Auditing and Assurance Model Test Paper - 1 (Answers) - CA Intermediate PDF Download

 Page 1


ANSWERS OF MODEL TEST PAPER 1 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
PART I - Multiple Choice Questions 
1. (b)
2. (b)
3. (b)
4. (d)
5. (c)
6. (a)
7. (c)
8. (a)
9. (a)
10. (d)
11. (b)
12. (d)
13. (c)
14. (c)
15. (b)
PART II-Descriptive Answers 
1. (a)  DOX Limited is in business of providing courier services. As name of the
company and given facts suggest: - 
? It is not a small company under section 2(85) of the Companies Act,
2013.
? It is not a private company.
? It is not a one person company.
? It is not a banking or insurance company.
? It is not a Section 8 company as it does not has charitable objects
etc.
Therefore, it does not qualify for any exemption from applicability of 
CARO, 2020.  Hence, reporting requirements under CARO, 2020 are 
applicable. While reporting under CARO, 2020, statutory auditor is 
required to report under clause (xiv) of paragraph 3 as under:  
415
Page 2


ANSWERS OF MODEL TEST PAPER 1 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
PART I - Multiple Choice Questions 
1. (b)
2. (b)
3. (b)
4. (d)
5. (c)
6. (a)
7. (c)
8. (a)
9. (a)
10. (d)
11. (b)
12. (d)
13. (c)
14. (c)
15. (b)
PART II-Descriptive Answers 
1. (a)  DOX Limited is in business of providing courier services. As name of the
company and given facts suggest: - 
? It is not a small company under section 2(85) of the Companies Act,
2013.
? It is not a private company.
? It is not a one person company.
? It is not a banking or insurance company.
? It is not a Section 8 company as it does not has charitable objects
etc.
Therefore, it does not qualify for any exemption from applicability of 
CARO, 2020.  Hence, reporting requirements under CARO, 2020 are 
applicable. While reporting under CARO, 2020, statutory auditor is 
required to report under clause (xiv) of paragraph 3 as under:  
415
(i)  whether the company has an internal audit system commensurate 
with the size and nature of its business 
(ii)  whether the reports of the internal auditors for the period under 
audit were considered by the statutory auditor 
(b)  The above situation is an example of misstatement relating to non-
compliance with requirements of AS 9 identified during audit. In 
accordance with requirements of SA 450, the auditor shall communicate 
on a timely basis all misstatements accumulated during the audit with 
the appropriate level of management, unless prohibited by law or 
regulation. The auditor shall request management to correct those 
misstatements.  
 Timely communication of misstatements to the appropriate level of 
management is important as it enables management to evaluate whether 
the items are misstatements, inform the auditor if it disagrees and take 
action as necessary. The correction by management of all 
misstatements, including those communicated by the auditor, enables 
management to maintain accurate accounting books and records and 
reduces the risks of material misstatement of future financial statements 
because of the cumulative effect of immaterial uncorrected 
misstatements related to prior periods. 
 If management refuses to correct some or all of the misstatements 
communicated by the auditor, the auditor shall obtain an understanding 
of management’s reasons for not making the corrections and shall take 
that understanding into account when evaluating whether the financial 
statements as a whole are free from material misstatement.  
(c)  In the given situation, following information is required to be disclosed in 
accordance with requirements to Schedule III to the Companies Act, 
2013:  
(a)  amount required to be spent by the company during the year 
`14.00 lacs 
(b)  amount of expenditure incurred   ` 14.50 lacs 
(c)  shortfall at the end of the year     NIL 
(d)  total of previous years shortfall     NA 
(e)  reason for shortfall      NA 
(f)  nature of CSR activities - Women empowerment  
activities through implementing agency 
(g)  details of related party transactions, e.g.,  
contribution to a trust controlled by the company  
in relation to CSR expenditure as per relevant  
Accounting Standard         NIL 
416
Page 3


ANSWERS OF MODEL TEST PAPER 1 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
PART I - Multiple Choice Questions 
1. (b)
2. (b)
3. (b)
4. (d)
5. (c)
6. (a)
7. (c)
8. (a)
9. (a)
10. (d)
11. (b)
12. (d)
13. (c)
14. (c)
15. (b)
PART II-Descriptive Answers 
1. (a)  DOX Limited is in business of providing courier services. As name of the
company and given facts suggest: - 
? It is not a small company under section 2(85) of the Companies Act,
2013.
