Auditing and Assurance Model Test Paper - 4 (Questions) - CA Intermediate PDF Download

 Page 1


MODEL TEST PAPER 4 
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 
M/s Vishwacharya and Associates, a CA firm based in Orissa, is appointed as an 
auditor of CBF Bank for the financial year 2023-24. During the course of audit, it 
came to notice that CBF Bank has sanctioned an overdraft facility of ` 75 lakh to 
Times Ltd. However, as per the stock statement furnished for the last quarter, the 
drawing power was calculated to be ` 50 lakh. It was observed that few advances 
were guaranteed by the: 
(i) Central Government as part of ‘Make in India’ initiative. However, the
guarantee was not invoked, and the advances were overdue by 75 days.
These advances were classified as standard assets and were regarded as
NPA for income recognition purpose.
(ii) State Government as part of power generation initiative. However, the
guarantee was not invoked, and the advances were overdue by 80 days.
These advances were also classified as standard assets and were regarded
as NPA for income recognition purpose.
Additionally, XYZ Ltd., is a borrower availing cash credit facility of ` 110 Lakh 
against security of paid stocks and debtors up to 90 days. Margin stipulated was 
25% of stock as and 40% for debtors. Bank has calculated drawing power based 
on following information provided by XYZ Ltd.  
Particulars Amount (`) 
Value of Stocks (as on 31.12.2023) 130 Lakh 
Value of Debtors (as on 31.12.2023) 75 Lakh 
Value of stocks (Fully damaged and included in (i) above) 7 Lakh 
Value of Debtors (exceeding 90 days included in (ii) above) 10 Lakh 
Value of creditors for goods 60 Lakh 
Also, the outstanding balance in one of the Loan accounts was ` 25 Lakh and the 
realisable value of the security as assessed by the bank / approved valuers was 
` 2.25 Lakh. Bank identified the same as erosion in the value of security. It was 
classified as doubtful category and provision was made for the doubtful assets. A 
discussion also took place among the team members regarding issuance of the 
audit reports after completion of the bank audit and annexure to the same such as 
Long Form Audit Report, Report on compliance with SLR Requirements, Report on 
133
Page 2


MODEL TEST PAPER 4 
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 
M/s Vishwacharya and Associates, a CA firm based in Orissa, is appointed as an 
auditor of CBF Bank for the financial year 2023-24. During the course of audit, it 
came to notice that CBF Bank has sanctioned an overdraft facility of ` 75 lakh to 
Times Ltd. However, as per the stock statement furnished for the last quarter, the 
drawing power was calculated to be ` 50 lakh. It was observed that few advances 
were guaranteed by the: 
(i) Central Government as part of ‘Make in India’ initiative. However, the
guarantee was not invoked, and the advances were overdue by 75 days.
These advances were classified as standard assets and were regarded as
NPA for income recognition purpose.
(ii) State Government as part of power generation initiative. However, the
guarantee was not invoked, and the advances were overdue by 80 days.
These advances were also classified as standard assets and were regarded
as NPA for income recognition purpose.
Additionally, XYZ Ltd., is a borrower availing cash credit facility of ` 110 Lakh 
against security of paid stocks and debtors up to 90 days. Margin stipulated was 
25% of stock as and 40% for debtors. Bank has calculated drawing power based 
on following information provided by XYZ Ltd.  
Particulars Amount (`) 
Value of Stocks (as on 31.12.2023) 130 Lakh 
Value of Debtors (as on 31.12.2023) 75 Lakh 
Value of stocks (Fully damaged and included in (i) above) 7 Lakh 
Value of Debtors (exceeding 90 days included in (ii) above) 10 Lakh 
Value of creditors for goods 60 Lakh 
Also, the outstanding balance in one of the Loan accounts was ` 25 Lakh and the 
realisable value of the security as assessed by the bank / approved valuers was 
` 2.25 Lakh. Bank identified the same as erosion in the value of security. It was 
classified as doubtful category and provision was made for the doubtful assets. A 
discussion also took place among the team members regarding issuance of the 
audit reports after completion of the bank audit and annexure to the same such as 
Long Form Audit Report, Report on compliance with SLR Requirements, Report on 
133
Treasury Operations – as per RBI guidelines, Report on compliance as per Ghosh 
committee recommendations and Report on adverse credit - lending ratio in the 
rural areas, etc. 
