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Hello everyone as a professor its very important to understand what material is being used for drafting papers, understand the trend so that I can make students hit bull's eye. So we worked for many hours to give you accurate and path-breaking analysis.

After analyzing papers setting for so many years, I have come to conclusion, that paper setters of ICAI draft paper from either remote corners of module or PM / RTP / Past Papers. So in some attempt, you may face many questions which you have not seen in past or it could be a cake walk if many questions are from PM / RTP / Past Papers etc, but scoring will depend on how strong is your understanding of the subject and how well you connect and present your knowledge. I have seen many students cram from PM and put it in exams, but they don’t get good marks because their answer is not expressing real meaning, examples etc

So PM / RTP is must but it cannot be first and base of your studies.

Source of Drafting Paper in May17

You will be surprised to see many of below facts. (Paper was of 124 marks) (Don't add up below marks there is overlapping of the source)

1. After last times analysis, I saw a trend that many questions were asked from module and PM which were in bold & italics, has diagram, chart or highlighted as case study. We even identified all such areas and uploaded important file online. So we suggested all students who came in touch that target such areas.

Bingo guys this time 37 Marks paper (all big questions) were from such areas. May be ICAI wanted target changes or it was natural human behaviour to pick such questions. So those who followed this strategy got rich dividends with very low time investment.

3.  Last 5 years RTPs contributed to 35 Marks of paper. May 17 RTP contributed around 9 marks.

4.  Last 10 years papers contributed to 50 Marks of paper.

5. PM contributed to 78 Marks paper, this also means 124 – 78 = 46 marks paper was not from PM.

6. There were questions of 34 Marks exclusively (Not Covered in PM / RTP) from module. But they were easy if someone has done regular classes properly along with class notes.

7. We have linked our notes to all PM questions, through PM analysis file so that you can covers PM along with notes efficiently and effectively. Students those who followed our notes and covered PM could target 120 marks.

I will suggest following your class notes as a base, very important for understanding and retention + PM for practicing questions. You should keep Module & Collection of past 5 years RTPs to see if any particular topic is left out, just see headings and topic questions are targeting.

Important Note:- In these suggested answer lot of content is picked from PM, module, bare act etc ICAI may not be expecting some points in details as covered below. So don’t worry if your answer doesn’t match as it is. Further ICAI gives 40-50% marks if your content is not bang on target. These answers are framed to help students understand paper and what was expected.

1. Discuss the following :

(a) “A satisfactory internal control environment may help reduce the risk of fraud but is not an absolute deterrent for fraud.” Explain.
[May17 RTP Q10(a) / May16 RTP Q10(b)]


Important part of ICS is Control Environment: - Attitude / Awareness / Ability / Action of TCWG and Management towards designing & operating effectiveness of ICS

Good CE reduces fraud risk, but doesn’t eliminate it fully. But weak CE can lead to frauds. Eg of weak CE, insufficient resources to IT department may lead to in appropriate access, manipulation of programmes and data.

CE influences auditors evaluation about RMM and hence NTE of further audit procedures.

CE it alone cannot prevent, detect, correct material misstatement. But it influences other parts of internal controls.

(b) Discuss with reference to SA 510, "Initial Audit Engagements - Opening Balances", the procedures the auditor should undertake in respect of opening balances for a new audit engagement.
[Similar Question in May 06]


Audit Procedures to examine Opening Balances

1. Check whether closing balances have been correctly brought forward from last year ledger.

2. Agree to opening balance with the most recent financial statements

3. Read predecessor audit report if any.

4. If any adjustment is shown as a prior period item, trace to previous period documents.

5. Whether audit procedures performed in the current period provide evidence relevant to the opening balances

(While physical verification of fixed assets, we can see date of acquisition to find out whether they existed in opening, the same thing can be done for investments, ask for confirmation for closing as well as opening balances for debtors, Collection opening debtors & creditors while doing ledger scrutiny)

6. Performing specific audit procedures to obtain evidence regarding the opening balances. (Reconciliation of inventory Op (Bal fig) + Purchase – Sale = Closing / Checking inventory valuation of opening inventory / Recomputing last year depreciation)

7. Read accounting policies of LY and determine whether they are consistently applied in CY. Also, check whether accounting policies are appropriate.