? It is not a private company.
? It is not a one person company.
? It is not a banking or insurance company.
? It is not a Section 8 company as it does not has charitable objects
etc.
Therefore, it does not qualify for any exemption from applicability of 
CARO, 2020.  Hence, reporting requirements under CARO, 2020 are 
applicable. While reporting under CARO, 2020, statutory auditor is 
required to report under clause (xiv) of paragraph 3 as under:  
415
(i)  whether the company has an internal audit system commensurate 
with the size and nature of its business 
(ii)  whether the reports of the internal auditors for the period under 
audit were considered by the statutory auditor 
(b)  The above situation is an example of misstatement relating to non-
compliance with requirements of AS 9 identified during audit. In 
accordance with requirements of SA 450, the auditor shall communicate 
on a timely basis all misstatements accumulated during the audit with 
the appropriate level of management, unless prohibited by law or 
regulation. The auditor shall request management to correct those 
misstatements.  
 Timely communication of misstatements to the appropriate level of 
management is important as it enables management to evaluate whether 
the items are misstatements, inform the auditor if it disagrees and take 
action as necessary. The correction by management of all 
misstatements, including those communicated by the auditor, enables 
management to maintain accurate accounting books and records and 
reduces the risks of material misstatement of future financial statements 
because of the cumulative effect of immaterial uncorrected 
misstatements related to prior periods. 
 If management refuses to correct some or all of the misstatements 
communicated by the auditor, the auditor shall obtain an understanding 
of management’s reasons for not making the corrections and shall take 
that understanding into account when evaluating whether the financial 
statements as a whole are free from material misstatement.  
(c)  In the given situation, following information is required to be disclosed in 
accordance with requirements to Schedule III to the Companies Act, 
2013:  
(a)  amount required to be spent by the company during the year 
`14.00 lacs 
(b)  amount of expenditure incurred   ` 14.50 lacs 
(c)  shortfall at the end of the year     NIL 
(d)  total of previous years shortfall     NA 
(e)  reason for shortfall      NA 
(f)  nature of CSR activities - Women empowerment  
activities through implementing agency 
(g)  details of related party transactions, e.g.,  
contribution to a trust controlled by the company  
in relation to CSR expenditure as per relevant  
Accounting Standard         NIL 
416
(h)  where a provision is made with respect to  
a liability incurred by entering into a contractual  
obligation, the movements in the provision during  
the year should be shown separately   NIL 
(d)  The firm is providing free hospitality to engagement team members 
including engagement partner.  In such circumstances, fundamental 
principles governing professional ethics are violated.  Such acts of free 
hospitality are capable of impairing objectivity of auditor. 
 The situation given in the question signifies that auditors have formed 
relationships with client where they may end up being too sympathetic 
to the client’s interests. Due to free hospitality enjoyed by engagement 
team members, they may take a sympathetic view to issues which may 
have arisen during course of audit. In this way, familiarity threats are 
created in the situation. 
2. (a)  Financial events or conditions that may cast significant doubt on 
the entity’s ability to continue as going concern: 
(i) Net liability or net current liability position. 
(ii) Fixed-term borrowings approaching maturity without realistic 
prospects of renewal or repayment; or excessive reliance on short 
term borrowings to finance long term assets. 
(iii) Indications of withdrawal of financial support by trade payables. 
(iv) Negative operating cash flows indicated by historical or prospective 
financial statements. 
(v) Adverse key financial ratios. 
(vi) Substantial operating losses or significant deterioration in the value 
of assets used to generate cash flows. 
(vii) Arrears or discontinuance of dividends.  
(viii) Inability to pay trade payables on due dates. 
(ix) Inability to comply with terms of loan agreements. 
(x) Change from credit to cash-on-delivery transactions with suppliers. 
(xi) Inability to obtain financing for essential new product development 
or other essential investments. 
