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

 Page 1


ANSWERS OF MODEL TEST PAPER 5
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
Part I - Multiple Choice Questions 
1. (b)
2. (c)
3. (c)
4. (d)
5. (c)
6. (b)
7. (b)
8. (a)
9. (a)
10. (b)
11. (a)
12. (a)
13. (c)
14. (b)
15. (d)
Part II - Descriptive Answers 
1. (a)  Misstatement refers to a difference between the amount, classification,
presentation, or disclosure of a reported financial statement item and the 
amount, classification, presentation, or disclosure that is required for the 
item to be in accordance with the applicable financial reporting 
framework. 
In the given situation, there is a difference in amount to be recorded as 
well as in disclosure of a financial statement item from what is required 
in accordance with applicable financial reporting framework. The 
company should have recorded gross amount of dividend and interest 
amounting to ? 2.00 lakhs and ? 3.00 lakhs respectively in its financial 
statements in accordance with AS 13. Therefore, amount recorded under 
459
Page 2


ANSWERS OF MODEL TEST PAPER 5
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
Part I - Multiple Choice Questions 
1. (b)
2. (c)
3. (c)
4. (d)
5. (c)
6. (b)
7. (b)
8. (a)
9. (a)
10. (b)
11. (a)
12. (a)
13. (c)
14. (b)
15. (d)
Part II - Descriptive Answers 
1. (a)  Misstatement refers to a difference between the amount, classification,
presentation, or disclosure of a reported financial statement item and the 
amount, classification, presentation, or disclosure that is required for the 
item to be in accordance with the applicable financial reporting 
framework. 
In the given situation, there is a difference in amount to be recorded as 
well as in disclosure of a financial statement item from what is required 
in accordance with applicable financial reporting framework. The 
company should have recorded gross amount of dividend and interest 
amounting to ? 2.00 lakhs and ? 3.00 lakhs respectively in its financial 
statements in accordance with AS 13. Therefore, amount recorded under 
459
head “Other income” should have been for ? 10 lakhs (2 lakhs+3 lakhs+5 
lakhs). 
Further, in accordance with disclosure requirements of Schedule III of 
the Companies Act, 2013, other income shall be classified in the above 
situation as: - 
(a) Interest Income of ? 3 lakhs
(b) Dividend Income of ? 2 lakhs
(c) Net gain on sale of investments of ? 5 lakhs
Few examples of misstatements are:
? Charging of an item of capital expenditure to revenue or vice-versa.
? Difference in disclosure of a financial statement item vis-à-vis its
requirement in applicable financial reporting framework.
? Selection or application of inappropriate accounting policies.
? Difference in accounting estimate of a financial statement item vis-
à-vis its appropriateness in applicable financial reporting
framework.
? Intentional booking of fake expenses in statement of profit and loss.
? Overstating of receivables in the financial statements by not writing
off irrecoverable debts.
? Overstating or understating inventories.
(b) In the given case, method of sampling being used in software is known
as interval sampling or systematic sampling. It is a selection method in
which the number of sampling units in the population is divided by the
sample size to give a sampling interval.
Sampling interval =  Sampling units in population/Sample size
i.e 1000/100
Sampling interval  = 10 
Records selected  = 100 
Software would pick every 10th record from 1 to 1000 records. 
When using this method, the auditor would need to determine that 
sampling units within the population are not structured in such a way that 
the sampling interval corresponds with a particular pattern in the 
population. 
Further, partner of CA Z suggested him to select the first 200 sales 
invoices from the sales book for the last month.  He is suggesting him 
block sampling for sales, this method involves selection of a block(s) of 
contiguous items from within the population. 
(c) Maintaining professional skepticism throughout audit is necessary if
auditor is to reduce risks of overlooking unusual circumstances and
460
Page 3


ANSWERS OF MODEL TEST PAPER 5
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
Part I - Multiple Choice Questions 
1. (b)
2. (c)
3. (c)
4. (d)
5. (c)
6. (b)
7. (b)
8. (a)
9. (a)
10. (b)
11. (a)
12. (a)
13. (c)
14. (b)
15. (d)
Part II - Descriptive Answers 
1. (a)  Misstatement refers to a difference between the amount, classification,
presentation, or disclosure of a reported financial statement item and the 
amount, classification, presentation, or disclosure that is required for the 
item to be in accordance with the applicable financial reporting 
framework. 
