Auditing and Assurance Model Test Paper - 7 (Questions) - CA Intermediate PDF Download

 Page 1


MODEL TEST PAPER 7 
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 
Oval Services Ltd.  appointed Rupa & Associates as the auditors for the financial 
year 2023-2024. The auditors believe that an audit program is crucial in providing 
clear and comprehensive instructions for the tasks to be carried out, offering a total 
perspective of the work involved. This is particularly important for large audits, and 
as such, they prepared an initial audit program based on the company’s 
organisational structure and effective internal controls. During the audit, CA Nitin, 
Engagement Partner identified issues with the company’s debt management 
practices, prompting the inclusion of a more detailed review of the loan agreements. 
However, in his opinion the planned review of petty cash was unnecessary due to 
the company’s policy of limiting cash transactions. Thus, review procedure was 
removed from the audit programme. 
To verify the balances of trade payables, the auditor decided to send external 
confirmation requests to the creditors of the company. These requests were made 
to verify the balances as on 20th March 2024, a date chosen deliberately to ensure 
the accuracy and completeness of the liabilities, free from any influence or prior 
knowledge of management. This approach was taken to maintain the integrity of 
the confirmation process. However, it was noted that M/s. Keshav Traders and M/s. 
Amrit Distributors did not respond to the confirmation requests. 
Furthermore, the auditor noted that in the financial year 2023-2024, the company’s 
Property, Plant, and Equipment (PPE) was revalued, resulting in an increase of 5% 
in the net carrying value of its machinery from ?10 lakh to ?10.5 lakh. 
Also, due to the significant compliance burden, company is considering to convert 
into a Limited Liability Partnership (LLP). Management views the LLP structure as 
a hybrid business model that combines the advantages of both companies and 
partnerships. Additionally, they believe this conversion would relieve them of 
mandatory audit requirements. 
165
Page 2


MODEL TEST PAPER 7 
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 
Oval Services Ltd.  appointed Rupa & Associates as the auditors for the financial 
year 2023-2024. The auditors believe that an audit program is crucial in providing 
clear and comprehensive instructions for the tasks to be carried out, offering a total 
perspective of the work involved. This is particularly important for large audits, and 
as such, they prepared an initial audit program based on the company’s 
organisational structure and effective internal controls. During the audit, CA Nitin, 
Engagement Partner identified issues with the company’s debt management 
practices, prompting the inclusion of a more detailed review of the loan agreements. 
However, in his opinion the planned review of petty cash was unnecessary due to 
the company’s policy of limiting cash transactions. Thus, review procedure was 
removed from the audit programme. 
To verify the balances of trade payables, the auditor decided to send external 
confirmation requests to the creditors of the company. These requests were made 
to verify the balances as on 20th March 2024, a date chosen deliberately to ensure 
the accuracy and completeness of the liabilities, free from any influence or prior 
knowledge of management. This approach was taken to maintain the integrity of 
the confirmation process. However, it was noted that M/s. Keshav Traders and M/s. 
Amrit Distributors did not respond to the confirmation requests. 
Furthermore, the auditor noted that in the financial year 2023-2024, the company’s 
Property, Plant, and Equipment (PPE) was revalued, resulting in an increase of 5% 
in the net carrying value of its machinery from ?10 lakh to ?10.5 lakh. 
Also, due to the significant compliance burden, company is considering to convert 
into a Limited Liability Partnership (LLP). Management views the LLP structure as 
a hybrid business model that combines the advantages of both companies and 
partnerships. Additionally, they believe this conversion would relieve them of 
mandatory audit requirements. 
165
Based on the above facts, answer the following: -  
1.  Whether audit team is correct in excluding the planned review of petty cash 
from the audit programme? 
(a)  No. Because an audit programme should always include a petty cash 
review, regardless of company policy. 
(b)  Yes. Because the company’s internal controls and policy of limiting cash 
transactions reduce the need for a petty cash review in the audit 
programme. 