(b) Adequate planning bene?ts the audit of ?nancial statements in 
several ways, including the following: 
(i) Helping the auditor to devote appropriate attention to important 
areas of the audit. 
(ii) Helping the auditor identify and resolve potential problems on a 
timely basis. 
(iii) Helping the auditor properly organize and manage the audit 
engagement so that it is performed in an e ?ective and e ?cient 
manner. 
417
Page 4


ANSWERS OF MODEL TEST PAPER 1 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
PART I - Multiple Choice Questions 
1. (b)
2. (b)
3. (b)
4. (d)
5. (c)
6. (a)
7. (c)
8. (a)
9. (a)
10. (d)
11. (b)
12. (d)
13. (c)
14. (c)
15. (b)
PART II-Descriptive Answers 
1. (a)  DOX Limited is in business of providing courier services. As name of the
company and given facts suggest: - 
? It is not a small company under section 2(85) of the Companies Act,
2013.
? It is not a private company.
? It is not a one person company.
? It is not a banking or insurance company.
? It is not a Section 8 company as it does not has charitable objects
etc.
Therefore, it does not qualify for any exemption from applicability of 
CARO, 2020.  Hence, reporting requirements under CARO, 2020 are 
applicable. While reporting under CARO, 2020, statutory auditor is 
required to report under clause (xiv) of paragraph 3 as under:  
415
(i)  whether the company has an internal audit system commensurate 
with the size and nature of its business 
(ii)  whether the reports of the internal auditors for the period under 
audit were considered by the statutory auditor 
(b)  The above situation is an example of misstatement relating to non-
compliance with requirements of AS 9 identified during audit. In 
accordance with requirements of SA 450, the auditor shall communicate 
on a timely basis all misstatements accumulated during the audit with 
the appropriate level of management, unless prohibited by law or 
regulation. The auditor shall request management to correct those 
misstatements.  
 Timely communication of misstatements to the appropriate level of 
management is important as it enables management to evaluate whether 
the items are misstatements, inform the auditor if it disagrees and take 
action as necessary. The correction by management of all 
misstatements, including those communicated by the auditor, enables 
management to maintain accurate accounting books and records and 
reduces the risks of material misstatement of future financial statements 
because of the cumulative effect of immaterial uncorrected 
misstatements related to prior periods. 
 If management refuses to correct some or all of the misstatements 
communicated by the auditor, the auditor shall obtain an understanding 
of management’s reasons for not making the corrections and shall take 
that understanding into account when evaluating whether the financial 
statements as a whole are free from material misstatement.  
(c)  In the given situation, following information is required to be disclosed in 
accordance with requirements to Schedule III to the Companies Act, 
2013:  
(a)  amount required to be spent by the company during the year 
`14.00 lacs 
(b)  amount of expenditure incurred   ` 14.50 lacs 
(c)  shortfall at the end of the year     NIL 
(d)  total of previous years shortfall     NA 
(e)  reason for shortfall      NA 
(f)  nature of CSR activities - Women empowerment  
activities through implementing agency 
(g)  details of related party transactions, e.g.,  
contribution to a trust controlled by the company  
in relation to CSR expenditure as per relevant  
Accounting Standard         NIL 
416
(h)  where a provision is made with respect to  
a liability incurred by entering into a contractual  
obligation, the movements in the provision during  
the year should be shown separately   NIL 
(d)  The firm is providing free hospitality to engagement team members 
including engagement partner.  In such circumstances, fundamental 
principles governing professional ethics are violated.  Such acts of free 
hospitality are capable of impairing objectivity of auditor. 
 The situation given in the question signifies that auditors have formed 
relationships with client where they may end up being too sympathetic 
to the client’s interests. Due to free hospitality enjoyed by engagement 
team members, they may take a sympathetic view to issues which may 
have arisen during course of audit. In this way, familiarity threats are 
created in the situation. 
2. (a)  Financial events or conditions that may cast significant doubt on 
the entity’s ability to continue as going concern: 
(i) Net liability or net current liability position. 
(ii) Fixed-term borrowings approaching maturity without realistic 
prospects of renewal or repayment; or excessive reliance on short 
term borrowings to finance long term assets. 