Based on the above facts, answer the following: - 
1. With respect to the overdraft facility sanctioned to Times Ltd., the account
would be termed as out of order if:
(i) The outstanding balance remains continuously in excess of ` 75 Lakh.
(ii) The outstanding balance remains continuously in excess of ` 50 Lakh.
(iii) The outstanding balance in the account is less than ` 75 Lakh but there
are no credits or payments deposited into the account continuously
for 90 days as on balance sheet date
(iv) The outstanding balance is less than ` 50 Lakh.
Choose the correct option from below:
(a) (i), (ii) and (iii)
(b) (i), (iii) and (iv)
(c) (ii),(iii) and (iv)
(d) (iii) and (iv)
2. Which of the treatment by the bank on the provisioning and income recognition
is correct in case of bank guarantee given by the Central Government and
State Government?
(a) Both (i) and (ii) are correct
(b) Only (ii) is correct
(c) Only (i) is correct
(d) Both (i) and (ii) are incorrect.
3. In the given case drawing power of the borrower XYZ Limited should be:
(a) ` 86.25 Lakh
(b) ` 76.35 Lakh
(c) ` 96.25 Lakh
(d) ` 85.45 Lakh
4. The Bank has identified an erosion in the value of security and made provision
for doubtful assets. Whether the treatment by bank for the doubtful asset is
correct?
(a) Yes. The security should be classified under doubtful category. It may
be either written off or fully provided by the bank.
(b) No. The existence of such security should be ignored, and the asset
should straight away be classified as loss asset. It may be either written
off or fully provided by the bank.
134
Page 3


MODEL TEST PAPER 4 
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 
M/s Vishwacharya and Associates, a CA firm based in Orissa, is appointed as an 
auditor of CBF Bank for the financial year 2023-24. During the course of audit, it 
came to notice that CBF Bank has sanctioned an overdraft facility of ` 75 lakh to 
Times Ltd. However, as per the stock statement furnished for the last quarter, the 
drawing power was calculated to be ` 50 lakh. It was observed that few advances 
were guaranteed by the: 
(i) Central Government as part of ‘Make in India’ initiative. However, the
guarantee was not invoked, and the advances were overdue by 75 days.
These advances were classified as standard assets and were regarded as
NPA for income recognition purpose.
(ii) State Government as part of power generation initiative. However, the
guarantee was not invoked, and the advances were overdue by 80 days.
These advances were also classified as standard assets and were regarded
as NPA for income recognition purpose.
Additionally, XYZ Ltd., is a borrower availing cash credit facility of ` 110 Lakh 
against security of paid stocks and debtors up to 90 days. Margin stipulated was 
25% of stock as and 40% for debtors. Bank has calculated drawing power based 
on following information provided by XYZ Ltd.  
Particulars Amount (`) 
Value of Stocks (as on 31.12.2023) 130 Lakh 
Value of Debtors (as on 31.12.2023) 75 Lakh 
Value of stocks (Fully damaged and included in (i) above) 7 Lakh 
Value of Debtors (exceeding 90 days included in (ii) above) 10 Lakh 
Value of creditors for goods 60 Lakh 
Also, the outstanding balance in one of the Loan accounts was ` 25 Lakh and the 
realisable value of the security as assessed by the bank / approved valuers was 
` 2.25 Lakh. Bank identified the same as erosion in the value of security. It was 
classified as doubtful category and provision was made for the doubtful assets. A 
discussion also took place among the team members regarding issuance of the 
audit reports after completion of the bank audit and annexure to the same such as 
Long Form Audit Report, Report on compliance with SLR Requirements, Report on 
133
Treasury Operations – as per RBI guidelines, Report on compliance as per Ghosh 
committee recommendations and Report on adverse credit - lending ratio in the 
rural areas, etc. 
Based on the above facts, answer the following: - 
1. With respect to the overdraft facility sanctioned to Times Ltd., the account
would be termed as out of order if:
(i) The outstanding balance remains continuously in excess of ` 75 Lakh.
(ii) The outstanding balance remains continuously in excess of ` 50 Lakh.
