CA Inter May 25 Suggested Answers | Audit
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Case Scenario – I
M/s AB & Co., Chartered Accountants, have been appointed as the statutory auditors for Financial Year 2024-25 of PQ Ltd., which is a textile company. Mr. X, the engagement partner, assigned the task of auditing the various items of financial statements to the articled clerks. Mr. X explained to the articled clerks that financial statements purport to present something as a whole in addition to its component details. An income statement purports to present “the results of operations,” whereas the balance sheet purports to present “financial position.” He further clarified that the auditor’s opinion is typically directed to these overall representations.
However, before formulating and providing an opinion on the overall truthfulness of these statements, the auditor must first examine the truth of various specific assertions that make up each of these statements. By evaluating these individual assertions, the auditor can then form a judgment regarding the financial statement as a whole.
To verify the assertions presented in the financial statements, the auditor must perform variety of procedures.
Articled clerks looking after different areas seek your advice as regards their different concerns.
Based on the above facts, answer the following Q. Nos 1 to 5:
1. Mr. C, an Articled Clerk responsible for the audit procedures regarding the share capital, found that during the year under audit, PQ Ltd. had issued sweat equity shares amounting to ₹10 Lakhs. Which of the following statements regarding the issue of sweat equity shares are correct?
(I) It can be issued to employees.
(II) It can be issued to directors.
(III) It can be issued at a discount.
(IV) It should be of a class of shares already issued by PQ Ltd.
(A) I & III above
(B) I, II & III above
(C) I, II & IV above
(D) I, II, III & IV above
All four statements are correct regarding the issue of sweat equity shares under the Companies Act, 2013:
2. Mr. D, an Articled Clerk, was performing audit procedures related to Reserves and Surplus in PQ Ltd. tell him that which statement are correct in respect of Reserves and Surplus?
(I) Reserves are the amounts appropriated out of profits for commitment.
(II) Securities premium is a capital reserve.
(III) A debit balance in the statement of profit and loss account shall be shown as a negative figure under the head ‘surplus’.
(IV) All reserves can be used to augment the working capital of the Company.
(A) I & II above
(B) II & III above
(C) III & IV above
(D) II & IV above
Let’s analyze each statement:
(I) Reserves are the amounts appropriated out of profits for commitment:
❌ Incorrect. Reserves are appropriations of profit, but not necessarily for a specific commitment. Some reserves (like general reserve) are not earmarked for specific purposes.
(II) Securities premium is a capital reserve:
✅ Correct. As per accounting norms, securities premium is treated as a capital reserve and is not available for distribution as dividend.
(III) A debit balance in the statement of profit and loss account shall be shown as a negative figure under the head ‘surplus’:
✅ Correct. If there is a loss (debit balance), it is presented as a negative amount under 'Surplus' in ‘Reserves and Surplus’.
(IV) All reserves can be used to augment the working capital of the Company:
❌ Incorrect. Not all reserves can be freely used — for example, securities premium and capital redemption reserve have restricted uses under the Companies Act.
3. Mr. E, an Articled Clerk, was not sure about which items should be considered as intangible assets in PQ Ltd. According to AS-26, which of the following items should not be recognized as intangible assets?
(I) Internally generated Goodwill
(II) Compact disk in the case of computer software
(III) Copyrights
(IV) Computer software for computer-controlled machine tools that cannot operate without that specific software, which is an integral part of the related hardware.
(A) I & II above
(B) II & III above
(C) III & IV above
(D) I & IV above
As per Accounting Standard (AS) 26 – Intangible Assets, the following analysis applies:
(I) Internally generated Goodwill:
❌ Should not be recognized as an intangible asset because its cost cannot be measured reliably. AS-26 explicitly prohibits recognition of internally generated goodwill.
(II) Compact disk in the case of computer software:
✅ Can be recognized as part of the intangible asset (the software), while the physical disk is a medium and not treated separately.