(iii) Indications of withdrawal of financial support by trade payables. 
(iv) Negative operating cash flows indicated by historical or prospective 
financial statements. 
(v) Adverse key financial ratios. 
(vi) Substantial operating losses or significant deterioration in the value 
of assets used to generate cash flows. 
(vii) Arrears or discontinuance of dividends.  
(viii) Inability to pay trade payables on due dates. 
(ix) Inability to comply with terms of loan agreements. 
(x) Change from credit to cash-on-delivery transactions with suppliers. 
(xi) Inability to obtain financing for essential new product development 
or other essential investments. 
(b) Adequate planning bene?ts the audit of ?nancial statements in 
several ways, including the following: 
(i) Helping the auditor to devote appropriate attention to important 
areas of the audit. 
(ii) Helping the auditor identify and resolve potential problems on a 
timely basis. 
(iii) Helping the auditor properly organize and manage the audit 
engagement so that it is performed in an e ?ective and e ?cient 
manner. 
417
(iv) Assisting in the selection of engagement team members with 
appropriate levels of capabilities and competence to respond to 
anticipated risks, and the proper assignment of work to them. 
(v) Facilitating the direction and supervision of engagement team 
members and the review of their work. 
(vi) Assisting, where applicable, in coordination of work done by 
auditors of components and experts. 
(c)  Example of practical limitation on ability of auditor to obtain audit 
evidence 
 An auditor does not test all transactions and balances. He forms his 
opinion only by testing samples. It is an example of practical limitation 
on auditor’s ability to obtain audit evidence. 
 Example of legal limitation on ability of auditor to obtain audit 
evidence 
 Management may not provide complete information as requested by 
auditor. There is no way by which auditor can force management to 
provide complete information as may be requested by auditor. In case 
he is not provided with required information, he can only report. It is an 
example of legal limitation on auditor’s ability to obtain audit evidence. 
(d)  The above company is a government company. Section 143(5) of the  
Companies Act,2013 states that, in the case of a Government company 
or any other company owned or controlled, directly or indirectly, by the 
Central Government, or by any State Government or Governments, or 
partly by the Central Government and partly by one or more State 
Governments, the comptroller and Auditor-General of India shall appoint 
the auditor under sub-section (5) of section 139 i.e. appointment of 
subsequent auditor and direct such auditor the manner in which the 
accounts of the Government company are required to be audited and 
thereupon the auditor so appointed shall submit a copy of the audit report 
to the Comptroller and Auditor-General of India which, among other 
things, include the directions, if any, issued by the Comptroller and 
Auditor-General of India, the action taken thereon and its impact on the 
accounts and financial statements of the company. 
3. (a)  Audit evidence comprises both information that supports and 
corroborates management’s assertions, and any information that 
contradicts such assertions. Purchase bill of ` 5.00 lacs pertaining to 
TIM Industries has been entered in books of TIM Private Limited. 
Therefore, it is contradicting management’s assertion relating to 
occurrence of such purchases.  Hence, it constitutes audit evidence. 
 Further, the absence of information (for example, management’s refusal 
to provide a requested representation) is used by auditor, and therefore, 
also constitutes audit evidence. In the given case, management has 
refused to provide a written representation relating to physical 
verification of inventories during the year. Therefore, absence of 
information is used by auditor and it also constitutes audit evidence. 
418
Page 5


ANSWERS OF MODEL TEST PAPER 1 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
PART I - Multiple Choice Questions 
1. (b)
2. (b)
3. (b)
4. (d)
5. (c)
6. (a)
7. (c)
8. (a)
9. (a)
10. (d)
11. (b)
12. (d)
13. (c)
14. (c)
15. (b)
PART II-Descriptive Answers 
1. (a)  DOX Limited is in business of providing courier services. As name of the
company and given facts suggest: - 
? It is not a small company under section 2(85) of the Companies Act,
2013.
? It is not a private company.
? It is not a one person company.
? It is not a banking or insurance company.
? It is not a Section 8 company as it does not has charitable objects
etc.
