Audit Report and CARO, 2020 - Test 1: answer key

Question 1 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. M/s Sharma & Associates are the statutory auditors of Alpha Infotech Ltd., a mid-sized Indian software company that earns implementation fees and annual subscription revenue from enterprise customers. During the year, the company migrated its billing and general-ledger applications to a cloud ERP. The audit team found that several finance users shared administrator credentials, one former employee’s account remained active, and the system permitted journal entries to be posted after period-end without an independent approval log. Management produced downloaded spreadsheets for selected entries but could not provide the linked customer contracts, acceptance certificates or original supporting vouchers for a material group of year-end revenue and receivable entries. For bank balances, the team sent confirmations using independently substantiated contact details. Two banks replied directly and agreed with the ledger. A third bank confirmed a balance ₹43 lakh lower than the amount recorded by Alpha. Management attributed the difference to cheques issued near year-end, but did not provide a complete bank reconciliation or evidence supporting ₹24 lakh of the reconciling items. The bank did not confirm management’s explanation. Alternative procedures did not resolve the difference, and management refused to provide read-only access to the ERP audit logs. The engagement team concluded that it could not obtain sufficient appropriate audit evidence over material revenue, receivables and cash-related balances. The possible effects were assessed as material and pervasive to the financial statements as a whole. The Board nevertheless asked the auditors to issue a clean report, arguing that the financial statements had been prepared by the finance department and that the auditors should reconstruct missing schedules and design controls. The Board approved the complete financial statements, including notes, and accepted responsibility for them on 9 May. The last necessary external evidence was obtained and evaluated on 12 May. The engagement partner is now finalising the report.

Assume the engagement team’s conclusion that the possible effects of the unavailable evidence are both material and pervasive is supportable. Which opinion is appropriate under the Standards on Auditing?

1. Give a qualified opinion because the scope limitation affects identified balances but its possible effects are not pervasive.
2. Disclaim an opinion because the auditor cannot obtain evidence and the possible effects are material and pervasive. (correct answer)
3. Give an adverse opinion because unavailable vouchers establish actual material and pervasive misstatements in recorded balances.
4. Give an unmodified opinion because management approved the accounts and supplied spreadsheets supporting selected entries.

Answer: B — Disclaim an opinion because the auditor cannot obtain evidence and the possible effects are material and pervasive.

Explanation. Under SA 705 (Revised), when the auditor cannot obtain sufficient appropriate audit evidence and the possible effects of undetected misstatements could be both material and pervasive, the auditor shall disclaim an opinion. A qualified opinion is appropriate where possible effects are material but not pervasive. An adverse opinion requires sufficient evidence of actual material and pervasive misstatement; an evidence limitation alone does not establish that conclusion. Management approval cannot cure the scope limitation.

Where it goes wrong. Confusing an inability to obtain evidence with proof of an actual misstatement, or treating management representations as a substitute for audit evidence.

Authority. SA 705

Question 2 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

The Board argues that the auditors should reconstruct the missing schedules and design the ERP controls because the finance department prepared the accounts. Which statement should the auditor reflect in the responsibilities section?

1. The auditor assumes responsibility for preparing schedules when original vouchers are missing and controls are weak.
2. The finance department alone is responsible, while the Board has no reporting responsibility after approving the accounts.
3. The auditor is responsible for designing controls, while management is responsible only for signing the financial statements.
4. Management remains responsible for preparing financial statements and necessary controls; the auditor obtains evidence and reports independently. (correct answer)

Answer: D — Management remains responsible for preparing financial statements and necessary controls; the auditor obtains evidence and reports independently.

Explanation. SA 700 requires the report to describe management’s responsibility for preparing the financial statements under the applicable framework and for such internal control as management determines is necessary to prevent material misstatement due to fraud or error. Management also assesses the entity’s ability to continue as a going concern. The auditor obtains reasonable assurance and reports; the auditor does not take over bookkeeping, control design or management decisions. Delegating tasks does not transfer accountability.

Where it goes wrong. Treating the auditor’s obligation to understand controls and test records as responsibility for designing or operating the entity’s controls.

Authority. SA 700

Question 3 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

When drafting the appropriate Basis section, using a modified heading where required, which elements must the auditor address under SA 700 and SA 705?

1. State that the audit followed SAs, cross-refer to auditor responsibilities, confirm independence and ethical compliance, and state whether evidence is sufficient and appropriate. (correct answer)
2. State that management confirmed every recorded transaction, the auditor guarantees fraud detection, and the Board approved the final accounts.
3. Repeat the opinion wording, list every detailed audit procedure and sample size, and omit independence because the auditor knows management personally.
4. Assert that all figures are free from every error, identify the finance director as auditor, and state that no further evidence is needed.