(c) What are the provisions regarding appointment of auditors by rotation, after the expiry of the term of the current auditor, that a company should consider?
Bold & Italics PM Ch7 Q48]


Manner of Rotation of Auditors on Expiry of their Term: Prescribed manner of rotation of auditors on expiry of their term is given below-

Tenure allowed to CA / CA Firms

(3) For the purpose of the rotation of auditors-

(i) in the case of an auditor (whether an individual or audit firm), the period for which the individual or the firm has held office as an auditor prior to the commencement of the Act shall be taken into account for calculating the period of five consecutive years or ten consecutive years, as the case may be;

(ii) the incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms.

The term "same network" includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control.

Role of Audit Committee / Board

(1) The Audit Committee shall recommend to the Board, the name of an individual auditor or of an audit firm who may replace the incumbent auditor on expiry of the term of such incumbent.

(2) Where a company is required to constitute an Audit Committee, the Board shall consider the recommendation of such committee and in other cases, the Board shall itself consider the matter of rotation of auditors and make its recommendation for appointment of the next auditor by the members in the annual general meeting.

Break / Signing Partner Joining Other Firm

Further, for the purpose of rotation of auditors,-

(a) a break in the term for a continuous period of five years shall be considered as fulfilling the requirement of rotation;

(b) if a partner, who is in charge of an audit firm and also certifies the financial statements of the company, retires from the said firm and joins another firm of chartered accountants, such other firm shall also be ineligible to be appointed for a period of five years.

Benefit of Joint Auditor

(4) Where a company has appointed two or more individuals or firms or a combination thereof as joint auditors, the company may follow the rotation of auditors in such a manner that both or all of the joint auditors, as the case may be, do not complete their term in the same year.

(d) In the course of the audit of Steadfast Ltd., a manufacturing company, you find that there is a sharp fall in the rate of gross profit in comparison to the previous year. State the steps you would take to verify the same.
[PM Ch5 Q16, Q37 / Nov06]


Decrease in Rate of Gross Profit on Sales: When the rate of Gross Profit on Sales of a manufacturing company has sharply decreased in comparison to the previous year, the auditor should satisfy the reasons for the same. Following factors should be considered which might cause decrease in the Gross Profit of the manufacturing company-

Stock Related Points

(ii) Change on the basis of inventory valuation. For example, opening inventory was valued at a market price above cost when closing inventory valued at cost which is below the market price.

(viii) The value of unusual inventory of consumable stores (fuel and packing materials) are not shown as inventory or not adjusted from corresponding expenses.

(i) Undervaluation of closing inventory or overvaluation of opening inventory either due to wrong valuation of inventory or mistake in inventory taking.

Sale Related Points

(iv) Reversal of fictitious sale entries recorded in the previous year to boost up profit.

(v) Sales return entry passed two times or entry for purchase return has not been passed whenever goods are returned to suppliers.

(vii) Goods sent out for sale on approval or on a consignment basis not included in closing inventory.

(xi) Goods sold or given as samples or destroyed, not accounted for.

Purchase & Expense Related

(iii) Inclusion in the current year, the amount of goods purchased in the previous year, that were received and taken in the same year.

(vi) Excess provision for wages or direct expenses have been made.

(ix) Expenses which should be charged to the Profit and Loss Account but wrongly charged to the Trading Account.

(x) Insurance claim received in respect of goods lost in transit or destroyed by fire, not credited in Trading Account.

2. State with reasons (in short) whether the following statements are correct or incorrect:

(Answer any eight)

(a) If financial statements are misstated, and in the auditor’s judgment such misstatement is material and pervasive, he should issue a qualified opinion.


