Auditing and Assurance Model Test Paper - 2 (Questions) | Model Test Papers for CA Intermediate PDF Download

 Page 1


MODEL TEST PAPER 2 
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 
Pluto Limited is engaged in manufacturing and distribution of ergonomic furniture.  
Such kind of customisable range home office furniture has gained lot of importance 
in past few years.  The company was able to perform well over the years and the 
same is reflected in their financials.  
During year 2023-24, audit firm of S.J. and Associates was reappointed as their 
auditor. The engagement team consisted of CA Sneha (partner) and five articled 
assistants. One of the assistants was new to this engagement. Considering huge 
volume of transactions, the partner asked him to go through files of last year and 
auditor’s report to gain an understanding of issues which arose in last year i.e. 
2022-23. 
While going through summary page of file of last year, he noticed that below points 
were under discussion with the partner before audit finalisation: 
Point 1: For employee benefit expenses, following points were verified by the team: 
• The employee benefit expenses shown in the books were actually incurred 
during the relevant period. 
• The expenses in respect of all personnel were accounted for. 
• The expense recognised during year 2022-23 related to this year only. 
Point 2: It was noted that dividend to equity shareholders for the year 2022-23, 
was declared on 15.04.2023. As the dividend related to the year 2022-23, the same 
was recognised as liability in the same year. 
Point 3: Debtors constitute one of the major components of company’s financials.  
As part of audit procedures, verification was made whether company had made 
allowance for those debtors which were doubtful.  In this regard, list of debtors 
under litigation was also obtained and scrutinized. 
Point 4: Asset additions during the year amounted to ` 50 lakhs.  The payment in 
respect of these assets were made through bank account of the company.   
However, on scrutiny, it was found that some of invoices were not in the name of 
the company but in name of one of directors. 
Point 5: The company was maintaining few bank accounts including one foreign 
currency account.  There was included in previous year file a paper converting 
foreign currency amount held in a bank account to Indian Rupees at closing 
exchange rate. 
110
Page 2


MODEL TEST PAPER 2 
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 
Pluto Limited is engaged in manufacturing and distribution of ergonomic furniture.  
Such kind of customisable range home office furniture has gained lot of importance 
in past few years.  The company was able to perform well over the years and the 
same is reflected in their financials.  
During year 2023-24, audit firm of S.J. and Associates was reappointed as their 
auditor. The engagement team consisted of CA Sneha (partner) and five articled 
assistants. One of the assistants was new to this engagement. Considering huge 
volume of transactions, the partner asked him to go through files of last year and 
auditor’s report to gain an understanding of issues which arose in last year i.e. 
2022-23. 
While going through summary page of file of last year, he noticed that below points 
were under discussion with the partner before audit finalisation: 
Point 1: For employee benefit expenses, following points were verified by the team: 
• The employee benefit expenses shown in the books were actually incurred 
during the relevant period. 
• The expenses in respect of all personnel were accounted for. 
• The expense recognised during year 2022-23 related to this year only. 
Point 2: It was noted that dividend to equity shareholders for the year 2022-23, 
was declared on 15.04.2023. As the dividend related to the year 2022-23, the same 
was recognised as liability in the same year. 
Point 3: Debtors constitute one of the major components of company’s financials.  
As part of audit procedures, verification was made whether company had made 
allowance for those debtors which were doubtful.  In this regard, list of debtors 
under litigation was also obtained and scrutinized. 
Point 4: Asset additions during the year amounted to ` 50 lakhs.  The payment in 
respect of these assets were made through bank account of the company.   
However, on scrutiny, it was found that some of invoices were not in the name of 
the company but in name of one of directors. 
Point 5: The company was maintaining few bank accounts including one foreign 
currency account.  There was included in previous year file a paper converting 
foreign currency amount held in a bank account to Indian Rupees at closing 
exchange rate. 
110
Based on above, answer the following questions:  
1. In point 1 relating to Employee benefits, which among the following assertions 
are discussed respectively (in same order as described in point 1)? 
(i) Valuation 
(ii) Occurrence 
(iii) Cut-off 
(iv) Completeness 
Choose the correct combination from below: - 
(a) (i),(ii) and (iv) 
(b) (ii), (iv) and (iii) 
(c) (ii), (iii) and (iv) 
(d) (i),(ii) and (iii) 
2. Do you think the amount of dividend recognised as liability in the year 2022-
23 as given in point 2 appropriate? 