Answer: A — State that the audit followed SAs, cross-refer to auditor responsibilities, confirm independence and ethical compliance, and state whether evidence is sufficient and appropriate.

Explanation. SA 700, paragraph 28, requires a Basis for Opinion section directly following the Opinion section. It states that the audit was conducted in accordance with SAs, refers to the section describing the auditor’s responsibilities, confirms independence under relevant ethical requirements and fulfilment of other ethical responsibilities, and states whether the evidence obtained is sufficient and appropriate to provide a basis for the opinion. It is not a guarantee of fraud detection or a management representation paragraph.

Where it goes wrong. Assuming a Basis for Opinion paragraph is unnecessary for a clean report, or that it can be replaced by management’s confirmation.

Authority. SA 700; SA 705

Question 4 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Considering the chronology stated in the case, what is the earliest date on which the auditor may date the report, assuming all other audit work is complete?

1. 9 May, because the Board had approved the complete statements and accepted responsibility by that date.
2. 10 May, because the auditor may date the report one day after management accepts responsibility for the statements.
3. 12 May, once required external evidence was evaluated and the complete statements, notes and management responsibility were in place. (correct answer)
4. Any date before 9 May, provided the engagement partner signs the report after the Board meeting.

Answer: C — 12 May, once required external evidence was evaluated and the complete statements, notes and management responsibility were in place.

Explanation. SA 700 requires the auditor’s report to be dated no earlier than the date on which sufficient appropriate audit evidence has been obtained to support the opinion. That includes evidence that all statements comprising the financial statements, including related notes, have been prepared and that persons with recognised authority have asserted responsibility for them. Here, although the Board accepted responsibility on 9 May, necessary external evidence was not obtained and evaluated until 12 May.

Where it goes wrong. Using the Board-approval date alone and overlooking the separate requirement that the auditor must first obtain sufficient appropriate audit evidence.

Authority. SA 700

Question 5 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. M/s K. Mehta & Co. are the statutory auditors of Zenith Manufacturing Ltd., a listed company that manufactures industrial pumps. The company breached a borrowing covenant in February, and its principal lender issued a notice reserving the right to recall a ₹38 crore term loan. At year-end, current liabilities exceeded current assets and two major customers had deferred orders. Management prepared a twelve-month cash-flow forecast that assumed recovery of overdue receivables, renewal of a working-capital facility and sale of an unused factory parcel. The renewal was not committed by the bank, and the proposed purchaser had signed only a non-binding letter of intent. The auditors challenged the forecast, tested subsequent receipts, inspected the lender correspondence and performed sensitivity analysis. They concluded that the going-concern basis remained appropriate because management had no present intention or realistic plan to liquidate, but that a material uncertainty existed which could cast significant doubt on the company’s ability to continue as a going concern. The financial statements contained a sufficiently detailed note describing the covenant breach, lender’s rights, forecast assumptions and uncertainty. The auditors concluded that the disclosure was adequate under the applicable framework. Separately, the valuation of a specialised inventory line required extensive auditor attention because of obsolescence indicators, management’s judgemental net-realisable-value assumptions and a significant write-down. The matter was discussed with the Audit Committee and was among the matters of most significance in the current-period audit. The engagement partner proposes to describe it as a Key Audit Matter. The finance director objects, claiming that a KAM paragraph would amount to a separate opinion on inventory and could replace the going-concern reporting. The Board also asks the auditors to state in the report that management’s assessment of future cash flows is the auditor’s responsibility.

The auditor concludes that use of the going-concern basis is appropriate, a material uncertainty exists, and the financial-statement disclosure is adequate. What is the appropriate reporting treatment?

1. Issue an adverse opinion because a material uncertainty always makes use of the going-concern basis inappropriate.
2. Issue a qualified opinion, with the uncertainty described only in a Basis for Qualified Opinion section.
3. Issue a disclaimer because the lender’s renewal and the proposed property sale are not assured by the auditor.
4. Unmodified opinion plus a separate Material Uncertainty Related to Going Concern section drawing attention to the adequate note. (correct answer)

Answer: D — Unmodified opinion plus a separate Material Uncertainty Related to Going Concern section drawing attention to the adequate note.

Explanation. SA 570 (Revised), read with SA 700, distinguishes the appropriateness of the going-concern basis from the existence of a material uncertainty. Where the basis is appropriate, a material uncertainty exists and is adequately disclosed, the auditor expresses an unmodified opinion and includes a separate section headed “Material Uncertainty Related to Going Concern” drawing attention to the note. Inadequate disclosure would require modification under SA 705; uncertainty alone does not automatically require qualification.

Where it goes wrong. Equating the existence of a material uncertainty with an automatic modified opinion, or using an Emphasis of Matter or KAM paragraph instead of the prescribed going-concern section.

Authority. SA 570; SA 700; SA 705

Question 6 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

How should the engagement partner determine whether the specialised inventory valuation is a Key Audit Matter for this listed entity?

