Students should practice these CA Inter Auditing Case Studies – CA Inter Audit MCQ based on the latest syllabus.

CA Inter Auditing Case Studies – CA Inter Audit MCQ

Integrated Case Study – 1
Moon Group of companies is a retail chain involved in the selling of daily consumer needs directly to the customer. They are in the process of appointing an audit firm for the audit of their accounts for the financial year 2019-20. Moon Group is a South Indian based consumer store having a total of 16 outlets across 4 cities in South India.
Sumant & Co. is appointed as the principal auditor for the entire group. Companies Act, 2013 prescribes in detail the terms of this audit engagement. Further, there are many branch auditors appointed for the outlets in the other cities. The company also has an internal audit function conducted on quarterly basis by Ram & Co. Following are the observations during the course of the statutory audit:
(a) One of the discounts offered by the store is in the form of payback cards where reward points are accumulated and the customer can redeem the same on subsequent purchase. The management and internal auditors are of the opinion that the points redeemed are to be treated as trade discount. The external auditors are doubtful on the matter.
One of the outlet in Chennai region is in the verge of getting closed and is only left with low value stock to be cleared before closure. During the year, the sales were only around Rs. 1,40,000 and the auditor considers this component immaterial. All other outlets are performing well with good revenue share.
The gratuity valuation of the employees of the retail chain is done by an external valuer. The auditor, considering the quantum involved appoints an external auditor’s expert for the verification of the actuarial calculation of gratuity.

From the above facts, answer the following questions by choosing the correct answer:
Question 1.
As per SA 210 – Agreeing the Terms of Audit Engagement, which of the following statement is correct?
(a) Though law prescribes in sufficient detail the terms of the audit engagement, the auditor still needs to record them in a written agreement and also seek written agreement from management that it acknowledges and understands that it has responsibility for the preparation of financial statements.
(b) Since law prescribes in sufficient detail the terms of the audit engagement, the auditor need not record them in a written agreement except for the fact that law or regulation applies and also seek written agreement from management that it acknowledges and understands that it has responsibility for the preparation of financial statements.
(c) The auditor has to take an extract of the law prescribing the details of the terms of the audit engagement and obtain the counter signature of the management in it.
(d) Though law prescribes in sufficient detail the terms of the audit engagement, the auditor still needs to record them in a written agreement, however it need not seek written agreement from management that it acknowledges and understands that it has responsibility for the preparation of financial statements.
Answer:
(b) Since law prescribes in sufficient detail the terms of the audit engagement, the auditor need not record them in a written agreement except for the fact that law or regulation applies and also seek written agreement from management that it acknowledges and understands that it has responsibility for the preparation of financial statements.

Reason:
As per SA 210, if law or regulation prescribes in sufficient detail the terms of the audit engagement, the auditor need not record them in a written agreement, except for the fact that such law or regulation applies and that management acknowledges and understands its responsibilities.

Question 2.
With respect to the treatment of discount on redemption of points in payback card, what should be the action of the external auditor?
(a) The auditor can place reliance and go by the opinion of the branch auditor and internal auditor as they have only done a thorough and detailed audit of the accounts
(b) The auditor can place reliance on the management’s accounting policy as prima facie they are only responsible for preparation of financial statements.
(c) The external auditor has sole responsibility for the audit opinion expressed and hence he should perform procedures to satisfy himself on the correct treatment and issue opinion accordingly.
(d) The auditor can advise management on correct treatment but cannot qualify his opinion as branch auditor’s opinion has higher authority than external auditor’s opinion.
Answer:
(c) The external auditor has sole responsibility for the audit opinion expressed and hence he should perform procedures to satisfy himself on the correct treatment and issue opinion accordingly.

Reason:
As per SA 600 and SA 610, Statutory auditor may use the work performed by Another Auditor and Interna! Auditor respectively, however, ultimate responsibility for opinion expressed is of Statutory auditor. Hence, he should perform procedures to satisfy himself on the correct treatment and issue opinion accordingly.

Question 3.
What is the main objective of the external auditor, when he uses the work of the internal audit function of Ram & Co.?
(a) To determine as to which areas, what extent the work can be used and whether that work is adequate for the purposes of the audit.
(b) To appropriately direct, supervise and review the work of the internal audit function
(c) Review the internal audit report and audit the areas not covered by the internal audit function
(d) Enquire from management on the special points that arose during internal audit and follow up on the course of action on those points.
Answer:
(a) To determine as to which areas, what extent the work can be used and whether that work is adequate for the purposes of the audit.

Reason:
As per SA 610, the objectives of the external auditor, if using the work of the internal audit function, is to determine whether that work is adequate for purposes of the audit.

Question 4.
The external auditor finds that the branch auditor of the outlet in the Chennai region, which is in the verge of closing down, is audited by an auditor who is not a member of the Institute of Chartered accountants of India. What should the external auditor do?
(a) Since the professional competence of the auditor is in question, the external auditor should himself visit the premise and audit the accounts.
(b) Since the financial statement of the component is immaterial, the provisions of SA 600 do not apply.
(c) The auditor can rely on the financial statements of that component by obtaining written representation from management that the branch auditor is otherwise well qualified.
(d) Since the professional competence of the auditor is in question, the external auditor should coordinate with the branch auditor and call for the books of account and other explanations.
Answer:
(b) Since the financial statement of the component is immaterial, the provisions of SA 600 do not apply.

Reason:
As per SA 600, when the principal auditor concludes that the financial information of a component is immaterial, the procedures outlined in SA 600 do not apply. When several components, immaterial in themselves, are together material in relation to the financial information of the entity as a whole, the procedures outlined in SA 600 should be considered.

Question 5.
Which of these is not a factor affecting the external auditor’s evaluation of the objectivity of the internal audit function?
(a) Whether the organizational status of the internal audit function supports the ability of the function to be free from bias, conflict of interest or undue influence of others to override professional judgment.
(b) Whether the internal audit function is free of any conflicting responsibilities.
(c) Whether the internal auditors have adequate technical training and proficiency in auditing.
(d) Whether those charged with governance oversee employment decisions related to internal audit function.
Answer:
(c) Whether the internal auditors have adequate technical training and proficiency in auditing.

Reason:
As per SA 610, in evaluation of the objectivity of the internal audit function, external auditor considers organisational status of internal audit function, conflicting responsibilities, oversight functions of TCWG w.r.t. employment decisions related to the internal audit function.

Integrated Case Study – 2
M/s JK & Associates have been appointed as auditors of Venus Ltd. for the financial year 2019-20. The team consist of Mr. J & Mr. K both Chartered Accountants as also the engagement partners and the audit staff consisting of 2 article assistants. While starting the audit work of Venus Ltd., the engagement partners briefed the audit staff about the audit work, areas to be covered and the various auditing concepts and their application in the audit of Venus Ltd. along with applicable Standard on Auditing.
Various topics like audit planning, overall audit strategy, audit programme were discussed in detail. The team was told about the purpose and implication of various statements and guidance notes issued by the Institute of Chartered Accountants of India (ICAI) from time to time. Mr. K also briefed the team about the concept of materiality to be applied while planning and performing audit. The team was also explained in detail about the area where benchmark materiality can be applied in case of Venus Ltd.

Based on the above facts, answer the following:
Question 1.
sets the scope, timing & direction of the audit and guides the development of the more detailed plan.
(a) Audit Programme
(b) Overall Audit Strategy
(c) Completion Memorandum
(d) Audit Plan
Answer:
(b) Overall Audit Strategy

Reason:
As per SA 300, 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

Question 2.
Statement 1: The establishment of the overall audit strategy and the detailed audit plan are not necessarily discrete or sequential process but are closely inter-related.
Statement 2: The auditor shall establish an overall audit strategy that guides the development of audit plan.
(a) Only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both Statements 1 & 2 are correct
(d) Both Statements 1 & 2 are incorrect
Answer:
(c) Both Statements 1 & 2 are correct

Reason:
As per SA 300, the establishment of the overall audit strategy and the detailed audit plan are not necessarily discrete or sequential processes, but are closely inter-related since changes in one may result in consequential changes to the other.

Question 3.
means the amount set bv the auditor at less than materialitv for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatement exceeds materiality for the financial statements as a whole:
(a) Benchmark Materiality
(b) Materiality in Planning
(c) Performance Materiality
(d) Materiality.
Answer:
(c) Performance Materiality

Reason:
As per SA 320, performance materiality means the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

Question 4.
Which of the following is not an example of benchmark that can be used in determining the materiality in the case of financial statements:
(a) Total Revenue
(b) Profit before tax
(c) Net Asset Value
(d) None of the above
Answer:
(d) None of the above

Question 5.
(i) Guidance notes issued by ICAI provide guidance to members on matters which may arise in the course of their professional work.
(ii) Statements are issued by ICAI with a view to secure compliance by members on some matters,
(iii) Guidance notes are recommendatory in nature.
(iv) Statements are mandatory in nature.
(a) All the above statements are correct
(b) Statements 1 & 2 are correct
(c) Statements 1, 2 & 3 are correct
(d) Statements 1,2 & 4 are correct
Answer:
(a) All the above statements are correct

Integrated Case Study – 3
Anvisha Ltd. is a company engaged in the business of software development. It is one of the largest companies in this sector with a turnover of ? 25,000 crores. The operations of the company are increasing constantly, however, the focus of the management is more on cost cutting in the coming years to improve its profitability. Shares of Anvisha Ltd. are listed on Bombay Stock Exchange.
Company in its AGM held on 26.08.2018, appointed M/s ABC and Associates, Chartered Accountants, as their auditors for five years.
In respect of the financial statements of the company for the year 2018-19, which are used by various stakeholders, some fraud was observed in respect of assets reported therein due to which those stakeholders suffered damages. As a result, those stakeholders applied to Tribunal for change of auditor on the basis that auditor is colluded in the fraud.
In the meanwhile, ABC and Associates, resigned from the company without assigning any reason. As per the requirements of Sec. 140(2) of Companies Act, 2013, the auditor who has resigned from the company shall file within a period of 30 days from the date of resignation, a statement in the Form ADT-3 with the company and the Registrar. However, no such statement is filed by ABC and Associates.

Based on the above facts, answer the following:
Question 1.
In case of an listed entity, for the purpose of appointment of a person as auditor of the company, qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and whether such qualifications and experience are commensurate with the size and requirements of the company, is to be considered by:
(a) Audit Committee
(b) Board of Directors
(c) Audit Committee and SEBI
(d) Board of Directors and SEBI
Answer:
(a) Audit Committee

Reason:
As per Rule 3 of Companies (Audit and Auditor’s) Rules, 2014, in case of a company that is required to constitute an Audit Committee u/s 177, the audit committee, shall take into consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and whether such qualifications and experience are commensurate with the size and requirements of the company.

Question 2.
After appointment of the auditor in AGM, Anvisha Ltd. shall inform ABC and Associates of their appointment. and also file a notice in Form ______ of such appointment with ______ within of the meeting in which the auditor is appointed.
(a) Form ADT -1, SEBI, 15 Days
(b) Form ADT -1, Registrar, 15 days.
(c) Form ADT – 2, SEBI, 30 days
(d) Form ADT – 2, Registrar, 30 days.
Answer:
(b) Form ADT -1, Registrar, 15 days.

Reason:
As per Proviso to Sec. 139(1) of the Companies Act, 2013, the company shall inform the auditor concerned of his or its appointment, and also file a notice (Form ADT-1) of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.

Question 3.
Which of the following stands true in respect of application made by shareholders to Tribunal for change of auditor on the basis that auditor is colluded in the fraud?
(a) Application will be rejected by Tribunal as application for change of auditor can be made only by Central Government.
(b) Application will be rejected by Tribunal as Only Tribunal may suo motu take action for change of auditor.
(c) If Tribunal is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors.
(d) Approval of Central Government is required before making application to Tribunal for change of auditors.
Answer:
(c) If Tribunal is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors.

Reason:
As per Sec. 140(5) of Companies Act, 2013, the Tribunal either suo mo to or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors.

Question 4.
An auditor, whether individual or firm, against whom final order has been passed by the Tribunal u/s 140(5) of Companies Act, 2013 shall not be eligible to be appointed as an auditor of any company for a period of from the date of passing of the order and the auditor shall also be liable for action under section .
(a) 5 years; Sec. 147
(b) 10 Years; Sec. 147
(c) 5 Years; Sec. 447
(d) 10 years; Sec. 447
Answer:
(c) 5 Years; Sec. 447

Reason:
As per Sec. 140(5) of Companies Act, 2013, an auditor, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of 5 years from the date of passing of the order and the auditor shall also be liable for action u/s 447.

Question 5.
If the auditor does not comply with the provisions of Sec. 140(2) of Companies Act, 2013, he or it
shall be liable to a penalty of:
(a) ₹ 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of ? 100 for each day after the first during which such failure continues, subject to a maximum of ₹ 1 lakh.
(b) ₹ 50,000 or an amount equal to the remuneration of the auditor, whichever is higher, and in case of continuing failure, with further penalty of? 100 for each day after the first during which such failure continues, subject to a maximum of ₹ 1 lakh.
(c) ₹ 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of ? 100 for each day after the first during which such failure continues, subject to a maximum of ₹ 5 lakh.
(d) ₹ 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of? 500 for each day after the first during which such failure continues, subject to a maximum of ₹ 5 lakh.
Answer:
(d) ₹ 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of? 500 for each day after the first during which such failure continues, subject to a maximum of ₹ 5 lakh.

Reason:
As per Sec. 140(3) of Companies Act, 2013, if the auditor does not comply with the provisions of Sec. 140(2), he or it shall be liable to a penalty of ? 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of? 500 for each day after the first during which such failure continues, subject to a maximum of ₹ 5 lakh.

Integrated Case Study – 4
M/s NSG & Associates have been appointed as auditors of Viaan Ltd. for the financial year 2019-20. The processes, operations, accounting and decisions are carried out by using computers in Viaan Ltd. The auditors understand that there are several aspects that they should consider to determine the level of automation and complexity in the business environment of Viaan Ltd. While planning the audit work, the engagement partners discussed with the audit staff about the various types of controls in the automated environment.
The different types of audit tests that can be used in audit of an automated business environment were also discussed within the engagement team. The responsibility regarding the Internal Financial Controls was also discussed in detail. Further the tools and techniques that can be used to deal with the enormous data and information of Viaan Ltd. were briefed to the audit staff by the engagement partners.

From the above facts, answer the following questions by choosing the correct answer:
Question 1.
______ are the manual controls that make use of some form of data or information or report produced from the IT systems and applications.
(a) Application Controls
(b) IT dependent Controls
(c) Automated Controls
(d) General IT Controls
Answer:
(b) IT dependent Controls

Question 2.
Statement 1: Application controls include both manual and automated controls that operate at a business process level.
Statement 2: General IT Controls apply to mainframe, miniframe as well as end user environment.
(a) Only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both Statements 1 & 2 are correct
(d) Both Statements 1 & 2 are incorrect
Answer:
(c) Both Statements 1 & 2 are correct

Question 3.
______ are also known as pervasive or indirect controls:
(a) General IT Controls
(b) Application Controls
(c) IT dependent Controls
(d) None of the above
Answer:
(a) General IT Controls

Question 4.
Which of the following are not the types of audit tests that can be used in the audit in an automated environment?
(a) Observation
(b) Inspection
(c) Re performance
(d) None of the above
Answer:
(d) None of the above

Question 5.
______ is the combination of Drocesses. tools and techniaues that are used to taD vast amounts of electronic data to obtain meaningful information:
(a) Computer Assisted Audit Techniques
(b) Automated Controls
(c) Data Analytics
(d) None of the above
Answer:
(c) Data Analytics

Integrated Case Study – 5
You are an audit manager at RMT & Co. and you are considering a number of ethical issues which have arisen on some of the firm’s long-standing audit clients.
ABC Ltd.
RMT & Co. is planning its external audit of ABC Ltd. Yesterday, the audit engagement partner, Ramesh, discovered that a significant fee for information security services, which were provided to ABC Ltd. by RMT & Co., is overdue. Mr. Ramesh hopes to be able to resolve the dispute amicably and has confirmed that he will discuss the matter with the finance director, Mr. Keshav, at the weekend, as they are both attending a party to celebrate the engagement of Ramesh’s daughter and Keshav’s son.
XYZ (P) Ltd.
RMT & Co. is the external auditor of XYZ (P) Ltd. and also provides other non-audit services to the company. While performing the audit for the current year, the audit engagement partner was taken ill and took an indefinite leave of absence from the firm. The ethics partner has identified the following potential replacements and is keen that independence is maintained to the highest level:

• Mr. Pankaj Garg who is also the partner in charge of the tax services provided to XYZ (P) Ltd.
• Mr. Mohit Taneja who was the audit engagement partner for the preceding five years.
• Mr. Chetanya Garg who introduced XYZ (P) Ltd. as a client when he joined the firm as an audit partner
  five years ago.
• Mr. Nikunj Garg who is also the partner in charge of the payroll services provided to XYZ (P) Ltd. MN Ltd.