(a) Yes. As the amount of dividend related to year 2022-23, it should be 
recognised in the same year irrespective of the year of declaration. 
(b) No. The amount should be recognised equally between two financial 
years. 
(c) No. The amount should not be recognised as liability in year 2022-23. 
But it needed to be disclosed in the notes to accounts of that year. 
(d) No. The amount should not be recognised as liability. Further, no 
disclosure was needed in the financials of that year.  
3. In relation to matter described in para 3 pertaining to debtors, which of the 
following assertions was verified by auditors? 
(a) Valuation 
(b) Rights and obligations 
(c) Existence 
(d) Completeness 
4.  Read Point 4 and choose which assertion is not proved in this case.  
(a) Existence 
(b) Rights and obligation 
(c) Completeness 
(d) Measurement/Valuation 
5. Choose the correct statement from below pertaining to matter described in 
Point 5. 
(a) The company was required to restate said amount in accordance with 
requirements of AS 1. By verifying it, auditor had verified existence 
assertion. 
111
Page 3


MODEL TEST PAPER 2 
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 
Pluto Limited is engaged in manufacturing and distribution of ergonomic furniture.  
Such kind of customisable range home office furniture has gained lot of importance 
in past few years.  The company was able to perform well over the years and the 
same is reflected in their financials.  
During year 2023-24, audit firm of S.J. and Associates was reappointed as their 
auditor. The engagement team consisted of CA Sneha (partner) and five articled 
assistants. One of the assistants was new to this engagement. Considering huge 
volume of transactions, the partner asked him to go through files of last year and 
auditor’s report to gain an understanding of issues which arose in last year i.e. 
2022-23. 
While going through summary page of file of last year, he noticed that below points 
were under discussion with the partner before audit finalisation: 
Point 1: For employee benefit expenses, following points were verified by the team: 
• The employee benefit expenses shown in the books were actually incurred 
during the relevant period. 
• The expenses in respect of all personnel were accounted for. 
• The expense recognised during year 2022-23 related to this year only. 
Point 2: It was noted that dividend to equity shareholders for the year 2022-23, 
was declared on 15.04.2023. As the dividend related to the year 2022-23, the same 
was recognised as liability in the same year. 
Point 3: Debtors constitute one of the major components of company’s financials.  
As part of audit procedures, verification was made whether company had made 
allowance for those debtors which were doubtful.  In this regard, list of debtors 
under litigation was also obtained and scrutinized. 
Point 4: Asset additions during the year amounted to ` 50 lakhs.  The payment in 
respect of these assets were made through bank account of the company.   
However, on scrutiny, it was found that some of invoices were not in the name of 
the company but in name of one of directors. 
Point 5: The company was maintaining few bank accounts including one foreign 
currency account.  There was included in previous year file a paper converting 
foreign currency amount held in a bank account to Indian Rupees at closing 
exchange rate. 
110
Based on above, answer the following questions:  
1. In point 1 relating to Employee benefits, which among the following assertions 
are discussed respectively (in same order as described in point 1)? 
(i) Valuation 
(ii) Occurrence 
(iii) Cut-off 
(iv) Completeness 
Choose the correct combination from below: - 
(a) (i),(ii) and (iv) 
(b) (ii), (iv) and (iii) 
(c) (ii), (iii) and (iv) 
(d) (i),(ii) and (iii) 
2. Do you think the amount of dividend recognised as liability in the year 2022-
23 as given in point 2 appropriate? 
(a) Yes. As the amount of dividend related to year 2022-23, it should be 
recognised in the same year irrespective of the year of declaration. 
(b) No. The amount should be recognised equally between two financial 
years. 
(c) No. The amount should not be recognised as liability in year 2022-23. 
But it needed to be disclosed in the notes to accounts of that year. 
(d) No. The amount should not be recognised as liability. Further, no 
disclosure was needed in the financials of that year.  
3. In relation to matter described in para 3 pertaining to debtors, which of the 
following assertions was verified by auditors? 
(a) Valuation 
(b) Rights and obligations 
(c) Existence 
(d) Completeness 
4.  Read Point 4 and choose which assertion is not proved in this case.  
(a) Existence 
(b) Rights and obligation 
(c) Completeness 
(d) Measurement/Valuation 
5. Choose the correct statement from below pertaining to matter described in 
Point 5. 
