Students should practice these Audit of Items of Financial Statements – CA Inter Audit MCQ based on the latest syllabus.

Audit of Items of Financial Statements – CA Inter Audit MCQ

Question 1.
Which assertion is common among income statement and balance sheet captions:
(a) Existence
(b) Valuation
(c) Completeness
(d) Measurement
Answer:
(c) Completeness

Question 2.
Direct confirmation procedures are performed during audit of trade receivable balances to address the following balance sheet assertion:
(a) Measurement
(b) Existence
(c) Rights and Obligations
(d) Completeness
Answer:
(b) Existence

Question 3.
Where no reply is received during the performance of direct confirmation procedures as part of audit of trade receivable balances, the auditor should perform:
(a) Additional testing including agreeing the balance to cash received; agreeing the detail of the respective balance to the customer’s remittance advice
(b) Additional testing including preparing a detailed analysis of the balance, ensuring it consists of identifiable transactions and confirming that these revenue transactions actually occurred
(c) No additional testing
(d) Both (a) and (b)
Answer:
(d) Both (a) and (b)

Question 4.
Obtaining trade receivables ageing report and analysis and identification of doubtful debts is performed during audit of trade receivable balances to address which of the following balance sheet assertion:
(a) Valuation
(b) Rights and obligations
(c) Measurement
(d) Completeness
Answer:
(a) Valuation

Question 5.
Observing inventory being counted and personally performing test counts to verify counts is performed during audit of inventory balances to address which of the following balance sheet assertion:
(a) Existence
(b) Rights and obligations
(c) Measurement
(d) Cut-off
Answer:
(a) Existence

Question 6.
Wages paid to workers will be classified as:
(a) Revenue expenditure
(b) Capital expenditure
(c) Deferred revenue Expenditure
(d) Revenue or capital expenditure depending upon facts and circumstances
Answer:
(d) Revenue or capital expenditure depending upon facts and circumstances

Question 7.
During the course of audit of intangible assets, expenditure incurred during which of the following phase is generally not capitalised:
(a) Research phase
(b) Development phase
(c) Both (a) and (b)
(d) None of the above
Answer:
(a) Research phase

Question 8.
Search for unrecorded liability is performed during audit of current liabilities to address which of the following balance sheet assertion:
(a) Rights and obligations
(b) Existence
(c) Completeness
(d) Occurrence
Answer:
(c) Completeness

Question 9.
Cut-off testing is performed during audit of sales to address which of the following assertion:
(a) Occurrence
(b) Measurement
(c) Completeness
(d) Existence
Answer:
(c) Completeness

Question 10.
ABC’s investee company- XYZ declares Final dividend for financial year 2018-19 in the meeting of board of directors held on April 15, 2019. In which financial year should ABC account for the dividend income:
(a) Proportionately i.e. considering 15 days of financial year 2019-20 and 350 days of financial year 201819
(b) Financial year 2018-19
(c) Financial year 2019-20
(d) Equally between financial year 2018-19 and financial year 2019-20
Answer:
(c) Financial year 2019-20

Question 11.
All inventory units held by the audit entity and that should have been recorded, has been recognized in the financial statements. The assertion involved is:
(a) Rights and Obligations
(b) Existence
(c) Completeness
(d) Valuation
Answer:
(c) Completeness

Question 12.
Which of the following is not an example of revenue expenditure?
(a) Salaries and wages of employees engaged directly or indirectly in production
(b) Repairs, maintenance and renewals of non-current assets
(c) Development expenditure on land
(d) Legal and professional expenses
Answer:
(c) Development expenditure on land

Question 13.
ABC Ltd. is a renowned food chain supplier in a posh area providing restaurant facility along with food delivering. CA. Ram was appointed as an auditor of the company for the Financial Year 2018-19. While examining the books of account of the company, auditor came to knowabout one ofthe major expenses of the company i.e. rent expense of ₹ 1,20,000 per month, for which he applied substantive analytical procedure for verification purpose. Explain, how would auditor perform substantive analytical procedure in the given scenario?
(a) Auditor would inspect every single rent invoice per month of ₹ 1,20,000 and verify other elements appropriately
(b) Auditor would compare the rental expense of the company with that of another nearby company having corresponding dimensions, for high degree of accuracy
(c) Auditor would select the first month rent invoice of ₹ 1,20,000 and appropriately verifying other elements would predict that the rent for the whole year would be ₹ 14,40,000 (i.e. ₹ 1,20,000 × 12). Thereafter, he would compare the actual with his prediction and follow-up for any fluctuation
(d) Both (a) and (b)
Answer:
(c) Auditor would select the first month rent invoice of ₹ 1,20,000 and appropriately verifying other elements would predict that the rent for the whole year would be ₹ 14,40,000 (i.e. ₹ 1,20,000 × 12). Thereafter, he would compare the actual with his prediction and follow-up for any fluctuation

