Auditing and Assurance Model Test Paper - 3 (Questions) - CA Intermediate PDF Download

 Page 1


MODEL TEST PAPER 3 
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  
GHB Ltd., a listed company, having its registered office at New Delhi, is in the 
business of blending, processing, packing and selling various brands of Tea. BPP 
& Co. LLP, Chartered Accountants, are appointed as the statutory auditors of the 
company for the financial year 2023-24, CA B is the engagement partner for the 
assignment. 
The company has a centralised warehouse near the border of Himachal Pradesh. 
CA B's attendance, on 31 March, 2024, at the physical inventory counting in aspect 
of the said warehouse became impracticable on account of natural calamity in that 
area. It also became impossible for CA B to perform alternative audit procedures 
to obtain sufficient appropriate audit evidence regarding the existence and 
condition of the inventory. 
The company had spent huge amount on employee benefits. Hence, CA B 
instructed his assistants to test the controls that the company had set around the 
employee benefit expenses. After being satisfied with the controls maintained by 
the  company, he instructed his team to bifurcate the employee benefit expenses 
into salaries and wages, contribution to PF, expenses on ESOP/ ESPP and staff 
welfare expenses. 
The engagement partner CA B, while evaluating, validating and reporting on the 
design and efficiency of internal financial controls at GHB Ltd., also impressed upon 
the directors, independent directors and the audit committee the way in which the 
Companies Act, 2013 has placed a greater emphasis on the effective 
implementation and reporting on the internal controls of a company. 
Due to time constraints, CA B is under pressure to issue a clean report in the limited 
time frame. He has insufficient time to properly perform or complete the relevant 
duties and issue appropriate audit report. 
The Board of Directors want CA B to certify the debtors to be sent to the bank 
without checking. CA B agrees, as most of the professional income of BPP & 4 Co. 
LLP comes from GHB Ltd. They have undue dependence on the fees from GHB 
Ltd. hence; they are concerned about losing the engagement. 
Based on the above facts, answer the following Q. Nos. 1 to 5. 
1.  Since it became impracticable for CA B, on 31 March, 2024, to attend physical 
inventory counting at the warehouse and also became impossible to perform 
122
Page 2


MODEL TEST PAPER 3 
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  
GHB Ltd., a listed company, having its registered office at New Delhi, is in the 
business of blending, processing, packing and selling various brands of Tea. BPP 
& Co. LLP, Chartered Accountants, are appointed as the statutory auditors of the 
company for the financial year 2023-24, CA B is the engagement partner for the 
assignment. 
The company has a centralised warehouse near the border of Himachal Pradesh. 
CA B's attendance, on 31 March, 2024, at the physical inventory counting in aspect 
of the said warehouse became impracticable on account of natural calamity in that 
area. It also became impossible for CA B to perform alternative audit procedures 
to obtain sufficient appropriate audit evidence regarding the existence and 
condition of the inventory. 
The company had spent huge amount on employee benefits. Hence, CA B 
instructed his assistants to test the controls that the company had set around the 
employee benefit expenses. After being satisfied with the controls maintained by 
the  company, he instructed his team to bifurcate the employee benefit expenses 
into salaries and wages, contribution to PF, expenses on ESOP/ ESPP and staff 
welfare expenses. 
The engagement partner CA B, while evaluating, validating and reporting on the 
design and efficiency of internal financial controls at GHB Ltd., also impressed upon 
the directors, independent directors and the audit committee the way in which the 
Companies Act, 2013 has placed a greater emphasis on the effective 
implementation and reporting on the internal controls of a company. 
Due to time constraints, CA B is under pressure to issue a clean report in the limited 
time frame. He has insufficient time to properly perform or complete the relevant 
duties and issue appropriate audit report. 
The Board of Directors want CA B to certify the debtors to be sent to the bank 
without checking. CA B agrees, as most of the professional income of BPP & 4 Co. 