(iii) The outstanding balance in the account is less than ` 75 Lakh but there
are no credits or payments deposited into the account continuously
for 90 days as on balance sheet date
(iv) The outstanding balance is less than ` 50 Lakh.
Choose the correct option from below:
(a) (i), (ii) and (iii)
(b) (i), (iii) and (iv)
(c) (ii),(iii) and (iv)
(d) (iii) and (iv)
2. Which of the treatment by the bank on the provisioning and income recognition
is correct in case of bank guarantee given by the Central Government and
State Government?
(a) Both (i) and (ii) are correct
(b) Only (ii) is correct
(c) Only (i) is correct
(d) Both (i) and (ii) are incorrect.
3. In the given case drawing power of the borrower XYZ Limited should be:
(a) ` 86.25 Lakh
(b) ` 76.35 Lakh
(c) ` 96.25 Lakh
(d) ` 85.45 Lakh
4. The Bank has identified an erosion in the value of security and made provision
for doubtful assets. Whether the treatment by bank for the doubtful asset is
correct?
(a) Yes. The security should be classified under doubtful category. It may
be either written off or fully provided by the bank.
(b) No. The existence of such security should be ignored, and the asset
should straight away be classified as loss asset. It may be either written
off or fully provided by the bank.
134
(c) Yes. The security should be classified under doubtful category and
provisioning should be made as applicable for doubtful assets.
(d) No. The existence of the security should be ignored, and the asset
should straight away be classified as loss asset. Provisioning should be
made for doubtful assets.
5. The Statutory Central Auditors of a bank must furnish, in addition to the main
audit report, various other audit reports. From the options, choose the audit
reports that M/s Vishwacharya and Associates shall furnish.
(i) Long Form Audit Report
(ii) Report on compliance with SLR Requirements
(iii) Report on Treasury Operations – as per RBI guidelines
(iv) Report on compliance as per Ghosh committee recommendations
(v) Report on adverse credit - lending ratio in the rural areas.
Choose the correct answer:
(a) (i), (ii),(iii),(iv) and(v)
(b) Only (i),(ii),(iii) and (iv)
(c) Only (i),(ii) and (iii)
(d) Only (i),(ii) and (v)
Case Scenario 2 
Priority Limited is a large company engaged in manufacturing of terry towels 
making steady profits on a year-to-year basis. PMR & Associates, statutory auditors 
of the company since last two years, are in process of establishing audit strategy 
for conducting statutory audit under Companies Act, 2013 for year 2023-24. 
The company has 5 branches which are audited by independent auditors appointed 
under Companies Act, 2013. It also has a wholly owned subsidiary company which 
is audited by another audit firm under name of JKL & Associates.  The engagement 
team has noticed that company has maintained several bank accounts and there 
is substantial movement in fixed deposits during the year leading to risk of 
misstatement in cash and cash equivalents. The engagement team has planned 
procedures regarding the same. 
(i) At planning stage, engagement partner is also trying to set materiality for
financial statements as a whole.  The following information extracted from
financial statements is given as under: -
Particulars (Amount in ` crores) 
Revenue 100 
Total Assets 40 
Profit before Tax 8 
Total Liabilities (excluding Equity) 30 
135
Page 4


MODEL TEST PAPER 4 
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 
M/s Vishwacharya and Associates, a CA firm based in Orissa, is appointed as an 
auditor of CBF Bank for the financial year 2023-24. During the course of audit, it 
came to notice that CBF Bank has sanctioned an overdraft facility of ` 75 lakh to 
Times Ltd. However, as per the stock statement furnished for the last quarter, the 
drawing power was calculated to be ` 50 lakh. It was observed that few advances 
were guaranteed by the: 
(i) Central Government as part of ‘Make in India’ initiative. However, the
guarantee was not invoked, and the advances were overdue by 75 days.
These advances were classified as standard assets and were regarded as
NPA for income recognition purpose.
(ii) State Government as part of power generation initiative. However, the
guarantee was not invoked, and the advances were overdue by 80 days.
These advances were also classified as standard assets and were regarded
as NPA for income recognition purpose.
Additionally, XYZ Ltd., is a borrower availing cash credit facility of ` 110 Lakh 
against security of paid stocks and debtors up to 90 days. Margin stipulated was 
25% of stock as and 40% for debtors. Bank has calculated drawing power based 
on following information provided by XYZ Ltd.  