MN Ltd. is a large public company, and has been an audit client of RMT & Co. for several years. Aadish Jain, a partner of RMT & Co., has acted as the engagement quality control reviewer (EQCR) on the last two audits. At a recent meeting, he advised that he can no longer be EQCR on the engagement as he is considering accepting appointment as a non-executive director and will sit on the audit committee of MN Ltd.
The board of directors has also asked RMT & Co. if they would be able to provide internal audit services to the company.
PQR Ltd.
PQR Ltd., a listed company, is one of RMT & Co.’s largest clients. Last year the fee for audit and other services was ₹ 1.2 Cr. and this year it is expected to be ₹ 1.5 Cr. which represents 18% and 19.6% of RMT & Co.’s total income respectively.

Question 1.
Which of the following statements correctly explains the possible threats to RMT & Co.’s independence and recommends an appropriate safeguard in relation to their audit of ABC Ltd.?
(1) An intimidation threat exists due to the overdue fee and ABC Ltd. should be advised that all fees must be paid prior to the auditor’s report being signed.
(2) A self-review threat exists due to the nature of the non-audit work which has been performed and an engagement quality control review should be carried out.
(3) A self-interest threat exists due to the relationship between Ramesh and Keshav and Ramesh should be removed as audit partner.
(a) 1, 2 and 3 (h) 1 and 2 only
(c) 2 only
(d) 3 only
Answer:
(d) 3 only

Reason:
In line with Code of Ethics, a self-interest threat would arise due to the personal relationship between the audit engagement partner and finance director. A self-interest threat, not intimidation threat, would arise as a result of the overdue fee and due to the nature of the non-audit, work, it is unlikely that a self-review threat would arise.

Question 2.
Taking into account the concern of the ethics partner, which of the partners identified as potential replacements should take over the audit of XYZ (P) Ltd. for the current year?
(a) Mr. Pankaj Garg
(b) Mr. Mohit Taneja
(c) Mr. Chetanya Garg
(d) Mr. Nikunj Garg
Answer:
(c) Mr. Chetanya Garg

Reason:
In order to maintain independence, Chetanya Garg would be the most appropriate re-placement as audit engagement partner as he has no ongoing relationship with XYZ (P) Ltd. Appointing any of the other potential replacements would give rise to self-review or familiarity threats to independence.

Question 3.
Which of the following correctly identifies the threats to RMT & Co.’s independence and proposes an appropriate course of action for the firm if Aadish Jain accepts appointment as a nonexecutive director of MN Ltd.?

	Threats	Course of action
(a)	Self-interest and familiarity	Can continue with appropriate safeguards
(b)	Self-interest and self-review	Must resign as auditor
(c)	Self-review and familiarity	Must resign as auditor
(d)	Familiarity only	Can continue with appropriate safeguards

Answer:
(b)

Reason:
If Aadish Jain accepts the position as a non-executive director for MN Ltd., self-interest and self-review threats are created which are so significant that no safeguards can be implemented. Further as per Code of Ethics, no partner of the firm should serve as a director of an audit client and as such, RMT & Co. would need to resign as auditor.

Question 4.
You are separately considering MN Ltd.’s request to provide internal audit services and the remit of these services if they are accepted.
Which of the following would result in RMT & Co. assuming a management responsibility in relation to the internal audit services?
(1) Taking responsibility for designing and maintaining internal control systems.
(2) Determining which recommendations should take priority and be implemented.
(3) Determining the reliance which can be placed on the work of internal audit for the external audit.
(4) Setting the scope of the internal audit work to be carried out.
(a) 1 and 3
(b) 2, 3 and 4
(c) 1, 2 and 4
(d) 3 and 4 only
Answer:
(c) 1, 2 and 4

Reason:
Assuming a management responsibility is when the auditor is involved in leading or directing the company or making decisions which are the remit of management. Designing and maintaining internal controls, determining which recommendations to implement and setting the scope of work are all decisions which should be taken by management.

Question 5.
Which of the following actions should RMT & Co. take to maintain their objectivity in relation to the level of fee income from PQR Ltd.?
(1) The level of fee income should be communicated to those charged with governance
(2) Separate teams should be used for the audit and non-audit work
(3) Request payment of the current year’s audit fee in advance of any work being performed
(4) Request a pre issuance review be conducted by an external accountant
(a) 1 and 4 only
(b) 3 and 4 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4
Answer:
(a) 1 and 4 only

Reason:
PQR Ltd. is a listed company and the fees received by RMT & Co. from the company is substantially high. As per Code of Ethics, this should be disclosed to TC WG and an appro-priate safeguard should be implemented. In this case, it would be appropriate to have a pre-issuance review carried out prior to issuing the audit opinion for the current year.

Integrated Case Study – 6
ABC Ltd., is one of the leading companies in the pharmaceuticals manufacturing industry. 75% Equity shares of ABC Ltd. was acquired by XYZ Ltd. five years ago and is being retained by XYZ Ltd. till date. Total shareholding of XYZ Ltd. includes the following:

• The Government of Punjab and Government of Haryana each hold 18% of the paid -up share capital,
• The Government of Rajasthan’s share is 15.5%.

On 29th Oct. 2019, Mr. Shyam, the auditor of ABC Ltd. had resigned from his post, citing medical reasons. However, he had forgotten to inform about his resignation to the concerned authorities. Casual vacancy so created was filled up with the appointment of RMT & Co. Chartered Accountants as statutory auditors of ABC Ltd.
As far as RMT & Co. Chartered Accountants are concerned, Mr. R, who is one of the partners of the firm had borrowed a sum of ₹ 3.00 lakhs from XYZ Ltd. He had also purchased goods worth ₹ 1.89 lakhs from the company. Both the sum borrowed and the cost of the goods bought are not yet paid by Mr. R does not sign the financials of ABC Ltd.
During the course of audit for the financial year 2019-20, the following observations with respect to the company were made by the auditors:
1. The company was not maintaining proper records with respect to the fixed assets maintained by it. The value of fixed assets of the company amounts to ₹ 1.50 crores approximately.
2. Physical verification for the same was not carried outat regular intervals. The last physical verification was conducted on 31st July 2018.
As a result of the above observations, the auditors decided to report the same in the Companies (Auditors Report) Order 2016. However, the management of the company was against the decision of the auditors and insisted that the observations need not be reported. After several discussions between the auditors and the management, RMT & Co. decided not to report the issues.

Question 1.
To whom should have Mr. Shyam informed about his resignation? What could be the possible consequence for his non-compliance?
(a) He should have informed the registrar and ABC Ltd. As a consequence of his failure, he is liable to a penalty not exceeding ₹ 5 lakhs.
(b) He should have informed the registrar alone. As a consequence of his failure, he is liable to a penalty not less than ₹ 50,000.
(c) He should have informed the registrar and RMT & Co, As a consequence of his failure, he is liable to a fine of ₹ 500 per day for each day of failure.
(d) He should have informed the registrar & comptroller and auditor general. As a consequence of his failure, he is liable to a fine of ₹ 45,000.
Answer:
(d) He should have informed the registrar & comptroller and auditor general. As a consequence of his failure, he is liable to a fine of ₹ 45,000.

Reason:
As per Sec. 140(2} of Companies Act, 2013, statement of resignation is required to be filed with Registrar, company and CAG (in case of Govt, company). As per Sec. 140(3) of Companies Act, 2013, minimum penalty for non-compliance of Sec. 140(2) is lower of audit fees and ₹ 50,000.

Question 2.
With respect to the acts carried out by Mr. R, the partner of the audit firm, what can you infer about the appointment of RMT & Co. as auditors of ABC Ltd.?
(a) It is valid since the indebtedness is within prescribed limits.
(b) It is not valid since the indebtedness exceeds prescribed limit of ₹ 1 lakhs,
(c) It is valid since Mr. R is not signing the financials of ABC Ltd.
(d) It is valid since the indebtedness is not with ABC Ltd.
Answer:
(a) It is valid since the indebtedness is within prescribed limits.

Reason:
As per Sec. 141(3)(c/) of Companies Act, 2013, a firm is disqualified to be appointed as auditor if any of the partner is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ₹ 5 Lacs,

Question 3.
Is the decision of RMT & Co. of not reporting the issues of ABC Ltd. in CARO 2016 justified? If so, under what reason?
(a) No. CARO 2016 is applicable to ABC Ltd. and hence the same has to be reported under clause (z) of CARO.
(b) Yes. CARO 2016 is not applicable to ABC Ltd. and hence the same need not to be reported.
(c) No. As per SA 240, the auditor has to maintain professional skepticism when it comes to issues in the area of fixed assets and hence the same has to be reported.
(d) Yes. As per SA 320, the auditor after taking into account the materiality of the issue, he may either choose to report or not report about the same.
Answer:
(a) No. CARO 2016 is applicable to ABC Ltd. and hence the same has to be reported under clause (z) of CARO.

Reason:
Reporting under CA.RO, 2016 is required in case of a public company.

Question 4.
Based on the shareholding pattern of ABC Ltd. and XYZ Ltd., please select the correct answer as to classification of these companies.
(a) Both ABC Ltd. and XYZ Ltd. will he classified as government companies.
(b) ABC Ltd. will be classified as government company, whereas XYZ Ltd. will be classified as non-government company.
(c) ABC Ltd. will be classified as non-government company, whereas XYZ Ltd. will be classified as government company.
(d) Both ABC Ltd. and XYZ Ltd. will be classified as classified as non-government companies.
Answer:
(a) Both ABC Ltd. and XYZ Ltd. will he classified as government companies.

Reason:
As per Sec. 2(45) of Companies Act, 2013, “Govt, company” means any company in which not less than 51% of the paid-up share capital is held by the C.G., or by any S.G.(s), or partly by the C.G. and partly by one or more S.G. (s), and includes a company which is a subsidiary company of such a Government company.

Question 5.
Casual Vacancy created in the office of auditor in the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within___ days:
Provided that in case the Comptroller and Auditor-General of India does not fill the vacancy within the said period, the Board of Directors shall fill the vacancy within next ______ days.
(a) 30 days; 60 days
(b) 60 days; 30 days
(c) 60 days; 60 days
(d) 30 days; 30 days
Answer:
(d) 30 days; 30 days

Integrated Case Study – 7
CGN Ltd. is a large company engaged in the business of oil exploration in India. The Tamil Nadu Government and the Central Government hold 37% and 20% respectively of the paid-up share capital of CGN Ltd.
During the year 2017-18, CGN Ltd. acquires 50.4% shares of NPR Ltd., a company engaged in construction activities and having an annual turnover of? 1200 Crores for financial year 2018-19.
The C&AG appointed the statutory auditors of CGN Ltd. and NPR Ltd. as per requirements of the Companies Act 2013. The company had a concern regarding this appointment because both companies wanted to appoint other auditors as per their assessment, however, considering the legal hassles which would have got involved, both companies decided to go ahead with the appointments made by C&AG.
The audit of the financial statement for the year ended 31 March 2019 got completed by the auditors appointed by the C&AG. Subsequent to this, the C&AG also issued an order for supplementary audit of financial statements of the CGN Ltd, which was objected by the management of CGN Ltd.
The management objected saying that the complete set of financial statements have been audited by auditors appointed by the C&AG and hence this order is not acceptable because this would lead to duplication of work.
Moreover, the management of CGN Ltd. has also written to the C&AG that for the next financial year, the existing auditors should either resign so that the management may bring in their own auditors or the C&AG should have faith in the work of the auditors appointed by them.

C&AG refuses to accept the request of CGN Ltd, and appoint auditor for the financial year ended 31st March 2020 on 20.08.2019.
The audit ofthe financial sta t .ement»of NPR Ltd, for the finarn iai year ended 31 March 2019 got completed but NPR Ltd, observed th t dui ing the course of audit, there was lot of intervention of C&AG, wherein C&AG was giving directions to the auditors on the manner in which audit should he conducted in respect
of certain areas. Further, it also received comments from C&AG on the audit report of the auditors. NPR Ltd. is seeking legal opinion to go against C&AG so that they can avoid unnecessary interference of C&AG and is also looking to have new auditors appointed by NPR Ltd. with whom they will have an engagement letter with the terms that those auditors don’t accept any interference of C&AG which the existing auditors have not been able to avoid.

Question 1.
Which of the following option is correct as to appointment of auditors in CGN Ltd. and NPR Ltd. by C&AG?
(a) Appointment of auditor in CGN Ltd. by C&AG is valid; Appointment of auditor in NPR Ltd. by C&AG is not valid.
(b) Appointment of auditor in CGN Ltd. by C&AG is not valid; Appointment of auditor in NPR Ltd. by C&AG is valid.
(c) Appointment of auditors in CGN Ltd. as well as NPR Ltd. by C&AG are valid.
(d) Appointment of auditors in CGN Ltd. as well as NPR Ltd. by C&AG are not valid.
Answer:
(c) Appointment of auditors in CGN Ltd. as well as NPR Ltd. by C&AG are valid.

Reason:
As per Sec. 139(5) ofCompaniesAct,2013,in the case ofa Government company, the C&AG shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of 180 days from the commencement of the financial year, who shall hold office till the conclusion of the AGM.

As per Sec. 2(45) of Companies Act, 2013, “Govt, company” means any company in which not less than 51% of the paid-up share capital is held by the C.G., or by any S.G.(s), or partly by the C.G. and partly by one or more S.G.(s), and includes a company which is a subsidiary company of such a Government company.

Question 2.
Please suggest how to resolve the matter as to objection of management of CGN Ltd. over the order of C&AG as to Supplementary audit.
(a) The management’s stand is not correct. The C&AG may order supplementary audit as per the requirements of the Companies Act 2013.
(b) The management’s stand is not correct. The C&AG may order supplementary audit as per the requirements of the Indian Penal Code.
(c) The management is correct and in this situation they get the right to appoint another auditor considering the fact that the C&AG has lost faith in the work of auditors appointed by them.
(d) Such type of matters should be taken to arbitration as per the requirements of the Arbitration Act.
Answer:
(a) The management’s stand is not correct. The C&AG may order supplementary audit as per the requirements of the Companies Act 2013.

Reason:
As per Sec. 143(6) of Companies Act, 2013, the CAG shall within 60 days from the date of receipt of the audit report have a right to, conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorise in this behalf.

Question 3.
Which of the following is correct as to order of supplementary audit by C&AG?
(a) The CAG shall within 60 days from the date of audit report have a right to, conduct a supplementary audit of the books of account of the company by such person or persons as he may authorise in this behalf.
(b) The CAG shall within 90 days from the date of receipt of the audit report have a right to, conduct a supplementary audit of the books of account of the company by such person or persons as he may authorise in this behalf.
(c) The GAG shall within 60 days from the date of receipt of the audit report have a right to, conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorise in this behalf.
(d) The CAG shall within 90 days from the date of audit report have a right to, conduct a supplementary audit of the financial statement of the company by company auditor.
Answer:
(c) The GAG shall within 60 days from the date of receipt of the audit report have a right to, conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorise in this behalf.

