Page 449 - CA Final PARAM Digital Book.

Part II -- Requirements of Relevant Standards & Laws
➢ Chartered Accountant in practice is deemed to be guilty of professional misconduct if he “does not
exercise due diligence or is grossly negligent in the conduct of his professional duties”.
Part III – Case Discussion
➢ CA. ZZ conducted ABC audit of a Marathi daily ‘New Era’ certified the circulation figures based on
Management Information System Report (M.I.S Report) without examining the books of Accounts
Part IV – Conclusion
➢ In the instant case, CA. ZZ did not exercise due diligence and is grossly negligent in the conduct of
his professional duties since he certified the circulation figures without examining the books of
accounts.

To ascertain the number of paid copies verification of remittances from the agents, credit allowed
to the agents for unsold copies returned, examination of books of account is essential.

Further certification of circulation figures based on statistical information without cross
verification with financial records amounts to gross negligence and failure to exercise due
diligence.

Hence, CA. ZZ is guilty of professional misconduct as per Clause (7) of Part I of Second Schedule of
Chartered Accountants Act, 1949.
Author’s Note
➢ Whenever Certification is done without collecting proper evidence. Following shall be referred-
• Clause 7 Part 1 of Second Schedule
• Clause 2 Part 1 of Second Schedule
• Clause 8 Part 1 of Second Schedule

Second Schedule, Part I, Cl,8 –No Checking as No Old Course-- (M10E, PM17, SM17, N18M, N20M)
QNO Change in Balance (Investments) New Course-- (SM23)
759.000
TITANIUM CNO – PE.1600 / PE.1540
Mr. A, a Chartered Accountant was the auditor of 'A Limited'. During the financial year 2015-16, the
investment appeared in the Balance Sheet of the company of `10 lakhs and was the same amount as in

the last year. Later on, it was found that the company's investments were only `25,000, but the value of
investments was inflated for the purpose of obtaining higher amount of Bank loan.
Answer Part I -- Relevant Standards & Laws
▪ Clause (2) of Part I of the Second Schedule to the Chartered Accountants Act, 1949
▪ Clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949
▪ Clause (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949
Part II -- Requirements of Relevant Standards & Laws
➢ As per Part I of Second Schedule to the Chartered Accountants Act, 1949, a Chartered Accountant
in practice shall be deemed to be guilty of professional misconduct, under

• Clause (2) of Part I of the Second Schedule
If he, certifies or submits in his name or in the name of his firm, a report of an examination
of financial statements unless the examination of such statements and the related records
has been made by him or by a partner or an employee in his firm or by another chartered
accountant in practice
• Clause (7) of Part I of the Second Schedule
Does not exercise due diligence or is grossly negligent in the conduct of his professional
duties.

• Clause (8) of Part I of the Second Schedule
If fails to obtain sufficient information which is necessary for expression of an opinion or
its exceptions are sufficiently material to negate the expression of an opinion

➢ The primary duty of physical verification and valuation of investments is of the management.
However, the auditor’s duty is also to verify the physical existence and valuation of investments
placed, at least on the last day of the accounting year. The auditor should verify the documentary
evidence for the cost/value and physical existence of the investments at the end of the year. He
should not blindly rely upon the Management’s representation.
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