Particulars Amount (`) 
Value of Stocks (as on 31.12.2023) 130 Lakh 
Value of Debtors (as on 31.12.2023) 75 Lakh 
Value of stocks (Fully damaged and included in (i) above) 7 Lakh 
Value of Debtors (exceeding 90 days included in (ii) above) 10 Lakh 
Value of creditors for goods 60 Lakh 
Also, the outstanding balance in one of the Loan accounts was ` 25 Lakh and the 
realisable value of the security as assessed by the bank / approved valuers was 
` 2.25 Lakh. Bank identified the same as erosion in the value of security. It was 
classified as doubtful category and provision was made for the doubtful assets. A 
discussion also took place among the team members regarding issuance of the 
audit reports after completion of the bank audit and annexure to the same such as 
Long Form Audit Report, Report on compliance with SLR Requirements, Report on 
133
Treasury Operations – as per RBI guidelines, Report on compliance as per Ghosh 
committee recommendations and Report on adverse credit - lending ratio in the 
rural areas, etc. 
Based on the above facts, answer the following: - 
1. With respect to the overdraft facility sanctioned to Times Ltd., the account
would be termed as out of order if:
(i) The outstanding balance remains continuously in excess of ` 75 Lakh.
(ii) The outstanding balance remains continuously in excess of ` 50 Lakh.
(iii) The outstanding balance in the account is less than ` 75 Lakh but there
are no credits or payments deposited into the account continuously
for 90 days as on balance sheet date
(iv) The outstanding balance is less than ` 50 Lakh.
Choose the correct option from below:
(a) (i), (ii) and (iii)
(b) (i), (iii) and (iv)
(c) (ii),(iii) and (iv)
(d) (iii) and (iv)
2. Which of the treatment by the bank on the provisioning and income recognition
is correct in case of bank guarantee given by the Central Government and
State Government?
(a) Both (i) and (ii) are correct
(b) Only (ii) is correct
(c) Only (i) is correct
(d) Both (i) and (ii) are incorrect.
3. In the given case drawing power of the borrower XYZ Limited should be:
(a) ` 86.25 Lakh
(b) ` 76.35 Lakh
(c) ` 96.25 Lakh
(d) ` 85.45 Lakh
4. The Bank has identified an erosion in the value of security and made provision
for doubtful assets. Whether the treatment by bank for the doubtful asset is
correct?
(a) Yes. The security should be classified under doubtful category. It may
be either written off or fully provided by the bank.
(b) No. The existence of such security should be ignored, and the asset
should straight away be classified as loss asset. It may be either written
off or fully provided by the bank.
134
(c) Yes. The security should be classified under doubtful category and
provisioning should be made as applicable for doubtful assets.
(d) No. The existence of the security should be ignored, and the asset
should straight away be classified as loss asset. Provisioning should be
made for doubtful assets.
5. The Statutory Central Auditors of a bank must furnish, in addition to the main
audit report, various other audit reports. From the options, choose the audit
reports that M/s Vishwacharya and Associates shall furnish.
(i) Long Form Audit Report
(ii) Report on compliance with SLR Requirements
(iii) Report on Treasury Operations – as per RBI guidelines
(iv) Report on compliance as per Ghosh committee recommendations
(v) Report on adverse credit - lending ratio in the rural areas.
Choose the correct answer:
(a) (i), (ii),(iii),(iv) and(v)
(b) Only (i),(ii),(iii) and (iv)
(c) Only (i),(ii) and (iii)
(d) Only (i),(ii) and (v)
Case Scenario 2 
Priority Limited is a large company engaged in manufacturing of terry towels 
making steady profits on a year-to-year basis. PMR & Associates, statutory auditors 
of the company since last two years, are in process of establishing audit strategy 
for conducting statutory audit under Companies Act, 2013 for year 2023-24. 
The company has 5 branches which are audited by independent auditors appointed 
under Companies Act, 2013. It also has a wholly owned subsidiary company which 
is audited by another audit firm under name of JKL & Associates.  The engagement 
team has noticed that company has maintained several bank accounts and there 
is substantial movement in fixed deposits during the year leading to risk of 
misstatement in cash and cash equivalents. The engagement team has planned 
procedures regarding the same. 