(a) The company was required to restate said amount in accordance with 
requirements of AS 1. By verifying it, auditor had verified existence 
assertion. 
111
(b) The company was required to restate said amount in accordance with 
requirements of AS 11. By verifying it, auditor had verified completeness 
assertion. 
(c) There was no responsibility of company to restate said amount. It was 
auditor’s responsibility to restate said amount in accordance with 
requirements of AS 11. No assertion was, therefore, verified by auditor. 
(d) The company was required to restate said amount in accordance with 
requirements of AS 11. By verifying it, auditor had verified valuation 
assertion.  
Case Scenario 2 
Watch IT India Private Limited is a company engaged in business of manufacturing 
smart watches.  The company had a slow start in the beginning as company’s 
products were gaining traction with customers.  However, momentum has picked 
up during the year.  The company wants to appoint M/s Tripati & Associates, a  
CA firm as their auditor for year 2023-24 by replacing their existing auditors  
M/s Sreepath and Co. M/s Tripati & Associates are willing to accept the 
engagement. They communicated with previous auditors before accepting the 
engagement. However, M/s Sreepath and Co.  have failed to respond.  
CA Kishan, partner of M/s Tripati & Associates explained to his team members 
about importance of Engagement letter.  He also arranged a team discussion on 
matters relating to acceptance of terms of engagement. 
First point of consideration was concerning preconditions for an audit. Mr. Arun, a 
team member could recollect few of them. Those included determining whether 
financial reporting framework used in the preparation of financial statement is 
acceptable, management providing auditor with access to all relevant information 
and additional information upon auditor’s request. It was further elaborated by Arun 
that management has to provide unrestricted access to employees within entity as 
may be required by auditor for obtaining audit evidence. Team members were 
asked to list factors that may necessitate revision of Engagement letter in case of 
recurring audits. Mr. Kumar, another team member replied that revision may be 
required in cases involving significant change in ownership, recent changes in 
senior management, change in financial reporting framework adopted in 
preparation of financial Statements, modest change in nature or size of the entity’s 
business, change in legal and regulatory requirements etc.   
Mr. Ram, one of the team members raised a doubt. He enquired regarding recourse 
available to incoming auditor in case management makes it clear before 
acceptance of engagement by auditor regarding its inability in providing support to 
him in respect of certain procedures expected to be performed during course of 
audit. In this respect, specific question was raised relating to sending of 
confirmation requests to material trade payables reflecting in financial statements 
of a company. Trade payables pertain to material input and input services acquired 
and utilised by company during the year. Lack of support by management in such 
a case would, in effect, signify management’s refusal to allow auditor to send 
confirmation requests at the outset before engagement is accepted by auditor.   
Based on above, answer the following questions:  
112
Page 4


MODEL TEST PAPER 2 
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 
Pluto Limited is engaged in manufacturing and distribution of ergonomic furniture.  
Such kind of customisable range home office furniture has gained lot of importance 
in past few years.  The company was able to perform well over the years and the 
same is reflected in their financials.  
During year 2023-24, audit firm of S.J. and Associates was reappointed as their 
auditor. The engagement team consisted of CA Sneha (partner) and five articled 
assistants. One of the assistants was new to this engagement. Considering huge 
volume of transactions, the partner asked him to go through files of last year and 
auditor’s report to gain an understanding of issues which arose in last year i.e. 
2022-23. 
While going through summary page of file of last year, he noticed that below points 
were under discussion with the partner before audit finalisation: 
Point 1: For employee benefit expenses, following points were verified by the team: 
• The employee benefit expenses shown in the books were actually incurred 
during the relevant period. 
• The expenses in respect of all personnel were accounted for. 
• The expense recognised during year 2022-23 related to this year only. 
Point 2: It was noted that dividend to equity shareholders for the year 2022-23, 
was declared on 15.04.2023. As the dividend related to the year 2022-23, the same 
was recognised as liability in the same year. 
Point 3: Debtors constitute one of the major components of company’s financials.  
As part of audit procedures, verification was made whether company had made 
allowance for those debtors which were doubtful.  In this regard, list of debtors 
under litigation was also obtained and scrutinized. 