Incorrect [Hint Answer Auditor Should give Adverse Opinion / Explain when to give qualified & when to give adverse]

(b) Under the Companies Act, 2013, the financial statements of a company must be approved by two directors out of which one shall be the managing director.
[Module Pg 8.8]


Correct [Hint Answer Explain as per Sec 134, who all are suppose to sign financial statements]

Authentication of Financial Statements: Section 134(1) provides that the financial statements, including consolidated financial statement, if any, shall be approved by the board of directors before they are signed on behalf of the board at least by the following-

(a) The chairperson of the company where he is authorized by the Board; or By two directors out of which one shall be managing director and
(c) The Chief Executive Officer, if he is a director in the company,
(d) The Chief Financial Officer, wherever he is appointed; and
(e) The Company Secretary of the company, wherever he is appointed.

However, in the case of a one person company, the financial statement shall be signed by only one director, for submission to the auditor for his report thereon.

(c) A joint auditor is not bound by the views of the majority of the joint auditors regarding matters to be covered in the auditors report.
[PM Ch2 Q19]


Normally, the joint auditors are able to arrive at an agreed report. However where the joint auditors are in disagreement with regard to any matters to be covered by the report, each one of them should express their own opinion through a separate report. A joint auditor is not bound by the views of majority of joint auditors regarding matters to be covered in the reportand should express his opinion in a separate report in case of a disagreement.

(d) The auditor is responsible for the compliance with laws and regulations by the audit client entity.


As per SA 250, Management is responsible for the compliance with laws and regulations by client entity.

(e) The use of computer facilities by a small enterprise may increase the control risk.
[PM Unsolved Q7 Ch4]


Use of computers will further reduce staff in accounting, segregation of duty will reduce, this will increase control risk.

(f) "Substantive procedures" may be defined as audit procedures designed to evaluate the operating effectiveness of controls in preventing, detecting and correcting material misstatements.


“Test of Controls” may be defined as audit procedures designed to evaluate the operating effectiveness of controls in preventing, detecting and correcting material misstatements.

(g) Analytical procedure is a part of routine audit checking.
Module 5.64

Incorrect, routine checks means checking opening balance, posting, casting, comparing with controls accounts, reconciliations, where focus is on arithmetical accuracy of books of accounts. Analytical procedures includes ration, percentage , trend analysis which are applied after performing routine checking.

(h) NGOs registered under the Companies Act, 2013 can maintain their books on either accrual or cash basis.

All companies have to follow accrual basis of accounting including NGOs registered under Section 8, option of cash basis accounting is available in income tax.

(i) Fraud against the company shall be reported by the auditor to the Central Government within 45 days of his knowledge.


Sec 143(12) Within 2 days to AC / BOD + 45 Days to Reply + 15 Days to send to CG so it is 62 days.

(j) If the Board of Directors fails to appoint the first auditor in case of a company other than a Government Company, then the Central Government shall appoint the auditor.

Answer:  Incorrect, Shareholders will appoint in such case in EGM within 90 days.

3. How will you vouch / verify the following ?

(a) Trademarks and copyrights
[RTP May17 Q13(b) / PM Q6(b) Ch5 / RTP Nov14 Q13(b) / Nov 2008]

(i) Obtain schedule of TradeMarks and Copyrights duly signed by the responsible officer and scrutinize the same and confirm that all of them are shown in the Balance Sheet.

(ii) Examine the written agreement in case of assignment of Copyrights and Assignment Deed in case of transfer of trademarks. Also ensure that trademarks and copyrights have been duly registered.

(iii) Verify existence of copyright by reference to contract between the author & the entity and note down the terms of payment of royalty.

(iv) See that the value has been determined properly and the costs incurred for the purpose of obtaining the trademarks and copyrights have been capitalized.

(v) Ascertain that the legal life of the trademarks and copyrights have not expired.

