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Question Paper

ADVANCED AUDITING, ASSURANCE Duration: 65

AND PROFESSIONAL ETHICS

Details: Test-13 (Ch-13 ) Marks: 35

Instructions:

 All the questions are compulsory

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Q-1 XYZ Limited holds 51% equity of QQQ Limited and 63% equity of RRR Limited. There are
different pieces of information and explanations which are disclosed by the respective
companies in the notes to their financial statements. At the time of consolidation, the
management of XYZ Limited has consolidated all the information and explanations disclosed in
the notes as well. The principal auditor is of the view that only those pieces of information and
explanations should form part of the notes to the consolidated financial statements which are
relevant at the group level. Please mention any five aspects which are given in the notes to the
separate financial statements of the parent and the subsidiaries, which need not be included in
the consolidated financial statements.

(5 Marks)

Q-2 CA Raj is the engagement partner conducting an audit of the consolidated financial
statements of a group that includes a parent entity and its 3 subsidiaries. The standalone
financial statements of its subsidiaries are audited by component auditors. He is considering
accepting such an appointment. What specific considerations have to be kept in mind by him
before accepting the appointment as the principal auditor of the group?

After acceptance, he is in a quandary with regard to the determination of materiality during the
audit of consolidated financial statements. What specific considerations have to be kept in
mind while determining materiality during the audit of the above group?

(5 Marks)

Q-3 CA. K is the auditor of Stellar Ltd., a parent company which presents Consolidated Financial
Statements. The management of Stellar Ltd. has provided the list of the components included
in the Consolidated Financial Statements. As an auditor of Consolidated Financial Statements,

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CA K has to verify that all the components have been included in the Consolidated Financial
Statements and review the information provided by the management in identifying the
components. State the procedures to be followed by CA. K in respect of the completeness of
this information.

(5 Marks)

Q-4 XYZ Limited holds the majority ownership of P Ltd. & Q Ltd. R Ltd. is an intermediate
subsidiary of XYZ Limited in Surat. XYZ Limited presents the consolidated financial statements
for audit purposes to ABC & Co. As a statutory auditor, ABC & Co. obtain a listing of all the
components and verify that all the components are included in the financial statements unless
any component meets the criteria for exclusion. Explain any two reasons which are considered
by ABC & Co. for the exclusion of components from the consolidated financial statements and
the reporting of reasons for exclusion thereof.

(5 Marks)

Q-5 Beta & Gamma Investments Ltd. is a company having paid-up share capital of ₹1 crore. It
has a subsidiary, Alpha Fund Management Ltd. The major business of Beta & Gamma
Investments Ltd. is to pool money from investors on a collective basis and invest this money in
various funds. This company pooled ₹12 crore from a number of clients, which represent the
Company's shareholders.

While auditing the books of accounts of Beta & Gamma Investments Ltd., CA Aryan observed
that the whole amount of ₹12 crore pooled has been invested in shares and debentures of
various companies, and profit earned due to the appreciation of the prices of these shares has
been distributed to various shareholders of the company. The performance of all of its
investments is measured on a fair value basis.

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Now, CA Aryan raised an issue while auditing the financial statements of Beta & Gamma
Investments Ltd. whether the consolidated financial statements are required as per Section
129(3) of the Companies Act, 2013?

Analyse the above issue and give your opinion.

(5 Marks)

Q-6 MCQs

1. Peace Ltd is in the business of construction and infrastructure. The company is listed in India
with an annual turnover of INR 3500 crore. The company has various project offices/operations
in India and outside India. The functional currency of the company and its project offices is INR.
The company has five joint ventures and various jointly controlled operations.

The company has been audited by Harmony & Associates, a firm of Chartered Accountants,
since its inception. During the year ended 31 March 2022, new auditors were appointed as the
statutory auditors of the company for the audit of the financial statements for the year ended
31 March 2022.

The new statutory auditors have raised various points related to the consolidation procedures
followed by the company. Management did not agree with the observations of the auditors as
they have been following these procedures for many years without any objections from
previous auditors. The auditors have highlighted that joint ventures have been consolidated by
the company in its standalone financial statements. However, management argues that these
are in the nature of its operations and to reflect a true and fair view, it would be appropriate to
consolidate them in the standalone financial statements.

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Please advise as auditors how you would deal with this matter.

(a) Since the matter is related to consolidation, which is more relevant for consolidated
financial statements, hence no reporting in respect of this matter would be required in the
auditor’s report for the year ended 31 March 2022.

(b) The auditor should look at the materiality and conservatism principle. The company has
included extra information in the financials which can be considered by the auditors and based
on that, a clean audit report should be given.