(III) Copyrights:
✅ Recognized as intangible assets, as they meet the definition — identifiable, non-monetary, and without physical substance.
(IV) Computer software integral to machine tools (hardware-specific software):
❌ Not treated as an intangible asset separately. If the software cannot operate independently and is essential for the hardware to function, it is treated as part of the hardware (i.e., a tangible fixed asset), not an intangible asset.
4. Mr. F, an Articled Clerk, wants to know that which of the below statement is incorrect while auditing Depreciation and Amortization expenses in PQ Ltd.?
(A) Depreciation and amortization have been charged as per the useful life of PPE and intangible assets.
(B) Depreciation on the revalued amount should be accounted from the revaluation reserve.
(C) Depreciation should be charged on assets from the date of actual usage and not when they are ready to use.
(D) Depreciation and amortization should be computed prospectively whenever there is any change in useful life of PPE and intangible assets.
Let’s evaluate each statement:
(A) Depreciation and amortization have been charged as per the useful life of PPE and intangible assets:
✅ Correct. Depreciation and amortization must align with the estimated useful life of the assets, as per applicable accounting standards.
(B) Depreciation on the revalued amount should be accounted from the revaluation reserve:
✅ Correct. As per accounting principles, the extra depreciation arising due to revaluation can be adjusted against the revaluation reserve.
(C) Depreciation should be charged on assets from the date of actual usage and not when they are ready to use:
❌ Incorrect. Depreciation begins when the asset is ready for use, not necessarily when it starts being used. This makes Option C incorrect.
(D) Depreciation and amortization should be computed prospectively whenever there is any change in useful life:
✅ Correct. Any changes in useful life must be applied prospectively as a change in accounting estimate.
5. Mr. B, an Articled Clerk responsible for the audit procedures concerning inventory, found that the inventory amounting to ₹ 38 lakhs, after excluding ₹ 2 lakhs of inventory that was held by PQ Ltd. as a consignee, has been recognized in the Balance Sheet. Which of the following assertions related to inventory are applicable in this situation?
(I) Occurrence
(II) Completeness
(III) Rights & Obligations
(IV) Measurement
(A) I & II above
(B) II & III above
(C) III & IV above
(D) I & IV above
The situation doesn't involve:
Hence, Assertions II (Completeness) and III (Rights & Obligations) are most applicable.
Case Scenario – II
M/s DG and Associates, Chartered Accountants, have been appointed as the statutory auditor of HT Private Limited for the financial year 2024-25. CA Mr. D, engagement partner, and a team comprising of three articled clerks has been assigned the task of conducting the audit of HT Private Limited for F.Y. 2024-25. In the initial stages of conducting an audit of HT Private Limited, CA Mr. D decided to evaluate internal control operating in the company. To gather information required for evaluation of internal control, CA Mr. D asked his team members to suggest a method which would help in gathering information so that internal control of the company can be evaluated.
First team member of the team suggested that they should follow a method, in which a series of instructions and/or questions are required to be followed and/or answered by the audit team and the answers to these instructions are usually Yes, No or Not Applicable. These instructions are framed having regard to the desirable elements of control.
The second team member of team suggested a method in which a complete and exhaustive description of the internal control system as found in operation is recorded by the auditor.
The third team member of team suggested a method in which comprehensive series of questions concerning internal control were required to be answered which would provide information about internal control.
Based on the above facts, answer the following Q. Nos 6 to 9:
Q.6 The method suggested by first team member according to which, a series of instructions and/or questions which a member of the auditing staff must follow and/or answer. When he completes instruction, he initials the space against the instruction. This method is called as
(A) Flow Chart
(B) Check List
(C) Narrative Record
(D) Questionnaire
A Check List is a method where auditors follow a series of instructions or questions, usually answered with Yes, No, or Not Applicable, and initial each item once completed. It ensures all necessary steps are performed and helps in evaluating internal control systematically.