(c)  No. Because the audit programme must cover all the areas of financial 
transactions, including petty cash, to ensure comprehensive auditing. 
(d)  Yes.  Because the audit programme should only focus on areas with high 
financial risk, and petty cash is not a high-risk area. 
2.  Whether the decision of auditor to send the confirmation request to the 
creditors of the company as on 20th March 2024 justified? 
(a)  Yes, decision of the auditor is correct as the auditor is allowed to choose 
any date reasonably close to the balance sheet date for confirmation, 
and the selected date helps to ensure the accuracy of the liabilities 
without consultation from the management. 
(b)  No, decision of the auditor is not correct as the auditor should have sent 
the confirmation requests for the balance sheet date as this would 
accurately reflect the liabilities as on that date. 
(c)  Yes, decision of the auditor is correct as the auditor is allowed to choose 
any date which is reasonably close to the balance sheet date for 
confirmation, and the selected date should be decided in consultation 
with the management. 
(d)  No, decision of the auditor is not correct as confirmation should be asked 
within a week of the date of audit report. 
3.  Which of the following is not an appropriate procedure to verify the balances 
for M/s. Keshav Traders and M/s. Amrit Distributers? 
(a)  Breaking down the balance into individual transactions and making sure 
they actually happened. 
(b)  Checking payments made after the year-end to vendors who didn’t 
respond to confirmation requests. 
(c)  Comparing the balance to the original invoices from the vendors. 
(d)  Request a written representation from management confirming that all 
payables are accurately recorded and complete. 
166
Page 3


MODEL TEST PAPER 7 
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 
Oval Services Ltd.  appointed Rupa & Associates as the auditors for the financial 
year 2023-2024. The auditors believe that an audit program is crucial in providing 
clear and comprehensive instructions for the tasks to be carried out, offering a total 
perspective of the work involved. This is particularly important for large audits, and 
as such, they prepared an initial audit program based on the company’s 
organisational structure and effective internal controls. During the audit, CA Nitin, 
Engagement Partner identified issues with the company’s debt management 
practices, prompting the inclusion of a more detailed review of the loan agreements. 
However, in his opinion the planned review of petty cash was unnecessary due to 
the company’s policy of limiting cash transactions. Thus, review procedure was 
removed from the audit programme. 
To verify the balances of trade payables, the auditor decided to send external 
confirmation requests to the creditors of the company. These requests were made 
to verify the balances as on 20th March 2024, a date chosen deliberately to ensure 
the accuracy and completeness of the liabilities, free from any influence or prior 
knowledge of management. This approach was taken to maintain the integrity of 
the confirmation process. However, it was noted that M/s. Keshav Traders and M/s. 
Amrit Distributors did not respond to the confirmation requests. 
Furthermore, the auditor noted that in the financial year 2023-2024, the company’s 
Property, Plant, and Equipment (PPE) was revalued, resulting in an increase of 5% 
in the net carrying value of its machinery from ?10 lakh to ?10.5 lakh. 
Also, due to the significant compliance burden, company is considering to convert 
into a Limited Liability Partnership (LLP). Management views the LLP structure as 
a hybrid business model that combines the advantages of both companies and 
partnerships. Additionally, they believe this conversion would relieve them of 
mandatory audit requirements. 
165
Based on the above facts, answer the following: -  
1.  Whether audit team is correct in excluding the planned review of petty cash 
from the audit programme? 
(a)  No. Because an audit programme should always include a petty cash 
review, regardless of company policy. 
(b)  Yes. Because the company’s internal controls and policy of limiting cash 
transactions reduce the need for a petty cash review in the audit 
programme. 
(c)  No. Because the audit programme must cover all the areas of financial 
transactions, including petty cash, to ensure comprehensive auditing. 
(d)  Yes.  Because the audit programme should only focus on areas with high 
financial risk, and petty cash is not a high-risk area. 
2.  Whether the decision of auditor to send the confirmation request to the 
creditors of the company as on 20th March 2024 justified? 