(i) At planning stage, engagement partner is also trying to set materiality for
financial statements as a whole.  The following information extracted from
financial statements is given as under: -
Particulars (Amount in ` crores) 
Revenue 100 
Total Assets 40 
Profit before Tax 8 
Total Liabilities (excluding Equity) 30 
135
(ii) While designing a sample for verifying revenues of company as part of tests 
of details, engagement partner has determined “tolerable misstatement” for  
` 5.00 Lakh in order to address the risk that aggregate of individual immaterial 
misstatements may cause the financial statements to be materially misstated 
and provide a margin for possible undetected misstatements. One of the 
newly joined engagement team members has little conceptual understanding 
of “tolerable misstatement” determined by engagement partner. He also has 
no idea of the effect of change in tolerable misstatement on sample size. 
(iii) During course of audit, while performing tests of details, engagement team 
has come across certain misstatements in selected sample pertaining to 
verification of revenues. The team has projected misstatements to population 
of revenues. The team wants to comply with the Standards on Auditing strictly. 
Based on the above facts, answer the following: - 
6.  The auditors of company are in process of establishing audit strategy. Which 
of the following is not a relevant factor in establishing overall audit strategy in 
the given case scenario? 
(a) Consideration of 5 branches which are audited by independent auditors 
(b)  Consideration of wholly owned subsidiary company audited by another 
audit firm 
(c)  Expected time of holding AGM in accordance with provisions of 
Companies Act, 2013 
(d)  Nature, timing and extent of planned procedures for cash and cash 
equivalents 
7. For Priority limited, which benchmark would the engagement partner most 
likely to use for setting materiality for the financial statements as a whole? 
(a)  A percentage of Revenue 
(b)  A percentage of Total assets 
(c) A percentage of Profit before tax 
(d) A percentage of Total liabilities (excluding equity) 
8. In the given case scenario, assume that the engagement partner has decided 
to increase tolerable misstatement to ` 10.00 Lakh while designing sample 
described. Select the correct statement. 
(a) It would lead to decrease in sample size. 
(b)  It would lead to an increase in sample size. 
(c)  It would have no effect on sample size. 
(d)  It is not possible to draw inference on sample size due to increase in 
tolerable misstatement. 
9. While performing procedures on designed sample, the engagement team 
identified certain misstatements in selected sample and projected these to the 
entire population of revenues.  According to the requirements of the Standards 
on Auditing, which statement is correct in this regard? 
136
Page 5


MODEL TEST PAPER 4 
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 
M/s Vishwacharya and Associates, a CA firm based in Orissa, is appointed as an 
auditor of CBF Bank for the financial year 2023-24. During the course of audit, it 
came to notice that CBF Bank has sanctioned an overdraft facility of ` 75 lakh to 
Times Ltd. However, as per the stock statement furnished for the last quarter, the 
drawing power was calculated to be ` 50 lakh. It was observed that few advances 
were guaranteed by the: 
(i) Central Government as part of ‘Make in India’ initiative. However, the
guarantee was not invoked, and the advances were overdue by 75 days.
These advances were classified as standard assets and were regarded as
NPA for income recognition purpose.
(ii) State Government as part of power generation initiative. However, the
guarantee was not invoked, and the advances were overdue by 80 days.
These advances were also classified as standard assets and were regarded
as NPA for income recognition purpose.
Additionally, XYZ Ltd., is a borrower availing cash credit facility of ` 110 Lakh 
against security of paid stocks and debtors up to 90 days. Margin stipulated was 
25% of stock as and 40% for debtors. Bank has calculated drawing power based 
on following information provided by XYZ Ltd.  
Particulars Amount (`) 
Value of Stocks (as on 31.12.2023) 130 Lakh 
Value of Debtors (as on 31.12.2023) 75 Lakh 
Value of stocks (Fully damaged and included in (i) above) 7 Lakh 
Value of Debtors (exceeding 90 days included in (ii) above) 10 Lakh 
Value of creditors for goods 60 Lakh 
Also, the outstanding balance in one of the Loan accounts was ` 25 Lakh and the 
realisable value of the security as assessed by the bank / approved valuers was 
` 2.25 Lakh. Bank identified the same as erosion in the value of security. It was 
classified as doubtful category and provision was made for the doubtful assets. A 
discussion also took place among the team members regarding issuance of the 
audit reports after completion of the bank audit and annexure to the same such as 
Long Form Audit Report, Report on compliance with SLR Requirements, Report on 
133
Treasury Operations – as per RBI guidelines, Report on compliance as per Ghosh 
committee recommendations and Report on adverse credit - lending ratio in the 
rural areas, etc. 