Reason:
As per Sec. 143(6) of Companies Act, 2013, the CAG shall within 60 days from the date of receipt of the audit report have a right to, conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorise in this behalf.

Question 4.
In the case of a Government company, the CAG shall appoint the auditor and direct such auditor the manner in which the accounts of the Government company are required to be audited. The auditor so appointed shall submit a copy of the audit report to the CAG which, among other things, include the following:
(i) directions, if any, issued by the C&AG
(ii) action taken on directions issued by C& AG
(iii) impact of directions on the accounts of the company.
(iv) impact of directions on the financial statements of the company.
(v) impact of directions on the audit of the company.
(a) (i), (ii) and (v)
(b) (i), (ii), (iii) and (iv)
(c) (i) (ii), (iii) and (v)
(d) (i), (ii), (iv) and (v)
Answer:
(b) (i), (ii), (iii) and (iv)

Reason:
As per Sec. 143(5) of Companies Act, 2013, in the case of a Government company, the CAG shall appoint the auditor and direct such auditor the manner in which the accounts of the Government company are required to be audited. The auditor so appointed shall submit a copy of the audit report to the CAG which, among other things, include the following:
1. directions, if any, issued by the CAG,
2. the action taken thereon and
3. its impact on the accounts and financial statement of the company.

Question 5.
In the context of directions being issued by C&AG to auditor of NPR Ltd. and stand of NPR Ltd. to seek legal opinion to go against C&AG so as to avoid unnecessary interference of C&AG, piease advise which of the following should be correct?
(a) The stand of the existing auditors should have been better i.e. not to accept any interference of C&AG.
(b) Management could have planned the audit work better by including the same terms in engagement letter with existing auditors instead of appointing another auditor.
(c) C&AG involvement could have been accepted if this was the audit of CGN Ltd. but not in case of NPR Ltd. and hence NPR Ltd. should also reach out to its parent company to get this resolved.
(d) Stand of NPR Ltd. is wrong as the C&AG may get involved in the audit of NPR Ltd.
Answer:
(d) Stand of NPR Ltd. is wrong as the C&AG may get involved in the audit of NPR Ltd.

Reason:
As per Sec. 143(5) of Companies Act, 2013, in the case of a Government company, the CAG shall appoint the auditor and direct such auditor the manner in which the accounts of the Government company are required to be audited.

Integrated Case Study – 8
ALT company manufactures and sells toys to the wholesale market. It has prepared its financial statements for the financial year 2018-19. You are an audit assistant with RMT & Co., a firm of Chartered Accountant in New Delhi and you have been assigned the current liabilities balances in the audit work plan.
You have calculated the payables payment period to be 66 days for the year ending 31.03.2019 (45 days
for the preceding financial year) and have asked the directors of ALT Company to provide an explanation as to the increase in days.
ALT Company receives monthly statements from its main suppliers and performs regular supplier statement reconciliations.
There were inconsistencies noted in respect of the following at 31.03.2019:

Supplier	Balance per purchase ledger (₹)	Balance per supplier statement (₹)
Digital Toys	145,321	221,130
Analog Toys	(89,973)	99,600
Hybrid Toys	94,658	1,09,650

Digital Toys
ALT Co. has a credit agreement with Digital Toys under which it receives goods 14 days before the supplier raises the invoice. ALT Co. received goods worth ₹ 75,809 on 18 March 2019 for which the invoice was received shortly after the year end in accordance with the agreement. ALT Co. entered the transaction into its accounting records at the date of invoice.

Analog Toys
The difference on this balance has still to be investigated.

Hybrid Toys
ALT Co.’s finance director has informed you that there was an error in closing the purchase ledger and it was closed three days early. Invoices received 29,30 and 31 March 2019 were posted to the 2019-20 ledger. The directors of ALT Co have confirmed that following the discovery of this error, a manual adjustment was made using the journal book.

Question 1.
Which of the following supplier balances would indicate a high risk in relation to the COMPLETENESS of the liability recorded at the year end?
(a) A supplier with a high balance at the year end and with a low volume of transactions during the year,
(b) A supplier with a low balance at the year end and with a high volume of transactions during the year.
(c) A supplier with a low balance at the year end and with a low volume of transactions during the year.
(d) A supplier with a high balance at the year end and with a high volume of transactions during the year.
Answer:
(b) A supplier with a low balance at the year end and with a high volume of transactions during the year.

Reason:
A supplier with a low balance at the year-end but with a high volume of transactions during the year may indicate that not all liabilities have been recorded at the year-end date.

Question 2.
Which of the following would correctly explain why the payables payment period has increased from 45 days in 2018-19 to 66 days in 2019-20?
(a) ALT Co. received a prompt payment discount from one of its suppliers for the first time in 2018-19,
(b) ALT Co. obtained a trade discount from one of its biggest suppliers which has reduced the amount owed to that supplier by 10% in the year.
(c) ALT Co. purchased an unusually high level of goods in March 2019 to satisfy a large order and had not paid for those goods by the year end.
(d) ALT Co. took advantage of extended credit terms offered by a new supplier in respect of a large order which it had fully settled by the year end.
Answer:
(c) ALT Co. purchased an unusually high level of goods in March 2019 to satisfy a large order and had not paid for those goods by the year end.

Reason:
A purchase of a large volume of goods close to the year-end would increase the payables payment period.
The prompt payment and trade discounts would both decrease the payables payment period, and the extended credit terms in this instance would have no impact as there is no closing balance with the new supplier.

Question 3.
Which of the following is an appropriate action in respect of the inconsistency in the balance with Digital Toys?
(a) The auditor should take no further action as this is a timing difference which was resolved upon receipt and posting of the invoice.
(b) The auditor should request that the purchase ledger balance is amended at the reporting date to reflect the recent invoice.
(c) The auditor should contact the Supplier and request a supplier statement as at the current date.
(d) The auditor should request that an accrual is created in respect of the goods received but not yet invoiced.
Answer:
(d) The auditor should request that an accrual is created in respect of the goods received but not yet invoiced.

Reason:
The difference of ₹ 75,809 with Digital Toys relates to goods which were received by ALT Co. prior to the year-end but were not recorded in the accounting records until after the year-end date. As ALT Co. had a liability to pay for the goods at the date of receipt, an accrual should be created for the goods received not yet invoiced.

Question 4.
Which of the following would be a valid explanation for the difference in respect of Analog Toys?
(1) An invoice for ₹ 189,573 has been paid twice.
(2) An invoice for ₹ 189,573 has been posted as a debit note.
(3) An invoice for ₹ 189,573 has been received and processed prior to receipt of the goods.
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1,2 and 3
Answer:
(a) 1 only

Reason:
The difference in respect of Analog Toys may have arisen if the invoice had been paid twice in error as an additional ₹ 189,573 will have been debited to the supplier account.

Question 5.
Which of the following would NOT provide sufficient and appropriate audit evidence over the COMPLETENESS of the purchase ledger balance in respect of Hybrid Toys?
(a) Obtain the journal book and confirm that all invoices recorded as received from Hybrid Toys dated 29-31 March have been manually adjusted for.
(b) Review the accruals listing to ensure goods received from Hybrid Toys post year end for which an invoice has not been received have been recorded in the correct period.
(c) For post year-end cash book payments to Hybrid Toys, confirm date of matching invoice and if pre year end agree to liability.
(d) Review a sample of invoices received from Hybrid Toys recorded post year end and match to GRN to determine if they should have been recorded at the year end.
Answer:
(b) Review the accruals listing to ensure goods received from Hybrid Toys post year end for which an invoice has not been received have been recorded in the correct period.

Reason:
Reviewing the accruals listing would not help the auditor confirm the purchase ledger balance with Bath Co. as accruals are recorded separately from the purchase ledger balance.

Integrated Case Study – 9
M/s TPR & Associates have been appointed as the auditors of Octopus Ltd. for the Financial Year 2019-20. During the course of audit, the auditor notices that there is significant change in the’number of debtors of the company. The auditor decided to check the debtors account in detail.
Further the company has made various provisions like the provisions for taxation, provision for bad & doubtful debts.
Also, during the current Financial Year, the auditor attended the physical verification of the inventory being carried out by the management.
The auditor notices that there is no substantial change in the bifurcation of amount of items representing the liabilities side of the balance sheet of Octopus Ltd. Still the auditor understands that he needs to check the liability side in detail.
Further the company has also recognised various income like interest income and dividend income which auditor understands need to be checked in detail.
The auditor is of the understanding that certain matters need to be reported under Companies Auditors Report Order (CARO).

Based on the above facts, answer the following:
Question 1.
______ 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) Provision
(b) Reserve
(c) Contingent Liability
(d) Liability
Answer:
(c) Contingent Liability

Reason:
As per AS 29 “Provisions, Contingent Liabilities and Contingent Assets” a contingent liability is a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.

Question 2.
Which of the following is not correct with respect to the inventory held by Octopus Limited:
(a) All inventory units held by the company should have been recorded and recognized in the financial statements.
(b) Any inventory held by a third party on behalf of the company should not be included as part of the inventory balance.
(c) Inventory should be recognized at cost or net realizable value whichever is lower,
(d) Inventory balance as at the year end does not include any element of next year.
Answer:
(b) Any inventory held by a third party on behalf of the company should not be included as part of the inventory balance.

Reason:
Any inventory held by a third party on behalf of the company should be included as part of the inventory balance, being owned by the company.

Question 3.
if the management of Octopus Ltd. refuses to allow the auditor, to send the confirmation request to the debtors, the auditor should:
(a) Withdraw from the engagement.
(b) Not listen at all to any requests of the management.
(c) Consider the management’s request for refusal and assess its validity and decide the nature, timing, extent of his audit procedures accordingly.
(d) Agree to management request and proceed with audit of other items of the financial statements.
Answer:
(c) Consider the management’s request for refusal and assess its validity and decide the nature, timing, extent of his audit procedures accordingly.

Reason:
As per SA 505 “External Confirmations”, if management refuses to allow the auditor to send a confirmation request, the auditor shall:
(a) Inquire as to management’s reasons for the refusal, and seek audit evidence as to their validity and reasonableness;
(b) Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant risks of material misstatement, including the risk of fraud, and on the nature, timing and extent of other audit procedures; and
(c) Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.

Question 4.
Which of the following statements is not true so far as the liabilities of a company are concerned:
(a) Liabilities are the financial obligations of a company including owner’s funds.
(b) Liabilities include borrowing, trade payable and other current liabilities and provisions.
(c) Verification of liabilities is an important as that of assets.
(d) All of the above.
Answer:
(a) Liabilities are the financial obligations of a company including owner’s funds.

Reason:
As per AS 29 “Provisions, Contingent Liabilities and Contingent Assets”, a liability is a present obligation’of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

Question 5.
Statement 1: Confirmations as well as undelivered letters should begiven/returned to the auditor and not to the client.
Statement 2: When no reply is received, the auditor should perform alternate procedures regarding the balances.
(a) Only statement 1 is correct
(b) Only statement 2 is correct
(c) Both 1 & 2 are correct
(d) Both 1 & 2 are incorrect
Answer:
(c) Both 1 & 2 are correct

Reason:
As per SA 505 “External Confirmations”, in the case of each non-response, the auditor shall perform alternative audit procedures to obtain relevant and reliable audit evidence.

Integrated Case Study -10
ABC Ltd, is a company dealing in products namely chocolate and coffee. ABC Ltd. approached audit firm XYZ & Associates for the statutory audit of its financial statements for the year ended 31.03.2019. The Gross turnover of the company is ₹ 105 crores, out of which turnover from one of its product namely coffee is of ₹ 95 crores during the immediate preceding Financial Year.
During the course of Audit, XYZ & Associates found certain delay in the payment of the Employees Provident Fund by ABC Ltd. They understand that the same need to be reported under the relevant provisions of Companies (Auditors Report) Order 2016.
During the FY 2018-2019, Mrs. X wife of CA Mr. X who is partner in XYZ & Associates acquires certain shares of ABC Ltd. The audit firm is of the opinion that this may call fora disqualification for the firm for being working as the auditor of the company under the relevant provisions of the Companies Act, 2013.
Further, ABC Ltd. also approached the auditors to provide them the Investment Banking service to which the auditors denied as per the provisions of Companies Act, 2013.
During the course of audit, XYZ & Associates has reason to believe that an offence of fraud involving some amount has been committed in the ABC Ltd. by its General Manager. The auditors understand that there is a requirement for reporting of fraud by the auditors under the Companies Act and the relevant rules.
Based on the above facts, answer the following:

Question 1.
After the appointment of XYZ & Associates, ABC Ltd. should inform the auditor and file a notice of such appointment with registrar within:
(a) 60 days
(b) 30 days
(c) 15 days
(d) 20 days
Answer:
(c) 15 days

Reason:
Proviso to Sec. 139(1) of Companies Act, 2013, requires that the company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.

Question 2.
If Mrs. X acquires security exceeding the prescribed limit in the ABC Ltd., then XYZ & Associates shall take corrective actions within ______ days. What is the prescribed limit:
(a) 100 days, Market Value ₹ 1,00,000
(b) 60 days, Face value ₹ 1,00,000
(c) 90 days, Face value ₹ 1,00,000
(d) 15 days, Market Value ₹ 1,00,000
Answer:
(b) 60 days, Face value ₹ 1,00,000

Reason:
Refer Rule 10 of Companies (Audit and Auditor’s) Rules, 2014.
For the purpose of proviso to Sec. 141 (3) (d) (/), a relative of an auditor may hold securities in the company of face value not exceeding ₹ 1 lakh:
Provided further that in the event of acquiring any security or interest by a relative, above the threshold prescribed, the corrective action to maintain the limits as specified above shall be taken by the auditor within 60 days of such acquisition or interest.

Question 3.
Under which section reporting of fraud by an auditor to the Central Government is required and what is the amount of fraud:
(a) Section 143(12), 1 crore & above
(b) Section 139(12), 1 crore & above
(c) Section 143(12), 2 crore & above
(d) None of the above
Answer:
(a) Section 143(12), 1 crore & above

Reason:
Refer Sec. 143(12) of Companies Act, 2013 and Rule 13 of Companies (Audit and Audi¬tor’s) Rules, 2014
Sec. 143(12): If an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed.
Rule 13: If an auditor of a company, in the course of the performance of his duties as stat-utory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of ₹ 1 Cr. or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government.

Question 4.
What is the requirement for ABC Ltd. as per the relevant provisions regarding maintenance of cost records:
(a) Maintenance of cost records is mandatory, in Form CRA 1.
(b) Maintenance of cost records is mandatory, in Form CRA. 2.
(c) Maintenance of cost records is mandatory, in any genera! format.
(d) No requirement of maintenance of cost records.
Answer:
(a) Maintenance of cost records is mandatory, in Form CRA 1.

Reason:
Refer Rule 5 of Companies (Cost Records and Audit) Rules, 2014
Every company under these rules includingall units and branches thereof, shall, in respect of each of its financial year commencing on or after the 1st day of April, 2014, maintain cost records in Form CRA 1.

Question 5.
Under relevant clause of CARO,2016, XYZ & Associates is required to report the extent of arrears of Employees Provident Fund as at the balance sheet date:
(a) Exceeding 9 months
(b) Exceeding 3 months
(c) Exceeding 6 months
(d) Exceeding 12 months
Answer:
(c) Exceeding 6 months

Reason:
Refer Para 3(vii)(i) of CARO, 2016
Whether the company is regular in depositing undisputed statutory dues including provident fund, employees’ state insurance, income-tax, sales-tax, service tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues to the appro¬priate authorities and if not, the extent of the arrears of outstanding statutory dues as on the last day of the financial year concerned for a period of more than 6 months from the date they became payable, shall be indicated.

