CA Intermediate - Auditing and Ethics (2025)

AP & Co. is statutory auditor of Heavy Industries Limited (listed EV manufacturer). A regulatory guideline requires every listed company to maintain a digital database of personnel having access to books of account, to prevent Insider Trading; non-compliance attracts hefty fines. CA P (engagement partner) planned, during the planning stage, to inquire from the in-house IT Head about maintenance of this digital database to identify and assess the risk of non-compliance with the regulatory guideline. Is CA P required to consider the maintenance of the digital database while framing the audit strategy?

In the same situation as above, CA P planned to inquire only from the in-house IT Head of the company about maintenance of the digital database, to identify and assess the risk of non-compliance. Are the procedures planned by CA P in line with SA-300?

Fashion Garments Limited (FGL) manufactures and sells ready-made garments for men, women and kids. Pearl & Associates is the statutory auditor. Partner CA Pearl asked her audit assistant (new to the engagement) to go through the segment information disclosed in the financial statements. What is the key responsibility of the auditor in relation to segment information, and what should CA Pearl guide the assistant on this matter?

What audit procedures should CA Pearl perform to ensure that the methods used by the management to present segment information are in accordance with the applicable financial reporting framework?

Spare Parts Limited's internal auditors observed that the internal controls implemented by the company appear reasonable but not strong enough to prevent or timely detect any fraudulent activity. CA Raj, appointed as Internal Control Head, studied various verticals, identified fraud-prone areas and implemented strong controls there. In a meeting with senior management and statutory auditors, he assured them that a satisfactory control environment exists and fraud cannot happen. Can the existence of a satisfactory control environment be considered an absolute deterrent to fraud?

XYZ Ltd, a yarn manufacturer, prepared prospective financial information (PFI) to present to potential investors/financial institutions to secure funding for expansion into new markets and products. A firm of auditors conducted an assurance engagement on this PFI, reviewed management's assumptions, and issued a report. Explain the key differences between prospective financial information and historical financial information, and how this distinction impacts the level of assurance provided in an assurance engagement on prospective financial information.

CA H, managing partner of HK & Co., noted the following observations for F.Y. 2023-24 while reviewing threats to independence in the firm: (i) CA J performed statutory audit as well as a non-audit engagement for M/s Take Away Private Limited. (ii) CA M, who conducted income tax audit of M/s Happy Associates, has material significant indirect financial interest in that firm. (iii) Costs of air travel and stay of audit team's family members for the Chennai audit were borne by the client. (iv) Client M/s Chalk Limited threatened to replace the firm as auditors because the audit team insisted on a provision for expected credit loss which the company was unwilling to provide. (v) CA N, who audited M/s NM Private Limited, became arbitrator for a dispute between NM Private Limited and one of its vendors. (vi) CA N accepted the assignment of Tax Audit of TRF Industries on behalf of the firm, for which management agreed to pay him a contingent fee. Classify the type of threat to independence in each of the above observations.

In case the threats to independence (as identified above) exist, what should the auditor/firm do?

NHG & Co. is statutory auditor of M/s Backlog Private Limited (BPL), a telecom services provider. BPL received a notice from the telecom regulator to deposit a fee for violation of norms; BPL filed an appeal with the telecom appellate authority, and the matter is pending at the year-end. The company has disclosed this in the financial statements. The audit team has completed its procedures and the team leader knows that the matter needs to be included in the auditor's report. Guide the team leader on how to report this matter.

ABC & Co. is statutory auditor of Pen Private Limited for F.Y. 2023-24. Mr. R, a team member, observed that Pen Private Limited purchased software for ₹2.00 crore, which is not an integral part of related hardware, and also incurred ₹1.00 crore on an internal research project. Following Indian GAAP, the company presented both items under Property, Plant and Equipment (PPE) in the Balance Sheet as on 31st March, 2024 (Software ₹2.00 crore and Research ₹1.00 crore). Mr. R wants to verify the correctness of this presentation under Schedule III to the Companies Act, 2013, and also wants to ensure that all additions to intangible assets during the year have been recorded appropriately. Guide Mr. R.

Projects India Limited (PIL) manufactures and trades disposable glasses and plates. Analytical procedures by the audit team (headed by CA Z) showed that the company's business is declining and PIL achieved only 50% of F.Y. 2022-23's total revenue; management has not taken steps to improve revenue/profitability, and suppliers are demanding cash payment for raw materials. Before finalising the audit report, the audit in-charge asked management for a cash flow forecast for the next 12 months from the balance sheet date. What can be the likely purpose of CA Z in asking for this?