In the given situation, there is a difference in amount to be recorded as 
well as in disclosure of a financial statement item from what is required 
in accordance with applicable financial reporting framework. The 
company should have recorded gross amount of dividend and interest 
amounting to ? 2.00 lakhs and ? 3.00 lakhs respectively in its financial 
statements in accordance with AS 13. Therefore, amount recorded under 
459
head “Other income” should have been for ? 10 lakhs (2 lakhs+3 lakhs+5 
lakhs). 
Further, in accordance with disclosure requirements of Schedule III of 
the Companies Act, 2013, other income shall be classified in the above 
situation as: - 
(a) Interest Income of ? 3 lakhs
(b) Dividend Income of ? 2 lakhs
(c) Net gain on sale of investments of ? 5 lakhs
Few examples of misstatements are:
? Charging of an item of capital expenditure to revenue or vice-versa.
? Difference in disclosure of a financial statement item vis-à-vis its
requirement in applicable financial reporting framework.
? Selection or application of inappropriate accounting policies.
? Difference in accounting estimate of a financial statement item vis-
à-vis its appropriateness in applicable financial reporting
framework.
? Intentional booking of fake expenses in statement of profit and loss.
? Overstating of receivables in the financial statements by not writing
off irrecoverable debts.
? Overstating or understating inventories.
(b) In the given case, method of sampling being used in software is known
as interval sampling or systematic sampling. It is a selection method in
which the number of sampling units in the population is divided by the
sample size to give a sampling interval.
Sampling interval =  Sampling units in population/Sample size
i.e 1000/100
Sampling interval  = 10 
Records selected  = 100 
Software would pick every 10th record from 1 to 1000 records. 
When using this method, the auditor would need to determine that 
sampling units within the population are not structured in such a way that 
the sampling interval corresponds with a particular pattern in the 
population. 
Further, partner of CA Z suggested him to select the first 200 sales 
invoices from the sales book for the last month.  He is suggesting him 
block sampling for sales, this method involves selection of a block(s) of 
contiguous items from within the population. 
(c) Maintaining professional skepticism throughout audit is necessary if
auditor is to reduce risks of overlooking unusual circumstances and
460
using inappropriate assumptions in determining the nature, time and 
extent of audit procedures and evaluating results thereof.  
In the given situation, revenue from operations of the company have 
increased from ? 80 crores to ?100 crores despite its operations being 
affected by fire for about two months. Further, despite loss of inventories 
to the tune of ? 5 crores, financial statements reflect increase in net profit 
before tax from 7.5% in year 2022-23 to 10% in year 2023-24. Thus, 
approach of CA D lacks professional skepticism. 
In spite of these unusual circumstances, the auditor has decided to rely 
upon same tests of details as performed in the previous years. The 
nature and extent of audit procedures need to be suitably altered 
considering changed circumstances.  He may include substantive 
analytical procedures to analyse variations and seek necessary 
explanations from management. In case of doubt about the reliability of 
information or indications of possible fraud, Standards on Auditing 
require auditor to determine what modifications or additions to audit 
procedures are necessary to resolve the matter. CA D, the auditor of a 
listed company, shall document the overall audit strategy, the audit plan 
and any significant changes made during the audit engagement to the 
overall audit strategy or the audit plan, and the reasons for such 
changes. 
2. (a)  Three examples of assurance engagements are as under :-
(i) Audit of financial statements
An audit of financial statements provides reasonable assurance
about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework.
(ii) Review of financial statements
Review provides lower level of assurance than audit. Further,
review involves fewer procedures and gathers sufficient
appropriate evidence on the basis of which limited conclusions can
be drawn up.
(iii) Examination of prospective financial information
In assurance reports involving prospective financial information,
the practitioner obtains sufficient appropriate evidence to the effect
that management’s assumptions on which the prospective financial
information is based are not unreasonable, the prospective
financial information is properly prepared on the basis of the
assumptions and it is properly presented and all material
assumptions are adequately disclosed. Such type of assurance
engagement provides a moderate assurance.
461
Page 4


ANSWERS OF MODEL TEST PAPER 5
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
Part I - Multiple Choice Questions 
1. (b)
2. (c)
3. (c)
4. (d)
5. (c)
6. (b)
7. (b)
8. (a)
9. (a)
10. (b)
11. (a)
12. (a)
13. (c)
14. (b)
15. (d)
Part II - Descriptive Answers 
1. (a)  Misstatement refers to a difference between the amount, classification,
presentation, or disclosure of a reported financial statement item and the 
amount, classification, presentation, or disclosure that is required for the 
item to be in accordance with the applicable financial reporting 
framework. 