Point 4: Asset additions during the year amounted to ` 50 lakhs.  The payment in 
respect of these assets were made through bank account of the company.   
However, on scrutiny, it was found that some of invoices were not in the name of 
the company but in name of one of directors. 
Point 5: The company was maintaining few bank accounts including one foreign 
currency account.  There was included in previous year file a paper converting 
foreign currency amount held in a bank account to Indian Rupees at closing 
exchange rate. 
110
Based on above, answer the following questions:  
1. In point 1 relating to Employee benefits, which among the following assertions 
are discussed respectively (in same order as described in point 1)? 
(i) Valuation 
(ii) Occurrence 
(iii) Cut-off 
(iv) Completeness 
Choose the correct combination from below: - 
(a) (i),(ii) and (iv) 
(b) (ii), (iv) and (iii) 
(c) (ii), (iii) and (iv) 
(d) (i),(ii) and (iii) 
2. Do you think the amount of dividend recognised as liability in the year 2022-
23 as given in point 2 appropriate? 
(a) Yes. As the amount of dividend related to year 2022-23, it should be 
recognised in the same year irrespective of the year of declaration. 
(b) No. The amount should be recognised equally between two financial 
years. 
(c) No. The amount should not be recognised as liability in year 2022-23. 
But it needed to be disclosed in the notes to accounts of that year. 
(d) No. The amount should not be recognised as liability. Further, no 
disclosure was needed in the financials of that year.  
3. In relation to matter described in para 3 pertaining to debtors, which of the 
following assertions was verified by auditors? 
(a) Valuation 
(b) Rights and obligations 
(c) Existence 
(d) Completeness 
4.  Read Point 4 and choose which assertion is not proved in this case.  
(a) Existence 
(b) Rights and obligation 
(c) Completeness 
(d) Measurement/Valuation 
5. Choose the correct statement from below pertaining to matter described in 
Point 5. 
(a) The company was required to restate said amount in accordance with 
requirements of AS 1. By verifying it, auditor had verified existence 
assertion. 
111
(b) The company was required to restate said amount in accordance with 
requirements of AS 11. By verifying it, auditor had verified completeness 
assertion. 
(c) There was no responsibility of company to restate said amount. It was 
auditor’s responsibility to restate said amount in accordance with 
requirements of AS 11. No assertion was, therefore, verified by auditor. 
(d) The company was required to restate said amount in accordance with 
requirements of AS 11. By verifying it, auditor had verified valuation 
assertion.  
Case Scenario 2 
Watch IT India Private Limited is a company engaged in business of manufacturing 
smart watches.  The company had a slow start in the beginning as company’s 
products were gaining traction with customers.  However, momentum has picked 
up during the year.  The company wants to appoint M/s Tripati & Associates, a  
CA firm as their auditor for year 2023-24 by replacing their existing auditors  
M/s Sreepath and Co. M/s Tripati & Associates are willing to accept the 
engagement. They communicated with previous auditors before accepting the 
engagement. However, M/s Sreepath and Co.  have failed to respond.  
CA Kishan, partner of M/s Tripati & Associates explained to his team members 
about importance of Engagement letter.  He also arranged a team discussion on 
matters relating to acceptance of terms of engagement. 
First point of consideration was concerning preconditions for an audit. Mr. Arun, a 
team member could recollect few of them. Those included determining whether 
financial reporting framework used in the preparation of financial statement is 
acceptable, management providing auditor with access to all relevant information 
and additional information upon auditor’s request. It was further elaborated by Arun 
that management has to provide unrestricted access to employees within entity as 
may be required by auditor for obtaining audit evidence. Team members were 
asked to list factors that may necessitate revision of Engagement letter in case of 
recurring audits. Mr. Kumar, another team member replied that revision may be 
required in cases involving significant change in ownership, recent changes in 
senior management, change in financial reporting framework adopted in 
preparation of financial Statements, modest change in nature or size of the entity’s 
business, change in legal and regulatory requirements etc.   
Mr. Ram, one of the team members raised a doubt. He enquired regarding recourse 
available to incoming auditor in case management makes it clear before 
acceptance of engagement by auditor regarding its inability in providing support to 
him in respect of certain procedures expected to be performed during course of 
audit. In this respect, specific question was raised relating to sending of 
confirmation requests to material trade payables reflecting in financial statements 
of a company. Trade payables pertain to material input and input services acquired 
and utilised by company during the year. Lack of support by management in such 
a case would, in effect, signify management’s refusal to allow auditor to send 
confirmation requests at the outset before engagement is accepted by auditor.   