(a)  Yes, decision of the auditor is correct as the auditor is allowed to choose 
any date reasonably close to the balance sheet date for confirmation, 
and the selected date helps to ensure the accuracy of the liabilities 
without consultation from the management. 
(b)  No, decision of the auditor is not correct as the auditor should have sent 
the confirmation requests for the balance sheet date as this would 
accurately reflect the liabilities as on that date. 
(c)  Yes, decision of the auditor is correct as the auditor is allowed to choose 
any date which is reasonably close to the balance sheet date for 
confirmation, and the selected date should be decided in consultation 
with the management. 
(d)  No, decision of the auditor is not correct as confirmation should be asked 
within a week of the date of audit report. 
3.  Which of the following is not an appropriate procedure to verify the balances 
for M/s. Keshav Traders and M/s. Amrit Distributers? 
(a)  Breaking down the balance into individual transactions and making sure 
they actually happened. 
(b)  Checking payments made after the year-end to vendors who didn’t 
respond to confirmation requests. 
(c)  Comparing the balance to the original invoices from the vendors. 
(d)  Request a written representation from management confirming that all 
payables are accurately recorded and complete. 
166
4.  In the given case, is there any requirement for separate disclosure of the PPE 
revaluation? 
(a)  Yes, separate disclosure is required due to the 5% increase in carrying 
value. 
(b)  No, separate disclosure is not required as the change in carrying value 
is less than 10%. 
(c)  Yes, separate disclosure is required regardless of the percentage 
change. 
(d)  No, separate disclosure is not required unless the revaluation results in 
a material change in the carrying value. 
5.  What is your perspective on the management's view regarding the audit 
requirements for an LLP? 
(a)  An LLP is always required to conduct an audit, regardless of its turnover 
or capital contribution. 
(b)  An LLP is always required to conduct an audit if either the turnover 
exceeds ` 40 lakhs or the capital contribution exceeds ` 25 lakhs. 
(c)  An LLP is always required to conduct an audit if either the turnover 
exceeds ` 25 lakhs or the capital contribution exceeds ` 40 lakhs. 
(d)  An LLP is always required to conduct an audit if the capital contribution 
exceeds ` 25 lakhs and the turnover exceeds ` 40 lakhs. 
Case Scenario 2 
Shreyansh, a Chartered Accountancy student, is part of an engagement team 
conducting audit of the Coimbatore branch of XYZ Bank under the guidance of CA 
Dilip, the Engagement Partner. Shreyansh has been assigned the task of verifying 
provisions made for the branch's non-performing assets (NPAs) and classification 
of certain loans as on March 31, 2024, of which details are as under: 
Non-Performing Assets (NPAs): 
Name of 
Account 
NPA 
classification 
Outstanding 
amount as 
on March 
31
st
, 2024  
(In ` lakhs) 
Amount of 
provision 
made  
(In ` lakhs) 
Security 
Available 
AB Industries Doubtful (D1) 10.00 5.00 Fully secured 
Mars Traders Substandard 
asset 
50.00 7.50 Fully secured 
RS Enterprises  Doubtful (D2) 30.00 30.00 Fully secured 
167
Page 4


MODEL TEST PAPER 7 
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 
Oval Services Ltd.  appointed Rupa & Associates as the auditors for the financial 
year 2023-2024. The auditors believe that an audit program is crucial in providing 
clear and comprehensive instructions for the tasks to be carried out, offering a total 
perspective of the work involved. This is particularly important for large audits, and 
as such, they prepared an initial audit program based on the company’s 
organisational structure and effective internal controls. During the audit, CA Nitin, 
Engagement Partner identified issues with the company’s debt management 
practices, prompting the inclusion of a more detailed review of the loan agreements. 
However, in his opinion the planned review of petty cash was unnecessary due to 
the company’s policy of limiting cash transactions. Thus, review procedure was 
removed from the audit programme. 