Based on the above facts, answer the following: - 
1. With respect to the overdraft facility sanctioned to Times Ltd., the account
would be termed as out of order if:
(i) The outstanding balance remains continuously in excess of ` 75 Lakh.
(ii) The outstanding balance remains continuously in excess of ` 50 Lakh.
(iii) The outstanding balance in the account is less than ` 75 Lakh but there
are no credits or payments deposited into the account continuously
for 90 days as on balance sheet date
(iv) The outstanding balance is less than ` 50 Lakh.
Choose the correct option from below:
(a) (i), (ii) and (iii)
(b) (i), (iii) and (iv)
(c) (ii),(iii) and (iv)
(d) (iii) and (iv)
2. Which of the treatment by the bank on the provisioning and income recognition
is correct in case of bank guarantee given by the Central Government and
State Government?
(a) Both (i) and (ii) are correct
(b) Only (ii) is correct
(c) Only (i) is correct
(d) Both (i) and (ii) are incorrect.
3. In the given case drawing power of the borrower XYZ Limited should be:
(a) ` 86.25 Lakh
(b) ` 76.35 Lakh
(c) ` 96.25 Lakh
(d) ` 85.45 Lakh
4. The Bank has identified an erosion in the value of security and made provision
for doubtful assets. Whether the treatment by bank for the doubtful asset is
correct?
(a) Yes. The security should be classified under doubtful category. It may
be either written off or fully provided by the bank.
(b) No. The existence of such security should be ignored, and the asset
should straight away be classified as loss asset. It may be either written
off or fully provided by the bank.
134
(c) Yes. The security should be classified under doubtful category and
provisioning should be made as applicable for doubtful assets.
(d) No. The existence of the security should be ignored, and the asset
should straight away be classified as loss asset. Provisioning should be
made for doubtful assets.
5. The Statutory Central Auditors of a bank must furnish, in addition to the main
audit report, various other audit reports. From the options, choose the audit
reports that M/s Vishwacharya and Associates shall furnish.
(i) Long Form Audit Report
(ii) Report on compliance with SLR Requirements
(iii) Report on Treasury Operations – as per RBI guidelines
(iv) Report on compliance as per Ghosh committee recommendations
(v) Report on adverse credit - lending ratio in the rural areas.
Choose the correct answer:
(a) (i), (ii),(iii),(iv) and(v)
(b) Only (i),(ii),(iii) and (iv)
(c) Only (i),(ii) and (iii)
(d) Only (i),(ii) and (v)
Case Scenario 2 
Priority Limited is a large company engaged in manufacturing of terry towels 
making steady profits on a year-to-year basis. PMR & Associates, statutory auditors 
of the company since last two years, are in process of establishing audit strategy 
for conducting statutory audit under Companies Act, 2013 for year 2023-24. 
The company has 5 branches which are audited by independent auditors appointed 
under Companies Act, 2013. It also has a wholly owned subsidiary company which 
is audited by another audit firm under name of JKL & Associates.  The engagement 
team has noticed that company has maintained several bank accounts and there 
is substantial movement in fixed deposits during the year leading to risk of 
misstatement in cash and cash equivalents. The engagement team has planned 
procedures regarding the same. 
(i) At planning stage, engagement partner is also trying to set materiality for
financial statements as a whole.  The following information extracted from
financial statements is given as under: -
Particulars (Amount in ` crores) 
Revenue 100 
Total Assets 40 
Profit before Tax 8 
Total Liabilities (excluding Equity) 30 
135
(ii) While designing a sample for verifying revenues of company as part of tests 
of details, engagement partner has determined “tolerable misstatement” for  
` 5.00 Lakh in order to address the risk that aggregate of individual immaterial 
misstatements may cause the financial statements to be materially misstated 
and provide a margin for possible undetected misstatements. One of the 
newly joined engagement team members has little conceptual understanding 
of “tolerable misstatement” determined by engagement partner. He also has 
no idea of the effect of change in tolerable misstatement on sample size. 