1. Select from matters communicated with governance those of most significance in the current audit, and explain how they were addressed. (correct answer)
2. Include every balance above materiality as a KAM, even without professional judgement or communication with those charged with governance.
3. Include only matters causing a modified opinion, because a KAM explains each qualification or disclaimer in the auditor’s report.
4. Use management’s risk labels as the sole basis, without considering auditor responses or communications with those charged with governance.

Answer: A — Select from matters communicated with governance those of most significance in the current audit, and explain how they were addressed.

Explanation. SA 701 requires the auditor, for a listed entity, to determine KAMs from matters communicated with those charged with governance that required significant auditor attention and were of most significance in the audit of the current period. The auditor describes each selected matter and how it was addressed in the audit. KAM selection is not an automatic list of balances above materiality, nor is it dictated solely by management’s risk labels or the existence of a modified opinion.

Where it goes wrong. Treating KAMs as an automatic checklist of material balances or as a substitute for reporting a modified opinion.

Authority. SA 701

Question 7 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

The finance director says that reporting inventory valuation as a KAM will give a separate audit opinion on that balance and remove the need for the going-concern section. Which response is correct?

1. Correct: a KAM is a separate opinion on the identified balance and replaces other report sections.
2. Correct: a KAM overrides SA 570 whenever it receives more audit attention than going concern.
3. Incorrect: a KAM is not a separate opinion or substitute for required disclosure, modification or going-concern reporting. (correct answer)
4. Incorrect: inventory valuation can never be a KAM when a material going-concern uncertainty is also reported.

Answer: C — Incorrect: a KAM is not a separate opinion or substitute for required disclosure, modification or going-concern reporting.

Explanation. SA 701 makes clear that communicating KAMs is not a separate opinion on individual matters. Nor does a KAM substitute for disclosures required by the reporting framework, a modification required by SA 705, or reporting under SA 570 when a material uncertainty exists. The inventory valuation may still be described as a KAM if it meets the selection criteria, while the going-concern uncertainty is reported in the manner required by SA 570.

Where it goes wrong. Assuming the KAM section can absorb or replace other mandatory reporting responsibilities, or that a KAM gives a standalone opinion on an account.

Authority. SA 570; SA 701; SA 705

Question 8 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

The Board requests a statement that the auditor, rather than management, is responsible for assessing the company’s future cash flows and deciding whether the going-concern basis is appropriate. Which allocation of responsibilities is correct?

1. Management prepares the cash-flow schedule and controls; the auditor alone decides whether the company can continue its operations.
2. Management assesses going concern and discloses related matters; the auditor evaluates the basis and concludes on any material uncertainty. (correct answer)
3. The Audit Committee alone prepares the financial statements; management and auditor have no separate going-concern duties.
4. The auditor prepares management’s forecast; the Board approves the financial statements only after the report is issued.

Answer: B — Management assesses going concern and discloses related matters; the auditor evaluates the basis and concludes on any material uncertainty.

Explanation. SA 700 requires the management-responsibilities section to explain that management assesses the entity’s ability to continue as a going concern, determines whether use of that basis is appropriate and discloses related matters where applicable. Under SA 570, the auditor independently evaluates management’s use of the basis and concludes, based on audit evidence, whether a material uncertainty exists. The auditor’s evaluation does not transfer management’s responsibility for preparation or assessment.

Where it goes wrong. Confusing the auditor’s duty to evaluate management’s going-concern assessment with management’s primary responsibility to make that assessment.

Authority. SA 570; SA 700

Question 9 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. M/s V. Raman & Associates, a sole-proprietor audit practice, has been proposed for appointment as statutory auditor of Suryodaya Sugar Mills Ltd., an unlisted public company. Before accepting the engagement, CA V. Raman discloses that he personally purchased 500 equity shares of the company through his demat account six months earlier and still holds them. The company’s secretary suggests that the holding is too small to affect independence and asks him to proceed because the audit committee has already recommended his appointment. The company is within the ordinary scope of CARO, 2020. During the preliminary audit work, the team reviews the year-end stock-count records. Physical verification was carried out at reasonable intervals, but the aggregate shortage in the finished-sugar class was 12.4 per cent of that class. Management has not passed an adjustment or otherwise dealt with the discrepancy in the books. The team also finds that, during one quarter, the company had aggregate working-capital limits of ₹5.40 crore from a bank, secured by current assets. The quarterly stock and receivables statements submitted to the bank differ materially from the corresponding books of account; management says that the bank statements were prepared using a separate spreadsheet and has not reconciled the differences. The previous statutory auditor resigned during the year after raising concerns about the reliability of those quarterly statements. The outgoing auditor’s communication identifies the unreconciled differences and repeated delays in receiving inventory records. The new engagement team has obtained that communication, but the company’s management asks the incoming auditor not to refer to it, describing the dispute as “closed”. The engagement partner must resolve the eligibility issue and determine what matters, if the appointment can lawfully proceed, require specific reporting under CARO, 2020.