To verify the balances of trade payables, the auditor decided to send external 
confirmation requests to the creditors of the company. These requests were made 
to verify the balances as on 20th March 2024, a date chosen deliberately to ensure 
the accuracy and completeness of the liabilities, free from any influence or prior 
knowledge of management. This approach was taken to maintain the integrity of 
the confirmation process. However, it was noted that M/s. Keshav Traders and M/s. 
Amrit Distributors did not respond to the confirmation requests. 
Furthermore, the auditor noted that in the financial year 2023-2024, the company’s 
Property, Plant, and Equipment (PPE) was revalued, resulting in an increase of 5% 
in the net carrying value of its machinery from ?10 lakh to ?10.5 lakh. 
Also, due to the significant compliance burden, company is considering to convert 
into a Limited Liability Partnership (LLP). Management views the LLP structure as 
a hybrid business model that combines the advantages of both companies and 
partnerships. Additionally, they believe this conversion would relieve them of 
mandatory audit requirements. 
165
Based on the above facts, answer the following: -  
1.  Whether audit team is correct in excluding the planned review of petty cash 
from the audit programme? 
(a)  No. Because an audit programme should always include a petty cash 
review, regardless of company policy. 
(b)  Yes. Because the company’s internal controls and policy of limiting cash 
transactions reduce the need for a petty cash review in the audit 
programme. 
(c)  No. Because the audit programme must cover all the areas of financial 
transactions, including petty cash, to ensure comprehensive auditing. 
(d)  Yes.  Because the audit programme should only focus on areas with high 
financial risk, and petty cash is not a high-risk area. 
2.  Whether the decision of auditor to send the confirmation request to the 
creditors of the company as on 20th March 2024 justified? 
(a)  Yes, decision of the auditor is correct as the auditor is allowed to choose 
any date reasonably close to the balance sheet date for confirmation, 
and the selected date helps to ensure the accuracy of the liabilities 
without consultation from the management. 
(b)  No, decision of the auditor is not correct as the auditor should have sent 
the confirmation requests for the balance sheet date as this would 
accurately reflect the liabilities as on that date. 
(c)  Yes, decision of the auditor is correct as the auditor is allowed to choose 
any date which is reasonably close to the balance sheet date for 
confirmation, and the selected date should be decided in consultation 
with the management. 
(d)  No, decision of the auditor is not correct as confirmation should be asked 
within a week of the date of audit report. 
3.  Which of the following is not an appropriate procedure to verify the balances 
for M/s. Keshav Traders and M/s. Amrit Distributers? 
(a)  Breaking down the balance into individual transactions and making sure 
they actually happened. 
(b)  Checking payments made after the year-end to vendors who didn’t 
respond to confirmation requests. 
(c)  Comparing the balance to the original invoices from the vendors. 
(d)  Request a written representation from management confirming that all 
payables are accurately recorded and complete. 
166
4.  In the given case, is there any requirement for separate disclosure of the PPE 
revaluation? 
(a)  Yes, separate disclosure is required due to the 5% increase in carrying 
value. 
(b)  No, separate disclosure is not required as the change in carrying value 
is less than 10%. 
(c)  Yes, separate disclosure is required regardless of the percentage 
change. 
(d)  No, separate disclosure is not required unless the revaluation results in 
a material change in the carrying value. 
5.  What is your perspective on the management's view regarding the audit 
requirements for an LLP? 
(a)  An LLP is always required to conduct an audit, regardless of its turnover 
or capital contribution. 
(b)  An LLP is always required to conduct an audit if either the turnover 
exceeds ` 40 lakhs or the capital contribution exceeds ` 25 lakhs. 
(c)  An LLP is always required to conduct an audit if either the turnover 
exceeds ` 25 lakhs or the capital contribution exceeds ` 40 lakhs. 
(d)  An LLP is always required to conduct an audit if the capital contribution 
exceeds ` 25 lakhs and the turnover exceeds ` 40 lakhs. 
