Audit Planning, Strategy and Execution – CA Final Audit Question Bank

Audit Planning, Strategy and Execution – CA Final Audit Question Bank is designed strictly as per the latest syllabus and exam pattern.

Audit Planning, Strategy and Execution – CA Final Audit Question Bank

Audit Planning

Question 1.
Write short notes on: Usefulness of careful and adequate audit planning. [May 09 (4 Marks)]
Answer:
Objectives of audit planning:

1. To ensure that appropriate attention is devoted to important areas of the audit: This is done through formal written audit plan, laying down the objectives and the procedures to be followed in order to meet those objectives.
2. To facilitate review: Work should be delegated to staff with the appropriate level of experience. All work should be properly supervised and reviewed by a senior member of staff.
3. To ensure that potential problems are identified: The auditor must ensure that resources are directed towards material/high risk areas.
4. To assist in the proper assignment of work: This may be to members of the audit team or to experts or other auditors. It helps the audit to proceed in a timely and efficient manner.
5. Coordination of work done by auditors of components and experts.

Question 2.
A & Co. was appointed as auditor of Great Airways Ltd. As the audit partner what factors shall be considered in the development of overall audit plan? [May 11 (8 Marks)]
Answer:
Factors to be considered in development of overall audit plan:

1. Terms of his engagement and any statutory responsibilities.
2. Nature and timing of reports or other communications.
3. Applicable Legal or Statutory requirements.
4. Accounting policies adopted by the clients and changes, if any, in those policies.
5. The effects of new accounting and auditing pronouncement on the audit.
6. Identification of significant audit areas.
7. Setting of materiality levels for the audit purpose.
8. Conditions requiring special attention such as the possibility of material error or fraud or involvement of parties in whom directors or persons who are substantial owners of the entity are interested and with whom transactions are likely.
9. Degree of reliance to be placed on the accounting system and internal control.
10. Possible rotation of emphasis on specific audit areas.
11. Nature and extent of audit evidence to be obtained.
12. Work of the internal auditors and the extent of reliance on their work, if any in the audit.
13. Involvement of other auditors in the audit of subsidiaries or branches of the client and involvement of experts.
14. Allocation of works to be undertaken between joint auditors and the procedures for its control and review.
15. Establishing and coordinating staffing requirements.
    (Note:,Any eight points may be answered)

Audit Strategy

Question 3.
Designing an Audit Strategy is the back bone of the “Audit planning” process. Discuss.
Answer:
Designing an Audit Strategy:
Audit strategy is concerned with designing optimised audit approaches that seek to achieve the necessary audit assurance at the lowest cost within the constraints of the information available.

SA 300 “Planning an Audit of Financial statements” requires the auditor to establish an audit strategy that sets the scope, timing and direction of the audit.

Audit strategy is designed by following the various activities:
1. Obtaining knowledge of business: SA 315 requires the auditor to obtain sufficient knowledge of the business to enable him to identify and understand the events, transactions and practices that, in his judgment, may have a significant effect on the financial statements or audit report.

2. Performing analytical proceduresatinitial stages: The use of analytical procedures during the planning stage requires the extensive use of accountingand business knowledge and experience to assess the potential for material misstatement in the financial statements as a whole.

3. Evaluating inherent risks: To assess inherent risk, the auditor should evaluate numerous factors, having regard to his experience of the entity from previous audit engagements of the entity, controls established by management and his knowledge of any significant changes which might have taken place since his last assessment.

4. Evaluating internal control system for strategy purposes: For strategy purposes the auditor should obtain a sufficient understanding of the control environment. The auditor needs an understanding of the accounting systems, regardless of whether the audit strategy will involve an extended assessment of internal accounting controls.

Question 4.
What are the major sources of obtaining information about the client’s business.
Answer:
Major Sources of Obtaining information about Client’s business:

1. Annual Reports circulated among the shareholders;
2. Minutes of meetings of shareholders, directors and their committees;
3. Internal reports over financial aspects for current and previous periods, including budgets;
4. Working Papers of previous year audits;
5. Policy and procedures Manual of the Client;
6. Discussions with the client;
7. Publications of the ICAI and other professional bodies, industry publication, trade Journals, newspapers etc.;
8. Consideration of general state of the economy and its effects on the client’s business; and
9. Visits to the premises of the client.