In the given situation, there is a difference in amount to be recorded as 
well as in disclosure of a financial statement item from what is required 
in accordance with applicable financial reporting framework. The 
company should have recorded gross amount of dividend and interest 
amounting to ? 2.00 lakhs and ? 3.00 lakhs respectively in its financial 
statements in accordance with AS 13. Therefore, amount recorded under 
459
head “Other income” should have been for ? 10 lakhs (2 lakhs+3 lakhs+5 
lakhs). 
Further, in accordance with disclosure requirements of Schedule III of 
the Companies Act, 2013, other income shall be classified in the above 
situation as: - 
(a) Interest Income of ? 3 lakhs
(b) Dividend Income of ? 2 lakhs
(c) Net gain on sale of investments of ? 5 lakhs
Few examples of misstatements are:
? Charging of an item of capital expenditure to revenue or vice-versa.
? Difference in disclosure of a financial statement item vis-à-vis its
requirement in applicable financial reporting framework.
? Selection or application of inappropriate accounting policies.
? Difference in accounting estimate of a financial statement item vis-
à-vis its appropriateness in applicable financial reporting
framework.
? Intentional booking of fake expenses in statement of profit and loss.
? Overstating of receivables in the financial statements by not writing
off irrecoverable debts.
? Overstating or understating inventories.
(b) In the given case, method of sampling being used in software is known
as interval sampling or systematic sampling. It is a selection method in
which the number of sampling units in the population is divided by the
sample size to give a sampling interval.
Sampling interval =  Sampling units in population/Sample size
i.e 1000/100
Sampling interval  = 10 
Records selected  = 100 
Software would pick every 10th record from 1 to 1000 records. 
When using this method, the auditor would need to determine that 
sampling units within the population are not structured in such a way that 
the sampling interval corresponds with a particular pattern in the 
population. 
Further, partner of CA Z suggested him to select the first 200 sales 
invoices from the sales book for the last month.  He is suggesting him 
block sampling for sales, this method involves selection of a block(s) of 
contiguous items from within the population. 
(c) Maintaining professional skepticism throughout audit is necessary if
auditor is to reduce risks of overlooking unusual circumstances and
460
using inappropriate assumptions in determining the nature, time and 
extent of audit procedures and evaluating results thereof.  
In the given situation, revenue from operations of the company have 
increased from ? 80 crores to ?100 crores despite its operations being 
affected by fire for about two months. Further, despite loss of inventories 
to the tune of ? 5 crores, financial statements reflect increase in net profit 
before tax from 7.5% in year 2022-23 to 10% in year 2023-24. Thus, 
approach of CA D lacks professional skepticism. 
In spite of these unusual circumstances, the auditor has decided to rely 
upon same tests of details as performed in the previous years. The 
nature and extent of audit procedures need to be suitably altered 
considering changed circumstances.  He may include substantive 
analytical procedures to analyse variations and seek necessary 
explanations from management. In case of doubt about the reliability of 
information or indications of possible fraud, Standards on Auditing 
require auditor to determine what modifications or additions to audit 
procedures are necessary to resolve the matter. CA D, the auditor of a 
listed company, shall document the overall audit strategy, the audit plan 
and any significant changes made during the audit engagement to the 
overall audit strategy or the audit plan, and the reasons for such 
changes. 
2. (a)  Three examples of assurance engagements are as under :-
(i) Audit of financial statements
An audit of financial statements provides reasonable assurance
about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework.
(ii) Review of financial statements
Review provides lower level of assurance than audit. Further,
review involves fewer procedures and gathers sufficient
appropriate evidence on the basis of which limited conclusions can
be drawn up.
(iii) Examination of prospective financial information
In assurance reports involving prospective financial information,
the practitioner obtains sufficient appropriate evidence to the effect
that management’s assumptions on which the prospective financial
information is based are not unreasonable, the prospective
financial information is properly prepared on the basis of the
assumptions and it is properly presented and all material
assumptions are adequately disclosed. Such type of assurance
engagement provides a moderate assurance.
461
(b) (i) When the auditor includes an Emphasis of Matter (EOM) paragraph
in the auditor’s report, the auditor shall:- 
(a) include the paragraph within a separate section of the
auditor’s report with an appropriate heading that includes the
term “Emphasis of Matter”
(b) include in the paragraph a clear reference to the matter being
emphasized and to where relevant disclosures that fully
describe the matter can be found in the financial statements.
The paragraph shall refer only to information presented or
disclosed in the financial statements and
(c) indicate that the auditor’s opinion is not modified in respect of
the matter emphasized.
(ii) Examples of circumstances where the auditor may consider it
necessary to include an Emphasis of Matter (EOM) paragraph are:
? An uncertainty relating to the future outcome of exceptional
litigation or regulatory action.