Case Scenario 2 
Shreyansh, a Chartered Accountancy student, is part of an engagement team 
conducting audit of the Coimbatore branch of XYZ Bank under the guidance of CA 
Dilip, the Engagement Partner. Shreyansh has been assigned the task of verifying 
provisions made for the branch's non-performing assets (NPAs) and classification 
of certain loans as on March 31, 2024, of which details are as under: 
Non-Performing Assets (NPAs): 
Name of 
Account 
NPA 
classification 
Outstanding 
amount as 
on March 
31
st
, 2024  
(In ` lakhs) 
Amount of 
provision 
made  
(In ` lakhs) 
Security 
Available 
AB Industries Doubtful (D1) 10.00 5.00 Fully secured 
Mars Traders Substandard 
asset 
50.00 7.50 Fully secured 
RS Enterprises  Doubtful (D2) 30.00 30.00 Fully secured 
167
NPS & Sons Loss 1.00 1.00 Only 
personal 
guarantee of 
proprietor 
(Net worth  
? 50 lakhs) 
Housing Loan and Car Loan 
A borrower Mr. Shyam has availed following two loans from the branch: 
• Housing Loan: EMIs are overdue for 120 days as on March 31, 2024. 
• Car Loan: EMIs are overdue for 60 days as on March 31, 2024. 
Agricultural Advances 
The branch has provided a loan of ?20 lakhs under the Kisan Credit Card (KCC) 
scheme to a farmer for the cultivation of paddy, which has a harvest period of 3–4 
months. There has been no transaction in the account for the last 90 days. The 
branch has classified the loan as a Standard Asset.  
CA Dilip has clarified that the NPA classification has been verified and is in 
accordance with RBI guidelines. He instructed Shreyansh to focus on evaluating 
the adequacy of the provisions, considering RBI Guidelines mandate specific 
percentages for provisioning based on the NPA classification and the nature of the 
security. 
Based on the above facts, answer the following: -  
6.  Is the provision made for AB Industries (Doubtful—D1) appropriate? 
(a)  Yes, as it exceeds the required 25% provisioning for secured assets. 
(b)  No, as it should be 40% of the outstanding amount. 
(c)  No, as the required provision is ? 2.50 lakhs (25% of ? 10.00 lakhs). 
(d) Yes, as provisions for Doubtful assets can exceed the minimum 
requirement. 
7.  Considering the Housing Loan and Car Loan availed by the borrower Shyam, 
which of the following statements is appropriate? 
(a)  Both Housing Loan and Car Loan should be classified as “Non-
Performing Assets” in accordance with RBI norms on asset 
classification. 
(b)  Housing Loan should be classified as “Non-Performing Asset” in 
accordance with RBI norms. However, Car Loan should be classified as 
Standard Asset. 
168
Page 5


MODEL TEST PAPER 7 
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 
Oval Services Ltd.  appointed Rupa & Associates as the auditors for the financial 
year 2023-2024. The auditors believe that an audit program is crucial in providing 
clear and comprehensive instructions for the tasks to be carried out, offering a total 
perspective of the work involved. This is particularly important for large audits, and 
as such, they prepared an initial audit program based on the company’s 
organisational structure and effective internal controls. During the audit, CA Nitin, 
Engagement Partner identified issues with the company’s debt management 
practices, prompting the inclusion of a more detailed review of the loan agreements. 
However, in his opinion the planned review of petty cash was unnecessary due to 
the company’s policy of limiting cash transactions. Thus, review procedure was 
removed from the audit programme. 
To verify the balances of trade payables, the auditor decided to send external 
confirmation requests to the creditors of the company. These requests were made 
to verify the balances as on 20th March 2024, a date chosen deliberately to ensure 
the accuracy and completeness of the liabilities, free from any influence or prior 
knowledge of management. This approach was taken to maintain the integrity of 
the confirmation process. However, it was noted that M/s. Keshav Traders and M/s. 
Amrit Distributors did not respond to the confirmation requests. 
Furthermore, the auditor noted that in the financial year 2023-2024, the company’s 
Property, Plant, and Equipment (PPE) was revalued, resulting in an increase of 5% 
in the net carrying value of its machinery from ?10 lakh to ?10.5 lakh. 