Question 5.
The process of establishing the overall audit strategy assists the auditor to determine certain matters with respect of team resource. Explain those matters.
Answer:
Matters determined by Audit Strategy with respect to team resources:
1. Employment of Qualitative Resources: Audit strategy helps in deploying the appropriate resources for specific audit areas, such as the use of experienced team members for high risk areas or the involvement of experts on complex matters.

2. Allocation of Quantity of Resources: Audit strategy helps in allocating the appropriate number of resources to specific audit areas, such as the number of team members assigned to observe the inventory count at material locations, the extent of review of other auditors’ work in the case of group audits, or the audit budget in hours to allocate to high risk areas.

3. Timing of Deployment of Resources: Audit strategy helps in determining the timing of deploying the resources, such as whether at an interim audit stage or at key cut-off dates.

4. Management of Resources: Audit strategy helps in managing, directing, supervising the resources, such as when team briefing and debriefing meetings are expected to be held, how engagement partner and manager reviews are expected to take pla’ce (for example, on-site or off-site), and whether to complete engagement quality control reviews.

Question 6.
You have been appointed as an auditor of Bahubali Ltd. for the first time. Enumerate the factors to be considered while establishing an overall audit strategy and its benefits. [May 18 – Old Course (4 Marks)]
Answer:
Factors to be considered in establishing audit strategy:
SA 300 “Planning an Audit of Financial Statements” requires that the auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan.

In establishing the overall audit strategy, the auditor shall:

• Identify the characteristics of the engagement that define its scope;
• As certain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required;
• Consider the factors that are significant in directing the engagement team’s efforts;
• Consider the results of preliminary engagement activities and, where applicable, whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant; and
• As certain the NTE of procedures necessary to perform.

Benefits of Audit Strategy:
1. Employment of Qualitative Resources: Audit strategy helps in deploying the appropriate resources for specific audit areas, such as the use of experienced team members for high risk areas or the involvement of experts on complex matters.

2. Allocation of Quantity of Resources: Audit strategy helps in allocating the appropriate number of resources to specific audit areas, such as the number of team members assigned to observe the inventory count at material locations, the extent of review of other auditors’ work in the case of group audits, or the audit budget in hours to allocate to high risk areas.

3. Timing of Deployment of Resources: Audit strategy helps in determining the timing of deploying the resources, such as whether at an interim audit stage or at key cut-off dates.

4. Management of Resources: Audit strategy helps in managing, directing, supervising the resources, such as when team briefing and debriefing meetings are expected to be held, how engagement partner and manager reviews are expected to take pla’ce (for example, on-site or off-site), and whether to complete engagement quality control reviews.

Question 7.
As an auditor of garment manufacturing company for the last five years you have observed that new venture of online shopping has been added by the company during current year. As an auditor what factors would be considered by you in formulating the audit strategy of the company? [May 15 (6 Marks)]
Answer:
Factors to be considered in formulating audit strategy:
SA 300 “Planning an Audit of Financial Statements” requires that the auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan.

In establishing the overall audit strategy, the auditor shall:

• Identify the characteristics of the engagement that define its scope;
• As certain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required;
• Consider the factors that are significant in directing the engagement team’s efforts;
• Consider the results of preliminary engagement activities and, where applicable, whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant; and
• As certain the NTE of procedures necessary to perform.

Specific Factors of audit strategy for online shopping:

1. Nature of transactions significant to the financial statements;
2. Procedures, within both information technology and manual systems, by which transactions are initiated, recorded, processed, corrected (if necessary), transferred to the general ledger and reported in the financial statements;
3. System by which the information system captures events and conditions, other than transactions, that are significant to the financial statements;
4. Controls used to record non-recurring, unusual transactions or adjustments.

“ICAI Examiner Comments” ‘
Candidates have not focused on factors to be considered in formulating audit strategy and instead they elaborated the areas of audit and answers were general in nature. They could not v write general and specific factors of audit strategy for online shopping.

