CA Kamal Garg

Common Mistakes Committed by the CA Final Students in Audit and Law Papers

Q. No.: Questions asked on FB Page[1] Wrong Answer(s) given by Students Correct Answer given by the Students Remarks
1. Mr. X, a person resident in India, was found to have holding unaccounted assets in Panama. Advise about the powers of competent authority in this regards under FEMA, 1999 as amended by the Finance Act, 2015 pursuant to Anti Black Money Law. 1) As Mr. x is a PRI and found holding unaccounted assets in Panama then he is liable under the provisions of FEMA because the transaction is in nature of capital account which are generally prohibited and required permissions from CG.

2) He is also liable under PMLA because he is using untainted money to hold assets outside India without prior CG permission.

Hence he is liable under both the act.

1). If authorised officer has reasons recorded in writing that any foreign exchange, security, IP is held in contravention of sec.4 he has power to seize value equivalent of such foreign exchange, security or IP.

2). order of seizure shall be placed with relevant material before competent authority within 30 days.

3). disposal of petition to be subject to principle of natural justice.

4). order to continue till disposal of adjudication proceeding & appropriate order if aggrieved person brings back asset.

The students have ignored the words “competent authority” used in the question and it shows that they have not considered Section 37A introduced in FEMA by the Finance Act, 2015. It shows that Students are not aware or are ignorant about the amendments.
He will liable to pay 30% as tax.
90% as penalty. So, technically value of undisclosed asset is gone.Also maximum term upto 10 years for not disclosing under compliance Window.
2. CA X and CA Y, both in practice, have agreed to share revenues in respect of work referred by one to the another. CA X is considering to appoint CA Y as his tax auditor. Advise As per clause 2 and 3 of part 1 schedule 1 a member in practice of ICAI would be deemed to be guilty if he pays or receives the profit of professional work except member of ICAI or other prescribed professionals. Hence he is not guilty.

CA X can appoint Mr. CA y as tax auditor provided prior communication with previous tax auditor made by CA Y.

In light of the recent amendments under the Income Tax Act, a CA shall be disqualified from being appointed as a Tax Auditor of an Assessee if such CA or his relative or his partner holds any security or interest in the assessee. However the disqualification shall not arise provided securities/ interest are held by a Relative for an amount not exceeding Rs. 1 L.

In the given case, it can be reasonably construed that since Mr X and Mr Y receive profit for the work referred to each other, they hold interest in each other. Consequently, neither of them are qualified to act as Tax Auditor in respect of the other.

However, the fact that they secure work through referral by each other (I.e. as CAs in practice) and receive profit on such referrals does not attract any professional misconduct in terms of Sec 8 of the CA Act 1949.

The words “tax auditor” used in the question are ignored by the Students.

It appears that Students are not aware of Section 288(2) of the Income Tax Act, 1961, as amended w.e.f 1st June 2015. This question was not merely based upon Chartered Accountants Act, 1949.

3. CA X is already having the following statutory audits under the Companies Act, 2013 comprising of the following:

a). 12 public companies;

b). 2 small public companies;

c). 1 small company;

d). 2 OPCs;

e). 3 Private Companies having paid up share capital in between Rs. 20 crores to Rs. 50 Crores

Can he accept the statutory audit of:

i). 2 Section 8 Companies;

ii). 1 Public Company

1). Number of public companies cannot exceed 10;

2). Number of statutory audits cannot exceed 20 in which OPCs, Dormant Companies, Small Companies, Private Companies < Rs. 100 crores paid up share capital are not counted;

3). Total audits not countable in 20 limit = 8 Companies [2 small public co. 1 small co., 2 OPCs, 3 private cos.];

4). Thus, he can accept audit of 2 Section 8 companies only

1). Statutory Audits per CA in practice: Limits u/s 141(3)(g) + Exemptions u/s 141(3)(g) =< 30 per financial year per CA in full time practice [Refer Section 141(3)(g) of Companies Act, 2013, as amended and Council General Guidelines, 2008];

2). Existing Limits u/s 141(3)(g) = 14 Companies [12 public companies (+) 2 small public companies];

3). Existing Exemptions u/s 141(3)(g) = 6 Companies [1 small co. (+) 2 OPCs (+) 3 private cos.]

4). Section 8 companies and public companies are not exempted and hence the limit at point (2) above would reach 17 companies if such statutory audits are accepted which still is within overall limits of 20 number of companies;

5). The equation Limits u/s 141(3)(g) + Exemptions u/s 141(3)(g) =< 30 per financial year per CA in full time practice, thus, is fulfilled and hence such audits can be accepted

Students are not aware of this Guideline issued by ICAI, i.e. Limits u/s 141(3)(g) + Exemptions u/s 141(3)(g) =< 30 per financial year per CA in full time practice. Majority Students thought that small public company is a small company despite the fact that a public company can never be a small company. Simply because the word “small” is added before public company, it does not qualify to be a small company.