Therefore, it does not qualify for any exemption from applicability of 
CARO, 2020.  Hence, reporting requirements under CARO, 2020 are 
applicable. While reporting under CARO, 2020, statutory auditor is 
required to report under clause (xiv) of paragraph 3 as under:  
415
(i)  whether the company has an internal audit system commensurate 
with the size and nature of its business 
(ii)  whether the reports of the internal auditors for the period under 
audit were considered by the statutory auditor 
(b)  The above situation is an example of misstatement relating to non-
compliance with requirements of AS 9 identified during audit. In 
accordance with requirements of SA 450, the auditor shall communicate 
on a timely basis all misstatements accumulated during the audit with 
the appropriate level of management, unless prohibited by law or 
regulation. The auditor shall request management to correct those 
misstatements.  
 Timely communication of misstatements to the appropriate level of 
management is important as it enables management to evaluate whether 
the items are misstatements, inform the auditor if it disagrees and take 
action as necessary. The correction by management of all 
misstatements, including those communicated by the auditor, enables 
management to maintain accurate accounting books and records and 
reduces the risks of material misstatement of future financial statements 
because of the cumulative effect of immaterial uncorrected 
misstatements related to prior periods. 
 If management refuses to correct some or all of the misstatements 
communicated by the auditor, the auditor shall obtain an understanding 
of management’s reasons for not making the corrections and shall take 
that understanding into account when evaluating whether the financial 
statements as a whole are free from material misstatement.  
(c)  In the given situation, following information is required to be disclosed in 
accordance with requirements to Schedule III to the Companies Act, 
2013:  
(a)  amount required to be spent by the company during the year 
`14.00 lacs 
(b)  amount of expenditure incurred   ` 14.50 lacs 
(c)  shortfall at the end of the year     NIL 
(d)  total of previous years shortfall     NA 
(e)  reason for shortfall      NA 
(f)  nature of CSR activities - Women empowerment  
activities through implementing agency 
(g)  details of related party transactions, e.g.,  
contribution to a trust controlled by the company  
in relation to CSR expenditure as per relevant  
Accounting Standard         NIL 
416
(h)  where a provision is made with respect to  
a liability incurred by entering into a contractual  
obligation, the movements in the provision during  
the year should be shown separately   NIL 
(d)  The firm is providing free hospitality to engagement team members 
including engagement partner.  In such circumstances, fundamental 
principles governing professional ethics are violated.  Such acts of free 
hospitality are capable of impairing objectivity of auditor. 
 The situation given in the question signifies that auditors have formed 
relationships with client where they may end up being too sympathetic 
to the client’s interests. Due to free hospitality enjoyed by engagement 
team members, they may take a sympathetic view to issues which may 
have arisen during course of audit. In this way, familiarity threats are 
created in the situation. 
2. (a)  Financial events or conditions that may cast significant doubt on 
the entity’s ability to continue as going concern: 
(i) Net liability or net current liability position. 
(ii) Fixed-term borrowings approaching maturity without realistic 
prospects of renewal or repayment; or excessive reliance on short 
term borrowings to finance long term assets. 
(iii) Indications of withdrawal of financial support by trade payables. 
(iv) Negative operating cash flows indicated by historical or prospective 
financial statements. 
(v) Adverse key financial ratios. 
(vi) Substantial operating losses or significant deterioration in the value 
of assets used to generate cash flows. 
(vii) Arrears or discontinuance of dividends.  
(viii) Inability to pay trade payables on due dates. 
(ix) Inability to comply with terms of loan agreements. 
(x) Change from credit to cash-on-delivery transactions with suppliers. 
(xi) Inability to obtain financing for essential new product development 
or other essential investments. 
(b) Adequate planning bene?ts the audit of ?nancial statements in 
several ways, including the following: 
(i) Helping the auditor to devote appropriate attention to important 
areas of the audit. 
(ii) Helping the auditor identify and resolve potential problems on a 
timely basis. 
(iii) Helping the auditor properly organize and manage the audit 
engagement so that it is performed in an e ?ective and e ?cient 
manner. 
417
(iv) Assisting in the selection of engagement team members with 
appropriate levels of capabilities and competence to respond to 
anticipated risks, and the proper assignment of work to them. 
(v) Facilitating the direction and supervision of engagement team 
members and the review of their work. 