Integrated Case Study – 11
Mr. Laxman is appointed as statutory auditor of Best Limited for the Financial Year ended 31st March, 2021.
During the course of audit, it was found that few doubtful transactions had been committed by finance manager who retired in March, 2021.
The fraud wasgoingon since last 4-5 years and the tola! amount misappropriated is approximately ₹ 75 lacs.
Balance sheet of Best Ltd. reflected a cash balance of ₹ 7 crores. The company has taken a loan of ₹ 2 crores from the bank despite of the huge cash balance with the company.
Also, Companies Act bestows some duties on auditors to report matters to Central Government in case of fraud.

Question 1.
Mr. Laxman shall obtain that the financial statements are free from fraud and misstatement.
(a) Absolute assurance
(b) Reasonable assurance
(c) Management’s assurance
(d) Chief Financial Officer assurance
Answer:
(b) Reasonable assurance

Reason:
As per SA 200, in conducting an audit of financial statements, the overall objective of the auditor is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

Question 2.
Mr. Laxman suspects that cash payments were inflated. Out of the below which could be probable reason for such inflated cash payments.
(a) Not accounting for cash sales completely
(b) Making payments against purchase vouchers
(c) Making payments against inflated vouchers
(d) Teeming and Lading
Answer:
(c) Making payments against inflated vouchers

Reason:
Reasons for inflated cash payments:
(a) Making payments against fictitious vouchers.
(b) Making payments against vouchers, the amounts whereof have been inflated.
(c) Manipulating totals of wage by including names of dummy workers in wage rolls.
(d) Over casting for petty cash expenditure.

Question 3.
As per Section 143(12) of Companies Act, 2013 & Rule 13 of CAAR, 2014; Mr. Laxman shall
(a) report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as prescribed.
(b) report the matter to the audit committee constituted under section 177 within such time and in such manner as prescribed.
(c) report the matter to the audit committee constituted under section 177 and also to the Board within such time and in such manner as prescribed.
(d) report the matter to the Board within such time and in such manner as prescribed.
Answer:
(a) report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as prescribed.

Reason:

Question 4.
Owing to the limitations of an audit, there is risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed in accordance with the SAs.
(a) Inherent, unavoidable
(b) Inherit, complete
(c) Management, unavoidable
(d) Regulatory, control
Answer:
(a) Inherent, unavoidable

Reason:
If an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and manner as prescribed:
Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted u/s 177 or to the Board in other cases within such time and in such manner as may be prescribed.

Question 5.
As an auditor what conclusion can Mr. Laxman draw looking at the huge cash reserve of the company and corresponding bank loan?
(a) Report this matter to the Central Government u/s 143(12) as there is a possibility of fraud
(b) Obtain sufficient and appropriate audit evidence of existence of fraud
(c) Report the matter under CARO, 2020
(d) There is nothing to report as it’s a normal financial decision
Answer:
(b) Obtain sufficient and appropriate audit evidence of existence of fraud

Reason:
As stated in SA 200 and SA 240, owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with the SAs.

Integrated Case Study – 12
Roop & Co. are the auditors of Onda group of Hotels. This is the first time the firm is auditing an industry in food and beverages and it is day one of the audit. The engagement partner along with his team wants to make a thorough understanding of the entity and its environment in order to identify and assess the risks of material misstatements, whether due to fraud or error. The following are some of the points identified by them on Day 1.
1. The hotel.has two banquet halls. The documentation available for verification of banquet hall revenue is only the invoice raised by the hotel and some mail conversations on customer enquiry and finalization of price. In audit trail, it is found that finance approval of the transaction is only after invoice is sent to them for accounting at final settlement. Advance paid by the clients are not vetted through finance team. The auditor suspects a weakness in this system.
2. The auditor also finds a control deficiency in the process of procurement of stores. A goods receipt note is not prepared at the time of receipt of goods. On enquiry with management, the auditor finds that there exists a system control wherein goods receipt note isautomatically prepared and approved in the system once the quantity and price of goods is entered against specific vendor. This entry is on real-time basis and system does not allow back dated entries.
3. The auditor enquires of the management as to what is risk assessment process followed by the entity for prevention and detection of risk of material misstatement due to fraud and error. The auditor finds there is no documented risk assessment process.
With the help of the above facts, answer the following questions by choosing the correct option.

Question 1.
What kind of a risk is portrayed in the booking of revenue with respect to Banquet halls?
(a) Inherent risk in the class of transaction
(b) Control risk in the class of transaction
(c) Detection risk in the audit procedures
(d) Audit risk in the opinion on the financial statements.
Answer:
(b) Control risk in the class of transaction

Reason:
The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control is known as Control Risk.

Question 2.
Which among the following statement is incorrect in the context of Audit Risk?
(a) The more extensive the audit procedures performed, the lower is the detection risk
(b) Greater the risk of material misstatement the auditor believes exist, less is the detection risk that can be accepted and accordingly more persuasive evidence is required by the auditor.
(c) Audit risk means the risk that the auditor gives an appropriate audit opinion when the financial statement are materially misstated.
(d) Risk of material misstatement at the assertion level is of two kinds – control risk and inherent risk.
Answer:
(c) Audit risk means the risk that the auditor gives an appropriate audit opinion when the financial statement are materially misstated.

Reason:
Audit risk may be defined as the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. Thus, it is the risk that the auditor may fail to express an appropriate opinion in an audit assignment.

Question 3.
In the case of procurement of stores, the auditor has tested more than one control for the same assertion. In that given case, what should be his reliance on the control?
(a) Since compensating controls are identified, if tested and evaluated to be effective, the auditor can rely on the control.
(b) Even though compensating controls are there, since one control is ineffective, the auditor should not rely on control for this assertion and should perform extensive procedures.
(c) Documentation in electronic medium cannot be accepted, hence, he cannot rely only on system control.
(d) Even though compensating controls are there, since one control is ineffective, the auditor should not rely on control for this assertion as well as associated assertions.
Answer:
(a) Since compensating controls are identified, if tested and evaluated to be effective, the auditor can rely on the control.

Question 4.
In the context of SA 315, which among the following is NOT a risk assessment procedure?
(a) Inquiries of management, of appropriate individuals within internal audit function and of others within the entity
(b) Analytical Procedures
(c) Observation and Inspection
(d) Audit Planning.
Answer:
(d) Audit Planning.

Reason:
As per SA 315, components of risk assessment procedures comprise of:
(a) Inquiries of management, of appropriate individuals within internal audit function and of others within the entity
(b) Analytical Procedures
(c) Observation and Inspection

Question 5.
What should be the course of action of the auditor for the entity not having a documented risk assessment process?
(a) The auditor should obtain management written representations on how risks are identified
(b) The auditor shall discuss with management on how risks are identified, addressed and determine whether the absence is appropriate in the circumstances or whether it represents a significant deficiency in internal control.
(c) The auditor should advise the management to document the same immediately and accordingly opine on the same in his audit report too.
(d) The auditor shall discuss with management on how risks are identified by system and place reliance on the same as documentation in this context is immaterial.
Answer:
(b) The auditor shall discuss with management on how risks are identified, addressed and determine whether the absence is appropriate in the circumstances or whether it represents a significant deficiency in internal control.

Integrated Case Study -13
M/JJ & Associates having office in Chennai are statutory auditors under Companies Act, 2013 of a s company viz. Sweet Aroma Private Limited engaged in business of obtaining and manufacturing rice from paddy catering to both domestic as well as international market mainly in Gulf nations. The company has a huge plant capacity for rice extraction in one of the states in Northern India. Needless to state that inventories are in huge quantity in such type of business consisting of raw material, work in progress and finished goods. The auditors want to obtain sufficient appropriate audit evidence regarding inventories.
In above context, answer the following questions;

Question 1.
Which of the following is most likely correct in relation to obtaining of sufficient appropriate audit evidence regarding existence and condition of inventory?
(a) It is mandatory for the auditor to attend physical inventory counting on the date of financial statements in all circumstances.
(b) Physical inventory counting may be attended by auditor on the date of financial statement or at a date other than date of financial statements in his discretion mandatorily in all circumstances.
(c) The attendance of auditors at physical inventory counting is impracticable due to time and costs involved because of auditor’s office location vis-a-vis company’s plant location. Hence, attendance at physical inventory counting may be skipped and alternative audit procedures may be performed to obtain sufficient appropriate evidence.
(d) The auditor shall attend at physical inventory counting unless impracticable. However, issue of time and costs involved because of auditor’s office location vis-a-vis company’s plant location is not a valid basis for skipping physical inventory counting.
Answer:
(d) The auditor shall attend at physical inventory counting unless impracticable. However, issue of time and costs involved because of auditor’s office location vis-a-vis company’s plant location is not a valid basis for skipping physical inventory counting.

Question 2.
Below are given certain cluster of matters which are relevant in planning attendance of auditor at physical inventory counting. Which of the following clusters consists of a likely inappropriate combination?
(a) Nature of inventory, timing of physical inventory counting and stages of completion of work in progress
(b) Nature of inventory, timing of physical inventory counting and valuation method of inventory
(c) Nature of inventory, timing of physical inventory counting, considerations regarding maintenance of a perpetual inventory system
(d) Risks of material misstatements related to inventory, nature of internal control pertaining to inventory, considerations regarding maintenance of a perpetual inventory system
Answer:
(b) Nature of inventory, timing of physical inventory counting and valuation method of inventory

Question 3.
Which of the following is the most likely logical sequence of steps in relation to attendance at physical inventory counting by auditor?
(a) Observance of performance of management’s count procedures, inspection of inventory, performing test counts and evaluation of management’s procedures for recording and controlling results of physical inventory counting
(b) Observance of performance of management’s count procedures, performing test counts, inspection of inventory and evaluation of management’s procedures for recording and controlling results of physical inventory counting
(c) Performing test counts, inspection of inventory, Observance of performance of management’s count procedures and evaluation of management’s procedures for recording and controlling results of physical inventory counting
(d) Evaluation of management’s procedures for recording and controlling results of physical inventory counting, Observance of performance of management’s count procedures, inspection of inventory and performing test counts
Answer:
(d) Evaluation of management’s procedures for recording and controlling results of physical inventory counting, Observance of performance of management’s count procedures, inspection of inventory and performing test counts

Question 4.
During attendance at physical inventory counting, the auditor inspects inventory. Following outcomes stated as 1, II & III are given below of this inspection procedure: –
Outcome I — Existence of inventory
Outcome II —- Ownership of inventory
Outcome III Condition of inventory
Which of following statements is most likely true?
(a) Outcomes I, II and III are all necessarily established after inspection.
(b) Only Outcomes I and III are established after inspection and Outcome II is never established.
(c) Outcomes I and III are established after inspection. However, outcome II may not be necessarily established.
(d) Outcome II and III are established after inspection. However, outcome I may not be necessarily established.
Answer:
(c) Outcomes I and III are established after inspection. However, outcome II may not be necessarily established.

Question 5.
It was observed by auditors that, out of total rice physically counted on 31st March, 2020 about 67 quintals of rice belonged to M/s PQR, a proprietary concern which had sent paddy to this company’s plant for extraction of rice. What would be treatment of this item in financial statements of company?
(a) The value of 67 quintals rice would be reflected in company’s financial statements as per method of valuation adopted by the company.
(b) The value of 67 quintals rice would be reflected in company’s financial statements as per method of valuation adopted by the proprietary concern.
(c) The value of 67 quintals rice would not be reflected in company’s financial statements.
(d) The value of 67 quintals rice would be reflected in proprietary concern’s financial statements as per method of valuation adopted by the company.
Answer:
(c) The value of 67 quintals rice would not be reflected in company’s financial statements.

Integrated Case Study – 14
A partnership firm of Chartered Accountants, YZ and Associates were appointed as auditor of company UV Private Limited. The financial year for which YZ and Associates were to audit books of account of UV Private Limited began on 1 April, 2020 and ended on 31 March, 2021.
YZ and Associates consisted of four partners namely Mr. Y, Mr. Z, Mr. G and Mr. H.
While auditing books of accounts of UV Private Limited for the period beginning on 1 April, 2020 and ending on 31 March, 2021, one of the partners of YZ and Associates namely Mr. H took up the expenses part for the purpose of audit.
The management of UV Private Limited had adopted various accounting policies and principles related to expenses which Mr. H as auditor of UV Private Limited was unable to understand. Some of the issues which Mr. H was unable to understand are mentioned as follows:
(1) Power and Fuel expenses paid for the months of April, 2021 and May, 2021 have been included and shown as Power and Fuel expenses for the period beginning 1 April, 2020 and ending 31 March, 2021.
(2) Personal Rent Expenses of the son of one of the director, Mr. T of UV Private Limited have been shown as Rent Expenses of business of UV Private Limited.
(3) Repair and Maintenance Expenses for the months of February 2021 and March 2021 were still outstanding and were not shown in Balance Sheet of UV Private Limited.
(4) Repair and Maintenance Expenses for the financial year 1 April, 2020 to 31 March, 2021 were very high as compared to financial year 1 April, 2019 to 31 March, 2020. The auditor Mr. H asked the appropriate authority about the reasons for such huge differences in amounts of two financial years.
(5) While verifying the insurance expenses, the insurance policies were not shown to auditor Mr. H. The above mentioned five points were some of the issues which Mr. H was unable to understand.

Answer the following questions:

Question 1.
As per the point number (1) mentioned in the above case, the Power and Fuel Expenses paid for the months of April 2021 and May 2021 must be shown under asset side of balance sheet of UV Private Limited as on 31 March, 2021 as:
(a) Outstanding Power and Fuel Expenses
(b) Prepaid Power and Fuel Expenses
(c) Power and Fuel Expenses
(d) Power and Fuel Expenses Payable
Answer:
(b) Prepaid Power and Fuel Expenses

Question 2.
As per point number (2) mentioned above in the case, the Personal Rent Expenses of the son of one of the director Mr. T were added to Rent Expenses of business of UV Private Limited. The amount of persona! rent expenses of the son of the director Mr. T must be:
(a) Subtracted from Rent Expenses of business of UV Private Limited
(b) Remain Added to Rent Expenses of business of UV Private Limited
(c) Again Added to Rent Expenses of business of UV Private Limited
(d) Subtracted twice from Rent Expenses of business of UV Private Limited
Answer:
(a) Subtracted from Rent Expenses of business of UV Private Limited

Question 3.
As per point number (3) mentioned above in the case, the Repair and Maintenance Expenses outstanding for the months of February 2021 and March 2021 must be shown under liability side of balance sheet of UV Private Limited as on 31 March, 2021 as:
(a) Prepaid Repair and Maintenance Expenses
(b) Repair and Maintenance Expenses
(c) Repair and Maintenance Expenses paid in advance
(d) Repair and Maintenance Expenses Payable
Answer:
(d) Repair and Maintenance Expenses Payabl

Question 4.
As per point number (4) mentioned in the case above, the auditor Mr. H asked the appropriate authority for reasons of huge differences in the amount of two financial years of repair and maintenance expenses. By appropriate authority Mr. H was referring to:
(a) All employees of UV Private Limited
(b) Management of UV Private Limited
(c) Members of UV Private Limited
(d) Any one director of UV Private Limited
Answer:
(b) Management of UV Private Limited

Question 5.
As per point number (5) mentioned in the case above, in verifying insurance expenses the insurance policies would provide auditor Mr. H as:
(a) Invalid Supporting
(b) No Supporting
(c) Lack of proper Supporting
(d) Valid Supporting
Answer:
(d) Valid Supporting

Consolidated Financial Statements – CA Inter Advanced Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Consolidated Financial Statements – CA Inter Advanced Accounting Study Material

Question 1.
E Ltd. acquires 70% of equity shares of Z Ltd. as on 31st March, 2017 at a cost of ₹ 70 lakhs. The following information is available from the balance sheet of Z Ltd. as on 31st March, 2017:

	₹ in lakhs
Fixed Assets	120
Investments	55
Current Assets	70
Loans & Advances	15
15% Debentures	90
Current Liabilities	50

The following revaluations have been agreed upon (not included in the above figures):
Fixed Assets Up by 20%
Investments Down by 10%
Z Ltd. declared and paid dividend @ 20% on its equity shares as on 31st March, 2017. E Ltd. purchased the shares of Zed Ltd. @ ₹ 20 per share.
Calculate the amount of goodwill/capital reserve on acquisition of shares of Z Ltd.
Answer:
Revalued net assets of Z Ltd. as on 31st March, 2017

W Note :
Total Cost of 70% Equity of Z Ltd. ₹ 70 lakhs
÷ Purchase Price of each share ₹ 20
⇒ Number of shares purchased [70 lakhs/₹ 20] 3.5 lakhs
Dividend @ 20 % ie. ₹ 2 per share ₹ 7 lakhs
Also, dividend received is for pre-acquisition period, which has been reduced from the cost of investment as per AS-13.