Based on above, answer the following questions:  
112
6. As regards doubt of Mr. Ram described in last para of case scenario, which 
of the following statements is likely to be in accordance with Standards on 
Auditing? 
(a)  The auditor needs to inquire into management’s reasons for the refusal 
and perform alternative audit procedures to obtain relevant and reliable 
audit evidence. 
(b)  The auditor needs to evaluate implications of management’s refusal on 
auditor’s assessment of risk of material misstatement and perform 
alternative audit procedures to obtain relevant and reliable audit 
evidence. 
(c)  The auditor should not accept such an engagement. 
(d)  The auditor needs to evaluate implications of management’s refusal on 
risk of fraud and perform alternative audit procedures to obtain relevant 
and reliable audit evidence. 
7.  When CA Kishan, the partner, asked about preconditions for an audit,  
Mr. Arun could recollect only few of them. Read the passage and find out 
which among the following points were missed. 
(i) Obtaining management responsibility on specific legal aspects 
governing the organisation. 
(ii) Obtaining management responsibility on Standards on Auditing 
applicable to the organisation. 
(iii) Obtaining management responsibility for the preparation of financial 
statements as per applicable financial reporting framework. 
(iv) Obtaining management responsibility on necessary Internal controls to 
enable preparation of financial statements which are free from material 
misstatement whether due to error or fraud.  
Choose the correct answer from below options. 
(a) (i), (ii) and (iii) 
(b) (ii), (iii) and (iv) 
(c) (iii) and (iv) 
(d) (i) and (iv) 
8.  From what Mr. Kumar replied about the factors requiring a revision of 
Engagement letter one point was incorrect. Read the passage and find that 
incorrect factor.  
(a)  A significant change in ownership 
(b)  A recent change in management 
(c)  A change in financial reporting framework adopted in preparation of 
Financial Statements 
(d)  A modest change in nature or size of the entity’s business 
9.  M/s Sreepath & Co. have failed to respond to incoming auditors. In this regard, 
choose the most appropriate option: -  
113
Page 5


MODEL TEST PAPER 2 
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 
Pluto Limited is engaged in manufacturing and distribution of ergonomic furniture.  
Such kind of customisable range home office furniture has gained lot of importance 
in past few years.  The company was able to perform well over the years and the 
same is reflected in their financials.  
During year 2023-24, audit firm of S.J. and Associates was reappointed as their 
auditor. The engagement team consisted of CA Sneha (partner) and five articled 
assistants. One of the assistants was new to this engagement. Considering huge 
volume of transactions, the partner asked him to go through files of last year and 
auditor’s report to gain an understanding of issues which arose in last year i.e. 
2022-23. 
While going through summary page of file of last year, he noticed that below points 
were under discussion with the partner before audit finalisation: 
Point 1: For employee benefit expenses, following points were verified by the team: 
• The employee benefit expenses shown in the books were actually incurred 
during the relevant period. 
• The expenses in respect of all personnel were accounted for. 
• The expense recognised during year 2022-23 related to this year only. 
Point 2: It was noted that dividend to equity shareholders for the year 2022-23, 
was declared on 15.04.2023. As the dividend related to the year 2022-23, the same 
was recognised as liability in the same year. 
Point 3: Debtors constitute one of the major components of company’s financials.  
As part of audit procedures, verification was made whether company had made 
allowance for those debtors which were doubtful.  In this regard, list of debtors 
under litigation was also obtained and scrutinized. 
Point 4: Asset additions during the year amounted to ` 50 lakhs.  The payment in 
respect of these assets were made through bank account of the company.   
However, on scrutiny, it was found that some of invoices were not in the name of 
the company but in name of one of directors. 
Point 5: The company was maintaining few bank accounts including one foreign 
currency account.  There was included in previous year file a paper converting 
foreign currency amount held in a bank account to Indian Rupees at closing 
exchange rate. 
110
Based on above, answer the following questions:  
1. In point 1 relating to Employee benefits, which among the following assertions 
are discussed respectively (in same order as described in point 1)? 