LLP comes from GHB Ltd. They have undue dependence on the fees from GHB 
Ltd. hence; they are concerned about losing the engagement. 
Based on the above facts, answer the following Q. Nos. 1 to 5. 
1.  Since it became impracticable for CA B, on 31 March, 2024, to attend physical 
inventory counting at the warehouse and also became impossible to perform 
122
alternative audit procedures to obtain sufficient appropriate audit evidence 
regarding the existence and conditions of inventory, CA B shall:      
(a)  Take Management Representation regarding the existence and 
valuation of inventory and mention in Emphasis of Matter paragraph. 
(b)  Rely on GHB Ltd.'s perpetual inventory records as audit evidence and 
express unmodified opinion. 
(c)  Omit altogether the audit procedure of physical inventory counting from 
the audit programme because of impracticability. 
(d)  Modify the opinion in the auditor's report in accordance with SA 705 as 
a result of the scope limitation. 
2.   Which assertion concerning the bifurcation of employee expenses into various   
heads is being verified by CA B? 
(a)  Occurrence 
(b)  Measurement 
(c)  Completeness 
(d)  Disclosures 
3. With reference to reporting on the internal financial controls system under the 
Companies Act, 2013, which of the following does not fall within the nature of 
responsibility of GHB Ltd? 
(a) In accordance with the terms of reference specified in writing by the 
Board, act of every audit committee to include evaluation of internal 
financial controls and risk management systems. 
(b)  Directors' responsibility statement to state that the Directors had laid 
down internal financial controls to be followed by the company and that 
such internal financial controls are adequate and were operating 
effectively. 
(c)  Board of Directors have to appoint an expert to state that the internal 
financial controls of the company are commensurate with the size and 
nature of its business. 
(d)  In terms of code for Independent Directors, independent directors to get 
themselves satisfied that financial controls and systems of risk 
management are robust and defensible. 
4. Due to tight deadlines, CA B has insufficient time to properly perform or 
complete the relevant duties and he has to sign off clean audit report. Which 
fundamental principle governing professional ethics is disregarded by him ? 
(a)  Professional competence and due care 
(b)  Professional behaviour 
(c) Integrity 
(d) Objectivity 
123
Page 3


MODEL TEST PAPER 3 
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  
GHB Ltd., a listed company, having its registered office at New Delhi, is in the 
business of blending, processing, packing and selling various brands of Tea. BPP 
& Co. LLP, Chartered Accountants, are appointed as the statutory auditors of the 
company for the financial year 2023-24, CA B is the engagement partner for the 
assignment. 
The company has a centralised warehouse near the border of Himachal Pradesh. 
CA B's attendance, on 31 March, 2024, at the physical inventory counting in aspect 
of the said warehouse became impracticable on account of natural calamity in that 
area. It also became impossible for CA B to perform alternative audit procedures 
to obtain sufficient appropriate audit evidence regarding the existence and 
condition of the inventory. 
The company had spent huge amount on employee benefits. Hence, CA B 
instructed his assistants to test the controls that the company had set around the 
employee benefit expenses. After being satisfied with the controls maintained by 
the  company, he instructed his team to bifurcate the employee benefit expenses 
into salaries and wages, contribution to PF, expenses on ESOP/ ESPP and staff 
welfare expenses. 
The engagement partner CA B, while evaluating, validating and reporting on the 
design and efficiency of internal financial controls at GHB Ltd., also impressed upon 
the directors, independent directors and the audit committee the way in which the 
Companies Act, 2013 has placed a greater emphasis on the effective 
implementation and reporting on the internal controls of a company. 
Due to time constraints, CA B is under pressure to issue a clean report in the limited 
time frame. He has insufficient time to properly perform or complete the relevant 
duties and issue appropriate audit report. 
The Board of Directors want CA B to certify the debtors to be sent to the bank 
without checking. CA B agrees, as most of the professional income of BPP & 4 Co. 
LLP comes from GHB Ltd. They have undue dependence on the fees from GHB 
Ltd. hence; they are concerned about losing the engagement. 
