CH06P02-SA 701

MCQ--701.1

RBJ Ltd is a listed company engaged in the business of software and is one of the largest company operating in this sector in India. The company’s annual turnover is INR 40,000 crores with profits of INR 5,000 crores. Due to the nature of the business and the size of the company, the operations of the company are spread out in India as well as outside India. Outside India, the company is focusing more on US and European markets and the company has been able to establish its good reputation in these markets as well. During the course of the audit, the audit team spends significant time on audit of revenue – be it planning, execution or conclusion. The audit team for this engagement is generally very big i.e. a team of approx. 70-80 members. The company’s contracts with its various customers are quite complicated and different. The efforts towards audit of revenue also involve significant involvement of senior members of the audit team including the audit partner. After completion of audit for the year ended 31 March 2019, the audit partner was discussing significant matters with the management wherein he also communicated to the management that he plans to include revenue recognition as key audit matter in his audit report. The management was quite surprised to understand this from the auditor and did not agree with revenue recognition to be shown as key audit matter in the audit report. As per the management, the auditors didn’t have any modification and such a matter getting reported as key audit matter would not go down well with various stakeholders and would significantly impact the financial positions of the company in the market. The auditors were not able to convince the management in respect of this point and there was a difference of opinion. You are requested to give your view in respect of this matter.

(CNO-SA701.040)

• a) The concern of the management is valid. For such a large sized company, such type of matter getting reported as key audit matter is not appropriate.

• b) The assessment of the auditor is valid. Such a matter qualifies to be a key audit matter and hence should be reported accordingly by the auditor in his audit report.

• c) Reporting revenue as key audit matter when the auditor does not have observation in that area leading to any modification in his report, would not be appropriate.

• d) This being the first year of reporting of key audit matters, the auditor should take a soft stand and should avoid reporting such controversial matters in his report.

MCQ--701.2

While auditing the complete set of consolidated financial statements of Tulips Ltd., a listed company, using a fair presentation framework, M/s Pintu& Co., a Chartered Accountant firm, discovered that the consolidated financial statements are materially misstated due to the non consolidation of a subsidiary. The material misstatement is deemed to be pervasive to the consolidated financial statements. The effects of the misstatement on the consolidated financial statements have not been determined because it was not practicable to do so. Thus, M/s Pintu& Co. decided to provide an adverse opinion for the same and further determined that, there are no key audit matters other than the matter to be described in the Basis for Adverse Opinion section. Comment whether M/s Pintu& Co. needs to report under SA 701 ‘Communicating Key Audit Matters in the Independent Auditor’s Report’?

(CNO-SA701.080)

• a) M/s Pintu& Co. have the option to follow SA 701, thus, need not to report any key audit matters.

• b) SA 701 is mandatory in the case of audit of listed entities, however, as there are no key audit matters other than the matter to be described in the Basis for Adverse Opinion section, no ‘Key Audit Matters’ para needs to be stated under audit report.

• c) SA 701 is mandatory in the case of audit of listed entities, however, as there are no key audit matters other than the matter to be described in the Basis for Adverse Opinion section, M/s Pintu& Co. shall state, under ‘Key Audit Matters’ para, that ‘except for the matter described in the Basis for Adverse Opinion section, we have determined that there are no other key audit matters to communicate in our report.’

• d) M/s Pintu& Co. is under compulsion to follow SA 701 as the audit is of a listed company and shall report