(vi) Ensure that amount paid for both the intangible assets is properly amortized having regard to appropriate legal and commercial considerations, as per the principles enunciated under AS 26 on Intangible Assets.

(b) Investments income in the case of charitable institutions
[Module 9.28]

(i) Vouching the amounts received with the dividend and interest counterfoils.

(ii) Checking the calculations of interest received on securities bearing fixed rates of interest.

(iii) Checking that the appropriate dividend has been received where any investment has been sold ex-dividend or purchased cum-dividend.

(iv) Comparing the amounts of dividend received with schedule of investments making special enquiries into any investments held for which no dividend has been received.

(c) Contingent liabilities
[RTP May15 Q13(b) / PM Ch6 Q13(a) / May 2007 / May 2004]

Contingent liabilities: Accounting Standard (AS) 29 on 'Provisions, Contingent Liabilities and Contingent Assets', defines 'Contingent Liability' as a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or as a present obligation that arises from past events but is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or a reliable estimate of the amount of the obligation cannot be made.

The auditor may take following steps to vouch or verify the contingent liabilities:

(i) Inspect the minute books of the company to ascertain all contingent liabilities known to the company.

(ii) Examine the contracts entered into by the company and the likelihood of contingent liabilities emanating there from.

(iii) Scrutinize the lawyer’s bills to track unreported contingent liabilities.

(iv) Examine bank letters in respect of bills discounted and not matured.

(v) Examine bank letters to ascertain guarantees on behalf of other companies or individuals.

(vi) Discuss with various functional officers of the company about the possibility of contingent liability existing in their respective field.

(vii) Obtain a certificate from the management that all known contingent liabilities have been included in the accounts and they have been properly disclosed.

(viii) Ensure that proper disclosure has been made as per Schedule III to the Companies Act, 2013 and AS 29, “Provisions, Contingent Liabilities and Contingent Assets”.

(d) Leasehold rights
[PM Ch6 Q45/ RTP(OLD) Q8(a) / Nov 14 / Nov 11 / Nov 09 / MTP May 16]

Lease Hold Property: Following are the main steps involved in verification/vouching of lease hold property-

(i) Inspect the lease agreement to ascertain the amount of premium, if any, for securing the lease and terms and conditions. A lease exceeding the period of one year is not valid unless it has been registered by an instrument. Hence this has to be ensured.

(ii) Ascertain that all the conditions, the failure of which may result in cancellation of the lease have been complied with, e.g. payment of ground rent, insurance premium, maintenance of lease and property in satisfactory state etc.

(iii) Ensure that due provisions for any claims that might arise under the dilapidation clause on the expiry of the lease have been made. If such provision has not been made, the auditor should draw the client’s attention to it.

(iv) Ensure that the outlay and legal expenses incurred to acquire lease property have been capitalized. The property must be written off in such a way that it completely wipes off the asset at the end of the lease period.

(v) He should ascertain that the clause entitles the lessee to sub let any part of the leased property and ensure its proper compliance.

4. Answer all questions :

(a) State in brief, the management's responsibilities relating to the audit of financial statements.
[Similar RTP Nov11 Q2 / Module Topic 7.10 Elements of Audit Report]

(a) This section of the auditor's report describes the responsibilities of those in the organization that are responsible for the preparation of the financial statements. The auditor's report need not refer specifically to “management”, but shall use the term that is appropriate in the context of the legal and/or regulatory framework applicable to the entity. In case of some entities, the appropriate reference may be to those charged with governance.

(b) The auditor's report shall include a section with the heading "Management's [or other appropriate term] Responsibility for the Financial Statements".