(iii) During course of audit, while performing tests of details, engagement team 
has come across certain misstatements in selected sample pertaining to 
verification of revenues. The team has projected misstatements to population 
of revenues. The team wants to comply with the Standards on Auditing strictly. 
Based on the above facts, answer the following: - 
6.  The auditors of company are in process of establishing audit strategy. Which 
of the following is not a relevant factor in establishing overall audit strategy in 
the given case scenario? 
(a) Consideration of 5 branches which are audited by independent auditors 
(b)  Consideration of wholly owned subsidiary company audited by another 
audit firm 
(c)  Expected time of holding AGM in accordance with provisions of 
Companies Act, 2013 
(d)  Nature, timing and extent of planned procedures for cash and cash 
equivalents 
7. For Priority limited, which benchmark would the engagement partner most 
likely to use for setting materiality for the financial statements as a whole? 
(a)  A percentage of Revenue 
(b)  A percentage of Total assets 
(c) A percentage of Profit before tax 
(d) A percentage of Total liabilities (excluding equity) 
8. In the given case scenario, assume that the engagement partner has decided 
to increase tolerable misstatement to ` 10.00 Lakh while designing sample 
described. Select the correct statement. 
(a) It would lead to decrease in sample size. 
(b)  It would lead to an increase in sample size. 
(c)  It would have no effect on sample size. 
(d)  It is not possible to draw inference on sample size due to increase in 
tolerable misstatement. 
9. While performing procedures on designed sample, the engagement team 
identified certain misstatements in selected sample and projected these to the 
entire population of revenues.  According to the requirements of the Standards 
on Auditing, which statement is correct in this regard? 
136
(a) Anomalous misstatement is auditor’s best estimate of misstatement in
population.
(b) The projected misstatement plus anomalous misstatement, if any, is best
estimate of misstatement in population.
(c) When projected misstatement exceeds tolerable misstatement, sample
provides a reasonable basis for conclusion about tested population.
(d) When projected misstatement plus anomalous statement, if any,
exceeds tolerable misstatement, sample provides a reasonable basis for
conclusion about tested population.
Case Scenario 3 
Bandhu Charitable Trust is considering appointment of MNO & Associates, 
Chartered Accountants, as independent auditors of its financial statements. The 
Trust is engaged in providing affordable healthcare services. It is in interest of both 
auditor and client to issue an engagement letter so that the possibility of 
misunderstanding is reduced to a great extent. It is, therefore, important that each 
party should be clear about nature of engagement. It should exactly specify the 
scope of work. Such an “engagement letter” is exchanged between Trust 
management and auditors.  
While performing audit procedures, it is noticed by auditors that bills of two vehicles 
are not in name of Trust but in name of trustees. However, payment of these 
vehicles was made from bank account of Trust. The said vehicles are used for 
activities of Trust. 
It is also noticed that a sum of ` 50.00 Lakh is reflected in Trust’s financial 
statements in name of Gamma Instrument and Equipment in schedule of creditors. 
The said amount is outstanding since two years. The auditors sent confirmation 
request to the said supplier and seek management’s co-operation in this regard. 
However, management of the Trust informs the auditor regarding certain dispute 
going on with the supplier of equipment due to some quality issues. It is further 
informed that dispute is near settlement and it would not be proper to send 
confirmation request as it can affect negotiation process.  
Based on the above facts, answer the following: - 
10. As regards exchange of engagement letter between Trust management and
auditors is concerned, which of following statements is likely to be true?
(a) Engagement letter is sent by MNO & Associates to Bandhu Charitable
Trust. It includes reference to the expected form and content of report to
be issued by them and a statement that there may be circumstances in
which such report may differ from its expected form and content.
(b) Engagement letter is sent by Bandhu Charitable Trust to MNO &
Associates. It includes reference to the expected form and content of
report to be issued by auditors. However, it does not include a statement
that such report may differ from its expected form and content.
(c) Engagement letter is sent by MNO & Associates to Bandhu Charitable
Trust. It includes reference to expected form and content of report to be
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