Q.7 The method suggested by second team member in which a complete and exhaustive description of internal control in operation is recorded. This method is known as
(A) Narrative Record
(B) Flow Chart
(C) Questionnaire
(D) Check List
A Narrative Record involves writing a detailed and descriptive account of the internal control system as it operates in practice. It gives a comprehensive understanding of the processes and controls, in the auditor’s own words.
Q.8 The third team member suggested a method in which comprehensive series of questions concerning internal control is used to collect information. These questions are usually issued to the client and the client is requested to fill it. This method of gathering information so that internal control can be evaluated is called as:
(A) Internal Control Questionnaire
(B) Flow Chart
(C) Narrative Record
(D) Check List
An Internal Control Questionnaire (ICQ) consists of a comprehensive set of questions related to the internal control system. These are typically filled out by the client, helping the auditor evaluate the adequacy and effectiveness of controls in various areas of the business.
Q.9 In initial stage of conducting audit of HT Private Limited, CA Mr. D decided to evaluate internal control of the company. Evaluation of internal control is very important part of
(A) Audit Report
(B) Audit Evidence
(C) Audit Documentation
(D) Audit Programme
Evaluation of internal control is a key step in the audit programme, which outlines how the audit will be conducted. It helps the auditor assess risks and plan audit procedures accordingly to ensure an effective and efficient audit.
Q.10 Which of the following statement is incorrect with regard to written representations?
(A) Written representations are an important source of audit evidence.
(B) Written representations are necessary information that the auditor requires in connection with the audit of the entity’s financial statements.
(C) Written representations not only provide necessary audit evidence, but also provide sufficient appropriate audit evidence on their own about any of matters with which they deal.
(D) Written representations only provide necessary audit evidence but do not provide sufficient appropriate audit evidence on their own about any of matters with which they deal.
Q.11 Which of the following statements is inappropriate?
(A) Once the overall audit strategy is established, an audit plan can be developed to address the various matters identified in the overall audit strategy.
(B) The establishment of an overall audit strategy as well as detailed audit plan are not necessarily discrete or sequential process.
(C) Audit Strategy and Audit plan are not inter-related as changes in one may not result in consequential changes to the other.
(D) The Audit plan is more detailed than the Audit Strategy that includes the nature, timing and extent of audit procedures to be performed by engagement team members.
Q.12 ABC Ltd. is undergoing an audit, and the auditors are evaluating the reliability of different types of audit evidence. External evidence is generally considered to be more reliable than internal evidence.
The following is NOT an example of internal evidence:
(A) Inspection report
(B) Purchase invoice
(C) Goods received note
(D) Bank reconciliation statement
Case Scenario – III
M/s Rama & Associates, Chartered Accountants, have been appointed as the statutory auditors of a Government company H Ltd. by the Comptroller & Auditor General of India for F.Y. 2024-25. H Ltd. is engaged in the manufacturing of metro train coaches.
CA Rama, the engagement partner, had to conduct audit of expenditure as well of receipts.
During the course of the audit, CA Rama also found that the company has constructed its new stockyard for parking its metro coaches and maintenance of its metro coaches. However, the newly constructed stockyard was not being used by the company for the designated purpose and the company continued using the rented stockyard. CA Rama considered such expenditure as infructuous and avoidable expenditure.
The engagement partner also discussed with his team regarding the areas to be covered while conducting the audit of receipts. The reporting responsibilities of the engagement team were also discussed by the engagement partner with his team.
Based on the above facts, answer the following Q. Nos 13 to 15:
13. While conducting an audit against provision of funds, the statutory auditors, M/s Rama & Associates must check:
(A) that each item of expenditure is covered by a sanction either general or special of a competent authority.
(B) that the expenditure incurred has been on the purpose for which the grant and appropriation has been provided and the amount of such expenditure does not exceed the appropriation made.
(C) that the expenditure conforms to the relevant provision of the constitution and of the laws and rules made thereunder.
(D) that the expenditure is in accordance with the financial rules, regulations and orders issued by the competent authority.