Based on the above facts, answer the following Q. Nos. 1 to 5. 
1.  Since it became impracticable for CA B, on 31 March, 2024, to attend physical 
inventory counting at the warehouse and also became impossible to perform 
122
alternative audit procedures to obtain sufficient appropriate audit evidence 
regarding the existence and conditions of inventory, CA B shall:      
(a)  Take Management Representation regarding the existence and 
valuation of inventory and mention in Emphasis of Matter paragraph. 
(b)  Rely on GHB Ltd.'s perpetual inventory records as audit evidence and 
express unmodified opinion. 
(c)  Omit altogether the audit procedure of physical inventory counting from 
the audit programme because of impracticability. 
(d)  Modify the opinion in the auditor's report in accordance with SA 705 as 
a result of the scope limitation. 
2.   Which assertion concerning the bifurcation of employee expenses into various   
heads is being verified by CA B? 
(a)  Occurrence 
(b)  Measurement 
(c)  Completeness 
(d)  Disclosures 
3. With reference to reporting on the internal financial controls system under the 
Companies Act, 2013, which of the following does not fall within the nature of 
responsibility of GHB Ltd? 
(a) In accordance with the terms of reference specified in writing by the 
Board, act of every audit committee to include evaluation of internal 
financial controls and risk management systems. 
(b)  Directors' responsibility statement to state that the Directors had laid 
down internal financial controls to be followed by the company and that 
such internal financial controls are adequate and were operating 
effectively. 
(c)  Board of Directors have to appoint an expert to state that the internal 
financial controls of the company are commensurate with the size and 
nature of its business. 
(d)  In terms of code for Independent Directors, independent directors to get 
themselves satisfied that financial controls and systems of risk 
management are robust and defensible. 
4. Due to tight deadlines, CA B has insufficient time to properly perform or 
complete the relevant duties and he has to sign off clean audit report. Which 
fundamental principle governing professional ethics is disregarded by him ? 
(a)  Professional competence and due care 
(b)  Professional behaviour 
(c) Integrity 
(d) Objectivity 
123
5. Undue dependence on the fees from GHB Ltd. creates which threat of 
independence for the auditors? 
(a)  Intimidation threat 
(b)  Familiarity threat 
(c)  Self-interest threat 
(d)  Advocacy threat 
Case Scenario 2 
M/s KRISH & Company is a firm of Chartered Accountants based in Punjab, CA K, 
CA R. CA I, and CA SH are the partners of the firm. The firm is engaged in various 
audit assignments. The engagement partners, who were handling their respective 
assignments for the financial year 2023-24, dealt with the following issues raised 
during the course of their respective audits. 
M/s KRISH & Co. is appointed as the joint auditor along with M/s. PK. and 
Associates and M/s. RS and Associates for the audit of a large manufacturing 
company for the financial year 2023-24. CA K is in charge of this audit. They have 
divided their audit areas and have also identified the common audit areas, which 
will be applicable to all the joint auditors. While forming the opinion, CA K had a 
different opinion whereas, the other two audit firms shared the same opinion. Both 
of them contended that as they were forming a majority, M/s KRISH & Co. will have 
to agree with their opinion. 
CA R is conducting the statutory audit of PAWAN Ltd. He observed that, during the 
year, the company has issued shares at premium and has transferred the amount 
received as premium to securities premium account. He wants to ensure that 
PAWAN Ltd. has utilised the amount available in the securities premium amount 
for the purposes permitted under the Companies Act, 2013. 
Registrar of Co-operative Societies has appointed M/s KRISH & Co. as the 
statutory auditor of NAND Co-operative Society for the financial year 2023-24. CA 
I is looking after the audit of the said registered society. During the year, in terms 
of Section 34 of the Cooperative Societies Act, with the sanction of the Registrar, 
Society has contributed for charitable purposes as defined in section 2 of the 
Charitable Endowments Act, 1890. CA I is ensuring whether requirements, as 
regards contribution made, have been complied with. 