Before accepting appointment, CA V. Raman continues to hold shares in the company for which he is proposed as statutory auditor. What is the correct conclusion under the Companies Act, 2013?

1. He is disqualified under section 141(3)(d)(i) while he holds the company’s securities and should not accept the appointment in that capacity. (correct answer)
2. He may accept because a shareholding below one per cent is automatically permitted for an individual statutory auditor.
3. He may accept if the audit committee records that the investment is not material to the company’s net worth.
4. He may accept after disclosing the shares in the audit report, because disclosure cures any statutory disqualification.

Answer: A — He is disqualified under section 141(3)(d)(i) while he holds the company’s securities and should not accept the appointment in that capacity.

Explanation. Section 141(3)(d)(i) of the Companies Act, 2013 disqualifies a person who, or whose relative or partner, holds a security or interest in the company or specified related entities. The limited statutory allowance for a holding of prescribed value applies to a relative’s holding; it does not validate the proposed auditor’s own shareholding. The sole proprietor therefore should not accept the appointment while personally holding the company’s shares. Audit committee consent or disclosure cannot cure the disqualification.

Where it goes wrong. Assuming a small percentage holding or an audit-committee waiver automatically overrides the auditor-eligibility restrictions in section 141.

Authority. Section 141

Question 10 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

What should the auditor report on the finished-sugar inventory discrepancy under CARO, 2020?

1. No specific reporting is required because physical verification took place at reasonable intervals and the shortage is below 15 per cent.
2. Report only if the shortage exceeds 15 per cent of the total inventory value across all classes combined.
3. Report the class-wise 12.4 per cent discrepancy and state that management has not properly dealt with it in the books. (correct answer)
4. Report only the value of the shortage in the financial statements; CARO does not address whether management adjusted it.

Answer: C — Report the class-wise 12.4 per cent discrepancy and state that management has not properly dealt with it in the books.

Explanation. Clause 3(ii)(a) of CARO, 2020 requires reporting on whether physical verification of inventory was conducted at reasonable intervals, whether its coverage and procedure were appropriate, and whether discrepancies of 10 per cent or more in the aggregate for each class of inventory were noticed and properly dealt with in the books. The 12.4 per cent shortage crosses the class-wise threshold, and management has not adjusted it. The 15 per cent and total-inventory alternatives misstate the test.

Where it goes wrong. Applying the discrepancy threshold to total inventory or assuming that physical verification alone satisfies the reporting requirement.

Authority. CARO, 2020

Question 11 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Which reporting obligation arises from the ₹5.40 crore working-capital facility and unreconciled quarterly statements submitted to the bank?

1. No reporting is required unless the sanctioned limit is more than ₹10 crore and the lender has issued a default notice.
2. Report only if the company has actually drawn the entire limit; sanctioned limits secured by current assets are irrelevant.
3. Report the difference only if the company has filed a false annual return; CARO does not cover quarterly bank statements.
4. Report the limit above ₹5 crore and explain the mismatch between quarterly lender statements and the company’s books, giving relevant details. (correct answer)

Answer: D — Report the limit above ₹5 crore and explain the mismatch between quarterly lender statements and the company’s books, giving relevant details.

Explanation. Clause 3(ii)(b) of CARO, 2020 applies where, at any point during the year, aggregate working-capital limits in excess of ₹5 crore were sanctioned by banks or financial institutions on the security of current assets. The auditor must report whether quarterly returns or statements filed with those lenders agree with the company’s books and give details where they do not. The threshold is based on sanctioned limits, not complete utilisation or a default notice.

Where it goes wrong. Reading “in excess of five crore” as “ten crore or more” or incorrectly requiring full drawdown before the clause applies.

Authority. CARO, 2020

Question 12 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

What is the specific CARO, 2020 reporting response to the resignation of the previous statutory auditor during the year?

1. The incoming auditor must reproduce the outgoing auditor’s full report and adopt every objection as a qualification.
2. Under clause 3(xviii), disclose the resignation and whether the auditor considered the outgoing auditor’s issues, objections or concerns. (correct answer)
3. No reporting is necessary once the company secretary describes the dispute as closed and the audit committee recommends a successor.
4. Report only if the outgoing auditor resigned after issuing an adverse opinion; other resignations are outside CARO.

Answer: B — Under clause 3(xviii), disclose the resignation and whether the auditor considered the outgoing auditor’s issues, objections or concerns.