(i) Valuation 
(ii) Occurrence 
(iii) Cut-off 
(iv) Completeness 
Choose the correct combination from below: - 
(a) (i),(ii) and (iv) 
(b) (ii), (iv) and (iii) 
(c) (ii), (iii) and (iv) 
(d) (i),(ii) and (iii) 
2. Do you think the amount of dividend recognised as liability in the year 2022-
23 as given in point 2 appropriate? 
(a) Yes. As the amount of dividend related to year 2022-23, it should be 
recognised in the same year irrespective of the year of declaration. 
(b) No. The amount should be recognised equally between two financial 
years. 
(c) No. The amount should not be recognised as liability in year 2022-23. 
But it needed to be disclosed in the notes to accounts of that year. 
(d) No. The amount should not be recognised as liability. Further, no 
disclosure was needed in the financials of that year.  
3. In relation to matter described in para 3 pertaining to debtors, which of the 
following assertions was verified by auditors? 
(a) Valuation 
(b) Rights and obligations 
(c) Existence 
(d) Completeness 
4.  Read Point 4 and choose which assertion is not proved in this case.  
(a) Existence 
(b) Rights and obligation 
(c) Completeness 
(d) Measurement/Valuation 
5. Choose the correct statement from below pertaining to matter described in 
Point 5. 
(a) The company was required to restate said amount in accordance with 
requirements of AS 1. By verifying it, auditor had verified existence 
assertion. 
111
(b) The company was required to restate said amount in accordance with 
requirements of AS 11. By verifying it, auditor had verified completeness 
assertion. 
(c) There was no responsibility of company to restate said amount. It was 
auditor’s responsibility to restate said amount in accordance with 
requirements of AS 11. No assertion was, therefore, verified by auditor. 
(d) The company was required to restate said amount in accordance with 
requirements of AS 11. By verifying it, auditor had verified valuation 
assertion.  
Case Scenario 2 
Watch IT India Private Limited is a company engaged in business of manufacturing 
smart watches.  The company had a slow start in the beginning as company’s 
products were gaining traction with customers.  However, momentum has picked 
up during the year.  The company wants to appoint M/s Tripati & Associates, a  
CA firm as their auditor for year 2023-24 by replacing their existing auditors  
M/s Sreepath and Co. M/s Tripati & Associates are willing to accept the 
engagement. They communicated with previous auditors before accepting the 
engagement. However, M/s Sreepath and Co.  have failed to respond.  
CA Kishan, partner of M/s Tripati & Associates explained to his team members 
about importance of Engagement letter.  He also arranged a team discussion on 
matters relating to acceptance of terms of engagement. 
First point of consideration was concerning preconditions for an audit. Mr. Arun, a 
team member could recollect few of them. Those included determining whether 
financial reporting framework used in the preparation of financial statement is 
acceptable, management providing auditor with access to all relevant information 
and additional information upon auditor’s request. It was further elaborated by Arun 
that management has to provide unrestricted access to employees within entity as 
may be required by auditor for obtaining audit evidence. Team members were 
asked to list factors that may necessitate revision of Engagement letter in case of 
recurring audits. Mr. Kumar, another team member replied that revision may be 
required in cases involving significant change in ownership, recent changes in 
senior management, change in financial reporting framework adopted in 
preparation of financial Statements, modest change in nature or size of the entity’s 
business, change in legal and regulatory requirements etc.   
Mr. Ram, one of the team members raised a doubt. He enquired regarding recourse 
available to incoming auditor in case management makes it clear before 
acceptance of engagement by auditor regarding its inability in providing support to 
him in respect of certain procedures expected to be performed during course of 
audit. In this respect, specific question was raised relating to sending of 
confirmation requests to material trade payables reflecting in financial statements 
of a company. Trade payables pertain to material input and input services acquired 
and utilised by company during the year. Lack of support by management in such 
a case would, in effect, signify management’s refusal to allow auditor to send 
confirmation requests at the outset before engagement is accepted by auditor.   
Based on above, answer the following questions:  
112
6. As regards doubt of Mr. Ram described in last para of case scenario, which 
of the following statements is likely to be in accordance with Standards on 
Auditing? 
(a)  The auditor needs to inquire into management’s reasons for the refusal 
and perform alternative audit procedures to obtain relevant and reliable 
audit evidence. 
(b)  The auditor needs to evaluate implications of management’s refusal on 
auditor’s assessment of risk of material misstatement and perform 
alternative audit procedures to obtain relevant and reliable audit 
evidence. 