Question 2.
A Ltd. acquired 70% of equity shares of B Ltd. as on 1st January, 2010 at a cost of ₹ 10,00,000 when B Ltd. had an equity share capital of ₹ 10,00,000 and reserves and surplus of ₹ 80,000. Both the companies follow calendar year as the accounting year. In the four consecutive years, B Ltd. fared badly and suffered losses of ₹ 2,50,000,4,00,000, ₹ 5,00,000 and ₹ 1,20,000 respectively. Thereafter in 2014, B Ltd. experienced turnaround and registered an annual profit of ₹ 50,000. In the next two years i.e. 2015 and 2016, B Ltd. recorded annual profits of ₹ 1,00,000 and ₹ 1,50,000 respectively.
Show the minority interests and cost of control at the end of each year for the purpose of consolidation.
Answer:

Note 1. In the year 2012, the minority’s share of losses actually comes to ₹ 1,50,000. But since minority interest as on 31.12.2011 was less than the share of loss, the excess of loss of ₹ 21,000 is to be added to A Ltd.’s share of losses.

Note 2: For the year 2013, the entire loss of B Ltd. is to be adjusted against A Ltd.’s profits for the purpose of consolidation. Therefore, upto 2013, the minority’s share of B Ltd.’s losses of ₹ 57,000 are to be borne by A Ltd. Thereafter, the entire profits of B Ltd. will be allocated to A Ltd. unless the minority’s share of losses previously absorbed 57,000) has been recovered. Such recovery is fully made in 2016 and therefore minority interest of ₹ 33,000 is shown after adjusting fully the share of losses of minority previously absorbed by A Ltd.

Question 3.
From the following data, determine the amount of holding company’s profit in the consolidated Balance Sheet assuming holding company’s own Profit & Loss Account to be ₹ 2,00,000 in each case:

Answer:
The balance in the Profit & Loss Account on the date of acquisition (1.1.2018) is Capital profit, as such the balance of Consolidated Profit & Loss Account shall be equal to Holding Co.’s profit.
On 31.12.2018 in each case the following amount shall be added or deducted from the balance of holding Co.’s Profit & Loss account.

	% Share holding (1)	P & L as on 31.12.2018 (2)	P & L as on consolidation date (3)	P & L post acquisition (3 – 2) = 4	Amount to be added/ (deducted) from holding’s P & L (4 X 1)
1	90%	50,000	70,000	20,000	18,000
2	85%	30,000	20,000	(10,000)	(8,500)
3	8096	20,000	20,000	Nil	Nil
4	100%	40,000	55,000	15,000	15,000

Question 4.
X Ltd. purchased 80% shares of A Ltd. on 1st January, 2016 for ₹ 2,80,000. The issued capital of A Ltd., on 1st January, 2016 was ₹ 2,00,000 and the balance in the Profit & Loss Account was ₹ 1,20,000.
During the year ended 31 st December, 2016, A Ltd. earned a profit of ₹ 40,000 and at year end, declared and paid a dividend of ₹ 60,000.

Show by an entry how the dividend should be recorded in the books of X Ltd.
You are required to compute amount of minority interest as on 1st January, 2016 and 31st December, 2016?
Answer:
Total dividend paid = ₹ 60,000
Out of post-acquisition profit = ₹ 40,000
Out of pre-acquisition profit = ₹ 20,000
Hence, 2/3rd of dividend received by X will be credited to P & L and l/3rd will be credited to Investment.
X Ltd.’s share of dividend = ₹ 60,000 × 80% = ₹ 48,000
In the books of X Ltd.

Question 5.
The Summarised Balance Sheet of X Ltd. and its subsidiary Y Ltd. as on 31st March, 2017 areas follows:

The following information is also given to you

(a) 10% dividend on Equity shares was declared by Y Ltd. on 31st March, 2016 for the year ended 31st March, 2016. X Ltd. credited the dividend received to its Profit & Loss Account.
(b) Credit Balance of Profit & Loss account of Y Ltd. as on 1st April, 2016 was ₹ 650 Lakhs.
(c) General Reserve of Y Ltd. stood at same ₹ 1,450 Lakhs as on 1st April, 2016.
(d) Y Ltd.’s Plant & machinery showed a balance of ₹ 4,000 Lakh on 1st April 2016. At the time of purchase of shares in Y Ltd., X Ltd. revalued Y’s Ltd. Plant & Machinery upward by ₹ 1,000 Lakh.
(e) Included in Trade Payables of Y Ltd. are ₹ 50 Lakh for goods supplied by X Ltd.
(f) On 31st March, 2017, Y’s Ltd. inventory included goods for ₹ 150 lakhs which it had purchased from X Ltd. X Ltd. sold goods to Y Ltd. at cost plus 25%.
You are required to prepare a Consolidated Balance Sheet of X Ltd. and its subsidiary Y Ltd. as on 31st March, 2017 giving working notes. (Ignoring dividend on preference shares).
Answer:
Consolidated Balance Sheet of X Ltd. and its subsidiary Y Ltd. as on 31st March, 2017.

Notes to Accounts

Working Notes

(i) Calculation of Post-Acquisition Profits
Y’s Ltd. Profit & Loss Account

Depreciation provided on Plant & Machinery

(ii) Calculation of Pre – Acquisition Profits

(iii) Calculation of Capital Reserve

(iv) Unrealised Profit
₹ 150 Lakh × 25/125 = 30 lakh

(v) Plant & Machinery of YLtd.

Question 6.
The following summarised Balance Sheets of H Ltd. and its subsidiary S Ltd. were prepared as on 31st March, 2017:

H Ltd. acquired the 80% shares of S. Ltd. on 1st April, 2016. On the date of acquisition, General Reserve and Profit Loss Account of S Ltd. stood at ₹ 50,000 and ₹ 30,000 respectively.

Machinery (hook value ₹ 2,00,000) and Furniture (book value ₹ 40,000) of S Ltd. were revalued at ₹ 3,00,000 and ? 30,000 respectively on 1 st April, 2016 for the purpose of fixing the price of its shares (rates of depreciation computed on the basis of useful lives: Machinery 10% and Furniture 15%). Trade Payables of H Ltd. include ?

35,000 due to S Ltd. for goods supplied since the acquisition of the shares. These goods are charged at 10% above cost. The inventories of H Ltd. includes goods costing ₹ 55,000 purchased from S Ltd.

You are required to prepare the Consolidated Balance Sheet as at 31st March, 2017. (May 2018 – New Course) (20 Marks)
Answer:
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 2017

Notes to Accounts

Working Notes:

I. Profit or loss on revaluation of assets

II. Calculation of short/excess depreciation

III. Analysis of profits of S Ltd. as on 31.03.2017

IV. Minority Interest

V Cost of Controls Goodwill

Question 7.
Consider the following summarized balance sheets of subsidiary N Ltd.:

Also consider the following information:

1. N Ltd. is a subsidiary of S Ltd. Both the companies follow calendar year as the accounting year.
2. S Ltd. values inventory on LIFO basis while N Ltd. used FIFO basis. To bring N Ltd.’s values in line with those of S Ltd. its value of inventory is required to be reduced by ₹ 6,000 at the end of 2015 and ₹ 17,000 at the end of 2016.
3. N Ltd. deducts 1 % from Trade Receivables as a general provision against doubtful debts.
4. Prepaid expenses in N Ltd. include advertising expenditure carried forward of ₹ 30,000 in 2015 and ₹ 15,000 in 2016, being part of initial advertising expenditure of ₹ 45,000 in 2015 which is being written off over three years. Similar amount of advertising expenditure of S Ltd. has been fully written off in 2015.

You are required to restate the balance sheet of N Ltd. as on 31st December,
2016 after considering the above information, for the purpose of consolidation.
Make the necessary restatement which is necessary to make the accounting
policies adopted by S Ltd. and N Ltd. uniform.
Answer:
Working Note I
Computation of Adjusted revenue reserves of N Ltd.

Note: Since N Ltd. follows FIFO basis, it is assumed that opening inventory has been sold out during the year 2015. Therefore, reduction in inventory would have been taken care of by sale value. Hence no adjustment has been made for the same.

Restated Balance Sheet of N Ltd. as at 31st December, 2016

Notes to Accounts

Question 8.
On 31st March, 2011, P Ltd. acquired 1,05,000 shares of Q Ltd. for ₹ 12,00,000. The Balance Sheet of Q Ltd. on that date was as under:

On 31st March, 2017 the summarized Balance Sheets of two companies were as follows:

Directors of Q Ltd. made bonus issue on 31st March, 2017 In the ratio of one equity share of 10 each fully paid for every two equity shares held on that date.
Calculate as on 31st March, 2017 (i) Cost of Control/Capital Reserve; (ii) Minority Interest; (iii) Consolidated Profit and Loss Account In each of the following cases:
(i) Before Issue of bonus shares.
(ii) Immediately after issue of bonus shares.
It may be assumed that bonus shares were issued out of post-acquisition profits by using General Reserve.
Prepare a Consolidated Balance Sheet after the bonus issue. –
Answer:
Consolidated Balance Sheet of P Ltd. and its subsidia, Q Ltd. as on 31st March, 2017

Notes to Accounts

Shareholding pattern

(i) Before issue of bonus shares

(ii) Immediately after issue of bonus shares

Working Note I:

Analysis of Profits of Q Ltd.

Note: Share of P Ltd. in General reserve has been adjusted in Consolidated Profit and Loss Account.

Question 9.
Given below are the Profit & Loss Accounts of H Ltd. and its subsidiary Ltd. for the year ended 31st March, 2017:

Other Information:

H Ltd. sold goods to S Ltd. of ₹ 120 lacs at cost plus 20%. Inventory of S Ltd. includes such goods valuing ₹ 24 lacs. Administrative expenses of S Ltd. include ₹ 5 lacs paid to H Ltd. as consultancy fees. Selling and distribution expenses of H Ltd. include ₹ 10 lacs paid to S Ltd. as commission.

H Ltd. holds 80% of equity share capital of ₹ 1,000 lacs in S Ltd. prior to 2015-2016. H Ltd. took credit to its Profit and Loss Account, the proportionate amount of dividend declared and paid by S Ltd. for the year 2015-2016.
You are required to prepare a consolidated profit and loss account of H Ltd. and its subsidiary S Ltd. for the year ended on 31st March, 2017.
Answer:
Consolidated Profit & Loss Account of H Ltd. and its subsidiary S Ltd. for the year ended on 31st March, 2017

Notes to Accounts

Question 10.
The Profit and Loss Accounts of A Ltd. and its subsidiary B Ltd. for the year ended 31st March, 2018 are given below:

The following information is also given:

1. A Ltd. sold goods of ₹ 180 Lakhs to B Ltd. at cost plus 25%. (1/6 of such goods were still in inventory of B Ltd. at the end of the year)
2. Administrative expenses of B Ltd. include ₹ 8 Lakhs paid to A Ltd. as consultancy fees.
3. Selling and distribution expenses of A Ltd. include ₹ 15 Lakhs paid to B Ltd. as commission.
4. A Ltd. holds 72% of the Equity Capital of B Ltd. The Equity Capital of B Ltd. prior to 2016-17 is ₹ 1,500 lakhs

Prepare a consolidated Profit and Loss Account for the year ended 31 st March, 2018. (November 2018 – New Course) (10 Marks)
Answer:
Consolidated Profit & Loss Account of A Ltd. and its subsidiary B Ltd. for the year ended on 31st March, 2018

Notes to Accounts

Assumption: It is assumed that dividend adjustment has not be done in sales & other income of A Ltd. i.e. dividend received from B Ltd. is not included in other income of A Ltd.

Students should practice these Audit of Different Types of Entities – CA Inter Audit MCQ based on the latest syllabus.

Audit of Different Types of Entities – CA Inter Audit MCQ

Question 1.
A Limited Liability Partnership shall maintain such proper books of account as may be prescribed relating to its affairs for each year of its existence. Books are prescribed _________
(a) under Section 34 of LLP Act, 2008
(b) under Rule 24 of LLP Rules, 2009
(c) under Section 44AA of the Income-tax Act, 1961
(d) under Section 129 of the Companies Act, 2013
Answer:
(b) under Rule 24 of LLP Rules, 2009

Question 2.
As per Section 34 of LLP Act, 2008, every LLP shall, prepare a Statement of Account and Solvency in prescribed form _________
(a) within a period of 3 months from the end of each financial year
(b) within a period of 6 months from the end of each financial year
(c) within a period of 30 days from the end of each financial year
(d) within a period of 60 days from the end of each financial year
Answer:
(b) within a period of 6 months from the end of each financial year

Question 3.
As per Rule 24 of LLP Rules, 2009, Statement of Account and Solvency shall be filed in with the _________, within a period of
(a) Form 5, SEBI, 30 days from the end of 3 months of the financial year to which the Statement of Account and Solvency relates
(b) Form 5, Registrar, 30 days from the end of 6 months of the financial year to which the Statement of Account and Solvency relates
(c) Form 8, SEBI, 30 days from the end of 3 months of the financial year to which the Statement of Account and Solvency relates
(d) Form 8, Registrar, 30 days from the end of 6 months of the financial year to which the Statement of Account and Solvency relates
Answer:
(d) Form 8, Registrar, 30 days from the end of 6 months of the financial year to which the Statement of Account and Solvency relates

Question 4.
Considering the provisions of Rule 24 of LLP Rules, 2009, state which of the following is correct:
(a) An LLP whose turnover does not exceed, in any financial year ₹ 50 Lacs, or whose contribution does not exceed ₹ 25 Lacs shall not be required to get its accounts audited
(b) An LLP whose turnover does not exceed, in any financial year ₹ 40 Lacs, or whose contribution does not exceed ₹ 20 Lacs shall not be required to get its accounts audited
(c) An LLP whose turnover does not exceed, in any financial year ₹ 40 Lacs, or whose contribution does not exceed ₹ 25 Lacs shall not be required to get its accounts audited
(d) An LLP whose turnover does not exceed, in any financial year ₹ 50 Lacs, or whose contribution does not exceed ₹ 40 Lacs shall not be required to get its accounts audited
Answer:
(c) An LLP whose turnover does not exceed, in any financial year ₹ 40 Lacs, or whose contribution does not exceed ₹ 25 Lacs shall not be required to get its accounts audited

Question 5.
Auditor of an LLP shall be appointed for:
(a) each financial year
(b) two financial years
(c) three financial years
(d) five financial years
Answer:
(a) each financial year

Question 6.
Auditor for the first financial year of an LLP may be appointed by the designated partners:
(a) within 3 0 days of incorporation of LLP
(b) within 3 months of incorporation of LLP
(c) at any time but before the end of the first financial year
(d) within 30 days of end of the first financial year
Answer:
(c) at any time but before the end of the first financial year