Explanation. Clause 3(xviii) of CARO, 2020 requires the auditor to state whether there has been any resignation of statutory auditors during the year and, if so, whether the auditor has taken into consideration the issues, objections or concerns raised by the outgoing auditor. It does not require the incoming auditor to adopt those concerns automatically, but neither management’s description nor the audit committee’s recommendation removes the reporting duty.

Where it goes wrong. Treating the outgoing auditor’s concerns as irrelevant once a new auditor is appointed, or confusing consideration of those concerns with automatic adoption.

Authority. CARO, 2020

Question 13 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. The auditor has titled the report “Independent Auditor’s Report” and addressed it to the company’s members. Which additional content is required in the Opinion section under SA 700?

The auditor has titled the report “Independent Auditor’s Report” and addressed it to the company’s members. Which additional content is required in the Opinion section under SA 700?

1. It may identify the entity and reporting period, but need not identify each statement or refer to the notes.
2. It should identify examined under statutory audit statements but may omit notes and significant accounting policies where the Board approves the annual report.
3. It identifies the entity and audit, names each statement, refers to notes including significant policies, and gives each statement’s date or period. (correct answer)
4. It may describe the auditor’s work generally and refer to management’s financial summary instead of naming the statements examined under statutory audit.

Answer: C — It identifies the entity and audit, names each statement, refers to notes including significant policies, and gives each statement’s date or period.

Explanation. SA 700 requires the Opinion section to identify the entity whose financial statements have been examined under statutory audit, state that they have been examined under statutory audit, identify the title of each statement comprising them, refer to the notes including the summary of significant accounting policies, and specify the date of or period covered by each statement. The report title and addressee are separate elements; Board approval does not permit omission of the required identification.

Where it goes wrong. Assuming that identifying the company and reporting year is enough, while overlooking the separate requirement to identify each statement and its notes.

Authority. SA 700

Question 14 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Scenario. The auditor has concluded that the financial statements are prepared, in all material respects, in accordance with the applicable framework. Which wording is acceptable for an unmodified opinion?

The auditor has concluded that the financial statements are prepared, in all material respects, in accordance with the applicable framework. Which wording is acceptable for an unmodified opinion?

1. “In our opinion, the accompanying financial statements give a true and fair view … in accordance with the applicable financial reporting framework.” (correct answer)
2. “In our opinion, the financial statements are correct, subject to the explanations given by management during the audit.”
3. “In our opinion, the financial statements are true, except for any matters that may be discovered after the report date.”
4. “In our opinion, the financial statements give a true and fair view, with the foregoing explanation and subject to the auditor’s reservations.”

Answer: A — “In our opinion, the accompanying financial statements give a true and fair view … in accordance with the applicable financial reporting framework.”

Explanation. SA 700 permits an unmodified opinion to use either “present fairly, in all material respects” or “give a true and fair view” in accordance with the applicable financial reporting framework; the phrases are regarded as equivalent. Expressions such as “subject to” or “with the foregoing explanation” suggest a conditional or weakened opinion and are therefore inappropriate for an unmodified opinion. The opinion must also identify the entity and financial statements examined under statutory audit.

Where it goes wrong. Adding conditional language to a clean opinion because the auditor wishes to qualify the strength of an otherwise unmodified conclusion.

Authority. SA 700

Question 15 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. Which combination most appropriately describes the signing particulars of an auditor’s report when an audit firm has been appointed?

Which combination most appropriately describes the signing particulars of an auditor’s report when an audit firm has been appointed?

1. The audit manager signs in the firm’s name only; no personal membership number or firm registration number is needed.
2. The engagement partner signs only in personal name; the firm’s name and UDIN are omitted where the company is unlisted.
3. The firm’s name and registration number are shown, but the partner’s personal signature may be replaced by the finance director’s countersignature.
4. State the firm name and registration number, signing member’s signature, name, designation, membership number and UDIN, plus place and date. (correct answer)

Answer: D — State the firm name and registration number, signing member’s signature, name, designation, membership number and UDIN, plus place and date.

Explanation. SA 700 requires the auditor’s report to be signed. Where a firm is appointed, it is signed in the audit firm’s name and in the personal name of the member signing on its behalf; the signing partner or proprietor states the ICAI membership number and the firm registration number, wherever applicable. ICAI’s UDIN requirements also call for the UDIN on the audit report. The place and date of signature are separately stated.

Where it goes wrong. Believing that an unlisted company’s audit report can omit the signing member’s particulars, or that a firm signature alone replaces the member’s signature and UDIN.

Authority. SA 700

Question 16 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Scenario. An auditor proposes to place the full description of audit responsibilities on the audit firm’s website and merely refer to it in the report. When is that approach permitted under SA 700?

An auditor proposes to place the full description of audit responsibilities on the audit firm’s website and merely refer to it in the report. When is that approach permitted under SA 700?