State any two audit procedures in relation to the cash flow forecast likely to be performed by CA Z.

Singh & Associates, statutory auditors of Rubber Industries Limited, found that debtors (60% of total assets) are not paying invoice-wise and management refused to provide external confirmations for debtors exceeding ₹1.00 lakh. The firm decided to disclaim an opinion on the financial statements. Guide them on the amendments to be made in the 'Basis for Opinion' section, and elements required by SA 700 (Revised) which need NOT be included in the auditor's report.

PQR & Co. is statutory auditor of MGM Ltd, which has material debtors outstanding. Ageing of debtors was done by internal auditors and reported in their monthly report; the engagement partner of PQR & Co., due to shortage of time, decided to adopt the age-wise debtors as per the internal auditor's report. After the audit report was released, the engagement partner realised the disclosure of debtors was misleading because the ageing was not done by the internal auditor on correct principles, and the provision against old debtors was wrong. The engagement partner held the internal auditor responsible. Is he correct? What considerations should PQR & Co. have undertaken before relying on the work of the internal auditor?

Identify and explain the assertion that the auditor will check by performing the audit procedure: Employee benefit expenses do not include the cost of any unauthorized personnel.

Identify and explain the assertion checked by the procedure: All items of inventory pertaining to the relevant year shall be included regardless of the location.

Identify and explain the assertion checked by: Sales are recorded correctly in the books based on the invoices; discounts have been properly adjusted or accounted for.

Identify and explain the assertion checked by: The entity owns or controls the inventory recorded in the financial statements, i.e., purchase invoices have been made in the name of the client.

Identify and explain the assertion checked by: Inventory has been recognized at the lower of cost and net realizable value in accordance with AS 2 - Inventories.

Z Ltd engaged ABC & Co. for its statutory audit for F.Y. 2023-24. The audit team developed an overall audit strategy and plan. During the audit, several significant changes occurred, including discovery of a material misstatement in inventory valuation and changes in scope of audit procedures due to an unexpected acquisition by Z Ltd. The audit documentation should reflect these changes, but the auditor failed to document the audit strategy and the audit plan. As a senior auditor, briefly outline what should be included in the documentation of audit strategy and audit plan, and how the audit documentation should address significant changes made during the audit engagement.

SRP Limited appointed M/s JK & Co. as its statutory auditors. During the audit, the auditors found that the company entered into a complex transaction having a material effect on the financial statements. To obtain realistic information on this transaction, the audit team decided to take assistance from 'those charged with governance'. Two team members could not get a fair idea of who can be 'those charged with governance'. Explain the same.

Helping Hands Co-operative society has been working for the welfare of its members for the last 10 years. The Governing Body decided to invest idle funds during F.Y. 2023-24 in blue chip mutual funds, considering equity market growth. The decision earned a handsome return; however, the society's auditor gave a qualified opinion. Management has hired you to guide where they went wrong, considering Section 32 of the Central Act.

CA P was consulted by his friend, Mr. Robin, who wants to invest in a school being operated in the city; operations will be managed by Robin only, and the investment will be made once CA P confirms the revenue figures given by the existing management. CA P stated that the main source of revenue is fees from students, and that will be verified. What special steps are involved in the verification of fees collected from students?

Oval Enterprises Limited (OEL) is required to present its current year's financial statements along with previous year's (comparative) financial statements. Karan & Associates is appointed statutory auditor for the year. CA Karan noticed that the last year's financial statements contain an adverse opinion due to a misstatement in the evaluation and disclosure of debtors. Guide CA Karan on his duty regarding the treatment and addressing of this issue while drafting his audit report, and the disclosures he is required to make.

Identify and explain the fundamental principle referred to in: Professional accountants should act diligently and in accordance with applicable technical and professional standards while providing professional services.

Identify and explain the fundamental principle referred to in: A professional accountant shall not knowingly be associated with reports where he believes that the information contains a materially false or misleading statement.

In an automated environment, there are generally four types of audit tests available. As a senior auditor, guide your team in selecting the appropriate audit tests based on the situation. Explain the types of audit tests commonly used in an automated setting and provide insights on how to determine when and which tests to apply, emphasizing the role of professional judgment.