All the engagement partners and the audit team of M/s KRISH & Co. have 
deliberations and discussions every week through google meet to review the 
progress of their respective assignments. During last such meet, CA SH, the 
managing partner, briefed to the team about the form, content, and extent of audit 
documentation in terms of SA 230, while citing examples of records to be excluded 
as well as to be included as a part of audit documentation. 
Based on the above facts, answer the following Q. Nos. 6 to 9. 
6.  In case of difference of opinion between the joint auditors, what course of 
action can M/s. KRISH & Co. take while issuing the audit report? 
(a)  They will have to agree with the opinion formed by the majority of 
auditors. 
124
Page 4


MODEL TEST PAPER 3 
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  
GHB Ltd., a listed company, having its registered office at New Delhi, is in the 
business of blending, processing, packing and selling various brands of Tea. BPP 
& Co. LLP, Chartered Accountants, are appointed as the statutory auditors of the 
company for the financial year 2023-24, CA B is the engagement partner for the 
assignment. 
The company has a centralised warehouse near the border of Himachal Pradesh. 
CA B's attendance, on 31 March, 2024, at the physical inventory counting in aspect 
of the said warehouse became impracticable on account of natural calamity in that 
area. It also became impossible for CA B to perform alternative audit procedures 
to obtain sufficient appropriate audit evidence regarding the existence and 
condition of the inventory. 
The company had spent huge amount on employee benefits. Hence, CA B 
instructed his assistants to test the controls that the company had set around the 
employee benefit expenses. After being satisfied with the controls maintained by 
the  company, he instructed his team to bifurcate the employee benefit expenses 
into salaries and wages, contribution to PF, expenses on ESOP/ ESPP and staff 
welfare expenses. 
The engagement partner CA B, while evaluating, validating and reporting on the 
design and efficiency of internal financial controls at GHB Ltd., also impressed upon 
the directors, independent directors and the audit committee the way in which the 
Companies Act, 2013 has placed a greater emphasis on the effective 
implementation and reporting on the internal controls of a company. 
Due to time constraints, CA B is under pressure to issue a clean report in the limited 
time frame. He has insufficient time to properly perform or complete the relevant 
duties and issue appropriate audit report. 
The Board of Directors want CA B to certify the debtors to be sent to the bank 
without checking. CA B agrees, as most of the professional income of BPP & 4 Co. 
LLP comes from GHB Ltd. They have undue dependence on the fees from GHB 
Ltd. hence; they are concerned about losing the engagement. 
Based on the above facts, answer the following Q. Nos. 1 to 5. 
1.  Since it became impracticable for CA B, on 31 March, 2024, to attend physical 
inventory counting at the warehouse and also became impossible to perform 
122
alternative audit procedures to obtain sufficient appropriate audit evidence 
regarding the existence and conditions of inventory, CA B shall:      
(a)  Take Management Representation regarding the existence and 
valuation of inventory and mention in Emphasis of Matter paragraph. 
(b)  Rely on GHB Ltd.'s perpetual inventory records as audit evidence and 
express unmodified opinion. 
(c)  Omit altogether the audit procedure of physical inventory counting from 
the audit programme because of impracticability. 
(d)  Modify the opinion in the auditor's report in accordance with SA 705 as 
a result of the scope limitation. 
2.   Which assertion concerning the bifurcation of employee expenses into various   
heads is being verified by CA B? 
(a)  Occurrence 
(b)  Measurement 
(c)  Completeness 
(d)  Disclosures 
3. With reference to reporting on the internal financial controls system under the 
Companies Act, 2013, which of the following does not fall within the nature of 
responsibility of GHB Ltd? 
(a) In accordance with the terms of reference specified in writing by the 
Board, act of every audit committee to include evaluation of internal 
financial controls and risk management systems. 
(b)  Directors' responsibility statement to state that the Directors had laid 
down internal financial controls to be followed by the company and that 
such internal financial controls are adequate and were operating 
effectively. 