Question 7.
The designated partners may appoint an auditor for each financial year {other than first financial year) of LLP:
(a) within 90 days of the commencement of each financial year
(b) within 180 days of the commencement of each financial year
(c) at least 30 days prior to the end of each financial year
(d) at least 90 days prior to the end of each financial year
Answer:
(c) at least 30 days prior to the end of each financial year

Question 8.
Auditor of an LLP shall hold office in accordance with the terms of his or their appointment and shall continue to hold such office till the period
(a) the new auditors are appointed
(b) they are re-appointed
(c) the new auditors are appointed, or they are re-appointed
(d) the new auditors are appointed, or they are re-appointed, whichever is later
Answer:
(c) the new auditors are appointed, or they are re-appointed

Question 9.
As per Section 3 5 of LLP Act, 2008, every LLP shall file _________ duly authenticated with the Registrar within _________
(a) Annual Return; 60 days of closure of its financial year
(b) Annual Return; 120 days of closure of its financial year
(c) Financial Statements and Audit Report; 30 days of closure of its financial year
(d) Financial Statements and Audit Report; 60 days of closure of its financial year
Answer:
(a) Annual Return; 60 days of closure of its financial year

Question 10.
As per Section 36 of LLP Act, 2008, documents of LLP maintained with Registrar can be inspected by:
(a) Designated Partner Only
(b) Any Partner
(c) Any partner and the lenders
(d) Any person
Answer:
(d) Any person

Question 11.
An auditor ofa Co-operative Society is appointed by the
(a) Governing body of Co-operative Society
(b) Members of Co-operative Society
(c) Registrar of Co-operative Societies
(d) None of the above .
Answer:
(c) Registrar of Co-operative Societies

Question 12.
As per Section 5 of the Co-operative Societies Act, 1912, in the case ofa society where the liability of a member of the society is limited, no member of a society other than a registered society can hold such portion of the share capital of the society as would exceed a maximum of _________ of the total number of shares or of the value of shareholding to _________
(a) 10%; ₹ 1,000
(b) 20%; ₹ 1,000
(c) 10%; ₹ 10,000
(d) 20%; ₹ 10,000
Answer:
(b) 20%; ₹ 1,000

Question 13.
A society may invest its funds in any one or more of the following:
(i) In the Central or State Co-operative Bank
(ii) In any of the securities specified in Section 20 of the Indian Trusts Act, 1882
(iii) In the shares, securities, bonds or debentures of any other society with limited liability
(iv) In the Shares of Public Sector Undertakings
(v) In the Securities of Public Listed companies
(vi) In any Co-operative Bank, other than a Central or State co-operative bank, as approved by the Registrar on specified terms and conditions
Select the appropriate one:
(a) (i), (ii) and (iii) only
(b) (i), (ii), (iii) and (iv) only
(c) (i), (ii), (iii), (iv) and (v) only
(d) (i), (ii), (iii) and (vi) only
Answer:
(d) (i), (ii), (iii) and (vi) only

Question 14.
A co-operative society is required to transfer _________ to Reserve Fund, before distribution as dividends or bonus to members
(a) 10% of the profits
(b) 20% of the profits
(c) 25% of the profits
(d) None of the above
Answer:
(c) 25% of the profits

Question 15.
A registered society may, with the sanction of the Registrar, contribute an amount _________
(a) not exceeding 10% of the net profits remaining after the compulsory transfer to the reserve fund for any charitable purpose
(b) not less than 10% of the net profits remaining after the compulsory transfer to the reserve fund for any charitable purpose
(c) not exceeding 10% of the net profits before transfer to the reserve fund, for any charitable purpose
(d) not less than 10% of the net profits before transfer to the reserve fund, for any charitable purpose
Answer:
(a) not exceeding 10% of the net profits remaining after the compulsory transfer to the reserve fund for any charitable purpose

Question 16.
In respect of examination of overdue debts of a co-operative society, auditor is required to perform which of the following:
(a) Overdue debts for a period from 30 days to 6 months and more than 6 months will have to be classified and shall have to be reported by an auditor
(b) The auditor will have to ascertain whether proper provisions for doubtful debts is made and whether the same is satisfactory
(c) The percentage of overdue debts to the paid-up capital will have to be compared with last year, so as to see whether the trend is increasing or decreasing
(d) All of the above
Answer:
(b) The auditor will have to ascertain whether proper provisions for doubtful debts is made and whether the same is satisfactory

Question 17.
In case of co-operative societies, bad debts and irrecoverable losses before being written off against Bad Debts Funds, Reserve Fund etc. should be certified as bad debts or irrecoverable losses by the _________
(a) auditor where the law so requires
(b) the managing committee of the society, when law is silent as to certification by auditor
(c) the managing committee of the society, irrespective of the provisions ofthe law
(d) both (a) and (b)
Answer:
(d) both (a) and (b)

Question 18.
During the course of audit of co-operative society, if the auditor notices that there are some serious irregularities in the working of the society, he may report these special matters to the _________
(a) Registrar
(b) Members
(c) Managing Committee
(d) None of the above
Answer:
(a) Registrar

Question 19.
Circumstances in which auditor of co-operative society is required to submit special report includes:
(a) Personal profiteering by members of managing committee
(b) Weak Internal Control
(c) Errors noticed in the books of account
(d) All of the above
Answer:
(a) Personal profiteering by members of managing committee

Question 20.
First Auditor of Multi-State Co-operative Society shall be appointed by _________
(a) Board of Directors within one month of registration
(b) Registrar within one month of registration
(c) Managing Committee within 60 days of registration
(d) Members within 60 days of registration
Answer:
(a) Board of Directors within one month of registration

Question 21.
Subsequent auditor of a multi-state co-operative society is to be appointed:
(a) by Registrar
(b) at each AGM
(c) at first AGM and thereafter at every 6th AGM
(d) by BOD
Answer:
(b) at each AGM

Question 22.
A person who is a Chartered Accountant can only be appointed as auditor of a multi-state co-operative society. However, a person who is indebted to multi-state co-operative society or who has given guarantee in connection with a loan of third party to multi state co-operative society for an amount exceeding _________ cannot be appointed as auditor
(a) ₹ 1,000
(b) ₹ 10,000
(c) ₹ 1,00,000
(d) ₹ 5,00,000
Answer:
(a) ₹ 1,000

Question 23.
Which of the following matter is not required to be inquired by auditor of multi-state co-operative society under Sec. 73(2) of Multi-State Co-operative Societies Act, 2002:
(a) Whether loans and advances made on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interests of the society or its members;
(b) Whether transactions which are represented merely by book entries are not prejudicial to the interest of Society;
(c) Whether personal expenses have been charged to revenue account; and
(d) Whether loans and advances shown as deposits
Answer:
(d) Whether loans and advances shown as deposits

Question 24.
As per Section 77 of Multi-State Co-operative Societies Act, 2002, Central Government may pass an order for the special audit if they are of opinion
(a) that the affairs of any Multi-State Co-operative society are not being managed in accordance with co-operative principles or prudent commercial practices or with sound business principles
(b) that any Multi-State Co-operative society is being managed in a manner likely to cause serious injury or damage to the interests of the trade industry or business to which it pertains
(c) that the financial position of any Multi-State Co-op-erative society is such as to endanger its solvency
(d) any of the above
Answer:
(d) any of the above

Question 25.
Special Auditor under section 77 of Multi-State Co-operative Societies Act, 2002 can be:
(a) Auditor of Multi-State Co-operative Society
(b) Any Chartered Accountant other than auditor of Multi-State Co-operative Society
(c) Any person, may or maybe a Chartered Accountant
(d) Either (a) or (b)
Answer:
(d) Either (a) or (b)

Question 26.
An inquiry may be ordered by Central Registrar u/s 78 of Multi-State Co-operative Societies Act, 2002, on a request received from:
(a) not less than 1 /3rd of the members of the board or not less than 1 /5th of the total number of members of a multi-state cooperative society
(b) not less than 1/5th of the members of the board or not less than 1/3rd of the total number of members of a multi-state cooperative society
(c) not less than 1/3rd of the members of the board or not less than 1/3rd of the total number of members of a multi-state cooperative society
(d) not less than 1/5thofthe members of the board or not less than 1/5th of the total number of members of a multi-state cooperative society
Answer:
(a) not less than 1 /3rd of the members of the board or not less than 1 /5th of the total number of members of a multi-state cooperative society

Question 27.
An inquiry may be ordered by Central Registrar u/s 78 of Multi-State Co-operative Societies Act, 2002, on a request received from certain category of person. However, no inquiry shall be held unless
a notice of not less than has been
given to the Multi-State Co-operative Society
(a) 10 days
(b) 15 days
(c) 30 days
(d) 45 days
Answer:
(b) 15 days

Question 28.
An inquiry may be ordered by Central Registrar u/s 78 of Multi-State Co-operative Societies Act, 2002, on a request received from certain category of person. Scope of inquiry related to:
(a) the constitution and managing committee of the Multi-State Co-operative Society
(b) the working of a Multi-State Co-operative Society
(c) the financial condition of a Multi-State Co-operative Society
(d) the constitution, working and financial condition of a Multi-State Co-operative Society
Answer:
(d) the constitution, working and financial condition of a Multi-State Co-operative Society

Question 29.
Person conducting inquiry u/s 78 of Multi-State Co-operative Societies Act, 2002 haspowerto require the officers of the society to call a general meeting of
the society by giving notice of not less than _________ at such time and place atthe headquarters ofthe society to consider such matters, as may be directed by him
(a) 7 days
(b) 14 days
(c) 21 days
(d) 21 clear days
Answer:
(a) 7 days

Question 30.
Person conducting inspection u/s 79 of Multi¬State Co-operative Societies Act, 2002 may exercise which of the following powers:
(a) access to all books, accounts, papers, vouchers, securities, stock and other property of that society and may, in the event of serious irregularities dis-covered during inspection, take them into custody
(b) verify the cash balance of the society
(c) call a meeting ofthe Board and also a general meet¬ing ofthe society where such general meeting is, in his opinion, necessary
(d) all of the above
Answer:
(d) all of the above

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

Audit of Banks – CA Inter Audit MCQ

Question 1.
Regulating body in case of banks is:
(a) SEBI
(b) IRDA
(c) RBI
(d) ICAI
Answer:
(c) RBI

Question 2.
Long Form Audit report is to be submitted by:
(a) 30th April every year
(b) 30th June every year
(c) 30th Sep. every year
(d) None of the above
Answer:
(b) 30th June every year

Question 3.
The matters which the banks require their auditors to deal with in the long form audit report have been specified by the
(a) Central Government
(b) State Bank of India
(c) Board of Directors of respective banks
(d) Reserve Bank of India
Answer:
(d) Reserve Bank of India

Question 4.
During stage of initial considerations in a bank audit, which of the following aspect is not covered:
(a) Acceptance & Continuance
(b) Terms of Audit Engagements
(c) Communication with Previous Auditor
(d) Engagement Team Discussions
Answer:
(d) Engagement Team Discussions

Question 5.
During stage of “understanding the business operations” in a bank audit, auditor is required to obtain understanding of various aspects. Which of the following aspect is not covered?
(a) Bank and its Environment including Internal Control
(b) Bank’s Accounting Process
(c) Risk Management Process
(d) None of the above
Answer:
(d) None of the above

Question 6.
During stage of “Risk Assessment” in a bank audit, auditor is required to identify and assess risks. Risks to be identified and assessed include:
(a) Risks of Material Misstatements and Risk of Fraud including Money Laundering
(b) Risks of Material Misstatements and Risk of Fraud including Money Laundering and Specific Risks
(c) Risk Associated with Outsourcing of activities and Risk of Fraud including Money Laundering
(d) Risks of Material Misstatements, Risk of Fraud including Money Laundering, Specific Risks and Risk Associated with Outsourcing of activities
Answer:
(d) Risks of Material Misstatements, Risk of Fraud including Money Laundering, Specific Risks and Risk Associated with Outsourcing of activities

Question 7.
Which of the following activity is generally not form part of execution stage in a bank audit:
(a) Establish Engagement Team
(b) Engagement Team Discussions
(c) Response to the Assessed Risks
(d) Appropriateness of Going Concern
Answer:
(a) Establish Engagement Team

Question 8.
You are at the planning stage for one of your firm’s clientXYZBankfor the year ended 31st March 2019. The bank is a commercial bank that provides a number of products and services to the general public and other segments of the economy in the area of South Mumbai. You are assigned the audit of one of the branches of XYZ Bank. The audit engagement team was called to have a detailed discussion on the following matters. Which one of the following should not be included in the discussion for the audit of banks?
(a) Appointment and remuneration to be received on this engagement
(b) Errors of last year in the application of accounting policies of the bank
(c) Methods of fraud if any perpetrated by the bank employee within particular balances and/or dis-closures
(d) Effect of the results of the risk assessment procedures on other aspects to decide the nature, timing and extent of further audit procedures
Answer:
(a) Appointment and remuneration to be received on this engagement

Question 9.
Which of the following activity is generally not form part of execution stage in a bank audit:
(a) Engagement Team Discussions
(b) Response to the Assessed Risks
(c) Understanding of bank accounting policies
(d) Audit Planning Memorandum
Answer:
(c) Understanding of bank accounting policies

Question 10.
Which of the following is fund based advance?
(a) Term loans
(b) Cash credits
(c) Demand Loans
(d) All of the above
Answer:
(d) All of the above

Question 11.
Which of the following is not classification of NPA?
(a) Impaired
(b) Sub Standard
(c) Doubtful
(d) Loss
Answer:
(a) Impaired

Question 12.
Agricultural advances are classified as NPA if interest and/or Instalment of principal is overdue for __________ in case loans granted for Short Duration crops and __________ in case loans granted for Long Duration crops (i.e. more than 1 year)
(a) two crop seasons; one crop season.
(b) one crop season; one crop season.
(c) two crop seasons; two crop seasons.
(d) one crop season; two crop season.
Answer:
(a) two crop seasons; one crop season.