? A significant subsequent event that occurs between the date
of the financial statements and the date of the auditor’s report.
? Early application (where permitted) of a new accounting
standard that has a material effect on the financial statements.
? A major catastrophe that has had, or continues to have, a
significant effect on the entity’s financial position.
(c) The auditor’s determination of materiality is a matter of professional
judgment and is affected by the auditor’s perception of the financial
information needs of users of the financial statements. In this context, it
is reasonable for CA Y, the auditor, to assume that users: -
(a) Have a reasonable knowledge of business and economic activities
and accounting and a willingness to study the information in the
financial statements with reasonable diligence
(b) Understand that financial statements are prepared, presented and
audited to levels of materiality
(c) Recognize the uncertainties inherent in the measurement of
amounts based on the use of estimates, judgment and the
consideration of future events and
(d) Make reasonable economic decisions on the basis of the
information in the financial statements.
3. (a)  In a banking environment, there exist documentary evidence containing
observations/comments on advances which can be useful to the 
statutory branch auditor in performing an effective audit. CA Amrish, the 
auditor should take into account the adverse comments, if any, on 
advances appearing in the following:- 
462
Page 5


ANSWERS OF MODEL TEST PAPER 5
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
Part I - Multiple Choice Questions 
1. (b)
2. (c)
3. (c)
4. (d)
5. (c)
6. (b)
7. (b)
8. (a)
9. (a)
10. (b)
11. (a)
12. (a)
13. (c)
14. (b)
15. (d)
Part II - Descriptive Answers 
1. (a)  Misstatement refers to a difference between the amount, classification,
presentation, or disclosure of a reported financial statement item and the 
amount, classification, presentation, or disclosure that is required for the 
item to be in accordance with the applicable financial reporting 
framework. 
In the given situation, there is a difference in amount to be recorded as 
well as in disclosure of a financial statement item from what is required 
in accordance with applicable financial reporting framework. The 
company should have recorded gross amount of dividend and interest 
amounting to ? 2.00 lakhs and ? 3.00 lakhs respectively in its financial 
statements in accordance with AS 13. Therefore, amount recorded under 
459
head “Other income” should have been for ? 10 lakhs (2 lakhs+3 lakhs+5 
lakhs). 
Further, in accordance with disclosure requirements of Schedule III of 
the Companies Act, 2013, other income shall be classified in the above 
situation as: - 
(a) Interest Income of ? 3 lakhs
(b) Dividend Income of ? 2 lakhs
(c) Net gain on sale of investments of ? 5 lakhs
Few examples of misstatements are:
? Charging of an item of capital expenditure to revenue or vice-versa.
? Difference in disclosure of a financial statement item vis-à-vis its
requirement in applicable financial reporting framework.
? Selection or application of inappropriate accounting policies.
? Difference in accounting estimate of a financial statement item vis-
à-vis its appropriateness in applicable financial reporting
framework.
? Intentional booking of fake expenses in statement of profit and loss.
? Overstating of receivables in the financial statements by not writing
off irrecoverable debts.
? Overstating or understating inventories.
(b) In the given case, method of sampling being used in software is known
as interval sampling or systematic sampling. It is a selection method in
which the number of sampling units in the population is divided by the
sample size to give a sampling interval.
Sampling interval =  Sampling units in population/Sample size
i.e 1000/100
Sampling interval  = 10 
Records selected  = 100 
Software would pick every 10th record from 1 to 1000 records. 
When using this method, the auditor would need to determine that 
sampling units within the population are not structured in such a way that 
the sampling interval corresponds with a particular pattern in the 
population. 
Further, partner of CA Z suggested him to select the first 200 sales 
invoices from the sales book for the last month.  He is suggesting him 
block sampling for sales, this method involves selection of a block(s) of 
contiguous items from within the population. 
(c) Maintaining professional skepticism throughout audit is necessary if
auditor is to reduce risks of overlooking unusual circumstances and
460
using inappropriate assumptions in determining the nature, time and 
extent of audit procedures and evaluating results thereof.  
In the given situation, revenue from operations of the company have 
increased from ? 80 crores to ?100 crores despite its operations being 
affected by fire for about two months. Further, despite loss of inventories 
to the tune of ? 5 crores, financial statements reflect increase in net profit 
before tax from 7.5% in year 2022-23 to 10% in year 2023-24. Thus, 
approach of CA D lacks professional skepticism. 