(c)  Board of Directors have to appoint an expert to state that the internal 
financial controls of the company are commensurate with the size and 
nature of its business. 
(d)  In terms of code for Independent Directors, independent directors to get 
themselves satisfied that financial controls and systems of risk 
management are robust and defensible. 
4. Due to tight deadlines, CA B has insufficient time to properly perform or 
complete the relevant duties and he has to sign off clean audit report. Which 
fundamental principle governing professional ethics is disregarded by him ? 
(a)  Professional competence and due care 
(b)  Professional behaviour 
(c) Integrity 
(d) Objectivity 
123
5. Undue dependence on the fees from GHB Ltd. creates which threat of 
independence for the auditors? 
(a)  Intimidation threat 
(b)  Familiarity threat 
(c)  Self-interest threat 
(d)  Advocacy threat 
Case Scenario 2 
M/s KRISH & Company is a firm of Chartered Accountants based in Punjab, CA K, 
CA R. CA I, and CA SH are the partners of the firm. The firm is engaged in various 
audit assignments. The engagement partners, who were handling their respective 
assignments for the financial year 2023-24, dealt with the following issues raised 
during the course of their respective audits. 
M/s KRISH & Co. is appointed as the joint auditor along with M/s. PK. and 
Associates and M/s. RS and Associates for the audit of a large manufacturing 
company for the financial year 2023-24. CA K is in charge of this audit. They have 
divided their audit areas and have also identified the common audit areas, which 
will be applicable to all the joint auditors. While forming the opinion, CA K had a 
different opinion whereas, the other two audit firms shared the same opinion. Both 
of them contended that as they were forming a majority, M/s KRISH & Co. will have 
to agree with their opinion. 
CA R is conducting the statutory audit of PAWAN Ltd. He observed that, during the 
year, the company has issued shares at premium and has transferred the amount 
received as premium to securities premium account. He wants to ensure that 
PAWAN Ltd. has utilised the amount available in the securities premium amount 
for the purposes permitted under the Companies Act, 2013. 
Registrar of Co-operative Societies has appointed M/s KRISH & Co. as the 
statutory auditor of NAND Co-operative Society for the financial year 2023-24. CA 
I is looking after the audit of the said registered society. During the year, in terms 
of Section 34 of the Cooperative Societies Act, with the sanction of the Registrar, 
Society has contributed for charitable purposes as defined in section 2 of the 
Charitable Endowments Act, 1890. CA I is ensuring whether requirements, as 
regards contribution made, have been complied with. 
All the engagement partners and the audit team of M/s KRISH & Co. have 
deliberations and discussions every week through google meet to review the 
progress of their respective assignments. During last such meet, CA SH, the 
managing partner, briefed to the team about the form, content, and extent of audit 
documentation in terms of SA 230, while citing examples of records to be excluded 
as well as to be included as a part of audit documentation. 
Based on the above facts, answer the following Q. Nos. 6 to 9. 
6.  In case of difference of opinion between the joint auditors, what course of 
action can M/s. KRISH & Co. take while issuing the audit report? 
(a)  They will have to agree with the opinion formed by the majority of 
auditors. 
124
(b)  They will have to agree with the opinion formed by the majority auditors, 
but they can mention their view in the Emphasis of Matter Paragraph. 
(c)  They can add a separate audit opinion paragraph in the common audit 
report.  
(d)  They can issue a separate audit report and the audit reports issued by 
the joint auditors shall make a reference to each other's audit report. 
7.  The securities premium account of PAWAN Ltd. cannot be applied for which 
of the following purposes ? 
(a)  In writing off the debit balance in the Profit & Loss account. 
(b)  In writing off the expenses of, or the commission paid or discount allowed 
on any issue of equity shares of the company. 
(c)  For the purchase of its own shares or other securities under section 68. 
(d)  In paying up unissued equity shares of the company to be issued to the 
members of the company as fully paid bonus shares. 