1. Whenever the description is publicly accessible on the audit firm’s website and remains available to users.
2. Only when law, regulation or applicable national auditing standards expressly permit a reference to an appropriate authority’s website. (correct answer)
3. Whenever management consents and the entity is privately held, regardless of who owns or maintains the website.
4. Whenever the auditor wants a shorter report, without obtaining separate permission under law, regulation or auditing standards.

Answer: B — Only when law, regulation or applicable national auditing standards expressly permit a reference to an appropriate authority’s website.

Explanation. SA 700 permits the description of the auditor’s responsibilities to appear in the report body, in an appendix referenced by the report, or by a specific reference to a website of an appropriate authority only where law, regulation or applicable national auditing standards expressly permit it. A firm’s own website or a convenience-based decision is not, by itself, enough. The report must still clearly identify where the description can be found.

Where it goes wrong. Treating online availability or a desire for a shorter report as sufficient authority to omit the responsibilities description from the report.

Authority. SA 700

Question 17 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. A listed entity’s management argues that a matter described as a Key Audit Matter need not be disclosed in the notes or addressed through a modified opinion. Which statement correctly applies SA 701?

A listed entity’s management argues that a matter described as a Key Audit Matter need not be disclosed in the notes or addressed through a modified opinion. Which statement correctly applies SA 701?

1. A KAM may replace note disclosure whenever the auditor explains the matter fully in the independent report.
2. A KAM may replace a qualified opinion whenever the matter was discussed with the Audit Committee and Board.
3. A KAM cannot replace required disclosures, a modified opinion or going-concern reporting; nor is it a separate opinion. (correct answer)
4. A KAM is available only when the financial statements contain no other significant disclosure or reporting issue.

Answer: C — A KAM cannot replace required disclosures, a modified opinion or going-concern reporting; nor is it a separate opinion.

Explanation. SA 701 expressly states that KAM communication is not a substitute for disclosures required by the applicable framework, a modified opinion required by SA 705, or reporting under SA 570 when a material uncertainty related to going concern exists. A KAM is a matter of most significance in the current-period audit, addressed in the context of the financial statements as a whole; the auditor does not express a separate opinion on it. Management’s disclosure duty continues independently.

Where it goes wrong. Using a KAM paragraph to avoid correcting deficient disclosure or modifying an opinion when another auditing standard requires it.

Authority. SA 570; SA 701; SA 705

Question 18 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Scenario. Which statement most accurately describes the auditor’s responsibilities that SA 700 requires the report to communicate?

Which statement most accurately describes the auditor’s responsibilities that SA 700 requires the report to communicate?

1. The auditor exercises judgement and scepticism, assesses risks, performs responsive procedures and obtains evidence; reasonable assurance is high but not assured. (correct answer)
2. The auditor guarantees detection of all material fraud and error whenever sampling is statistically designed and properly applied under SAs.
3. The auditor’s work is confined to checking ledger balances and confirming that supporting invoices are filed by the accounts team.
4. The auditor prepares the entity’s accounting policies, estimates and financial statements, then certifies management’s forecasts for the Board.

Answer: A — The auditor exercises judgement and scepticism, assesses risks, performs responsive procedures and obtains evidence; reasonable assurance is high but not assured.

Explanation. SA 700 requires the auditor-responsibilities section to explain the objective of obtaining reasonable assurance about whether the financial statements as a whole are free from material misstatement and issuing a report containing the opinion. It must clarify that reasonable assurance is high but not a guarantee, and describe professional judgement, professional scepticism, risk assessment, responsive procedures and evidence gathering. An audit is not a guarantee and does not transfer management’s accounting duties to the auditor.

Where it goes wrong. Equating reasonable assurance with absolute assurance, or confusing the auditor’s independent examination with management’s responsibility to prepare the financial statements.

Authority. SA 700

Question 19 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. Which responsibility should be attributed to management, rather than to the auditor, in the financial-statement responsibilities section?

Which responsibility should be attributed to management, rather than to the auditor, in the financial-statement responsibilities section?

1. Designing audit procedures for assessed risks and obtaining sufficient appropriate audit evidence throughout the engagement.
2. Preparing financial statements, maintaining necessary internal control, and assessing the entity’s ability to continue as a going concern. (correct answer)
3. Determining whether evidence supports an unmodified opinion and signing the independent auditor’s report for the company.
4. Maintaining professional scepticism throughout the audit and communicating significant audit findings to those charged with governance.

Answer: B — Preparing financial statements, maintaining necessary internal control, and assessing the entity’s ability to continue as a going concern.

Explanation. SA 700’s management-responsibilities section describes management’s responsibility for preparing the financial statements under the applicable framework, maintaining such internal control as it determines necessary, and assessing the entity’s ability to continue as a going concern with related disclosures. The other activities listed are auditor responsibilities under the SAs, including risk assessment, evidence gathering, forming an opinion, professional scepticism and communicating audit findings.