Question 14.
In July, 2018, M/s ABC & Co. entered into an agreement with M/s X & Co. under which a machinery would be let on hire and M/s X & Co. would have the option to purchase the machinery in accordance with the terms of the agreement. Thus, M/s X & Co. agreed to pay M/s ABC & Co. a settled amount in periodical instalments. The property in the goods shall be passed to M/s X & Co. on the payment of last of such instalments. While checking such hire-purchase transaction, what would the auditor examine?
(a) That the periodical instalments paid are charged as an expenditure by M/s X & Co.
(b) That M/s ABC & Co. charges depreciation through-out the life of the machinery
(c) That the hire purchase agreement specifies clearly the hire purchase price of the machinery to which the agreement relates
(d) All of the above
Answer:
(c) That the hire purchase agreement specifies clearly the hire purchase price of the machinery to which the agreement relates

Question 15.
The management of M Ltd. has developed a strong internal control in its accounting system in such a way that the work of one person is reviewed by another. Since no individual employee is allowed to handle a task alone from the beginning to the end, the chances of early detection of frauds and errors are high. CA. Amar has been appointed as an auditor of the company for current Financial Year 2018-19. Before starting the audit, he wants to evaluate the internal control system of M Ltd. To facilitate the accumulation of the information necessary for the proper review and evaluation of internal controls, CA. Amar decided to use internal control questionnaire to knowand assimilate the system and evaluate the same. Which of the following questions need notbe framed under internal control questionnaire relating to purchases?
(a) Are authorized signatories for purchases limited to elected officials?
(b) Are payments approved only on original invoices?
(c) Are monthly bank reconciliations implemented for each and every bank accounts of the company?
(d) Does authorized officials thoroughly review the documents before signing cheques?
Answer:
(c) Are monthly bank reconciliations implemented for each and every bank accounts of the company?

Question 16.
While auditing the books of account of ABC Ltd., CA. Sanyam, the statutory auditor of the company, came to know that the management of the company has recognized internally generated goodwill as a fixed asset. CA. Sanyam discussed with the management that according to AS 26, internally generated goodwill is not recognized as an asset because it is not an identifiable resource controlled by the enterprise that can be measured reliably at cost. However, the management is quite rigid to the accounting treatment followed for internally generated goodwill and not paying attention to the auditor. Thus, through an example, CA. Sanyam explained which type of goodwill may be recognized as a fixed asset for which the management got justified. State which of the following examples he must have given to the management?
(a) If an item meeting the definition of an intangible asset is acquired in abusiness combination, it forms part of the goodwill to be recognized at the date of the amalgamation
(b) Goodwill is recognised only when there is a contractual or other legal rights for a physical asset which shall not be amortized over the period
(c) Only those goodwill needs to be recognized as a fixed asset which can be touched like physical assets, for example, land and buildings
(d) Any of the above
Answer:
(a) If an item meeting the definition of an intangible asset is acquired in abusiness combination, it forms part of the goodwill to be recognized at the date of the amalgamation

Question 17.
The notes to the account statement of A Ltd. shows the break-up of accounts payable for the Financial Year 2018-19 as follows:

Accounts Payable	Amount (in ₹ )
Mr. A	2,20,000
Mr. B	1,40,000
Mr. C	16,56,000
Total	21,16,000

CA. Sanyam, the auditor of A Ltd., wants to investigate the valuation of accounts payable of Mr. C amounting to ₹ 16,56,000. Which of the following procedures is best fitted & more reliable to be followed by the auditor to get more reliable evidence for the existence of such balance as on 31st March, 2019?
(a) Inspect the invoices issued by Mr. C and the payments made
(b) Inspect each and every journal entry passed in the books of A Ltd.
(c) Ask A Ltd. to provide the details of payment made during the year 2018-19
(d) Any of the above
Answer:
(a) Inspect the invoices issued by Mr. C and the payments made