(c) The auditor's report shall describe management's responsibility for the preparation of the financial statements in the manner in which that responsibility is described in the terms of the audit engagement. The description shall include an explanation that management is responsible for the preparation of the financial statements in accordance with the applicable financial reporting framework; this responsibility includes the design, implementation and maintenance of internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

(d) Where the financial statements are prepared in accordance with a fair presentation framework, the explanation of management's responsibility for the financial statements in the auditor's report shall refer to "the preparation and fair presentation of these financial statements" or "the preparation of financial statements that give a true and fair view", as appropriate in the circumstances.

(b) Write a short note on Random Sampling.
[RTP May15 Q8(a)/ PM Ch3 Q2, Q36 (Bold & Italics) / May 2012]

Random Sampling: Random selection ensures that all items in the population or within each stratum have a known chance of selection. It may involve use of random number tables. Random sampling includes two very popular methods which are discussed below–

(i) Simple Random Sampling: Under this method each unit of the whole population e.g. purchase or sales invoice has an equal chance of being selected. The mechanics of selection of items may be by choosing numbers from table of random numbers by computers or picking up numbers randomly from a drum. It is considered that random number tables are simple and easy to use and also provide assurance that the bias does not affect the selection. This method is considered appropriate provided the population to be sampled consists of reasonably similar units and fall within a reasonable range. For example the population can be considered homogeneous, if say, trade receivables balances fall within the range of Rs 5,000 to Rs 25,000 and not in the range between Rs 25 to Rs 2,50,000.

(ii) Stratified Sampling: This method involves dividing the whole population to be tested in a few separate groups called strata and taking a sample from each of them. Each stratum is treated as if it was a separate population and if proportionate of items are selected from each of these stratum. The number of groups into which the whole population has to be divided is determined on the basis of auditor judgment. For example in the above case, trade receivables balances may be divided into four groups as follows -

(a) balances in excess of Rs 1,00,000;
(b) balances in the range of Rs 75,000 to Rs 1,00,000;
(c) balances in the range of Rs 25,000 to Rs 75,000; and
(d) balances below Rs 25,000.

(c) What is the purpose of a Letter of Engagement? What are the important contents of a Letter of Engagement?
[PM Ch3 Q4]

Letter of Engagement: The legal requirement to get the accounts audited so far extends only to companies, co-operative societies, and registered societies. In these cases, the respective law governs the appointment of auditors and their duties. In all other cases, it is a matter of contract.

The client tells the auditor the nature of service he requires and the auditor, if he is agreeable to undertake the assignment, specifies his terms. He must sign an agreement, if he accepts the work in terms of the agreement subject to professional standards.

Clients who are not statutorily required to get their accounts audited may require preparation of accounts for tax returns, checking of the sales tax-returns, etc. besides audit. In such cases, there may be a misunderstanding about the exact scope of the work; the auditor may think that he is merely required to prepare accounts while the client may think audit of accounts, is also covered. It is, therefore, of the greatest importance, both for the accountant and client, that each party should be clear about the nature of the engagement. It must be reduced in writing and should exactly specify the scope of the work.

The audit engagement letter is sent by the auditor to his client which documents, the objective and scope of the audit, the extent of his responsibilities to the client and the form of report. The ICAI has issued Standard on Auditing 210 "Agreeing the Terms of Audit Engagement" on the subject. It is in the interest of both the auditor and the client to issue an engagement letter so that the possibility of misunderstanding is reduced to a great extent.

SA 210 lays down the standards on agreeing the terms of the engagement with the client and the auditor’s response to a request by a client to change the terms of an engagement to one that provides a lower level of assurance.

5. Answer all questions :

(a) What are the important objectives of local body audits?
[PM Ch9 Q28 (Bold & Italics)]

Objectives of Audit of Local Bodies: The external control of municipal expenditure is exercised by the state governments through the appointment of auditors to examine municipal accounts. The municipal corporations of Delhi, Mumbai and a few others have powers to appoint their own auditors for regular external audit. The important objectives of audit are-

(i) reporting on the fairness of the content and presentation of financial statements;
(ii) reporting upon the strengths and weaknesses of systems of financial control;
(iii) reporting on the adherence to legal and/or administrative requirements;
(iv) reporting upon whether value is being fully received on money spent; and
(v) detection and prevention of error, fraud and misuse of resources.