Also, due to the significant compliance burden, company is considering to convert 
into a Limited Liability Partnership (LLP). Management views the LLP structure as 
a hybrid business model that combines the advantages of both companies and 
partnerships. Additionally, they believe this conversion would relieve them of 
mandatory audit requirements. 
165
Based on the above facts, answer the following: -  
1.  Whether audit team is correct in excluding the planned review of petty cash 
from the audit programme? 
(a)  No. Because an audit programme should always include a petty cash 
review, regardless of company policy. 
(b)  Yes. Because the company’s internal controls and policy of limiting cash 
transactions reduce the need for a petty cash review in the audit 
programme. 
(c)  No. Because the audit programme must cover all the areas of financial 
transactions, including petty cash, to ensure comprehensive auditing. 
(d)  Yes.  Because the audit programme should only focus on areas with high 
financial risk, and petty cash is not a high-risk area. 
2.  Whether the decision of auditor to send the confirmation request to the 
creditors of the company as on 20th March 2024 justified? 
(a)  Yes, decision of the auditor is correct as the auditor is allowed to choose 
any date reasonably close to the balance sheet date for confirmation, 
and the selected date helps to ensure the accuracy of the liabilities 
without consultation from the management. 
(b)  No, decision of the auditor is not correct as the auditor should have sent 
the confirmation requests for the balance sheet date as this would 
accurately reflect the liabilities as on that date. 
(c)  Yes, decision of the auditor is correct as the auditor is allowed to choose 
any date which is reasonably close to the balance sheet date for 
confirmation, and the selected date should be decided in consultation 
with the management. 
(d)  No, decision of the auditor is not correct as confirmation should be asked 
within a week of the date of audit report. 
3.  Which of the following is not an appropriate procedure to verify the balances 
for M/s. Keshav Traders and M/s. Amrit Distributers? 
(a)  Breaking down the balance into individual transactions and making sure 
they actually happened. 
(b)  Checking payments made after the year-end to vendors who didn’t 
respond to confirmation requests. 
(c)  Comparing the balance to the original invoices from the vendors. 
(d)  Request a written representation from management confirming that all 
payables are accurately recorded and complete. 
166
4.  In the given case, is there any requirement for separate disclosure of the PPE 
revaluation? 
(a)  Yes, separate disclosure is required due to the 5% increase in carrying 
value. 
(b)  No, separate disclosure is not required as the change in carrying value 
is less than 10%. 
(c)  Yes, separate disclosure is required regardless of the percentage 
change. 
(d)  No, separate disclosure is not required unless the revaluation results in 
a material change in the carrying value. 
5.  What is your perspective on the management's view regarding the audit 
requirements for an LLP? 
(a)  An LLP is always required to conduct an audit, regardless of its turnover 
or capital contribution. 
(b)  An LLP is always required to conduct an audit if either the turnover 
exceeds ` 40 lakhs or the capital contribution exceeds ` 25 lakhs. 
(c)  An LLP is always required to conduct an audit if either the turnover 
exceeds ` 25 lakhs or the capital contribution exceeds ` 40 lakhs. 
(d)  An LLP is always required to conduct an audit if the capital contribution 
exceeds ` 25 lakhs and the turnover exceeds ` 40 lakhs. 
Case Scenario 2 
Shreyansh, a Chartered Accountancy student, is part of an engagement team 
conducting audit of the Coimbatore branch of XYZ Bank under the guidance of CA 
Dilip, the Engagement Partner. Shreyansh has been assigned the task of verifying 
provisions made for the branch's non-performing assets (NPAs) and classification 
of certain loans as on March 31, 2024, of which details are as under: 
Non-Performing Assets (NPAs): 
Name of 
Account 
NPA 
classification 
Outstanding 
amount as 
on March 
31
st
, 2024  
(In ` lakhs) 
Amount of 
provision 
made  
(In ` lakhs) 
Security 
Available 
AB Industries Doubtful (D1) 10.00 5.00 Fully secured 
Mars Traders Substandard 
asset 
50.00 7.50 Fully secured 
RS Enterprises  Doubtful (D2) 30.00 30.00 Fully secured 
167
NPS & Sons Loss 1.00 1.00 Only 
personal 
guarantee of 
proprietor 
(Net worth  
? 50 lakhs) 
Housing Loan and Car Loan 
A borrower Mr. Shyam has availed following two loans from the branch: 
• Housing Loan: EMIs are overdue for 120 days as on March 31, 2024. 