4. ABC Limited is under investigation by ROC. Being apprehensive about the probable disclosures before the investigation officers by the factory manager, it has decided to terminate his services. Examine the legal implications under the Companies Act, 1956/ 2013 in this regard. Who has decided to terminate his services? ABC Ltd. ??? No answer Surprising to note that difficulty is there in even understanding the clear language of the question. It also appears that the Students are not aware of Section 635B of the Companies Act, 1956 contained in the Chapter on “Inspection, Inquiry and Investigation”
5. The useful life for certain fixed assets was estimated by the management expert which was less than the life given under Schedule II of the Companies Act, 2013. What audit considerations should be observed by the auditors in this regard. Refer Schedule II, AS 6, SA 620 Refer Schedule II, AS 6, SA 620, SA 500 and SA 540 [must] Students did not discussed the principles of SA 540
6.  What are the reporting requirements about internal control system by the statutory auditors under the Companies Act, 2013. As per SA 450 auditor is not dutiable to assess the internal control efficiency and this responsibility lies with management only. However while understanding entity as per SA 315 and assessing risk as per SA 330 auditor can come to know about some internal control weakness. Thus as per SA 450 he will report IC weakness specifying his responsibility is not to in relation to ic and can also give recommendations to improve internal controls Section 143(3) along with rules provide for principal assertions to be made by statutory auditor. Rules provide that Stat Auditor has to report about whether Internal control system are placed and are operating effectively. Also, As per Clause 3(iv) of CARO, 2015, auditor has to report whether Internal control system for sales and purchase of goods, sale of services and purchase of Fixed asset commensurate with size of co and nature of business. Majority Students seemingly are not aware of reporting requirements of Section 143(3)(i) of the Companies Act, 2013.

Some of those who are aware have ignored CARO requirements.

7. ABC Limited has been declaring dividends in past at a consistent decent rate but in the current year the BOD decided not to declare the dividend and plough back the distributable profits. Certain disgruntled shareholders have filed a petition for prevention of mismanagement. Examine the legal implications for sustainability of this petition under the Companies Act, 1956. BOD has discretion to declare dividend in any financial year. Although Mismanagement has not been defined under Co. Act. But It means unfair abuse of power. If BOD of ABC Ltd has bonafide reasons like future plan of action
Then it can be concluded that affairs of co. Are not inefficient or prejudicial to the interest of co.
Petition is not sustainable because merely not declaring divided on bonafide grounds cannot be termed as mismanagement, shareholders cannot use the concept of mismanagement to make management agree with their terms. Company may decide not to declare divided if company is earning more than shareholders expectations.
Hence the contention of shareholders is not valid
Self evident by comparison of both the answers
8. What are the aspects that should be kept in mind by the auditor while obtaining knowledge about the client’s business. As per engagement & quality control standards issued by ICAI knowledge of business can be obtained through following sources : previous experience of auditor, interaction with directors & employees, entity publications, visit to entity premises  As per SA 315 – identifying and assessing the risk of material misstatement through understanding the entity and its environment, aspects auditor should kept in mind while obtaining knowledge of client business are-
1. legal structure;2. how it is financed;3. who are its promoters and financers;4. its subsidiaries , joint ventures, etc;5. future plans and strategies;6. who are its directors and key managerial persons;7. understand its MOA/ AOA/ Bye Laws;8. Its accounting policies and applicable FRF;

9. Industry ratio and trend

Sources are not asked aspects are asked. Students wrongly discussed the sources of obtaining knowledge about client’s business
9. ABC Limited has defaulted in allotment of share capital in respect of share application money received 3 months ago. The company has also defaulted in refunding such share application money. Advise about the reporting requirements as a statutory auditor. Answer 1:

As per SA 250, the auditor has to consider the laws which have material impact on the F.S. As per facts of this case, this may have material impact by way of penalty, which needs provision as per AS 29, if it is not provided and the matter is not adequately disclosed he may have to qualify his report.

Answer 2:

Sec.143 duty of auditor to inquire about certain matters

This will be considered deposit under sec 73 of Companies Act 2013.
The auditor will have to report the fact in the CARO. Moreover there will be restriction on the company on declaration of dividend.The auditor should also report the fact that the company has not allotted the shares within 60 days of receipt of allotment money and has failed to refund the same in his audit report through appropriate reporting.
Majority Students were unaware of the provisions of Acceptance of Deposits by the Companies vis-à-vis Share Application Money and consequently CARO was not touched even for their answers
10. Mr. X, a director of ABC Private Limited, authorised by BOD to prepare and file return, report or other documents to registrar on behalf of the company. He timely filed all the required documents to Registrar; however, subsequently it is found that the filed documents are false in respect to material particulars (knowing it to be false) submitted to registrar. Explain the penal provision under the Companies Act, 2013. Guilty of fraud u/s 447 Under section 448 of the companies act, 2013, where any person makes a statement which is false in material particulars knowing it to be false, then the person shall be liable under section 447. Section 448 was not discussed. In the given question only when he would be found guilty u/s 448 then only penalties u/s 447 would be attracted. So a direct mention of Section 447 is not correct.

Note: The above compilation is merely indicative and represents the views of the author. The above remarks and suggestions are not intended in any manner whatsoever to represent the views of the Institute or any person connected thereto

Compiled by CA Kamal Garg


(Author can be reached at [email protected])

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April 2021