8. CA I, who is in charge of audit of NAND Co-operative Society, wants to ensure 
that the society has contributed for charitable purposes within the limits 
prescribed. How much is the society allowed to contribute for charitable 
purposes ? 
(a)  contribute an amount not exceeding 10% of the net profits remaining 
after the compulsory transfer to the reserve fund. 
(b)  contribute an amount at the appropriate rate as per class of the society. 
(c)  contribute an amount not exceeding 20% of the net profits remaining 
after the compulsory transfer to the reserve fund. 
(d)  contribute annually at prescribed percentage of the profits as approved 
by the General body of the society. 
9. Which of the following need not be included by the audit team as a part of 
audit documentation during handling of their respective assignments? 
(a)  Significant and specific contracts and agreements. 
(b)  Draft audit engagement letter. 
(c)  Summaries of significant matters. 
(d)  Checklists. 
Case Scenario 3 
Mega Power Ltd. is a manufacturer of solar lanterns, which are used in remote 
villages where there is no reliable supply of electricity. However, due to power 
projects undertaken by the government, the demand for their solar lanterns has 
significantly declined over the past few years. 
The company was in need of `2 crores for working capital and other expenses but 
was not able to fund this amount Consequently, their suppliers were paid much 
later than usual and hence some of them withdrew the credit terms, meaning the 
company had to pay cash on delivery. This created a severe cash crunch and the 
125
Page 5


MODEL TEST PAPER 3 
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  
GHB Ltd., a listed company, having its registered office at New Delhi, is in the 
business of blending, processing, packing and selling various brands of Tea. BPP 
& Co. LLP, Chartered Accountants, are appointed as the statutory auditors of the 
company for the financial year 2023-24, CA B is the engagement partner for the 
assignment. 
The company has a centralised warehouse near the border of Himachal Pradesh. 
CA B's attendance, on 31 March, 2024, at the physical inventory counting in aspect 
of the said warehouse became impracticable on account of natural calamity in that 
area. It also became impossible for CA B to perform alternative audit procedures 
to obtain sufficient appropriate audit evidence regarding the existence and 
condition of the inventory. 
The company had spent huge amount on employee benefits. Hence, CA B 
instructed his assistants to test the controls that the company had set around the 
employee benefit expenses. After being satisfied with the controls maintained by 
the  company, he instructed his team to bifurcate the employee benefit expenses 
into salaries and wages, contribution to PF, expenses on ESOP/ ESPP and staff 
welfare expenses. 
The engagement partner CA B, while evaluating, validating and reporting on the 
design and efficiency of internal financial controls at GHB Ltd., also impressed upon 
the directors, independent directors and the audit committee the way in which the 
Companies Act, 2013 has placed a greater emphasis on the effective 
implementation and reporting on the internal controls of a company. 
Due to time constraints, CA B is under pressure to issue a clean report in the limited 
time frame. He has insufficient time to properly perform or complete the relevant 
duties and issue appropriate audit report. 
The Board of Directors want CA B to certify the debtors to be sent to the bank 
without checking. CA B agrees, as most of the professional income of BPP & 4 Co. 
LLP comes from GHB Ltd. They have undue dependence on the fees from GHB 
Ltd. hence; they are concerned about losing the engagement. 
Based on the above facts, answer the following Q. Nos. 1 to 5. 
1.  Since it became impracticable for CA B, on 31 March, 2024, to attend physical 
inventory counting at the warehouse and also became impossible to perform 
122
alternative audit procedures to obtain sufficient appropriate audit evidence 
regarding the existence and conditions of inventory, CA B shall:      
(a)  Take Management Representation regarding the existence and 
valuation of inventory and mention in Emphasis of Matter paragraph. 
(b)  Rely on GHB Ltd.'s perpetual inventory records as audit evidence and 
express unmodified opinion. 
(c)  Omit altogether the audit procedure of physical inventory counting from 
the audit programme because of impracticability. 