In spite of these unusual circumstances, the auditor has decided to rely 
upon same tests of details as performed in the previous years. The 
nature and extent of audit procedures need to be suitably altered 
considering changed circumstances.  He may include substantive 
analytical procedures to analyse variations and seek necessary 
explanations from management. In case of doubt about the reliability of 
information or indications of possible fraud, Standards on Auditing 
require auditor to determine what modifications or additions to audit 
procedures are necessary to resolve the matter. CA D, the auditor of a 
listed company, shall document the overall audit strategy, the audit plan 
and any significant changes made during the audit engagement to the 
overall audit strategy or the audit plan, and the reasons for such 
changes. 
2. (a)  Three examples of assurance engagements are as under :-
(i) Audit of financial statements
An audit of financial statements provides reasonable assurance
about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework.
(ii) Review of financial statements
Review provides lower level of assurance than audit. Further,
review involves fewer procedures and gathers sufficient
appropriate evidence on the basis of which limited conclusions can
be drawn up.
(iii) Examination of prospective financial information
In assurance reports involving prospective financial information,
the practitioner obtains sufficient appropriate evidence to the effect
that management’s assumptions on which the prospective financial
information is based are not unreasonable, the prospective
financial information is properly prepared on the basis of the
assumptions and it is properly presented and all material
assumptions are adequately disclosed. Such type of assurance
engagement provides a moderate assurance.
461
(b) (i) When the auditor includes an Emphasis of Matter (EOM) paragraph
in the auditor’s report, the auditor shall:- 
(a) include the paragraph within a separate section of the
auditor’s report with an appropriate heading that includes the
term “Emphasis of Matter”
(b) include in the paragraph a clear reference to the matter being
emphasized and to where relevant disclosures that fully
describe the matter can be found in the financial statements.
The paragraph shall refer only to information presented or
disclosed in the financial statements and
(c) indicate that the auditor’s opinion is not modified in respect of
the matter emphasized.
(ii) Examples of circumstances where the auditor may consider it
necessary to include an Emphasis of Matter (EOM) paragraph are:
? An uncertainty relating to the future outcome of exceptional
litigation or regulatory action.
? A significant subsequent event that occurs between the date
of the financial statements and the date of the auditor’s report.
? Early application (where permitted) of a new accounting
standard that has a material effect on the financial statements.
? A major catastrophe that has had, or continues to have, a
significant effect on the entity’s financial position.
(c) The auditor’s determination of materiality is a matter of professional
judgment and is affected by the auditor’s perception of the financial
information needs of users of the financial statements. In this context, it
is reasonable for CA Y, the auditor, to assume that users: -
(a) Have a reasonable knowledge of business and economic activities
and accounting and a willingness to study the information in the
financial statements with reasonable diligence
(b) Understand that financial statements are prepared, presented and
audited to levels of materiality
(c) Recognize the uncertainties inherent in the measurement of
amounts based on the use of estimates, judgment and the
consideration of future events and
(d) Make reasonable economic decisions on the basis of the
information in the financial statements.
3. (a)  In a banking environment, there exist documentary evidence containing
observations/comments on advances which can be useful to the 
statutory branch auditor in performing an effective audit. CA Amrish, the 
auditor should take into account the adverse comments, if any, on 
advances appearing in the following:- 
462
? Previous year’s audit reports.
? Latest internal inspection reports of bank officials.
? Reserve Bank’s latest inspection report.
? Concurrent / Internal audit report.
? Report on verification of security.
? Any other internal reports specially related to particular accounts.
? Manager’s charge-handing-over report when incumbent is
changed.
(b) The auditor, CA L should read the LLP agreement & note the following
provisions: -
(a) Nature of the business of the LLP.
(b) Amount of capital contributed by each partner.
(c) Interest – in respect of additional capital contributed.
(d) Duration of partnership.
(e) Drawings allowed to the partners.
(f) Salaries, commission etc. payable to partners.
(g) Borrowing powers of the LLP.
(h) Rights & duties of partners.
(i) Method of settlement of accounts between partners at the time of
admission, retirement, admission etc.
(j) Any loans advanced by the partners.
(k) Profit sharing ratio
Reporting Responsibilities of CA L/ concerning the financial statements 
of Bro Traders LLP is as follows: 
The auditor should mention 
(a) Whether the records of the ?rm appear to be correct & reliable.
(b) Whether he was able to obtain all information & explanation
necessary for his work.
(c) Whether any restriction was imposed upon him.
(c) Changes may be made to the audit documentation during the final
assembly process, if they are administrative in nature.
Examples of such changes include: -
? Deleting or discarding superseded documentation.
? Sorting, collating and cross-referencing working papers.
? Signing off on completion checklists relating to the file assembly
process.
463