(b) Distinguish between absolute and reasonable assurance. Identify the type of assurance that is expected in an audit of the financial statements, clearly outlining the reasons to justify your point of view. [Module (Bold & Italics) Pg 1.14]

Expression of opinion: If there remains a deep laid fraud in the accounts, which in the normal course of examination of accounts may not come to light, it will not be construed as failure of audit, provided the auditor was not negligent in the carrying out his normal work. This principle was established as early as in 1896 in the leading casein Re-Kingston Cotton Mills Co.

The nature of audit objectives was also highlighted in the leading case Re The London and General Bank Ltd. [1895]. It was held that an auditor must ascertain that the books of account show the true financial position of the company. For the first time, the duties of the company auditor were spelled out in specific terms. Lord Justice Lindley observed, “It is no part of an auditor’s duty to give advice either to directors or shareholders as to what they ought to do. An auditor has nothing to do with the prudence or imprudence of making loans without security. It is nothing to him whether the business of company is being conducted prudently or imprudently, profitably or unprofitably; it is nothing to him whether dividends are properly or improperly declared, provided he discharges his own duty to the shareholders. His business is to ascertain and state the true financial position of the company at the time of the audit and his duty is confined to that.”

As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting an audit of financial statements, the overall objectives of the auditor are:

(a) To obtain 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; and

(b) To report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s findings.

The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. In the case of most general purpose frameworks, that opinion is on whether the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with the framework. An audit conducted in accordance with SAs and relevant ethical requirements enables the auditor to form that opinion.

The auditor’s opinion on the financial statements deals with whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. Such an opinion is common to all audits of financial statements. The auditor’s opinion therefore does not assure, for example, the future viability of the entity nor the efficiency or effectiveness with which management has conducted the affairs of the entity. In some cases, however, the applicable laws and regulations may require auditors to provide opinions on other specific matters, such as the effectiveness of internal control, or the consistency of a separate management report with the financial statements. While the SAs include requirements and guidance in relation to such matters to the extent that they are relevant to forming an opinion on the financial statements, the auditor would be required to undertake further work if the auditor had additional responsibilities to provide such opinions. As the basis for the auditor’s opinion, SAs require the auditor to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Reasonable assurance is a high level of assurance. It is obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk (i.e., the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low

level. However, reasonable assurance is not an absolute level of assurance, because there are inherent limitations of an audit which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.

(c) National College, an institution managed by a trust, has received a grant of 2.40 crore from Government nodal agencies for funding a project of research on rural health systems in India. Draft an audit programme for auditing this fund in the accounts of the college. [PM Ch3 Q16]

6. Answer all questions :

(a) Specify the class of companies to whom rotation of auditor applies, under the provisions of Companies Act, 2013.
[RTP May15 Q15(b) / PM Q44 Ch7]

Audit Programme for Audit of Grant Fund of a College:

(i) The auditor should obtain the basic documents about the constitution of the college, objectives of the trust, rules of college etc.

(ii) The government policy on grant should be checked with the relevant application, brochure and sanction advices.

(iii) The conditions stipulated in award of grant should be studied.

(iv) The receipt of grant should be vouched with bank statement.

(v) The budgeted heads of expenses for the project and actual utilization of the fund should be checked.

(vi) The purchase of capital items covered within the project should be correctly capitalized.

The same should be properly and distinctly shown in the balance sheet of the college. The cost of the asset should be adjusted for the grant amount.

(vii) The expenses of revenue nature incurred from and out of grant in the form of salaries to field staff, materials purchased, traveling, survey and field work expenses and analysis and preparation of reports etc should be vouched with the relevant vouchers.

(viii) The expenses should be accounted as withdrawal of amounts from the fund. It is to be checked that these expenses are not accounted in income and expenditure of the college.