Audit against provision of funds ensures that money is spent only for the purpose for which it was granted and within the sanctioned limits. It focuses on whether the expenditure aligns with the budgeted appropriation, which is precisely what option (B) states.
Q.14 Which type of the expenditure audit covers the scrutiny of the expenditure incurred on the construction of stockyard by the company which is considered as infructuous and avoidable by CA Rama?
(A) Propriety Audit
(B) Audit against provision of funds
(C) Audit of sanctions
(D) Performance Audit
Propriety Audit examines whether public money has been spent wisely and prudently, and checks for wasteful or avoidable expenditure.
Since CA Rama considered the construction of the stockyard as infructuous and avoidable, it falls under Propriety Audit, which focuses on judging the wisdom, faithfulness, and economy of spending decisions.
Q.15 ______ is conducted to ensure that the various programmes, schemes, and projects where large financial expenditure have been incurred are run economically and are yielding results expected of them.
(A) Propriety Audit
(B) Audit against Rules and Orders
(C) Performance Audit
(D) Audit against Provision of funds
Performance Audit checks if government projects and schemes are running economically, efficiently, and effectively. It ensures that money spent delivers the intended results. In this case, the unused stockyard reflects poor use of resources, which is exactly what performance audits aim to identify.
M/s YZW & Co., Chartered Accountants, have been appointed as the statutory auditors of First Health Private Limited for the financial year 2024-25. CA Y is the engagement partner for this assignment. First Health Private Limited operates in the business of hospitals and pharmaceuticals, with 60 hospitals and 200 pharmacy stores across the country. The company has a turnover of ₹ 680 crores and PAT of ₹ 32 crores in the current year.
While verifying the assertions about book debts, CA Y was informed about the availability of the client’s ledger invoices, debit notes, and credit notes as audit evidence. CA Y accepts these documents as audit evidence, considering them to be “available.”
(i) Is this decision correct, based on the meaning of the term “available”?
(ii) Also, explain how an auditor should select the most appropriate evidence when testing the accuracy of any assertion to form an opinion.
Mention the types of control in an automated environment.
Identify the type of control in the following table in Column B against Column A which contains areas where controls are to be implemented in an automated environment.
|
Column A |
Column B |
|
Access security |
? |
|
Sequence number checks |
? |
|
Data centre and network operations |
? |
|
Mandatory data fields |
? |
M/s BPA & Associates, Chartered Accountants, was appointed as the auditors of Nissan Ltd., a company with PAN-India presence, for the financial year 2023-24. The audit report was issued on August 20, 2024. Following the issuance of audit report, CA P instructed junior team member Mr. Y to assemble the final audit file and prepare the Completion Memorandum.
(i) Explain the meaning and significance of a Completion Memorandum.
(ii) Team Member Y completed the assembly of the final audit file in March 2025 and handed it over to CA P. Was team member Y correct in his approach?
Mention any three standards issued under authority of ICAI Council which are collectively known as ‘Engagement Standards’.
Also mention the purpose of issue of these standards.
Give five examples of operating events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern.
TS Ltd. has raised funds by issuing fully convertible debentures. These funds were raised for the expansion and diversification of the business.
The company had clearly outlined in its board resolution that these funds will be used for business expansion and diversification purposes only.
However, the company utilised these funds for repayment of long-term loans and advances rather than for the intended purpose of business growth and expansion.
State the reporting responsibility of the auditor under paragraph 3, clause (x) of the Companies Auditor’s Report Order, 2020 (CARO 2020).
LMN Ltd., a mid-sized manufacturing company, generates revenue primarily through the sale of consumer electronics in domestic and international market. The company reported sales of ₹ 2 crores in the Financial Year 2024-25. The company generates revenue through sale of standard electronics devices, customized product orders with specific delivery terms and extended warranties and after-sales services.
The auditor has to verify that all sales are accurately measured as per applicable accounting standards and correctly journalized, summarized and posted in the financial statements.