(c) Management should restate the financials to adjust the error related to the consolidation of
joint ventures in standalone financial statements. Otherwise, the auditor may modify their
opinion on the current year's financial statements considering the materiality.

(d) As per the requirements of IND AS, a joint venture if consolidated in standalone financial
statements should not be consolidated again in the consolidated financial statements. Based on
that, this point should be dropped by the auditor.

2. Eshan Ltd. was set up initially as a private limited company. Subsequently, it got converted
into a public company. The company’s management has plans for expansion, but the business
was not growing in an organic manner. Therefore, the management decided to acquire the
competitors. During the financial year ended 31st March 2021, the company acquired two
companies in India and France in September 2020 and January 2021 respectively. The company
controls both of these companies as per the criteria laid down in the Companies Act, 2013, as
well as the applicable accounting standards.

The management started discussions with the auditors regarding the audit, wherein it was also
pointed out by the auditors that the management should also prepare consolidated financial
statements, if they want. Management needs your advice on the same.

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(a) Management must prepare the consolidated financial statements as per the requirements
of the Companies Act, 2013.

(b) Management has a choice not to prepare consolidated financial statements but should go
for that considering that its true performance and financial position can then be demonstrated.

(c) Management could have prepared consolidated financial statements if the acquired
companies would have completed at least one year post-acquisition.

(d) Management must prepare consolidated financial statements, but it should include only the
company acquired in India.

3. X Limited controls entity Y Limited (75%) and entity Z Limited (an investment company).
Entity X Limited reduced the control of entity Y Limited from 75% to 60%. With regard to that,
certain adjustments were made to account for the change in the shareholding of entity Y
Limited which is consolidated. These adjustments are known as:

(a) Memorandum adjustments.

(b) Current period consolidation adjustments.

(c) Permanent consolidation adjustments.

(d) Temporary period consolidation adjustments.

4. NT 22 Group is a large group comprising 22 subsidiary companies, 14 associate companies,

and 19 joint ventures. NT Ltd. is the holding company which is also listed on Bombay Stock
Exchange and New York Stock Exchange. The Group prepares its consolidated financial
statements every quarter for various reporting requirements – SEBI (Stock and Exchange Board
of India), Stock Exchanges, Registrar of Companies in India and others. The turnover of the

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Group is INR 15,000 crores and many of its components have significant operations at the
standalone level.

The Group is audited by one audit firm, Arya & Co LLP. For the purpose of group audit of the
current year, the auditors have considered performing testing of journal entries across the
group to address the significant risk; however, the auditors are facing challenges to perform
this audit procedure across the group because of the volume and limitation of resources. Please
suggest the correct options in respect of this matter.

(a) The Group auditors have a choice to test journal entries of the components which is also
backed up by the auditing standards.

(b) The Group auditors must test journal entries of all components.

(c) The Group auditors need not test journal entries of components requiring an analytical
response at the group level.

(d) The Group auditors need not test journal entries of components scoped with a
comprehensive approach.

5. XCO Private Ltd is a joint venture of XCO Gmbh and YCOR Ltd. XCO Gmbh is a company based
out of Germany and is also listed in Germany. XCO Gmbh prepares its financial statements as
per IFRS. YCOR Ltd is a company based out of India and is also listed in India. YCOR Ltd prepares
its financial statements as per Ind AS. For the purpose of reporting of financial information to
XCO Gmbh and YCOR Ltd for consolidation purposes, XCO Private Ltd uses a reporting package
(which comprises of balance sheet, profit and loss, and other notes to accounts). XCO Private
Ltd prepares its financial statements as per Ind AS.

XCO Private Ltd has taken useful life of some fixed assets in its Ind AS financial statements
based on their useful lives which is different from the useful lives of similar nature fixed assets
taken by XCO Gmbh (in line with their accounting policies). The reporting package of XCO

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Private Ltd is audited before reporting to XCO Gmbh. The auditor audits the reporting package
which is prepared in line with the Group accounting policies of XCO Gmbh and mentions in his
report that the reporting package has been prepared as per the Group accounting policies of
XCO Gmbh.

XCO Private Ltd makes an adjustment for changes in useful lives in the reporting package on the
basis of Group accounting policies of XCO Gmbh. The auditor has asked the management to
take the same useful lives of fixed assets in the reporting package which have also been taken
by them in its Ind AS financial statements. Management has not agreed with the view of the
auditor. Please suggest the right course of action.

(a) Position taken by the management is correct.

(b) Position suggested by the auditor is correct and if the management does not agree then
auditor may have to modify his report on the basis of materiality.

(c) The matter relates to an estimate (i.e. useful life) which may be subject to changes under
different GAAPs and hence auditor should ignore this point.

(d) The report would be for special purpose which should always be a clean report.

(2 x 5 = 10 Marks)

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