Where it goes wrong. Mixing management’s responsibility for the financial statements with the auditor’s independent responsibility for performing the audit and expressing an opinion.

Authority. SA 700

Question 20 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Scenario. Which private company satisfies the specific private-company exemption from CARO, 2020, assuming no other facts alter its classification?

Which private company satisfies the specific private-company exemption from CARO, 2020, assuming no other facts alter its classification?

1. A private company that is a subsidiary of a public company, with paid-up capital and reserves below ₹1 crore, borrowings below ₹1 crore and revenue below ₹10 crore.
2. A private company not linked to a public company, with capital and reserves below ₹1 crore, revenue below ₹10 crore, but borrowings of ₹1.25 crore during the year.
3. A private company that is not linked to a public company, with borrowings and revenue within the limits, but capital and reserves of ₹1.10 crore at the balance-sheet date.
4. A private company not linked to a public company, with capital and reserves ≤₹1 crore, borrowings ≤₹1 crore throughout the year, and revenue ≤₹10 crore. (correct answer)

Answer: D — A private company not linked to a public company, with capital and reserves ≤₹1 crore, borrowings ≤₹1 crore throughout the year, and revenue ≤₹10 crore.

Explanation. CARO, 2020 exempts a private limited company only when it is not a subsidiary or holding company of a public company and the specified limits are all met: paid-up capital and reserves and surplus not more than ₹1 crore at the balance-sheet date, total borrowings from banks or financial institutions not exceeding ₹1 crore at any point during the year, and total revenue (including revenue from discontinuing operations) not exceeding ₹10 crore. Failure of any one condition defeats this exemption.

Where it goes wrong. Treating the private-company exemption as available when only two of the three financial thresholds are satisfied, or ignoring the public-company holding/subsidiary restriction.

Authority. CARO, 2020

Question 21 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. A parent company prepares consolidated financial statements that include subsidiaries to which CARO, 2020 would ordinarily apply. What is the reporting position under the Order?

A parent company prepares consolidated financial statements that include subsidiaries to which CARO, 2020 would ordinarily apply. What is the reporting position under the Order?

1. CARO, 2020 applies to every clause in the consolidated report and to every component company report.
2. CARO, 2020 never applies to consolidated statements, even when a component auditor reports a qualification or adverse remark.
3. It excludes the consolidated audit report except paragraph 3(xxi), which covers qualifications or adverse remarks in component CARO reports. (correct answer)
4. It applies to a parent company only when each subsidiary is listed on a recognised stock exchange.

Answer: C — It excludes the consolidated audit report except paragraph 3(xxi), which covers qualifications or adverse remarks in component CARO reports.

Explanation. The application provision of CARO, 2020 states that the Order does not apply to the auditor’s report on consolidated financial statements except clause (xxi) of paragraph 3. That clause requires the auditor to report whether there have been qualifications or adverse remarks in the CARO reports of companies included in the consolidated financial statements and, where applicable, identify the companies and relevant paragraph numbers. The exemption is therefore not absolute.

Where it goes wrong. Remembering the general consolidated-financial-statement exclusion but overlooking the express paragraph 3(xxi) exception.

Authority. CARO; CARO, 2020

Question 22 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Scenario. At the balance-sheet date, undisputed GST dues have remained unpaid for seven months after becoming payable. A separate income-tax demand is under appeal before the Commissioner (Appeals), while the company has merely sent a representation against another demand to the tax department. What should the auditor report under CARO, 2020?

At the balance-sheet date, undisputed GST dues have remained unpaid for seven months after becoming payable. A separate income-tax demand is under appeal before the Commissioner (Appeals), while the company has merely sent a representation against another demand to the tax department. What should the auditor report under CARO, 2020?

1. Report undisputed dues outstanding over six months; disclose the appeal amount and forum, but not a mere departmental representation as a dispute. (correct answer)
2. Report only dues outstanding over twelve months and treat every written representation to a department as a pending dispute.
3. Report dues only after a recovery notice and omit demands pending before an appellate forum or other statutory authority.
4. Report only disputed income-tax demands; GST and other undisputed statutory dues are also outside the CARO reporting clause.

Answer: A — Report undisputed dues outstanding over six months; disclose the appeal amount and forum, but not a mere departmental representation as a dispute.

Explanation. Clause 3(vii)(a) of CARO, 2020 requires reporting the extent of undisputed statutory dues outstanding at the year-end for more than six months from the date they became payable. Under clause 3(vii)(b), disputed statutory dues are reported with the amounts involved and the forum where the dispute is pending. A mere representation to the concerned department is expressly not treated as a dispute. The seven-month GST arrears therefore cross the reporting threshold.

Where it goes wrong. Confusing the six-month test for undisputed dues with the treatment of disputed dues, or treating a departmental representation as a formal dispute.

