed amounts, to correct customers and on
correct dates.
3. Preparation of schedule of movement of bad debts.
4. Review of the process of providing discounts to ensure that it is in accordance
with company policy.
Another junior team member, S, observed that “Share Options Outstanding 
Account” reflected in the financial statements of the company. He started searching 
classification requirements of Schedule III of Companies Act, 2013 in this regard. 
144
The engagement team wants to ensure that only the inventories held by company 
have been recorded in the financial statements and do not include any inventories 
belonging to third parties. They are keen to verify completeness assertion for 
inventories. The team has planned following audit procedures in this respect: - 
1. Comparison of inventory turnover ratio of current period with previous years;
2. Vertical analysis of current period with previous years;
3. Comparison of budgetary expectations vis-à-vis actuals;
4. Performing purchase and sales cut-off tests
During the course of audit, R, a team member concluded that company has 
followed a particular accounting policy for revenue recognition during year 2023-24 
which is in accordance with Accounting Standards and applicable financial 
reporting framework, but it was not consistently applied in preceding period having 
an impact upon opening balances of trade receivables of current year 2023-24. R 
is confused regarding the possible implications on auditor’s report on this issue. 
Based upon above, answer the following questions: - 
1. The engagement team members are not able to take decision on sending
negative confirmation requests to some entities described in case scenario.
Which of the following statements is in accordance with Standards on
Auditing?
(a) It would be appropriate for engagement team to send negative
confirmation requests to these business entities.
(b) It would be inappropriate for engagement team to send negative
confirmation requests to these business entities.
(c) Sending negative confirmation requests depends upon auditor’s
professional judgment and Standards on Auditing do not spell out any
confirmation requirements in this respect.
(d) Business entities are more likely to respond in case of disagreement.
Therefore, sending negative confirmation requests always provides
better qualitative audit evidence as compared to other confirmation
modes.
2. Which of the planned audit procedure(s) pertaining to trade receivables
described in case scenario is/are not related to verification of “Completeness
assertion”?
(a) 2 only
(b) 2 and 3
(c) 3 only
(d) 1 and 3
3. Guide team member S by selecting the correct option with respect to “Share
Options Outstanding Account”:
(a) It is required to be classified under head “Current liabilities”.
145
(b) It is required to be classified under Shareholder funds under “Share
Capital”. Further, it is to be classified separately under “Paid up Share
Capital”.
(c) It is required to be classified under Shareholder funds under “Reserves
& Surplus”. Further, it is to be classified separately as such under
“Reserves & Surplus”.
(d) It is required to be classified under Shareholder funds under “Reserves
& Surplus”. However, it is shown as part of Capital Reserve. No Separate
disclosure is mandated under Schedule III of Companies Act, 2013.
4. Which of the planned audit procedures in relation to the inventories described
in the case scenario is/are not in nature of analytical procedure(s)?
(a) 2 and 3
(b) 3 only
(c) 2 and 4
(d) 4 only
Case Scenario 2 
CA J is nearing completion of audit of Cheap Cost Private Limited, a manufacturing 
company for the year 2023-24. The draft financial statements of the company show 
a profit before tax of ` 5 crores. Materiality for financial statements as a whole has 
been determined @ 5% of Profit before Tax. At the end of June 2024, he is 
considering following issues flagged during the course of audit which remain 
uncorrected: - 
• A fire took place in one of the premises of the company on 1
st
 May, 2024
resulting in damages to all the inventories lying there amounting to ` 1 crores.
The inventories of affected premises are insured with Quick Bima Limited for
` 50 lakhs and company has also lodged a claim with it which is still to be
settled.
• The company has debited ` 10 lakhs under “Machinery Account” whereas
expenditure relates to normal wear and tear of high-speed automated
machinery. The amount has been wrongly capitalised under “Machinery
account”. (Ignore depreciation effect)
• The company has not properly accounted for necessary elements of cost in
arriving at work in progress. Further, estimates regarding various stages of
production have not been made properly. All such factors have resulted in
overstatement of work in progress inventories by ` 20 lakhs.
No other issues except as stated above merit attention. Besides, written 
representation letter has also been obtained on matters concerning management’s 
responsibilities regarding fulfilment of responsibilities for preparation of financial 
statements and providing access to all information to CA J. However, written 
representation provided to CA J begins in the below stated manner:  
“This representation letter is provided in connection with your audit of the financial 
statements of Cheap Cost Private Limited for the year ended March 31, 2024, for 
146
the purpose of expressing an opinion as to whether the financial statements give a 
true and fair view in accordance with the applicable accounting standards in India. 