(c)  The auditor should not accept such an engagement. 
(d)  The auditor needs to evaluate implications of management’s refusal on 
risk of fraud and perform alternative audit procedures to obtain relevant 
and reliable audit evidence. 
7.  When CA Kishan, the partner, asked about preconditions for an audit,  
Mr. Arun could recollect only few of them. Read the passage and find out 
which among the following points were missed. 
(i) Obtaining management responsibility on specific legal aspects 
governing the organisation. 
(ii) Obtaining management responsibility on Standards on Auditing 
applicable to the organisation. 
(iii) Obtaining management responsibility for the preparation of financial 
statements as per applicable financial reporting framework. 
(iv) Obtaining management responsibility on necessary Internal controls to 
enable preparation of financial statements which are free from material 
misstatement whether due to error or fraud.  
Choose the correct answer from below options. 
(a) (i), (ii) and (iii) 
(b) (ii), (iii) and (iv) 
(c) (iii) and (iv) 
(d) (i) and (iv) 
8.  From what Mr. Kumar replied about the factors requiring a revision of 
Engagement letter one point was incorrect. Read the passage and find that 
incorrect factor.  
(a)  A significant change in ownership 
(b)  A recent change in management 
(c)  A change in financial reporting framework adopted in preparation of 
Financial Statements 
(d)  A modest change in nature or size of the entity’s business 
9.  M/s Sreepath & Co. have failed to respond to incoming auditors. In this regard, 
choose the most appropriate option: -  
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(a)  It was unethical on part of outgoing auditors for failing to respond to 
communication made by incoming auditors. It is violation of principle of 
objectivity governing professional ethics. 
(b) It was ethical on part of outgoing auditors for failing to respond to 
communication made by incoming auditors. It does not involve violation 
of any of fundamental principles governing professional ethics. 
(c)  It was unethical on part of outgoing auditors for failing to respond to 
communication made by incoming auditors. It is violation of principle of 
Professional competence and due care governing professional ethics. 
(d)  It was unethical on part of outgoing auditors for failing to respond to 
communication made by incoming auditors. It is violation of principle of 
professional behaviour governing professional ethics. 
Case Scenario 3 
In accordance with requirements of Standards on Auditing, CA Tina (a freshly 
qualified professional) wants to obtain sufficient appropriate audit evidence in an 
audit engagement pertaining to financial statements of a partnership firm for year 
2022-23. The firm is trading in FMCG goods.  Appointed in May, 2023, she needs 
evidence to obtain information for arriving at her judgment.  Clearly remembering 
fundamentals that an auditor has to obtain sufficient appropriate audit evidence to 
draw reasonable conclusions on financial statements, she proceeded in 
accordance with audit plan prepared by her.  
During the year 2022-23, firm was maintaining a current account with a branch of 
a public sector bank. Her audit plan had included procedure of confirming balance 
of current account directly from bank. As at 28
th 
March, 2023, the firm had an urgent 
need to pay its utility bill amounting to `1.00 lacs. However, due to insufficiency of 
funds, it had requested branch manager to get cheque drawn on utility company 
cleared. Therefore, balance in current account of firm in books of bank branch stood 
at `0.92 lacs (Debit). The firm had also issued cheques in evening of 31
st
 
March,2023 in anticipation of funds on next working day i.e.3
rd
 April, 2023. It had 
also certain cheques dated 27
th
 March, 2023 from its debtors lying with it which 
were deposited in afternoon of 31
st
 March,2023 in bank branch at request of 
debtors. 
Her plan also included performance of certain procedures pertaining to verification 
of inventories. Inventories of FMCG goods were material to financial statements. 
Her assistant, Tisha, had her own notion about understanding of sufficient 
appropriate audit evidence.  She further feels that when audit evidence is obtained 
from available records of an entity, it is known as internal evidence like purchase 
bills of FMCG goods, debit notes issued by firm on debtors for GST short charged 
earlier during the year and credit notes issued by firm during the year on debtors 
to account for extra price charged in accordance with provisions of GST law.  She 
is also of the view that audit evidence obtained by auditor is final and conclusive. 
Based upon above, answer the following questions: - 
10.  As regards matter of balance in current account and related issues is 
concerned, which of following statements is likely to be most appropriate? 
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