CA Final Advanced Auditing (Mock Test Series Nov.

2017 Exams)
Mock Test I (27.08.2017) Company Audit

Test Company Audit

M.M.: 30 Marks
Time: 60 Minutes
Instructions: Q. No. 1 is Compulsory and attempt any five from the rest.

Marks
1 (a) (a) Second proviso to Sec. 139(2) of Companies Act, 2013 provides that as on the date of 5
appointment no audit firm having a common partner or partners to the other audit firm,
whose tenure has expired in a company immediately preceding the financial year, shall
be appointed as auditor of the same company for a period of five years.
In the present case, CA. X is common partner in AB & Associates and MN & Associates as
on date of appointment. Therefore M/s MN & Associates is not allowed to accept the
appointment as auditor of XYZ Ltd. for a period of five years after expiry tenure of M/S
AB & Associates.
(b) Rule 6 of Companies (Audit & Auditors) Rules, 2014 provides that 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.
In this case, Mr. X being in-charge of M/s AB & Associates and certifying authority of
financial statements of XYZ Ltd., retires from the partnership in M/s AB & Associates
and joins M/s MN & Associates, which renders M/S MN & Associates to be ineligible to
be appointed as auditor for a period of five years.
Marking Scheme
Reference of Sec. 139(2) along with explanation 2 Marks
Conclusion of Part (a) 1 Mark
Reference of Rule 6 along with explanation
Conclusion of Part (b) 1 Mark

(b) Reporting Requirement under CARO w.r.t. payment of statutory dues: 5

Para 3(vii)(a) of CARO 2016 requires the auditor to comment whether the company is
regular in depositing undisputed statutory dues including Provident Fund, Employees
State Insurance (ESI), Income-tax, Sales-tax, Wealth tax, Service tax, Duties of Customs,
Duty of Excise, Value Added Tax, cess and any other statutory dues with the appropriate
authorities and if not, the extent of the arrears of outstanding statutory dues as at the
last day of the financial year concerned for a period of more than six months from the
date they became payable.
SA 250 Consideration of Laws and Regulations in an audit of financial statements, also
requires the auditor to obtain sufficient appropriate audit evidence regarding
compliance with the provisions of those laws and regulations generally recognised to
have a direct effect on the determination of material amounts and disclosures in the
financial statements.
A company is required to deposit provident fund and Employees State Insurance dues
to appropriate authorities with in the period prescribed under the EPF Act and the
Rules governing it.

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 CA Final Advanced Auditing (Mock Test Series Nov. 2017 Exams)
Mock Test I (27.08.2017) Company Audit

In the present case company is not regular in depositing the provident Fund/ESI
Contributions. The reason put forward by the Chief Accountant that the amount has not
been deposited due to financial problems faced by the Company is no excuse for not
remitting the PF/ESI Contributions.
Conclusion: Non-payment of PF/ESI contribution needs to be disclosed by the auditor in his
audit report as per requirement of Para 3(vii)(a) of CARO 2016.
Marking Scheme
Reference of Para 3(vii)(a) along with explanation 3 Marks
Reference of SA 250 along with explanation 1 Mark
Conclusion 1 Mark

2 Impact of reporting u/s Sec. 143(3)(f) of Companies Act, 2013: 4

Sec. 143(3)(f) of Companies Act, 2013 requires the auditor to state in his report observations or
comments of the auditors on financial transactions or matters which have any adverse effect on the
functioning of the company.
As per Guidance Note on Reporting u/s 143(3)(f) and 143(3)(h) of Companies Act, 2013 as issued
by the ICAI there is no change in the objective and scope of an audit of financial statements
because of inclusion of clause (f) in sub-section (3) of section 143 of the Act.
The auditor expresses his opinion on the true and fair view presented by the financial statements
through his report which may be modified in certain circumstances. However, the auditor would
now have to evaluate the subject matters leading to modification of the audit report or emphasis of
matter in the auditors report to make judgement as to which of them has an adverse effect on the
functioning of the company within the overall context of audit of financial statements of the
company. Only such matters which, in the opinion of the auditor, have an adverse effect on the
functioning of the company should be reported under this clause.
Conversely, such qualifications or adverse opinions or disclaimer of opinion or emphasis of matters
of the auditor, which do not deal with matters that have adverse effect on the functioning of the
company, need not be reported under this clause.
Marking Scheme
Reference of Guidance Note 1 Mark
Explanation 3 Marks

3 Applicability of CARO, 2016: 4

The Companies (Auditors Report) Order (CARO), 2016, exempts private limited companies, not
being a subsidiary or holding of a public company, from its application which fulfils all the
following conditions:
(i) its paid-up capital and reserves are not more than Rs. 1 Cr. as on Balance Sheet date, and
(ii) its total borrowings any bank or financial institution are not more than Rs. 1 cr. at any
point of time during the financial year; and
(iii) its total revenue as disclosed in Schedule III (including revenue from discontinuing
operations) does not exceed Rs. 10 Cr. during the financial year as per the financial
statements.