Authority. CARO, 2020

Question 23 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. A company granted a loan during the year. At the balance-sheet date, an instalment had been overdue for 104 days, and the company had not initiated any recovery steps. Which CARO, 2020 reporting requirement is most directly relevant?

A company granted a loan during the year. At the balance-sheet date, an instalment had been overdue for 104 days, and the company had not initiated any recovery steps. Which CARO, 2020 reporting requirement is most directly relevant?

1. Clause 3(ix)(a), because an overdue loan instalment is automatically a borrowing default by the company.
2. Clause 3(iii)(d), report amounts overdue beyond 90 days and whether reasonable recovery steps were taken. (correct answer)
3. Clause 3(vii)(a), because overdue loan principal becomes a statutory due after six months.
4. Clause 3(xvii), because any loan instalment overdue beyond 90 days automatically constitutes a cash loss.

Answer: B — Clause 3(iii)(d), report amounts overdue beyond 90 days and whether reasonable recovery steps were taken.

Explanation. Clause 3(iii)(d) of CARO, 2020 addresses loans and advances in the nature of loans granted by the company. Where an amount is overdue, the auditor states the total amount overdue for more than 90 days and whether reasonable steps have been taken by the company for recovery of principal and interest. Clause 3(ix) concerns defaults by the company in repaying its own borrowings, while statutory-dues reporting and cash-loss reporting address different matters.

Where it goes wrong. Confusing an amount lent by the company that is overdue with a borrowing repayment default by the company itself.

Authority. CARO, 2020

Question 24 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Scenario. An auditor contravenes a requirement of section 143 of the Companies Act, 2013, but the facts do not establish an intention to deceive the company, shareholders, creditors or tax authorities. Which penalty provision is ordinarily attracted under section 147(2)?

An auditor contravenes a requirement of section 143 of the Companies Act, 2013, but the facts do not establish an intention to deceive the company, shareholders, creditors or tax authorities. Which penalty provision is ordinarily attracted under section 147(2)?

1. Imprisonment up to three years and a fine of at least ₹1 lakh, without reference to the audit remuneration.
2. A fixed fine of ₹10,000, with no possibility of a higher amount even where the audit remuneration is substantial.
3. A fine between ₹50,000 and ₹25 lakh, or eight times the auditor’s remuneration, whichever is less, in every case of contravention.
4. A fine of at least ₹25,000, which may extend to ₹5 lakh or four times the auditor’s remuneration, whichever is less. (correct answer)

Answer: D — A fine of at least ₹25,000, which may extend to ₹5 lakh or four times the auditor’s remuneration, whichever is less.

Explanation. Section 147(2) of the Companies Act, 2013 prescribes, for an auditor contravening sections 139, 143, 144 or 145, a fine of not less than ₹25,000 which may extend to ₹5 lakh or four times the auditor’s remuneration, whichever is less. The higher punishment involving imprisonment and the ₹50,000-to-₹25-lakh/eight-times-remuneration fine is linked to a contravention committed knowingly or wilfully with intent to deceive. The facts expressly exclude that aggravating intent.

Where it goes wrong. Applying the enhanced punishment for deliberate deception to an ordinary contravention, or overlooking the statutory remuneration-based ceiling.

Authority. Section 147; section 143; section 147

Question 25 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. During a company audit, the auditor has reason to believe that an officer committed a fraud involving ₹80 lakh. Which statement correctly describes the reporting route and the separate CARO obligation?

During a company audit, the auditor has reason to believe that an officer committed a fraud involving ₹80 lakh. Which statement correctly describes the reporting route and the separate CARO obligation?

1. Report the matter to the Central Government under section 143(12); CARO reporting applies only when fraud exceeds ₹1 crore.
2. Report the matter only to the police; the Board and Audit Committee have no role under the Companies Act.
3. Report sub-₹1 crore fraud to the Audit Committee or Board; CARO clause 3(xi) separately covers fraud by or on the company. (correct answer)
4. Report it only under section 143(3); Form ADT-4 is required for every fraud amount below ₹1 crore.

Answer: C — Report sub-₹1 crore fraud to the Audit Committee or Board; CARO clause 3(xi) separately covers fraud by or on the company.

Explanation. Section 143(12) of the Companies Act, 2013 read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014 distinguishes fraud involving or expected to involve individually ₹1 crore or more, which is reported to the Central Government in the prescribed manner, from fraud below ₹1 crore, which is reported to the Audit Committee under section 177 or to the Board in other cases. CARO clause 3(xi) separately asks whether fraud by or on the company was noticed or reported, including its nature and amount.

Where it goes wrong. Importing the ₹1 crore threshold into CARO clause 3(xi), or assuming every fraud below ₹1 crore is reported to the Central Government in Form ADT-4.

Authority. CARO; Section 143; section 177