MCQ--701.3

LMN & Co LLP is a large firm of Chartered Accountants having its offices based in Delhi, Pune, Chandigarh and Bangalore. The firm has staff of around 300 with 28 Partners. The firm has also created various departments for various services that it offers – statutory audit, risk advisory, mergers & acquisitions, indirect tax and direct tax, where dedicated teams are working who are specialized in those fields. The firm is also considering to create departments on the basis of industry sectors so that the staff can become specialized into specific industries as the same would help in the objective of the firm i.e., to offer best quality service to its various clients. Statutory audit department of the firm has 13 partners across various offices in India out of which 6 are based in Delhi office. The audit team of one of the prestigious clients, KSH Ltd, has concluded that audit where audit partner was AD Jain. As per the agreed timelines, the financial statements and the audit report were planned to be signed on 30 June 2019, however, on 29 June 2019, AD Jain was required to move out of India due to some exigency and would be back to India after a month’s time. He was also not accessible during this period. The management of KSH Ltd discussed the matter with another partner of the audit firm, SK Gupta, who eventually signed the audit report on 30 June 2019 even though he was not part of the audit team which was involved in the fieldwork. We would like to understand your views in respect of this matter. After completion of audit for the year ended 31 March 2019, the audit partner was discussing significant matters with the management wherein he also communicated to the management that he plans to include revenue recognition as key audit matter in his audit report. The management was quite surprised to understand this from the auditor and did not agree with revenue recognition to be shown as key audit matter in the audit report. As per the management, the auditors didn’t have any modification and such a matter getting reported as key audit matter would not go down well with various stakeholders and would significantly impact the financial positions of the company in the market. The auditors were not able to convince the management in respect of this point and there was a difference of opinion. You are requested to give your view in respect of this matter.

(CNO-SA701.040 )

• a) The management in such a case should have waited for AD Jain to come back and then get the report signed. The audit report in this case would be considered to be invalid.

• b) SK Gupta signed the audit report considering the client was prestigious for the firm which was unethical.

• c) Signing of the audit report as per the agreed timelines by SK Gupta was fine as he was also the audit partner of the firm.

• d) Signing of audit report by any other person interferes with the concept of clarity of responsibility.

MCQ--701.4

"Before concluding the audit, there was a difference of opinion between the audit committee and the auditors as to which among the following are the areas which the auditor should take into account to determine “Key Audit Matter” as per SA 701:

(I) The effect on audit of significant transactions that took place in the FY.

(II) Areas of high risk as assessed and reported by management’s expert.

(III) Significant auditor judgement relating to areas in the financials that involved significant management judgement.

As per SA 701- Communicating Key audit matters in the Independent auditor’s Report, which among the above-mentioned areas should CA & Co. take into account to determine “Key Audit Matter”?

(CNO-SA701.040)

• a) (I) & (III)

• b) (II) only

• c) (I) & (II)

• d) (I), (II) & (III)"

MCQ--701.5

Description of each key audit matter in the “key audit matters section” needs to cover except following aspects:

(CNO-SA701.060)

• a) Reference to related disclosures, if any, in the financial statements.

• b) Explanation on the matter given by management.

• c) How the matter was addressed in the audit.

• d) Why the matter was considered to be one of most significance in the audit and therefore determined to be a key audit matter

MCQ--Incs.49.4

While performing the audit procedure to validate the Trade Payables ageing, Mr. A identified that management has calculated the due date of trade payables from the end of 180 days from the date of transaction. Mr. A found it appropriate based on the conservative approach. 4. Mr. A did not qualify his audit opinion on the financial statement prepared for the period ending on 31 March 2022 on any grounds. Also, Mr. A specified that : “The financial statements for the year ended on 31 March 2022 give a true and fair view of the state of affairs of the company, comply with the accounting standards notified under section 133 and are in the form provided for the company in Schedule III of the Act

Whether the reporting performed by Mr. A related to intercompany trade payables under the paragraph/section of Key Audit Matter in the audit report appropriate? Select from the below option to support your answer

• a) Mr. A should have expressed an unmodified opinion if he was not able to gather appropriate & sufficient audit evidence to validate the disputed intercompany trade payables. As per SA 701, those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period are Key Audit Matters. The auditor shall not communicate a matter in the Key Audit Matters section of the auditor’s report when the auditor would be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter.

• b) Mr. A should have expressed a modified opinion if he was not able to gather appropriate & sufficient audit evidence to validate the disputed intercompany trade payables. As per SA 701, those matter that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period are Key Audit Matters. The auditor shall not communicate a matter in the Key Audit Matters section of the auditor’s report when the auditor would be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter.

• c) Mr. A should have expressed an unmodified opinion if he was not able to gather appropriate & sufficient audit evidence to validate the disputed intercompany trade payable s. As per SA 701, the auditor shall report the matter in Key Audit Matters in the auditor’s report when the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement or the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.

• d) The auditor shall express an adverse opinion and report the said matter in Key Audit Matter Para when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements. In the current case, the auditor has appropriately disclosed the said matter in Key Audit Matter Paragraph.