(ix) In balance sheet, the fund account should be shown as a liability with a separate schedule indicating the receipts, payments and balance as on the date of closing of accounts.

(x) The fund balance should be cross checked with the periodical statements of accounts submitted to the nodal agencies.

(xi) The physical verification of assets pertaining to the project should be done by the management of the college.

(xii) The progress of the project may be ascertained from the minutes, committee meeting extracts and reports. This must be done to ensure that the project fund is genuinely utilized for the purposes it intended for.

(b) With reference to SA 500, "Audit Evidence", discuss the different sources and their reliability, of audit evidence.
[(Bold & Italics) Module Pg 2.7]

Sources of Audit Evidence - Some audit evidence is obtained by performing audit procedures to test the accounting records.

For example-

- Through analysis and review,
- Re-performing procedures followed in the financial reporting process,
- And reconciling related types and applications of the same information.

Through the performance of such audit procedures, the auditor may determine that the accounting records are internally consistent and agree to the financial statements.

More assurance is ordinarily obtained from consistent audit evidence obtained from different sources or of a different nature than from items of audit evidence considered individually. For example, corroborating information obtained from a source independent of the entity may increase the assurance the auditor obtains from audit evidence that is generated internally, such as evidence existing within the accounting records, minutes of meetings, or a management representation.

Information from sources independent of the entity that the auditor may use as audit evidence may include confirmations from third parties, analysts’ reports, and comparable data about competitors.

(c) State the analytical review procedures normally carried out in the audit of inventories.
[PM Q23 Ch6 / May 2006]

Analytical Procedures for Verification of Inventories: The auditor can adopt the following analytical procedures to verify the inventory of inventories-

(i) Quantitative reconciliation of opening inventories, purchases, production, sales and closing inventories;

(ii) Comparison of closing inventory quantities and amounts with those of the previous year.

(iii) Comparison of the inventory turnover ratios for the current year with that of the previous year and with industry standards if available.

(iv) Comparison of the closing inventory (Raw materials, closing work-in-progress and finished goods are percentage of total inventories) with the corresponding figures of the previous year.

(v) Comparison of current year gross profit ratio of the previous year.

7. Write short notes on any four of the following :

(a)What is an Emphasis of Matter paragraph, when it is used, and manner of its use in an audit report ?
[PM Q43, Q49 (Bold & Italics) Ch7 / May 14]

SA 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report”, the inclusion of an Emphasis of Matter paragraph in the auditor’s report does not affect the auditor’s opinion. When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor shall:

(i) Include it immediately after the Opinion paragraph in the auditor’s report;

(ii) Use the heading “Emphasis of Matter”, or other appropriate heading;

(iii) 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; and

(iv) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.


i. An uncertainty relating to the future outcome of an exceptional litigation or regulatory action.
ii. Early application (where permitted) of a new accounting standard that has a pervasive effect on the financial statements in advance of its effective date.
iii. A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.

(b) Important requirements which should be kept in mind to establish a system of internal control for application process at a service bureau.
[PM Ch4 Q9 / May 2004]

Requirements of Internal Control System at a Service Bureau: Various requirements to establish or evaluate a system of internal control for applications processed at a service bureau are stated below-

(i) Liaison between bureau and user should be clearly defined. Senior member of the user's staff is appointed as liaison officer.

(ii) Need for a system testing including all clerical procedures at the user company.

(iii) Control over physical movement of data and in this respect whether a copy or microfilm of documents sent to the service bureau is kept.

(iv) Planning procedure so that error is identified by documents provided by the bureau. The user must ensure that prompt correction and resubmission of rejection to meet the bureau processing schedule.

(v) Establishing a system in the user company to ensure that all exceptional reports are received from bureau.

(vi) Establish clerical control to verify the accuracy of computer processing.

(vii) Normally, user has no physical control over the files; therefore, high control over the maintenance of data on master files should be established.