Question 13.
Your firm has been appointed as auditors of a branch of a nationalised Bank. The bank is a consortium member of Cash Credit Facilities of ₹ 5 0 crores to X Ltd. Bank’s own share is ₹ 10 crores only. During the last two quarters against a debit of ₹ 1.75 crores towards interest, the credits in X Ltd. account are to the tune of ₹ 1.2 5 crores only. Based on the certificate of lead bank, the bank has classified the account of X Ltd. as performing
(a) Classification of advance as performing is in order as in case of consortium advances, classification is to be done on the basis of certificate of lead bank
(b) Classification of advance as performing is in order subject to confirmation from branch statutory auditor
(c) Classification of advance as performing is in order subject to confirmation from Central Statutory auditor
(d) Classification of advance as performing is not in order
Answer:
(d) Classification of advance as performing is not in order

Question 14.
M/s. S Ltd. is a MSME unit. The company does multiple banking. The company is availing cash credit limit from U Bank of ₹ 25 crores. The limit availed remained less than ₹ 5.00 crores during all the days of F.Y. 2017-18. The company has not done any credit in cash credit account during the year as it is operating current account in newly opened another bank branch adjoining to company premises. The company is having sufficient security of stocks and debtors and DP of ₹ 25.00 crores remains all over the year. The company is availing term loans from other bank branches. Now the Bank Manager is insisting to route the sale proceeds through U Bank, otherwise cash credit limit and term loan accounts with other banks will be treated as Non-Performing Accounts
(a) Cash credit facility with U Bank need to be classified as NPA as there are no credit in the account to serve the interest charged in the account. Classification of term loan with other banks depends upon the payment made to that bank
(b) Cash credit facility with U Bank as well term loans with other bank branches need to be classified as NPA
(c) Cash credit facility with U Bank as well term loans with other bank branches need to be classified as performing
(d) Cash credit facility with U Bank need to be classified as performing whereas classification of term loan with other banks depends upon the payment made to that bank
Answer:
(a) Cash credit facility with U Bank need to be classified as NPA as there are no credit in the account to serve the interest charged in the account. Classification of term loan with other banks depends upon the payment made to that bank

Question 15.
Which of the following is correct in case of Banks?
(a) The policy ofincomerecognitionshouldbe objective
(b) The policy of income recognition should be subjective
(c) The policy of income recognition maybe objective or subjective
(d) The policy of income recognition should be objective and based on record of recovery rather than on any subjective considerations
Answer:
(d) The policy of income recognition should be objective and based on record of recovery rather than on any subjective considerations

Question 16.
In course of audit of Good Samaritan Bank as at 31st March 2019 you observed the following: in a particular account there was no recovery in the past 18 months. The bank has not applied the NPA norms as well as income recognition norms to this particular account. When queried the bank management replied that this account was guaranteed by the central government and hence these norms were not applicable. The bank has not invoked the guarantee
(a) Bank is correct to the extent of not applying the NPA norms for provisioning purpose. But this exemption is not available in respect of income recognition norms
(b) Bank is not correct to the extent of not applying the NPA norms for provisioning purpose. But this exemption is available in respect of income recognition norms
(c) Bank is correct in not applying the NPA norms and income recognition norms
(d) Bank is not correct in not applying the NPA norms and income recognition norms
Answer:
(a) Bank is correct to the extent of not applying the NPA norms for provisioning purpose. But this exemption is not available in respect of income recognition norms

Question 17.
In carrying out audit of deposits and liabilities in a bank, the auditor is primarily concerned with obtaining __________ that all known liabilities are recorded and stated at appropriate amounts
(a) Absolute assurance
(b) Reasonable assurance
(c) Moderate assurance
(d) Limited assurance
Answer:
(b) Reasonable assurance

Question 18.
Management develops controls and uses performance indicators to aid in managing key business and financial risks. Requirements of Risk Management System in a Bank may include:
1. Oversight by Those Charged with Governance
2. Identification, measurement and monitoring of risks
3. Control activities
4. Monitoring activities
5. Reliable information systems
6. Assess the Risk of Fraud including Money Laun-dering by audit team
7. Identifying and Assessing the Risks of Material Misstatements by auditor
8. Assess Specific Risks at engagement level that may cause material misstatement
Identify the reqc irements:
(a) 1, 2, 3 and 4
(b) 5, 6, 7 and 8
(c) 1, 2, 3,4 and 5
(d) 6, 7 and 8
Answer:
(b) 5, 6, 7 and 8

Question 19.
Which of the following is correct?
(a) Sub-section (1) of section 30 of the Banking Regulation Act, 1949 requires that the balance sheet and profit and loss account of a banking company should be audited by a Firm of Chartered Accountants only.
(b) Sub-section (1) of section 30 of the Banking Regulation Act, 1949 requires that the balance sheet and profit and loss account of a banking company should be audited by a person duly qualified under any law for the time being in force to be an auditor of companies.
(c) Sub-section (1) of section 30 of the Banking Regulation Act, 1949 requires that the balance sheet and profit and loss account of a banking company ; should be audited by a CAG Auditor only.
(d) Sub-section (1) of section 30 of the Banking Regulation Act, 1949 requires that the balance sheet and profit and loss account of a banking company should be audited by a person duly qualified under Banking Law.
Answer:
(b) Sub-section (1) of section 30 of the Banking Regulation Act, 1949 requires that the balance sheet and profit and loss account of a banking company should be audited by a person duly qualified under any law for the time being in force to be an auditor of companies.

Question 20.
A Ltd. has been assigned a Cash Credit limit of INR 20 lacs as against its Book Debts furnished as security. What kind of Security creation is it?
(a) Pledge
(b) Mortgage
(c) Assignment
(d) Set-off
Answer:
(c) Assignment

Students should practice these Audit Documentation and Audit Evidence – CA Inter Audit MCQ based on the latest syllabus.

Audit Documentation and Audit Evidence – CA Inter Audit MCQ

Question 1.
SA 230 defines the term audit documentation as to the record of:
(a) audit procedures performed and audit evidence obtained
(b) audit evidence Obtained and Conclusion the auditor reached
(c) Audit procedure performed and conclusion the auditor reached
(d) Audit procedure performed, relevant audit evidence obtained and conclusion the auditor reached
Answer:
(d) Audit procedure performed, relevant audit evidence obtained and conclusion the auditor reached

Question 2.
As per SA 230 auditor is required to prepare audit documentation that provides a ________ and ________ record of the basis of the auditor’s report
(a) Complete and Exhaustive
(b) Sufficient and Reliable
(c) Sufficient and Appropriate
(d) None of the Above
Answer:
(c) Sufficient and Appropriate

Question 3.
________ refers to one or more folders or other storage media, in physical or electronic form, containing the records that comprise the audit documentation for a specific engagement
(a) Completion Memorandum
(b) Audit File
(c) Audit Report
(d) Audit Summary
Answer:
(b) Audit File

Question 4.
The auditor shall assemble the audit documentation in an audit file and complete the administrative process of assembling the final audit file on a timely basis within ________ of the date of the auditor’s report
(a) 30 days
(b) 60 days
(c) 90 days
(d) 120 days
Answer:
(b) 60 days

Question 5.
The completion of the assembly of the final audit file after the date of the auditor’s report is ________
(a) an administrative process that does not involve the performance ofnewauditproceduresbutcertainly involves the drawing of new conclusions
(b) an administrative process that involves the performance of new audit procedures or the drawing of new conclusions
(c) an administrative process that does not involve the performance of new audit procedures or the drawing of new conclusions
(d) a statutory process
Answer:
(c) an administrative process that does not involve the performance of new audit procedures or the drawing of new conclusions

Question 6.
SA 500 defines the term audit evidence as informa-tion used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. The term information as used in definition of audit evidence comprises of:
(a) Information contained in accounting records
(b) Information obtained from other sources
(c) Both of the above
(d) None of the above
Answer:
(c) Both of the above

Question 7.
Procedures performed to obtain understanding of the entity and its environment including the entity internal control, to identify and assess the risk of material misstatement whether due to fraud or error at the financial statement and assertion level are known as
(a) Risk Assessment procedures
(b) Compliance procedures
(c) Substantive procedures
(d) Analytical procedures
Answer:
(a) Risk Assessment procedures

Question 8.
Substantive procedures comprise of:
(a) Tests of Control and Tests of Details
(b) Risk Assessment procedures and Tests of details
(c) Tests of Control and Substantive Analytical Procedures
(d) Tests of details and Substantive Analytical Procedures
Answer:
(d) Tests of details and Substantive Analytical Procedures

Question 9.
Which of the following statement is false?
(a) Reliability of audit evidence is increased when it is obtained from independent sources outside the entity
(b) Audit evidence obtained indirectly are more reliable than audit evidence obtained directly by the auditor
(c) Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than evidence obtained orally
(d) Audit evidence provided by original documents are more reliable than audit evidence provided by photocopies
Answer:
(b) Audit evidence obtained indirectly are more reliable than audit evidence obtained directly by the auditor

Question 10.
Audit evidence is necessary to support the au-ditor’s opinion and report. It is ________ in nature and is primarily obtained from audit procedures performed during the course of the audit
(a) Cumulative
(b) Regressive
(c) Selective
(d) Objective
Answer:
(a) Cumulative

Question 11.
As per SA 330, which of the following factors do not warrant retesting of controls:
(a) Effective control environment
(b) Personnel changes that significantly affect the application of the control
(c) Significant manual element to the relevant controls
(d) Both (b) and (c) above
Answer:
(a) Effective control environment

Question 12.
As per SA 330, external confirmations may be used as substantive procedure. Areas in which ex-ternal confirmations may be obtained are:
(a) Amount due to lenders, including terms of repayment
(b) Salary paid to employees
(c) Profits transferred to reserves
(d) Both (a) and (c)
Answer:
(a) Amount due to lenders, including terms of repayment

Question 13.
In the context of an audit of financial statements, substantive tests are audit procedures that
(a) may be eliminated under certain conditions
(b) may be either tests of transactions, direct tests of financial balances, or analytical tests
(c) will increase proportionately with the auditor’s reliance on internal control
(d) are designed to discover significant subsequent events
Answer:
(b) may be either tests of transactions, direct tests of financial balances, or analytical tests

Question 14.
The auditor’s decision on whether to rely on audit evidence obtained in previous audits for controls that:(a) have not changed since they were last tested; and (b) are not controls that mitigate a significant risk; is a matter of professional judgment. In addition, the length of time between retesting such controls is also a matter of professional judgment, but is required to be at least
(a) once in every year
(b) once in every two year
(c) once in every third year
(d) once in every fifth year
Answer:
(c) once in every third year

Question 15.
When deviations from controls upon which the auditor intends to rely are detected, the auditor shall make specific inquiries to understand these matters and their potential consequences, and shall determine whether:
(a) The tests of controls that have been performed provide an appropriate basis for reliance on the controls
(b) Additional tests of controls are necessary
(c) The potential risks of misstatement need to be addressed using substantive procedures
(d) Any of the above
Answer:
(d) Any of the above

Question 16.
A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence is known as
(a) Letter of Engagement
(b) External Confirmation
(c) Written Representation
(d) Third party confirmation
Answer:
(c) Written Representation

Question 17.
Which of the following is true?
(a) Written representation shall be in the form of a representation letter addressed to TCWG
(b) Date of written representation shall be as near as practicable to the date of financial statements
(c) If based on written representation received, auditor claims that there is sufficient doubt about integrity of management, he shall issue an adverse opinion
(d) None of the above
Answer:
(d) None of the above

Question 18.
Which statement is correct regarding written representations?
(a) Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal
(b) Written representations provide sufficient appropriate audit evidence on their own about any of the matters with which they deal
(c) Written representations neither provide necessary audit evidence nor they provide sufficient appropriate audit evidence
(d) Written representations are not related to audit evidence
Answer:
(a) Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal

Question 19.
As per SA 580 “Written Representations” the auditor shall disclaim the opinion on the financial statements in accordance with SA 705 if;
(a) Auditor has concerns about the competence, integrity, ethical values or diligence of management
(b) Written representations are inconsistent with other audit evidences
(c) Management does not provide the written representation
(d) None of the above
Answer:
(c) Management does not provide the written representation

Question 20.
While auditing a lawyer company, Mr. X, the statutory auditor of the company, was unable to get the confirmation about the existence and value of certain books existed in the library worth ₹ 35 lakh. However, the management gave him a certificate to prove the existence and value of the books as appearing in the books of account. The auditor accepted the same without any further procedure and signed the audit report. Is he right in his approach?
(a) The approach adopted by the auditor is right, as “Written Representations” are considered as suf-ficient appropriate audit evidence in the absence of other audit evidences
(b) The approach adopted by the auditor is not right, as “Written Representations” cannot be a substitute for other audit evidence that the auditor could reasonably expect to be available
(c) The approach adopted by the auditor can be considered as right, if he discloses this fact in the audit report as “Key Audit Matter”
(d) The approach adopted by the auditor can be considered as right, if he discloses the fact in the audit report in “Emphasis of Matter” Para
Answer:
(b) The approach adopted by the auditor is not right, as “Written Representations” cannot be a substitute for other audit evidence that the auditor could reasonably expect to be available

Question 21.
As per SA 501, auditor is required to obtain sufficient and appropriate audit evidences as to:
(a) Valuation of Inventory
(b) Completeness of Litigation and Claims
(c) Presentation and Disclosures of Financial Instruments
(d) All of the Above
Answer:
(b) Completeness of Litigation and Claims

Question 22.
If physical inventory counting is conducted at a date other than the date of the financial statements, the auditor shall
(a) perform audit procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded
(b) shall make or observe some physical counts on an alternative date, and perform audit procedures on intervening transactions
(c) perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory. If it is not possible to do so, the auditor shall modify the opinion in the auditor’s report in accordance with SA 705
(d) obtain sufficient appropriate audit evidence regarding the existence and condition of that inventory by requesting confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity
Answer:
(a) perform audit procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded

Question 23.
When inventory under the custody and control of a third party is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of that inventory by
(a) Request confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity
(b) Perform inspection or other audit procedures appropriate in the circumstances
(c) Either or Both of the above
(d) None of the above
Answer:
(c) Either or Both of the above

Question 24.
“If inventory is material to the financial state-ments, theauditor shall obtain sufficient appropriate audit evidence regarding the existence of inventory by attending the physical inventory counting unless impracticable.” Purpose of attending inventory count is to:
1. Evaluate management’s instructions and procedures for recording and controlling the results of the entity’s physical inventory counting
2. Observe the performance of management’s count procedures;
3. Inspect the inventory;
4. Perform test counts
5. Valuation of the inventory
6. Identify the weaknesses to be informed to those charged with governance as per requirement of SA 260
7. Determine the key audit matters so as to be incorporated in the audit report as per require-ments of SA 701
Select the main purpose:
(a) 1,2, 6 and 7
(b) 1, 2, 3 and 4
(c) 1,2, 5, 6 and 7
(d) 5, 6 and 7
Answer:
(b) 1, 2, 3 and 4

Question 25.
ABC Ltd. is dealing in trading of electronic goods. Huge inventory {60% approximately) of the company is lying on consignment (i.e. under the custody of third party). CA. Mohit, the auditor of the company, wants to obtain sufficient appropriate audit evidence regarding the existence and condition of the inventory lying on consignment. Thus, he requested & obtained confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity, however, it raised doubts about the integrity and objectivity ofthe third party. Which of the following other audit procedures may be performed by CA. Mohitto obtain sufficient appropriate audit evidence regarding the existence and condition of the inventory under the custody of third party?
(a) Attend third party’s physical counting of inventory
(b) Arrange for another auditor to attend third party’s physical counting of inventory
(c) Inspect warehouse receipts regarding inventory held by third parties
(d) All of the above
Answer:
(d) All of the above

Question 26.
A request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information is known as:
(a) Positive Confirmation request
(b) Negative Confirmation request
(c) Third party confirmation
(d) Request for Written representation
Answer:
(a) Positive Confirmation request

Question 27.
While designing external confirmation request, which ofthe following factors need to be considered:
(a) Method of communication
(b) Management authorisation/encouragement to Confirming Party to respond to auditor
(c) Ability of Confirming Party to provide/confirm requested info
(d) All of the Above
Answer:
(d) All of the Above

Question 28.
As per SA 505, if management refuses to allow the auditor to send a confirmation request, the auditor:
(a) need not to inquire the reasons from management and may modify the opinion directly
(b) need not to inquire the reasons from management & perform alternate procedures
(c) need to inquire the reasons and perform alternate audit procedures
(d) None of the above
Answer:
(c) need to inquire the reasons and perform alternate audit procedures

Question 29.
As per SA 505 “External Confirmations”, if man-agement refuses the auditor to send a confirmation request, the auditor shall:
(a) Determine the implications for the audit and audi-tor’s opinion in accordance with SA 705
(b) Evaluate the implications ofthe assessment ofthe relevant risk of material misstatements, including the risk of fraud
(c) Consider the matter as Key Audit matter and report as per SA 701
(d) None of the above
Answer:
(b) Evaluate the implications ofthe assessment ofthe relevant risk of material misstatements, including the risk of fraud

Question 30.
In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?
(a) A substantial number of accounts maybe in dispute and the accounts receivable balance arises from sales to a few major customers
(b) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances
(c) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers
(d) A substantial number of accounts maybe in dispute and the accounts receivable balance arises from sales to many customers with small balances
Answer:
(b) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances

Question 31.
Initial Audit Engagement is an engagement in which prior period financial statements are:
(a) not audited
(b) audited by the predecessor auditor
(c) audited by same auditor
(d) either (a) or (b)
Answer:
(d) either (a) or (b)