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 CA Final Advanced Auditing (Mock Test Series Nov. 2017 Exams)
Mock Test I (27.08.2017) Company Audit

In the present case paid-up capital is less than Rs. 1 Cr., Revenue is less than Rs. 10 Crores, total
borrowings from banks and financial institution is 90 lacs, i.e. less than Rs. 1 Cr.
As per Guidance Note of CARO, 2016 issued by ICAI, while computing total borrowings from
banks and financial statements, loans against Fixed deposits are to be taken into consideration.
Further loans from banks and financial institutions are to be taken cumulatively not
individually. Personal loan from director of Rs. 16 Lacs will not be considered for the purpose of
determining applicability of CARO, 2016
Conclusion: Contention of management of H Private Ltd. is correct as it satisfies all conditions
applicable for exemption from reporting under CARO, 2016.
Marking Scheme
Conditions for exemption of Private Limited companies 2 Marks
Explanation and conclusion 2 Marks

4 Additional requirements w.r.t. Audit Committee as provided in Regulation 18 of SEBI(LODR) 4

Regulations, 2015, which are silent in Sec. 177 of Companies Act, 2013:
(a) The audit committee may invite such of the executives, as it considers appropriate (and
particularly head of the finance function) to be present at the meeting of the committee, but on
occasions, it may also meet without the presence of any executives of the company.
(b) The company secretary shall act as secretary to the committee.
(c) The audit committee shall meet at least four times in a year. The gap between two meetings
should not be more than four months.
(d) The quorum of the audit committee shall be two members or one-third of the members of the
audit committee whichever is higher and minimum of two independent directors be present.
Marking Scheme - 1 Mark for 1 point

5 Declaration of Interim Dividend: 4

According to section 123(3) of the Companies Act, 2013, the Board of Directors of a company may
declare interim dividend during any financial year out of the surplus in the profit and loss account
and out of profits of the financial year in which such interim dividend is sought to be declared.
However, in case the company has incurred loss during the current financial year up to the end of
quarter immediately preceding the date of declaration of interim dividend, such interim dividend
shall not be declared at a rate higher than the average dividends declared by the company during
the immediately preceding three financial years.
In the given case the company is facing loss during the current financial year 2015-16. In the
immediate preceding three financial years, the company declared dividend at the rate of 8%, 10%
and 12%. As per the above mentioned provision, such interim dividend shall not be declared at a
rate higher than the average dividends declared by the company during the immediately preceding
three financial years [i.e. 8+10+12=30/3=10%].
Conclusion: Decision of Board of Directors to declare 12% of the interim dividend for the current
financial year is not tenable and hence auditor need to qualify his report.
Marking Scheme
Reference of Sec. 123(3) of Companies Act, 2013 along with explanation 3 Marks
Conclusion 1 Mark

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 CA Final Advanced Auditing (Mock Test Series Nov. 2017 Exams)
Mock Test I (27.08.2017) Company Audit

6 Matters on which an Auditor of a company has to express his views and comments in his 4
report as per the Companies (Audit and Auditors) Rules, 2014:
Rule 11 of Companies (Audit and Auditors) Rules, 2014 requires the auditor to report on the
following:
(a) whether the company has disclosed the impact, if any, of pending litigations on its financial
position in its financial statement;
(b) whether the company has made provision, as required under any law or accounting standards,
for material foreseeable losses, if any, on long term contracts including derivative contracts;
(c) whether there has been any delay in transferring amounts, required to be transferred, to the
Investor Education and Protection Fund by the company.
(d) whether the company had provided requisite disclosures in its F.S. as to holdings as well as
dealings in Specified Bank Notes during the period from 8th Nov., 2016 to 30th Dec. 2016 and if
so, whether these are in accordance with the books of accounts maintained by the company.
Marking Scheme - 1 Mark for 1 point

7 Directors Responsibility Statement: 4

Sec. 134(5) of Companies Act, 2016 requires that the Directors Responsibility Statement shall state
the following:
(a) That in the preparation of the annual accounts, the applicable AS had been followed along with
proper explanation relating to material departures;
(b) That the directors had selected such accounting policies and applied them consistently and
made judgments and estimates that are reasonable and prudent so as to give a true and fair
view of the state of affairs of the company at the end of the financial year and of the profit and
loss of the company for that period;
(c) That the directors had taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of this Act for safeguarding the assets of
the company and for preventing and detecting fraud and other irregularities;
(d) That the directors had prepared the annual accounts on a going concern basis;
(e) That the directors, in the case of a listed company, had laid down internal financial controls to
be followed by the company and that such internal financial controls are adequate and were
operating effectively.
(f) That the directors had devised proper systems to ensure compliance with the provisions of all
applicable laws and that such systems were adequate and operating effectively.
Marking Scheme - 1 Mark for 1 point (any four)

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