(d)  Modify the opinion in the auditor's report in accordance with SA 705 as 
a result of the scope limitation. 
2.   Which assertion concerning the bifurcation of employee expenses into various   
heads is being verified by CA B? 
(a)  Occurrence 
(b)  Measurement 
(c)  Completeness 
(d)  Disclosures 
3. With reference to reporting on the internal financial controls system under the 
Companies Act, 2013, which of the following does not fall within the nature of 
responsibility of GHB Ltd? 
(a) In accordance with the terms of reference specified in writing by the 
Board, act of every audit committee to include evaluation of internal 
financial controls and risk management systems. 
(b)  Directors' responsibility statement to state that the Directors had laid 
down internal financial controls to be followed by the company and that 
such internal financial controls are adequate and were operating 
effectively. 
(c)  Board of Directors have to appoint an expert to state that the internal 
financial controls of the company are commensurate with the size and 
nature of its business. 
(d)  In terms of code for Independent Directors, independent directors to get 
themselves satisfied that financial controls and systems of risk 
management are robust and defensible. 
4. Due to tight deadlines, CA B has insufficient time to properly perform or 
complete the relevant duties and he has to sign off clean audit report. Which 
fundamental principle governing professional ethics is disregarded by him ? 
(a)  Professional competence and due care 
(b)  Professional behaviour 
(c) Integrity 
(d) Objectivity 
123
5. Undue dependence on the fees from GHB Ltd. creates which threat of 
independence for the auditors? 
(a)  Intimidation threat 
(b)  Familiarity threat 
(c)  Self-interest threat 
(d)  Advocacy threat 
Case Scenario 2 
M/s KRISH & Company is a firm of Chartered Accountants based in Punjab, CA K, 
CA R. CA I, and CA SH are the partners of the firm. The firm is engaged in various 
audit assignments. The engagement partners, who were handling their respective 
assignments for the financial year 2023-24, dealt with the following issues raised 
during the course of their respective audits. 
M/s KRISH & Co. is appointed as the joint auditor along with M/s. PK. and 
Associates and M/s. RS and Associates for the audit of a large manufacturing 
company for the financial year 2023-24. CA K is in charge of this audit. They have 
divided their audit areas and have also identified the common audit areas, which 
will be applicable to all the joint auditors. While forming the opinion, CA K had a 
different opinion whereas, the other two audit firms shared the same opinion. Both 
of them contended that as they were forming a majority, M/s KRISH & Co. will have 
to agree with their opinion. 
CA R is conducting the statutory audit of PAWAN Ltd. He observed that, during the 
year, the company has issued shares at premium and has transferred the amount 
received as premium to securities premium account. He wants to ensure that 
PAWAN Ltd. has utilised the amount available in the securities premium amount 
for the purposes permitted under the Companies Act, 2013. 
Registrar of Co-operative Societies has appointed M/s KRISH & Co. as the 
statutory auditor of NAND Co-operative Society for the financial year 2023-24. CA 
I is looking after the audit of the said registered society. During the year, in terms 
of Section 34 of the Cooperative Societies Act, with the sanction of the Registrar, 
Society has contributed for charitable purposes as defined in section 2 of the 
Charitable Endowments Act, 1890. CA I is ensuring whether requirements, as 
regards contribution made, have been complied with. 
All the engagement partners and the audit team of M/s KRISH & Co. have 
deliberations and discussions every week through google meet to review the 
progress of their respective assignments. During last such meet, CA SH, the 
managing partner, briefed to the team about the form, content, and extent of audit 
documentation in terms of SA 230, while citing examples of records to be excluded 
as well as to be included as a part of audit documentation. 
Based on the above facts, answer the following Q. Nos. 6 to 9. 
6.  In case of difference of opinion between the joint auditors, what course of 
action can M/s. KRISH & Co. take while issuing the audit report? 
(a)  They will have to agree with the opinion formed by the majority of 
auditors. 