Question 8.
Write short note on: Relationship in between Audit strategy and Audit Plan.
Or
Discuss the relationship between overall audit strategy and audit plan. [Nov. 16 (4 Marks)]
Answer:
Relationship between Audit Strategy and Audit Plan:

• Audit strategy and audit plan are inter-related to each other because change in one would result into change in the other.
• The audit strategy is prepared before the audit plan. The audit plan contains more details than the overall audit strategy.
• The audit strategy provides the guidelines for developing the audit plan.
• Audit strategy establishes the scope, timing and direction of the audit and thereby works as basis for developing a detailed audit plan
• Detailed audit plan would include the nature, timing and extent of the audit procedures so as to obtain sufficient appropriate audit evidence.

Audit Programme

Question 9.
As an internal auditor for a large manufacturing concern, you are asked to verily whether there are adequate records for identification and value of Plant and Machinery, tools and dies and whether any of these items have become obsolescent and not in use. Draft a suitable audit programme for the above. [MTP-April 18]
Answer:
Audit Programme to determine adequacy of records w.r.t. Plant and Machinery:

The Internal Audit Programme for verification of adequate records for identification and value of plant and machinery may cover the following;

1. Examination of Internal Control System Aspects: With respect to following:
   • Maintenance of separate register for fully owned assets, jointly owned assets hired assets and leased asset
   • Periodic inspection of fixed asset.
   • Proper authorisation and recording for purchase, repair and disposal of fixed assets.
2. Examination of Assets Register: To ensure whether the registers are showing clearly the date of purchase, cost price, location, depreciation charged, etc. for each plant and machinery.
3. Examination of Measurement of Cost: Verily the items which have been capitalised.
4. Examination of Code Register: To ensure that each item of plant and machinery has been given a distinct code number.
5. Physical Verification: Ensure that physical verification has been conducted by management at frequent intervals.
6. Disposal of Assets: Examine whether assets have been disposed of after proper technical and financial advice and is properly authorised.
7. Spare Parts Register: To examine the system of control over the various tools and spare parts to be used for each plant and machinery.
8. Review of Maintenance: Examine the programme for a periodical servicing and overhauling of machines.

Question 10.
As an internal auditor of a Cement Manufacturing Company, draft an audit programme for verifi-cation of transportation charges for dispatches from the factory.
Answer:
Audit Programme for verification of transportation charges:

1. Examine the agreement to note down the rates contracted with transporters for carriage of goods.
2. Examine whether the rates charged in the invoice is as per the contract. In case of any discrepancy, ensure whether the same is authorized by the appropriate authority.
3. Examine whether the transporter’s invoice includes a delivery challan bearing the customers stamp indicating the receipt of goods. In case there is no stamp on the delivery challan, check whether the goods are received back and there is a corresponding inward note.
4. Check whether all the goods to be dispatched have a transport booking order reference.
5. Check whether invoice of transporter’s mentions the transport booking order reference.
6. Check whether the transport booking orders have corresponding transporters names and transport booking orders are pre-numbered.
7. Ensure correct recording of amount stated in the invoice.
8. Examine whether service-tax on the transporters is properly correctly calculated and accounted.
9. Check whether TDS has been deducted at appropriate rate and deposited with the government in time.

Question 11.
You have been appointed as the auditor of a Multiplex Cinema House. Draw an audit programme in respect of its Revenue and Expenditure. [Nov. 08 (8 Marks), RTP-May 18]
Or
Cineplex, a movie theatre complex, is the foremost theatre located in Delhi. Along with the sale of tickets over the counter and online booking, the major proportion of income is from the cafe, shops, pubs etc. located in the complex. It’s other income includes advertisements exhibited within/ outside the premises such as hoardings, banners, slides, short films etc. The facility for parking of vehicles is also provided in the basement of the premises.