(c) General Purpose Financial Statements.
[PM Ch1 Q10 / Nov 2005]

General Purpose Financial Statements: As defined in SA 700 “Forming an Opinion and Reporting on Financial Statements”, general purpose financial statements are financial statements prepared in accordance with a general purpose framework.

A financial reporting framework designed to meet the common financial information needs of a wide range of users is called General purpose framework.

The term “General Purpose Financial Statements” normally includes a Balance Sheet, a statement of profit and loss (also known as ‘income statement’), a cash flow statement and those notes and other statements and explanatory material that are an integral part of the financial statements. They may also include supplementary schedules and information based on or derived from, and expected to be read with, such statements. Such schedules and supplementary information may deal, for example, with financial information about business and geographical segments, and disclosures about the effects of changing prices. Financial statements do not, however, include such items as reports by directors, statements by the chairman, discussion and analysis by management and similar items that may be included in a financial or annual report. Such financial statements are prepared and presented at least annually and are directed toward the common information needs of a wide range of users.

Some of these users may require, and have the power to obtain, information in addition to that contained in the financial statements. Many users, however, have to rely on the financial statements as their major source of financial information and such financial statements should, therefore, be prepared and presented with their needs in view. Accounting Standards are applicable to all General Purpose Financial Statements.

(d) Provisions regarding re-appointment of a retiring auditor at the Annual General Meeting, for a company not covered under auditor rotation provisions.
[PM Ch7 Q25 / RTP Nov14 Q15(a) / RTP (OLD) Q10 / Nov 13 / Nov 08 / MTP May16]

Circumstances where Retiring Auditor Cannot be Reappointed: In the following circumstances, the retiring auditor cannot be reappointed-

(i) A specific resolution has not been passed to reappoint the retiring auditor.

(ii) The auditor proposed to be reappointed does not possess the qualification prescribed under section 141 of the Companies Act, 2013.

(iii) The proposed auditor suffers from the disqualifications under section 141(3), 141(4) and144 of the Companies Act, 2013.

(iv) He has given to the company notice in writing of his unwillingness to be reappointed.

(v) A resolution has been passed in AGM appointing somebody else or providing expressly that the retiring auditor shall not be reappointed.

(vi) A written certificate has not been obtained from the proposed auditor to the effect that the appointment or reappointment, if made, will be in accordance within the limits specified under section 141(3)(g) of the Companies Act, 2013

(e) The purpose of providing depreciation.
[PM Ch6 Q12(c) / Nov12 / Nov14]

Purpose of Providing Depreciation: According to AS 6 on Depreciation Accounting, depreciation may be defined as, "a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined". This is a measure of the exhaustion of the useful life of an asset during the accounting period. Depreciation is charged in each accounting period by reference to the extent of the depreciable amount irrespective of an increase in the market value of fixed assets. The principal objective of depreciation on fixed assets is to allocate as an expense, the related depreciation amount on a year to year basis. Depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise. The main purpose of providing depreciation is as under:

(i) To keep intact the capital invested in fixed assets - This is accomplished by retaining the amount of depreciation charged in the Statement of Profit and Loss in the business.

(ii) To ascertain the true cost of production - As the value of fixed assets depletes gradually by consumption during the process of production, it is necessary that such consumption of value be charged in the accounts for determination of the true cost of production.

(iii) To determine the profit or loss for the year - Depreciation being an expense represented by the loss in value of fixed assets arising on use, it is charged to the Statement of Profit and Loss for determining the profit or loss during a year.

(iv) To present a true and fair value of entity's assets in the balance sheet, since the original costs of fixed assets gradually decreases due to use and other factors, it is improper to continue to carry such assets at original costs. Therefore, the amount of depreciation charged in the Statement of Profit and Loss representing the loss in value of the assets is deducted from the original cost on a cumulative basis so as to reflect in the balance sheet a true and fair value of the fixed assets.

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