Explain the audit procedures to ensure the same.
SA 701 “Communicating Key Audit Matters in the Auditor’s Report” deals with the auditor’s responsibility to communicate key audit matters in the auditor’s report.
Explain the definition of Key Audit Matter and how an auditor will determine the Key Audit Matters?
Luck Ltd., a mid-sized manufacturing company, has approached CA S, a qualified Chartered Accountant, to conduct the audit for the financial year ended March 31, 2025. The company requests CA S to give acceptance for the audit so that audit can be commenced within time.
With reference to SA 210, how the auditor will establish that whether the preconditions for an audit are present?
CA Pari is conducting the audit of Heavy Ltd., a company with large number of customers which are generally small retail shop owners. While verifying sundry debtors, CA Pari assesses the risk of material misstatement (ROMM) as low and internal control is operating effectively.
With reference to SA 505 (External Confirmations):
(i) Which type of confirmation request is most likely to be used by CA Pari in this scenario?
(ii) What are the conditions necessary for using such a confirmation request effectively?
M/s ABC & Co., Chartered Accountants, have been appointed as the statutory auditors of DEF Ltd., which is a listed company, for the Financial Year 2024-25. CA X, a seasoned Chartered Accountant with over 15 years of experience has been assigned as the engagement partner for this audit. CA X takes responsibility for maintaining overall quality on this audit engagement in accordance with SA 220.
What do the actions of engagement partner and appropriate messages to the other members of the engagement team, in taking responsibility for the overall quality on audit engagement emphasize?
While auditing the accounts of PQR Ltd., a member of the audit team wants to carry out test of controls for checking the effectiveness of internal control over sales as a part of debtor’s audit procedure. State any four points that need to be considered in respect of trade receivables.
As per SA 299 “Joint Audit of Financial Statements”, Joint audit basically implies pooling together the resources and expertise of more than one firm of auditors to render an expert job in a given time period which may be difficult to accomplish acting individually. Explain by stating any five advantages of joint audit.
The Management of Sun Shine Ltd. has provided the auditor with a written representation regarding its responsibilities for the preparation of the financial statements. In addition to this, the auditor may request other written representations about the financial statements.
Mention such other representations which may supplement but do not form part of the written representation relating to management’s responsibilities regarding preparation of financial statements.
Compute the Drawing power for Cash Credit limit granted to S Ltd. by Trust Bank for the month of March 2025 from the following information:
|
Particulars |
Amount in (₹) |
|
Value of stocks |
50,000 |
|
Value of debtors (including debtors of ₹ 5,000 for an invoice dated 17.11.2024) |
45,000 |
|
Value of creditors for goods |
15,000 |
|
Sanctioned limit |
45,000 |
Margin on stock is 20% and on debtors is 50%.
Note: Debtors older than 3 months are ineligible for calculation of D.P.
T Ltd. has appointed NFO & Co., Chartered Accountants, as statutory auditors. Since inventory is a material component of the financial statements, CA F plans to attend the physical inventory counting. Provide any five matters that CA F should consider when planning their attendance at the physical inventory counting.
M/s PQ & Co., Chartered Accountants have been appointed as statutory auditors of CBD Multiplex Cinema Ltd. The audit team started the audit and verified the ledger and other books of accounts for the F.Y. 2024-2025. However, one of the team members is of the view that the internal control mechanism of the company should also be verified. Can you guide the audit team about the areas that will be covered in verifying the internal control mechanism?
The auditor shall take into consideration the reporting objectives of the engagement so as to plan timing of different audit procedures and also nature of communications while establishing audit strategy. Give any four instances of reporting objectives.
As an auditor of Star Ltd., a company covered under Section 135 of the Companies Act, 2013, what matters should auditor verify to ensure that proper disclosures regarding Corporate Social Responsibility (CSR) activities is made in Additional Information to notes to account. Mention any four such matters.
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