(vi) Assisting, where applicable, in coordination of work done by 
auditors of components and experts. 
(c)  Example of practical limitation on ability of auditor to obtain audit 
evidence 
 An auditor does not test all transactions and balances. He forms his 
opinion only by testing samples. It is an example of practical limitation 
on auditor’s ability to obtain audit evidence. 
 Example of legal limitation on ability of auditor to obtain audit 
evidence 
 Management may not provide complete information as requested by 
auditor. There is no way by which auditor can force management to 
provide complete information as may be requested by auditor. In case 
he is not provided with required information, he can only report. It is an 
example of legal limitation on auditor’s ability to obtain audit evidence. 
(d)  The above company is a government company. Section 143(5) of the  
Companies Act,2013 states that, in the case of a Government company 
or any other company owned or controlled, directly or indirectly, by the 
Central Government, or by any State Government or Governments, or 
partly by the Central Government and partly by one or more State 
Governments, the comptroller and Auditor-General of India shall appoint 
the auditor under sub-section (5) of section 139 i.e. appointment of 
subsequent auditor and direct such auditor the manner in which the 
accounts of the Government company are required to be audited and 
thereupon the auditor so appointed shall submit a copy of the audit report 
to the Comptroller and Auditor-General of India which, among other 
things, include the directions, if any, issued by the Comptroller and 
Auditor-General of India, the action taken thereon and its impact on the 
accounts and financial statements of the company. 
3. (a)  Audit evidence comprises both information that supports and 
corroborates management’s assertions, and any information that 
contradicts such assertions. Purchase bill of ` 5.00 lacs pertaining to 
TIM Industries has been entered in books of TIM Private Limited. 
Therefore, it is contradicting management’s assertion relating to 
occurrence of such purchases.  Hence, it constitutes audit evidence. 
 Further, the absence of information (for example, management’s refusal 
to provide a requested representation) is used by auditor, and therefore, 
also constitutes audit evidence. In the given case, management has 
refused to provide a written representation relating to physical 
verification of inventories during the year. Therefore, absence of 
information is used by auditor and it also constitutes audit evidence. 
418
(b)  As described in the situation given in the question, banking regulator has 
imposed restrictions due to non-compliance with regulatory 
requirements and there is material uncertainty of such events or 
conditions which may cast a significant doubt on ability of Bank to 
continue as going concern.  However, the financial statements of Bank 
do not make adequate disclosure of material uncertainty due to above 
events in financial statements. 
 If adequate disclosure about the material uncertainty is not made in the 
financial statements, the auditor shall: 
(i)  Express a qualified opinion or adverse opinion, as appropriate, in 
accordance with SA 705. 
(ii)  In the Basis for Qualified (Adverse) Opinion section of the auditor’s 
report, state that a material uncertainty exists that may cast 
significant doubt on the entity’s ability to continue as a going 
concern and that the financial statements do not adequately 
disclose this matter. 
(c)  SA 300 states that auditor shall develop an audit plan that shall include 
description of- 
(i)  The nature, timing and extent of planned risk assessment 
procedures 
(ii)  The nature, timing and extent of planned further audit procedures 
at assertion level 
(iii)  Other planned audit procedures that are required to be carried out 
so that the engagement complies with SAs. 
(d)  Audit documentation refers to the record of audit procedures performed, 
relevant audit evidence obtained, and conclusions the auditor reached. 
The objective of the auditor in accordance with SA 230 is to prepare 
documentation that provides: - 
(i)  A sufficient and appropriate record of the basis for the auditor’s 
report and 
(ii)  Evidence that the audit was planned and performed in accordance 
with SAs and applicable legal and regulatory requirements. 
4. (a)  Following audit procedures can be performed to perform to verify that 
recorded sales in financial statements represent goods actually sold 
during the period and recorded sales are not overstated. 
? Check whether a single sales invoice is recorded twice or a 
cancelled sales invoice has been recorded. 
? Test check few invoices with their relevant entries in sales journal.  
? Obtain confirmation from few customers to ensure genuineness of 
sales transaction 
? Check whether any fictitious customers and sales have been 
recorded. 
419