Question 32.
Which of the following is false?
(a) If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate in accordance with SA 705
(b) If the auditor concludes that the opening balances contain a misstatement that materially affects the current period’s financial statements and the effect of the misstatements is not properly accounted for or adequately presented or disclosed, the auditor shall express a qualified opinion or an adverse opinion as appropriate in accordance with SA 705
(c) If the auditor concludes that the current period accounting policies are consistency applied in relation to opening balances in accordance with applicable FRF, the auditor shall express a qualified opinion or an adverse opinion as appropriate in accordance with SA 705
(d) If the auditor concludes that a change in accounting policies is not properly accounted for or not adequately presented or disclosed in accordance with the applicable FRF, the auditor shall express a qualified opinion or an adverse opinion as appropriate in accordance with SA
Answer:
(c) If the auditor concludes that the current period accounting policies are consistency applied in relation to opening balances in accordance with applicable FRF, the auditor shall express a qualified opinion or an adverse opinion as appropriate in accordance with SA 705

Question 33.
Which of the following is false in case of initial audit engagement?
(a) The auditor shall read the most recent F.S., if any, and the predecessor auditor’s report thereon, if any, for information relevant to opening balances
(b) If the auditor obtains audit evidence that the opening balances contain misstatements that could materially affect the current period’s F.S., the auditor shall perform such additional audit procedures as appropriate to determine the effect on the current period’s F.S.
(c) Auditor shall obtain SAAE about whether the accounting policies reflected in the opening balances have been consistently applied in the current period’s F.S.
(d) If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall express an adverse opinion
Answer:
(d) If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall express an adverse opinion

Question 34.
Which of the below mentioned standards deals with the related party disclosures in the financial statements and auditor’s responsibilities regarding related party relationships and transactions when performing an audit of financial statements
(a) AS 18 and SA 540
(b) AS 17 and SA 550
(c) AS 18 and SA 550
(d) AS 17 and SA 540
Answer:
(c) AS 18 and SA 550

Question 35.
As per SA 550 “Related Parties”, if the auditor identifies related parties or significant related party transactions that management has not previously identified or disclosed to the auditor, the auditor shall:
(a) Determine whether the underlying circumstances confirm the existence of those relationships or transactions
(b) Request management to identify all transactions with the newly identified related parties for the auditor’s further evaluation
(c) Report the matter to the Central Government
(d) All of the above
Answer:
(b) Request management to identify all transactions with the newly identified related parties for the auditor’s further evaluation

Question 36.
If the auditor identifies related parties or significant related party transactions that management has not previously identified or disclosed to the auditor, the auditor shall:
(a) Promptly communicate the relevant information to Regulatory authorities
(b) Perform appropriate substantive aud it procedures relating to such newly identified related parties or significant related party transactions
(c) Reconsider the risk that other related parties or significant related party transactions may exist that auditor fails to identify
(D) All of the above
Answer:
(b) Perform appropriate substantive aud it procedures relating to such newly identified related parties or significant related party transactions

Question 37.
For identified significant related party transactions outside the entity’s normal course of business, the auditor shall evaluate whether
(a) The business rationale (or lackthereof) ofthe trans-actions suggests that they may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets
(b) The terms of the transactions are consistent with management’s explanations
(c) The transactions have been appropriately accounted for and disclosed in accordance with the applicable financial reporting framework
(d) All of the above
Answer:
(d) All of the above

Question 38.
If the auditor identifies significant transactions outside the entity’s normal course of business when performing the audit procedures, the auditor shall
(a) inquire of management about the nature of these transactions and whether related parties could be involved
(b) perform the procedures as prescribed in SA 240
(c) ask a written representation from the management in this regard
(d) none of the above
Answer:
(a) inquire of management about the nature of these transactions and whether related parties could be involved

Question 39.
Which of the following is false?
(a) Nature of related party relationships and transactions may, in some circumstances, give rise to higher risks of material misstatement of the financial statements than transactions with unrelated parties
(b) Where the applicable FRF establishes requirements of related party disclosures, auditor has no respon-sibility to perform audit procedures to identify, assess and respond to the RMM arising from the entity’s failure to appropriately account for or disclose related party relationships, transactions or balances
(c) In case of identification of significant Related party transaction outside the entity normal course of business, auditor shall obtain evidence that transactions have been appropriately authorised & approved
(d) All of the Above
Answer:
(b) Where the applicable FRF establishes requirements of related party disclosures, auditor has no respon-sibility to perform audit procedures to identify, assess and respond to the RMM arising from the entity’s failure to appropriately account for or disclose related party relationships, transactions or balances

Question 40.
As per SA 560, subsequent events are events oc- curringbetween the date ofthe financial statements and the ________ and facts that become known to the auditor after the date of the auditor’s report
(a) Date of approval of financial statement
(b) Date of the auditor’s report
(c) Date of the annual general meeting
(d) None of the above
Answer:
(b) Date of the auditor’s report

Question 41.
SA 560 “Subsequent Events” deals with the auditor’s responsibilities as to:
(a) Subsequent events in an audit of financial statements
(b) “Other Information” obtained after the date of auditor’s report
(c) Both of the above
(d) None of the Above
Answer:
(a) Subsequent events in an audit of financial statements

Question 42.
As per SA 560, if auditor identifies events or conditions that require adjustments or disclosures in the financial statements, the auditor
(a) has no obligation to perform any audit procedures regarding the financial statements after the date of the auditor’s report
(b) shall modify the audit opinion
(c) shall determine whether each such event is appropriately reflected in financial statements
(d) Any of the above
Answer:
(c) shall determine whether each such event is appropriately reflected in financial statements

Question 43.
If a fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall
(a) discuss the matter with management
(b) determine whether the financial statements need amendment
(c) if financial statements need to be amended, inquire how management intends to address the matter in the financial statements
(d) All of the Above
Answer:
(d) All of the Above

Question 44.
AS 4 discusses the treatment of events occurring after period end in the financial statement. Events are classified in two categories;
I. Events that provide further evidence of conditions that existed at period end
II. Events that are indicative of conditions that arose subsequent to period end
How are the following two types of significant event treated?
(a) Adjust Financial Statement for Type I and Disclosure in Type II
(b) Adjust Financial Statement for Type I and Type II
(c) Disclosure for Type I and Type II
(d) Disclosure for Type I and Adjust Financial Statement in Type II
Answer:
(a) Adjust Financial Statement for Type I and Disclosure in Type II

Question 45.
Which of the following is not an example of sub-sequent events relating to conditions that existed at period end which require adjustment in the financial statements?
(a) disposal of equipment not being used in operations at a price below current book value
(b) an uninsured loss of inventories as a result of fire
(c) settlement of litigation at an amount different from the amount recorded on the books
(d) sale of investments at a price below recorded cost
Answer:
(b) an uninsured loss of inventories as a result of fire

Question 46.
Which of the below mentioned indicators are classified as financial indicators that may cast doubt about going concern assumption:
(a) loss of key management without replacement
(b) non-compliance with capital requirements
(c) shortage of important supplies
(d) in ability to pay creditors on due dates
Answer:
(d) in ability to pay creditors on due dates

Question 47.
As per SA 570, if auditor concludes that use of going concern basis of accounting by management in preparation of financial statements is inappropriate, auditor shall issue ________
(a) Qualified Opinion
(b) Adverse Opinion
(c) Disclaimer of Opinion
(d) Unmodified opinion with a separate section titled as “Material Uncertainty relatingto Going Concern”
Answer:
(b) Adverse Opinion

Question 48.
As per SA 570, if events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall determine whether or not a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern through performing additional audit procedures. Additional Procedures may comprise of:
(a) Evaluating Management Plans for future actions (h) Evaluating the reliability of cash flow forecast
(c) Requesting Written Representations from manage-ment regarding feasibility for future plans
(d) All of the above
Answer:
(d) All of the above

Question 49.
When an auditor concludes there is substantial doubt about a continuing audit client’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to
(a) Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern
(b) Report to the client’s audit committee that management’s accounting estimates may need to be adjusted
(c) Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements
(d) Reissue the prior year’s auditor’s report and add an explanatory paragraph that specifically refers to “substantial doubt” and “going concern.”
Answer:
(a) Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern

Question 50.
Which of the following is false?
(a) If the financial statements have been prepared using the going concern basis of accounting but, in the auditor’s judgment, management use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, the auditor shall express an adverse opinion
(,b) If management is unwilling to make or extend its assessment when requested to do so by the auditor, the auditor shall consider the implications for the auditor’s report
(c) If use of going concern basis of accounting is appropriate but a material uncertainty exists and adequate disclosure aboutthe material uncertainty is made in the financial statements, the auditor shall express a modified opinion and auditor report shall include a separate section under the heading “Material Uncertainty related to Going Concern”
(d) If use of going concern basis of accounting is ap-propriate but a material uncertainty exists and adequate disclosure aboutthe material uncertainty is not made in the financial statements, the auditor shall express a qualified opinion or adverse opinion as appropriate in accordance with SA 705
Answer:
(c) If use of going concern basis of accounting is appropriate but a material uncertainty exists and adequate disclosure aboutthe material uncertainty is made in the financial statements, the auditor shall express a modified opinion and auditor report shall include a separate section under the heading “Material Uncertainty related to Going Concern”

Question 51.
Audit evidence is necessary to support the auditor’s opinion and report. It is in nature and is primarily obtained from audit procedures performed during the course of the audit.
(a) cumulative
(b) regressive
(c) selective
(d) objective
Answer:
(a) cumulative

Question 52.
________ refer to the audit procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels.
(a) Audit assessment procedures
(b) Substantive procedures
(c) Test of control
(d) Risk assessment procedures
Answer:
(d) Risk assessment procedures

Question 53.
If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall express:
(a) a disclaimer opinion
(b) a qualified opinion
(c) a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.
(d) unmodified opinion
Answer:
(c) a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.

Question 54.
A failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a confirmation request returned undelivered is called ________
(a) Negative confirmation request
(b) Non-response
(c) Exception
(d) Positive confirmation request
Answer:
(b) Non-response

Question 55.
Which of the following is correct:
(a) The auditor shall assemble the audit documentation in an audit file and complete the administrative process of assembling the final audit file on a timely basis after the date of the auditor’s report,
(b) The auditor shall assemble the audit documentation in an audit file and shall not complete the administrative process of assembling the final audit file.
(c) The auditor shall assemble the audit documentation in an audit file and complete the administrative process of assembling the final audit file on a timely basis before the date of the auditor’s report.
(d) The auditor shall not assemble the audit documentation in an audit file.
Answer:
(a) The auditor shall assemble the audit documentation in an audit file and complete the administrative process of assembling the final audit file on a timely basis after the date of the auditor’s report,

Question 56.
Audit evidence includes
(a) information contained in the accounting records underlying the financial statements
(b) both information contained in the accounting records underlying the financial statements and other information.
(c) other information.
(d) information contained in the accounting records underlying the financial statements or other information.
Answer:
(d) information contained in the accounting records underlying the financial statements or other information.

Question 57.
Most of the auditor’s work in forming the auditor’s opinion consists of:
(a) obtaining audit evidence.
(b) evaluating audit evidence.
(c) obtaining or evaluating audit evidence.
(d) obtaining and evaluating audit evidence.
Answer:
(d) obtaining and evaluating audit evidence.

Question 58.
A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework is:
(a) Misstatement
(b) Error
(c) Fraud
(d) Any of the above
Answer:
(a) Misstatement

Question 59.
If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances,
(a) the auditor shall express a qualified opinion in accordance with SA 705.
(b) the auditor shall express a disclaimer of opi nion in accordance with SA 705.
(c) the auditor shall express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705.
(d) the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.
Answer:
(d) the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.

Question 60.
Audit documentation provides:
(a) evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of the auditor; or evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements.
(b) evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of the auditor; and evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements.
(c) evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of the auditor
(d) evidence thatthe audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements.
Answer:
(b) evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of the auditor; and evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements.

Question 61.
Which of the following is not an example of audit documentation?
(a) Audit programmes
(b) Summaries of significant matters
(c) Audit file
(d) Checklists.
Answer:
(c) Audit file

Question 62.
Which of the following is incorrect?
(a) Inquiry consists of seeking information of unknown persons, both financial and non-financial, within the entity or outside the entity.
(b) Inquiry is used extensively throughout the audit in addition to other audit procedures.
(c) Inquiries may range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry process.
(d) Responses to inquiries may provide the auditor with information not previously possessed or with corroborative audit evidence.
Answer:
(a) Inquiry consists of seeking information of unknown persons, both financial and non-financial, within the entity or outside the entity.

Question 63.
Which of the following is incorrect?
(a) Written representations are necessary information that the auditor requires in connection with the audit of the entity’s financial statements.
(b) Similar to responses to inquiries, written repre-sentations are audit evidence.
(c) Written representations are requested from those responsible for the preparation and presentation of the financial statements.
(d) Written representations provide necessary audit evidence and also they provide sufficient appro-priate audit evidence on their own about any of the matters with which they deal.
Answer:
(d) Written representations provide necessary audit evidence and also they provide sufficient appro-priate audit evidence on their own about any of the matters with which they deal.

Question 64.
The auditor has no obligation to perform any audit procedures regarding the financial statements after the date ofthe auditor’s report. However, when, after the date ofthe auditor’s report but before the date the financial statements are issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall:
(a) Discuss the matter with management and, where appropriate, those charged with governance.
(b) Determine whether the financial statements need amendment.
(c) Inquire how management intends to address the matter in the financial statements.
(d) All of the above
Answer:
(a) Discuss the matter with management and, where appropriate, those charged with governance.

Question 65.
A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request is ________
(o) Positive confirmation request
(b) Non-response
(c) Exception
(d) Negative confirmation request
Answer:
(d) Negative confirmation request

Question 66.
The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including:
(a) Inquiry of management and, where applicable, others within the entity, including in-house legal counsel.
(b) Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel.
(c) Reviewing legal expense accounts.
(d) All of the above
Answer:
(d) All of the above

Question 67.
CA. Bobby is a recently qualified Chartered Accountant. He is appointed as an auditor of Droopy Ltd. for the current Financial Year 2017-18. He is quite conservative in nature which is also replicated in his professional work. CA. Bobby is of the view that he shall record all the matters related to audit, audit procedures to be performed, audit evidence obtained and conclusions reached. Thus, he maintained a file and recorded each and every of his Findings during the audit. His audit file, besides other thing, includes audit programmes, notes reflecting preliminary thinking, letters of confir-mation, e-mails concerning significant matters, etc. State which of the following need not be included in the audit documentation?
(a) Audit programmes.
(b) Notes reflecting preliminary thinking.
(c) Letters of confirmation.
(d) E-mails concerning significant matters.
Answer:
(b) Notes reflecting preliminary thinking.

Question 68.
Statement 1: Audit procedures consist of Risk Assessments Procedures and other procedures.
Statement 2: Substantive procedures consist of test of details and analytical procedures.
(a) Only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both 1 & 2 are correct
(d) Both 1 & 2 are incorrect
Answer:
(c) Both 1 & 2 are correct

Question 69.
A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request is ________
(a) Positive confirmation request
(b) Non-response
(c) Exception
(d) Negative confirmation request
Answer:
(d) Negative confirmation request

Question 70.
If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall express;
(a) a disclaimer opinion
(b) a qualified opinion
(c) a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.
(d) unmodified opinion
Answer:
(c) a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.

Question 71.
Which of the following is not an example of an event or condition that may cast significant doubt on entity’s ability to continue as a going concern:
(a) Loss of key management without replacement
(b) Adverse key financial ratios
(c) Inability to pay creditors on due date
(d) Current year profit turns to loss after providing depreciation
Answer:
(d) Current year profit turns to loss after providing depreciation