We confirm that (to the best of our knowledge and belief, having made such 
inquiries as we considered necessary for the purpose of appropriately informing 
ourselves) ………………” 
Based upon above, answer the following questions: - 
5. Which of following statements is most appropriate as regards to fire incident?
(a) The auditor should ask management to adjust financial statements for
period under audit and book a loss of ` 50 lakhs in its Statement of Profit
and Loss.
(b) The auditor should ask management to adjust financial statements for
period under audit and book a loss of ` 1 crores in its Statement of Profit
and Loss.
(c) The auditor should ask management to disclose it in notes to accounts.
(d) The auditor has no responsibility regarding described fire incident.
6. Identify the correct option regarding materiality of uncorrected misstatements
relating to wrong capitalisation under “Machinery Account” and overstatement
of inventories of work in progress.
(a) The uncorrected misstatements are not material in context of audit of
financial statements as a whole as these are below materiality level
determined by auditor.
(b) The uncorrected misstatements are material in context of audit of
financial statements as a whole and their effect on opinion should be
considered by auditor.
(c) The uncorrected misstatements are not material in context of audit of
financial statements as a whole as these are in nature of management’s
judgment.
(d) The uncorrected misstatements are material in context of audit of
financial statements as a whole and auditor should correct these.
7. The auditor has performed certain audit procedures described in case
scenario relating to inventories of work in progress. Such procedures are
related to verification of _______ assertion.
(a) Completeness
(b) Valuation
(c) Existence
(d) Rights and obligations
8. Which of the following statements is correct in respect to manner of providing
written representations by management?
(a) The extract of written representations provided in case scenario is
proper.
147
(b) The use of words “having made such enquiries” is not permitted.
(c) The use of words “to the best of our knowledge and belief” is not
permitted.
(d) The use of both kind of words “having made such enquiries” and “to the
best of our knowledge and belief” is not permitted.
Case Scenario 3 
MPM & Associates, a firm of Chartered Accountants, have received offer letter from 
PST Bank for carrying out statutory audit of their Chandigarh branch for the 
financial year 2023-24. The offer letter, inter alia, requests audit firm to give an 
undertaking in writing that firm is not disqualified under Section 141(3)(d)(ii) of 
Companies Act, 2013. Such provision relates to disqualification of a person as 
auditor of a company if he, his relative or partner is indebted to the company subject 
to certain prescribed conditions. Before accepting the said audit, the firm checks 
out whether it complies with law requirements. However, there is a difference of 
opinion among firm personnel whether such an undertaking can be given in case 
of banks. 
The offer letter also contains following declaration to be signed by the auditors in 
case they choose to accept the appointment: - 
“We declare that we will not communicate or allow to be communicated to any 
person, not legally entitled thereto, any information relating to the affairs of PST 
Bank or to the affairs of the person having any dealing with the Bank, nor will we 
allow any such person to inspect or have access to any books or documents 
belonging to or in possession of the Bank relating to the business of any person 
having any dealing with the Bank.” 
The audit firm has also received a document kit provided by Statutory Central 
Auditors of Bank. It relates to scope of audit, areas of special consideration while 
performing audit and requires audit firm to confirm certain matters like adherence 
to RBI Master Circulars for income recognition, asset classification & provisioning 
and adequacy of checking of books of accounts based on sample etc. to them by 
way of a letter.  
The document kit received also requires MPM & Associates to consider adverse 
comments made by stock auditors of borrowers enjoying cash credit facilities in 
their reports for purpose of reporting. It also contains specific instructions to check 
foreign letter of credits (FLCs) issued during the year in compliance with sanction 
terms of the respective borrowers and to verify income recognized in respect of 
FLCs. 
9. Which of the following statements is likely to be most appropriate regarding
required undertaking in accordance with the Companies Act, 2013?
(a) The referred provision mainly addresses self-interest threats to
independence of auditors. The audit firm can give such an undertaking
after verifying if it complies with such requirements.
(b) The referred provision mainly addresses self-review threats to
independence of auditors. The audit firm can give such an undertaking
after verifying if it complies with such requirements.
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