• Car Loan: EMIs are overdue for 60 days as on March 31, 2024. 
Agricultural Advances 
The branch has provided a loan of ?20 lakhs under the Kisan Credit Card (KCC) 
scheme to a farmer for the cultivation of paddy, which has a harvest period of 3–4 
months. There has been no transaction in the account for the last 90 days. The 
branch has classified the loan as a Standard Asset.  
CA Dilip has clarified that the NPA classification has been verified and is in 
accordance with RBI guidelines. He instructed Shreyansh to focus on evaluating 
the adequacy of the provisions, considering RBI Guidelines mandate specific 
percentages for provisioning based on the NPA classification and the nature of the 
security. 
Based on the above facts, answer the following: -  
6.  Is the provision made for AB Industries (Doubtful—D1) appropriate? 
(a)  Yes, as it exceeds the required 25% provisioning for secured assets. 
(b)  No, as it should be 40% of the outstanding amount. 
(c)  No, as the required provision is ? 2.50 lakhs (25% of ? 10.00 lakhs). 
(d) Yes, as provisions for Doubtful assets can exceed the minimum 
requirement. 
7.  Considering the Housing Loan and Car Loan availed by the borrower Shyam, 
which of the following statements is appropriate? 
(a)  Both Housing Loan and Car Loan should be classified as “Non-
Performing Assets” in accordance with RBI norms on asset 
classification. 
(b)  Housing Loan should be classified as “Non-Performing Asset” in 
accordance with RBI norms. However, Car Loan should be classified as 
Standard Asset. 
168
(c)  Car Loan should be classified as “Non-Performing Asset.” However, 
Housing Loan should be classified as Standard Asset. 
(d)  Both Housing Loan and Car Loan should be classified as Standard 
Assets. 
8.  What is the minimum provision required for RS Enterprises (Doubtful—D2), 
considering the account is fully secured? 
(a)  ?30.00 lakhs 
(b)  ?12.00 lakhs 
(c)  ?15.00 lakhs 
(d)  ?25.00 lakhs 
9. As regards the description of the agricultural advance under Kisan Credit 
Card, which of the following statements is most appropriate? 
(a)  The branch has erred in making classification as per RBI norms. It is a 
“Sub-standard” asset. 
(b)  The classification made by the branch is proper. However, since there 
are no transactions in the account for 90 days, it is an SMA (Special 
Mention Account). 
(c)  The classification made by the branch is proper. 
(d)  The branch has erred in making classification as per RBI norms. It is a 
“Doubtful” asset. 
Case Scenario 3 
M/s MCP Associates are having 3 partners namely CA Mahavir, CA Chandana and 
CA Prabha. CA Mahavir is about to conclude audit of a company. During the audit, 
he noticed that there is a shortage of important raw material supplies being 
imported from China due to prevailing geopolitical situation. The company has 
shared with him its plan to deal with the situation. He is satisfied with assessment 
of the company for dealing with the matter. The issue is disclosed in financial 
statements and considering management’s assessment, it is felt that use of going 
concern assumption by company in preparation of financial statements is 
appropriate. He also verifies that all subsequent events have been accounted for 
and requests written representations from management, although the 
representations include qualifying language. Significant findings were 
communicated both orally and in writing to those charged with governance, with 
relevant communications documented. 
CA Chandana is conducting an audit of a manufacturing company dealing in towels 
and bedspreads. The company’s inventory is spread across its own locations and 
third-party premises. As part of audit procedures, she is performing many audit 
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