Cineplex appointed your firm as the auditor of the entity. Being the head of the audit team, you are therefore required to draw an audit programme initially in respect of its revenue and expenditure considering the above-mentioned facts along with other relevant points relating to a complex. [Nov. 19 – New Syllabus (5 Marks)]
Answer:
Audit Programme for Revenue and Expenditure of Multiplex:

1. Study the MOA and AOA of the entity so as to ensure that the object clause of MOA permits the entity to engage in this business,
2. In respect of income from sale of tickets, perform the following:
   (a) Examine the internal control system to ensure proper accounting of sale of tickets.
   (b) Examine the system of online booking and realization of money.
   (c) Examine the system of reconciliation of collections with the number of seats available.
3. Examine the existence and effectiveness of internal control system relating to the income from cafes shops, pubs etc., located within the multiplex.
4. Examine the control exercised relating to the income receivable from advertisements exhibited within the premises.
5. Examine the system of collection from the parking areas.
6. Examine the system of payment to the distributors which may be either through out right payment or percentage of collection.
7. Examine the system of payment of salaries and other benefits to the employees and ensure compliance of statutory requirements.
8. Examine the expenses incurred in respect of the maintenance of the building.

Question 12.
XY Ltd. is a manufacturing company, provided following details of wastages of raw materials in percentage, for various months. You havtTbeen asked to enquire into causes of abnormal wastage of raw materials. Draw out an audit plan. Wastage percentage are:
July – 2020 -1.5% Aug. 2020 -1.7%
Sep. – 2020 -1.4% Oct. 2020 – 4.1% [Nov. 11 (8 Marks), MTP – April 18]
Answer:
Audit Plan to inquire causes of abnormal wastage of raw material:
Before planning for detailed investigation, the auditor is required to understand the manufacturing operations from the initial stage of purchase of materials, issue of material, consumption of material and conversions into finished goods. To locate the reasons for the abnormal wastage, the audit plan may include the following:

1. Obtain a list of raw materials used in the production process mentioning therein the names and detailed characteristics of each raw material.
2. As certain the basis of computation of normal wastage figures and its consistency as compared to previous months.
3. Obtain internal control reports, in respect of manufacturing costs incurred with reference to predetermined standards or budgets.
4. Examine the stock records so as to determine the raw material purchased, material issued to production.
5. Examine the production records so as to determine the material received from the stores and actual material consumed in the production and waste produced in the production process.
6. Study the Maintenance Programme of machinery to ensure that the machinery does not consume more raw material and quality of goods manufacture is not of sub-standard nature.
7. As certain whether employees engaged in production are properly trained and working efficiently.
8. Determine the existence and effectiveness of quality control techniques employed in the entity.
9. Examine inventory controls in respect of storage, pilferage, issues etc.
10. Obtain a statement showing break up of wastage figures in storage, handling and production for the period under reference and compare the results of the analysis for each of the month.
11. Consider the existence of following situations that may also cause the abnormal wastage:
    (a) Purchase of poor quality of raw materials.
    (b) Machinery breakdown or power failure.
    (c) High rate of rejections of finished goods
    (d) Deterioration of raw material lying in godowns
    (e) Abnormal wastages in storage and handling.
    (f) Commencing new production line.

Audit Execution

Question 13.
Briefly explain the key phases in the audit execution.
Or
Key phases in the audit execution stage are Execution Planning, Riskand Control Evaluation, Testing and Reporting. Explain. [RTP-Nov. 18]
Answer:
Key Phases in the audit Execution:
Phase-I: Execution Planning

• In order to carry out the audit in an effective, efficient & timely manner, auditors need to plan the work and a detailed audit program should be prepared covering the audit objectives, scope and audit approach.
• During execution planning, auditor should consider the manpower requirement, qualification of members of ET, time factor etc.

Phase-II: Risk and Control Evaluation
Auditor need to conduct a detailed assessment of risk and control as per requirements of SA 315.
Steps involved in assessment of risk are:

• List the risk that need to be reviewed for each segment of audit.
• Capture for each risk the controls that exist or those that are needed
• Determine the steps required to test the effectiveness of each controls.

Phase-III: Testing

• As required by S A 330, auditor should test the operating effectiveness of the controls to determine whether controls are operating as designed.
• Auditor should perform appropriate substantive procedures (Tests of Details and SAP] so as to collect sufficient appropriate audit evidences w.r.t. completeness, accuracy and validity of accounting data.

Phase-IV: Reporting

• The auditor should review and assess the conclusions drawn from the audit evidence obtained as the basis for the expression of an opinion on the F.S. The opinion so farmed should be expressed in the form of audit report as required by SA 700.
• Auditor’s report should contain a clear written expression of opinion on the financial statements taken as a whole.