Question 18.
An entity in addition to undertaking purchases and incurring employee benefit expenses also j spends on other expenditure that are essential and incidental to running of business operations. One of such expenses is the legal and professional expenses. These are the fees paid for professional advices regardingspecificdealsTitanicLtd. is having a retainer ship agreement with a lawyer, Mr. Bhan- war, to whom the company is paying a huge sum as legal and professional expenses on monthly basis. While vouching such expenses, what should be kept in mind by the auditor?
(a) In case of monthly retainer ship agreements, only j verify if the expenditure for all 12 months has been recorded correctly
(b) The auditor should verify that the payments have been only through bank vouchers
(c) The auditor should be cautious while vouching for legal expenses as the same may highlight a dispute for which the entity may not have made g any provision and the matter may also not have been discussed/highlighted to the auditor for his S specific consideration
(d) In case of monthly retainer ship agreements, only verify that all the payments have been made and there is no outstanding balance to be shown as liability in the Balance Sheet
Answer:
(c) The auditor should be cautious while vouching for legal expenses as the same may highlight a dispute for which the entity may not have made g any provision and the matter may also not have been discussed/highlighted to the auditor for his S specific consideration

Question 19.
The management of XYZ Ltd. could not differentiate between any obligation for which either provisions need to be made or the contingent liability to be shown. The auditor of the company clarifies the management that the provisions are the amounts charged against revenue to provide for a known liability, the amount whereof cannot be determined with substantial accuracy. On the other hand, a contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or a present obligation that arises from past events j but is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability. The auditor further explains the concept with the help of examples. State which of the following examples the auditor must have provided in respect of contingent liability?
(a) Depreciation
(b) Clean-up costs for unlawful environmental damage
(c) Product warranties
(d) Lawsuit against the company where iris more likely that no present obligation exists
Answer:
(d) Lawsuit against the company where iris more likely that no present obligation exists

Question 20.
One of your junior audit team members is con-fused with the term ‘material misstatement’. You explain him that a material misstatement is untrue information in a financial statement that could affect the financial decisions of one who relies on the statement. Which of the following would constitute material misstatement?
(1) An error of ₹ 5,000 in relation to assets of ₹ 20 lakhs
(2) A payroll fraud of ₹ 100 in a company where profit before tax is ₹ 11,000
(3) Non-disclosure of a material uncertainty
(4) Financial statements have been prepared on a . going concern basis when the company is in the process of being liquidated
(a) 1 and 2
(b) 3 and 4
(c) 2 and 3
(d) 1 and 4
Answer:
(b) 3 and 4

Question 21.
One of your junior audit team members is con-fused with the term ‘material misstatement’. You explain him that a material misstatement is untrue information in a financial statement that could affect the financial decisions of one who relies on the statement.
(1) An error of ₹ 5,000 in relation to assets of ₹ 20 lakhs.
(2) A payroll fraud of ₹ 100 in a company where profit before tax is ₹ 11,000.
(3) Non-disclosure of a material uncertainty.
(4) Financial statements have been prepared on a going concern basis when the company is in the process of being liquidated.
Which of the above mentioned would constitute material misstatement?
(a) 1 and 2
(b) 3 and 4
(c) 2 and 3
(d) 1 and 4
Answer:
(b) 3 and 4

Question 22.
While auditing the accounts of Thought Co. Ltd., CA. Biiss, the auditor of the company came across certain accounts payable balances for which direct confirmation procedure needs to be applied. Thus, for the year endingS IstMarch, 2018, he sent positive confirmation requests wherein the trade payables are requested to respond whether or not they are in agreement with the balance shown. The auditor received all the confirmation replies from the trade payables on time as correct except from five of them. What other option the auditor is left with regard to trade payables from which no reply for confirmation requests received?
(a) Perform additional testing which may include agreeing the balance to subsequent cash paid.
(b) Accept the balances as it is assuming other replies against received confirmation requests being correct.
(c) Accept the balances as it is assuming that the trade payables must have replied in case of any discrepancies.
(d) None of the above.
Answer:
(a) Perform additional testing which may include agreeing the balance to subsequent cash paid.

Question 23.
__________ is a possible obligation that arises from the past events and whose existence will be confirmed only by the occurrence/non-occurrence of one or more uncertain future events not wholly within the control of the entity:
(a) Provisions
(b) Reserves
(c) Contingent Liabilities
(d) Liability
Answer:
(c) Contingent Liabilities

Question 24.
While conducting the audit of Saraswati Ltd., a packaged water making company, it was found that a purchase of motor car was made in the name of the company. Your Article Assistant has performed the following audit procedures. Identify which of the following procedure is incorrect.
(a) Ascertain whether the purchase of car has been properly authenticated.
(b) Check invoice of the car dealer to confirm the purchase price
(c) Examine registration with Transport Authorities to verify the ownership
(d) Ensure that the motor car has been included in the Closing inventory of goods
Answer:
(d) Ensure that the motor car has been included in the Closing inventory of goods