124
(b)  They will have to agree with the opinion formed by the majority auditors, 
but they can mention their view in the Emphasis of Matter Paragraph. 
(c)  They can add a separate audit opinion paragraph in the common audit 
report.  
(d)  They can issue a separate audit report and the audit reports issued by 
the joint auditors shall make a reference to each other's audit report. 
7.  The securities premium account of PAWAN Ltd. cannot be applied for which 
of the following purposes ? 
(a)  In writing off the debit balance in the Profit & Loss account. 
(b)  In writing off the expenses of, or the commission paid or discount allowed 
on any issue of equity shares of the company. 
(c)  For the purchase of its own shares or other securities under section 68. 
(d)  In paying up unissued equity shares of the company to be issued to the 
members of the company as fully paid bonus shares. 
8. CA I, who is in charge of audit of NAND Co-operative Society, wants to ensure 
that the society has contributed for charitable purposes within the limits 
prescribed. How much is the society allowed to contribute for charitable 
purposes ? 
(a)  contribute an amount not exceeding 10% of the net profits remaining 
after the compulsory transfer to the reserve fund. 
(b)  contribute an amount at the appropriate rate as per class of the society. 
(c)  contribute an amount not exceeding 20% of the net profits remaining 
after the compulsory transfer to the reserve fund. 
(d)  contribute annually at prescribed percentage of the profits as approved 
by the General body of the society. 
9. Which of the following need not be included by the audit team as a part of 
audit documentation during handling of their respective assignments? 
(a)  Significant and specific contracts and agreements. 
(b)  Draft audit engagement letter. 
(c)  Summaries of significant matters. 
(d)  Checklists. 
Case Scenario 3 
Mega Power Ltd. is a manufacturer of solar lanterns, which are used in remote 
villages where there is no reliable supply of electricity. However, due to power 
projects undertaken by the government, the demand for their solar lanterns has 
significantly declined over the past few years. 
The company was in need of `2 crores for working capital and other expenses but 
was not able to fund this amount Consequently, their suppliers were paid much 
later than usual and hence some of them withdrew the credit terms, meaning the 
company had to pay cash on delivery. This created a severe cash crunch and the 
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auditor feels that other than the cash crunch, there are several other financial 
indicators that cast a significant doubt on the company's ability to continue as a 
going concern. 
The management of the company, however, assures the auditor that this is 
temporary and the situation will change soon as they are planning to diversify their 
business. They are ready to provide written representation for the same. The 
auditor feels that a material uncertainty still exists. The auditor wants the 
management to make adequate disclosure about this in the financial statements. 
The auditor wants to include a separate section about this in his audit report. He is 
also contemplating about the kind of audit report that should be issued. 
The auditor has concerns about ethical values and diligence of management. He is 
concerned about the reliability of the representations made by the management 
and the audit evidence in general. The auditor is of the opinion that the written 
representations from management are not reliable. 
Based on the above facts, answer the following Q. Nos. 10 to 12. 
10. Financial events or conditions that may cast significant doubt on the entity's 
ability to continue as a going concern does not include 
(a)  Inability to comply with the terms of loan agreements. 
(b)  Inability to pay creditors on due dates. 
(c)  Shortage of important supplies. 
(d)  Substantial operating losses. 
11. Which kind of audit report will the auditor issue, if the use of going concern 
basis of accounting is appropriate, but a material uncertainty exists and 
adequate disclosure of the material uncertainty is made in the financial 
statements by the management?  
(a)  Adverse opinion 
(b)  Disclaimer of opinion 
(c)  Unmodified opinion 
(d)  Qualified opinion 
12. If the auditor is of the opinion that the written representations are not reliable, 
what kind of audit opinion should be issued by him? 
(a)  Disclaimer of opinion 
(b)  Adverse opinion 
(c)  Unmodified opinion and mention the facts in Other Matters Paragraph 
(d)  Unmodified opinion and mention the facts in Emphasis of Matter 
Paragraph 
  
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